international lawyersThere is an old saying about how lawyers do well when an economy is either rising or falling, just not when it is stagnating. When the US and Russia imposed sanctions on business from the other our international lawyers saw a massive bump in Russia related business for the following 3-6 months. Borrowing from the securities industry, we termed this a dead cat bounce.

The recent imposition of tariffs on China goods coming into the United States (and with more to come) have meant our China lawyers and our international trade lawyers have been receiving an unprecedented onslaught of phone calls and emails from companies asking what to do. We also have been receiving a slew of phone calls and emails from companies that sell their products to China seeking help with tariffs there.

The questions we are getting mostly center on the following:

  1. Are my products subject to tariffs?  The lists are long and it is not always clear whether a particular product is on one of the lists or not.
  2. My products appear to be subject to tariffs, is there anything I can do to avoid them? Yes. You can fight inclusion of your product on the lists. See How to Get YOUR Products Out from Under the U.S.-China Trade War. Sometimes you can change your product enough so that it goes from being on one of the lists to not being on the list. Sometimes you can change where the products are shipped so as to avoid the tariffs. For instance, if you are having products shipped into Long Beach, California and then trucked to your facility in Nogales, Mexico, we should be exploring whether it might not make better sense to ship them directly to Mexico. If you are having all your products shipped from China to the United States and then stored in the US and sold from there within the United States and to other countries, well maybe you should at least consider having at least some of your shipments sent elsewhere.
  3. My products are subject to tariffs and there is no way I am going to be able to get around this. What are my other options? In the last year our international lawyers have helped companies shift some or all of their production to Brazil, Canada, Hungary, India,Mexico, Pakistan, Spain, Vietnam, and the United States. Is it time for you to do the same?
  4. Should I continue to manufacture in China, but then sell my products in the EU and other jurisdictions where no tariffs will be imposed? Yes. This is actually a great way to go for many companies. They can ramp up sales to countries other than the United States, which will likely serve them well now matter what ends up happening between China and the United States.

The one thing not to do: stick your head in the sand.

 

International Trade LawyersPresident Trump has targeted about $250 billion of products imported from China. These China tariffs have been rolled out in three waves:

  • (List 1) – has a 25% tariff that covers about $34 billion of Chinese products listed in 818 tariff subheadings. The 25% tariff for List 1 went into effect on July 6, 2018.
  • (List 2) – has a proposed 25% tariff that would cover about $16 billion listed in 284 tariff subheadings. The 25% tariff for List 2 has not yet gone into effect.
  • (List 3) – has a proposed 10% tariff that would cover $200 billion listed in 6,031 tariff subheadings.

The products targeted in List 1 and List 2 were primarily intermediate inputs and capital equipment (semiconductors, machinery, equipment parts, industrial chemicals). These products were selected by the U.S. Trade Representative (USTR) because they were more patent-intensive and thus related to China’s unfair practices on intellectual property and technology transfer. The products in List 3 were selected to respond to China’s immediate retaliation to impose $50 billion tariffs on U.S. goods imported into China.  List 3 covers a much broader range of products, including many consumer goods that were specifically not chosen for List 1 and 2.

If your supply chain includes imported articles from China subject to the extra 25% or 10% tariffs, there is still hope for a product-specific exclusion. The process of how the List 1 China tariffs were rolled out shows that U.S companies have at least two chances to submit comments to try to get certain products off the list.

On April 6, 2018, USTR originally proposed a List 1 of products covered by 1,333 tariff subheadings and invited comments on the proposed tariff subheadings and whether they contained products that should or should not be hit with 25% tariffs. After receiving approximately 3,200 comments and holding three days of hearings in May 2018, USTR on June 20, 2018 issued a revised List 1 of products covered by 818 tariff subheadings. The total value of the products on the original and revised List 1 was still around $34 billion, but USTR noted that it had removed some tariff subheadings, and added others based on the comments and testimony provided on the List 1 products.

Although the 25% tariff went into effect for the List 1 products on July 6, 2018, USTR on July 11, 2018, published a notice explaining the procedures and criteria for requests for product-specific exclusions for the List 1 products. USTR’s first round of comments were focused more on the tariff subheadings proposed to be subject to the tariffs, while this second round of comments gives parties a second chance to explain why their specific products should be excluded from the tariffs. The List 1 product exclusion requests are due by October 9, 2018.

List 1 Exclusion Process

USTR will now consider excluding a particular product within one of the included 818 subheadings – but not the tariff subheading as a whole – from the additional 25% tariff. The details for exclusion requests are here List 1 Exclusion Request Procedures

Exclusion Request Conditions

USTR will accept requests from all interested persons, including trade associations. Exclusion requests must identify a specific product with supporting data and rationale for an exclusion. And interested persons seeking an exclusion for multiple products must submit a separate request for each product.

Factors for USTR Consideration in Granting Exclusion Requests

In granting an exclusion request on a product-by-product basis, USTR will consider whether the product is available from a source outside of China, whether the additional tariffs would cause severe economic harm to the requestor or other U.S. interests, and whether the particular product is strategically important or related to Chinese industrial programs including “Made in China 2025.”  USTR unlikely to grant any exclusion requests that undermine the objective of the Section 301 investigation.

USTR will consider each request on a product-by-product basis.  Exclusions will be granted on a product basis, meaning any individual exclusion will apply to all imports of that particular product (not just to products imported by the requestor).

Exclusion Request Schedule

The USTR notice provides:

  • Product exclusion requests are to be filed by no later than October 9, 2018.
  • Following public posting of the filed request (in docket number USTR–2018–0025-0001 on www.regulations.gov) the public will have 14 days to file responses to the product exclusion.
  • At the close of the 14-day response period, any replies responses are due within 7-days.
  • Any exclusions granted will be effective for one year upon the publication of the exclusion determination in the Federal Register, and will apply retroactively to July 6, 2018.

Making Exclusion Requests – Requirements

The USTR notice provides that each request must include material set out in the bullet-point summaries listed below.  And USTR has issued Exclusion Request Guidelines for facilitating submissions.

  • Identification of the particular product in terms of the physical characteristics (e.g., dimensions, material composition, or other characteristics) that distinguish it from other products within the covered 8-digit subheading.  USTR will not consider requests that identify the product at issue in terms of the identity of the producer, importer, ultimate consumer, actual use or chief use, or trademarks or trade names.  USTR will not consider requests that identify the product using criteria that cannot be made available to the public.
  • The 10 digit subheading of the HTSUS applicable to the particular product requested for exclusion.
  • Requesters also may submit information on the ability of U.S. Customs and Border Protection to administer the exclusion.
  • Requesters must provide the annual quantity and value of the Chinese-origin product that the requester purchased in each of the last three years.  (Trade associations should provide such information based on members’ data.)  If precise annual quantity and value information are not available, USTR will accept an estimate with justification.

Exclusion requests should address the following factors:

  • Whether the particular product is available only from China.  In addressing this factor, requesters should address specifically whether the particular product and/or a comparable product is available from sources in the United States and/or in third countries.
  • Whether imposition of additional duties on the particular product would cause severe economic harm to the requester or other U.S. interests.
  • Whether the particular product is strategically important or related to “Made in China 2025” or other Chinese industrial programs.
  • Requesters may also provide any other information or data they consider relevant to an evaluation of the request.

All exclusion requests must be accompanied by a certification that the information submitted is complete and correct.  USTR strongly encourages interested persons to submit exclusion requests on its prepared form (request form) to simplify exclusion request filings.

As the China tariffs are still in the process of being rolled out, parties still have a chance to request that certain products be excluded from the proposed tariff list. For List 1 products, product specific exclusion requests can be filed up to October 9, 2018.  For List 2 and 3 products, initial comments on the proposed tariff subheadings can be filed by July 23, 2018 (List 2) and August 17, 2018 (List 3), and likely will get another chance to make product-specific exclusion requests if and when the tariffs for these two lists go effective.

Products that are not produced or cannot be adequately supplied by domestic producers would have a better chance at exclusion.  Domestic producers have a chance to oppose any exclusion requests and likely would challenge any exclusion request for Chinese products that are competing with their products. 

China Employment LawyersBecause China is not an employment-at-will jurisdiction, mutual termination is usually the safest path for a China employer that has chosen to terminate one of its China employees. In a mutual termination, it is critical the employer gets a termination agreement that resolves all outstanding matters with the relevant employee and that explicitly releases the employer from all employee claims. If used correctly, mutual terminations can be a useful tool when dealing with a China employee. In this post, I discuss a few dos and don’ts you should keep in mind during a mutual termination process.

First, do take control of the discussion and do not turn it into an endless negotiation. Usually the employee will accept a quick payout when you initiate the termination process. But occasionally a disgruntled or difficult employee who has NO intention of settling may want to drag you into an endless discussion regarding termination. For example, our China employment lawyers have seen instances where after reviewing a proposed mutual termination agreement the employee comes back with a few requests for minor modifications to the agreement but then refuses to sign the agreement and also refuses to give a reason for not signing the agreement. Then when the employer follows up, the employee says: “wait a minute, you should pay me an additional month’s salary for not giving me sufficient notice of my termination.” Generally speaking, with a mutual termination, the employer is not obligated to pay an additional month’s salary in lieu of notice so the employer is not required to grant such a request. But suppose the employer is okay with paying a little extra to try to cleanly end the employment relationship and the employee in response to this says “I need more time to review.” At this point (or even before this), you know the employee is not going to accept the mutual termination and you also know the employee is not acting in a reasonable manner. You should not expect the employee to change and you should forget about terminating on mutually agreed terms and you should start thinking about other options. Must you terminate this employee? And if yes, what legal grounds do you have for a unilateral termination?

Our employment lawyers also sometimes have to deal with an employee who is willing to leave but sees his or her termination as a great way to “make” a lot of money. This employee often will ask for more in severance but not specify how much more they want. How should you negotiate with this sort of employee? The short answer is you don’t. Unless you are willing to pay more, the severance amount you initially proposed to the employee should be your only offer. In other words, you as the employer should be prepared to say “take it or leave it” when the moment comes.

But do listen to legitimate concerns or comments from your employee. Taking control is not playing hard ball. The goal of a mutual termination is to end things with the employee in a way that is reasonable and fair to both sides. Even though we craft our employee termination agreements in a clear, concise and reasonable fashion, it is not uncommon for employees to raise legitimate concerns that should be addressed. For example, an employee may want her employer to make the severance payment sooner than the employer has initially proposed. As long as it’s feasible for the employer to pay by the date requested by the employee and as long as this will get the employee to execute the mutual termination agreement right away, the employer should accept. Sometimes the employee may propose some minor revisions to the Chinese text which will make them feel good, for instance, adding a few words to emphasize that the employer initiated the termination process. As long as the employee’s proposed revision does not change the meaning of the terms and is otherwise harmless, you should accept. It is up to you and your China employment attorneys to distinguish between an employee’s genuine, good-faith concerns and stalling or revenge tactics.

Next, do not get bogged down on the reasons for the mutual termination. Employees are human beings and it is hard to predict exactly how they will react to their termination. They may get upset or disappointed or they may be happy to move on with their lives with a generous severance payment. You should avoid “touchy” subjects as much as you can.  For example, if you anticipate the employee will dispute their having performed unsatisfactorily (and most do), don’t mention it. “It was not a good match” often works well in this scenario. Do not indicate to the employee that there may be something she can do to make you change your mind about her termination. To put it another way, do not start the process unless and until you are certain about terminating the employee and unless and until you know pretty much exactly what you are going to tell them.

Much of the time our China employment lawyers rehearse with our employer clients how to handle the termination. It is that important.

 

China IP licensing lawyersTen years ago, our China IP lawyers did maybe one or two licensing agreements a year. Five years ago, it was maybe one or two every four to six months. Fast forward to today and we are doing one or two a week. Why the big change? China wants foreign technology and it understands it must pay for it. This though is not to say China IP licensing deals are not without their own brand of major and minor pitfalls. For some examples of what can (and does) go wrong on China IP licensing deals, check out the below:

One of the risky things our China licensing lawyers are constantly seeing are proposed China licensing deals (usually reflected in an MOU or an LOI) that involve the American company purportedly getting an ownership stake in its Chinese counter-party entity. This is risky for the simple reason that it cannot be done with Chinese privately held companies. See China Scam Week, Part 4: The China Stock Option Scam. As you can imagine, this means any proposed deal that calls for the foreign company to take ownership in the Chinese side must be remade to actually work. The below is the sort of email our China technology licensing attorneys send out when confronted with such a deal.

We have reviewed your China IP License Agreement Term Sheet, and our initial reaction is that it is acceptable for an agreement between two America entities, but not so good for an agreement between an American entity and a Chinese entity.

For starters, even though the term sheet says it is non-binding, the fact that both parties signed it may make it binding under Chinese law. See this post we wrote here for more details. But obviously what’s done is done and there is no way to un-sign the document.. At this point, you just need to be careful going forward in explaining your negotiating position and be sure not to sign anything else, without one of your lawyers reviewing it first.

Another issue we see right off the bat is that It will not be possible for each party to take a minority ownership stake in the other, as set out in your term sheet. Though it is generally legal for Chinese entities to own part of a US entity, the reverse is not true unless the Chinese entity is expressly set up for foreign ownership (e.g., a joint venture or a Wholly Foreign-Owned Entity). I assume you do not want to give XYZ Chinese Company a minority stake in your company without any reciprocation. If you really want to “invest” in XYZ Chinese Company’s business and have XYZ Chinese Company invest in your business, you can do so via a contractual arrangement.

I have additional comments about the specific deal terms, but before I get to them it would be helpful if you could provide us with some background about this proposed technology licensing deal. A narrative paragraph or two would be fine, with particular attention to the following:

Please explain a bit more about the ________ product. I have reviewed your website and I understand it is a _______ but that’s the extent of my knowledge. Is it a ___________? Can it do _____________? Is it the sort of _______ that __________? How long does it t________?

How did this deal get started? Did XYZ Chinese Company find you or vice versa?

I see that XYZ Chinese Company already has a similar product. Does that product compete with yours? If so, where and how well?

Have you had any previous business dealings with XYZ Chinese Company? If so, in what context, and what has been good and bad about it?

Have you sold any of your products or services in China? If so, what and to whom and how?

Have you already started selling this product in the United States? If so, for how long and with what sort of revenues?

What sort of revenue projections have you or XYZ Chinese Company made for the Chinese market?

Who drafted this term sheet?

Let’s set up a time for us to talk after you get us answers to our above questions.

China self driving cars As I outlined in my previous post, Self Driving Cars in China: The Roadmap and the Risks, the Chinese government is pushing hard for development of a Chinese based self driving car. In reviewing China’s proposed legislative framework and recent books from China, we can see how Chinese’s system offers unique advantages for developing fully autonomous vehicles.

China does not seem to have the atavistic fear of robots and AI common in the Western world. Recent surveys show that over 75% of Chinese car buyers have a favorable opinion of self driving vehicles, as opposed to only 50% in the U.S. More significant is that 60% of Chinese auto buyers believe developing self driving cars is a significant issue, as opposed to less than 20% in the U.S. and in Germany.

Fear of autonomous driving is not a factor in China. The issues in China are more direct. Is a self driving car available? Will it be available in a reasonable time frame? Will a self driving car work well? How much will it cost? Will the vehicle be owned by an individual or by a ride sharing entity or (in China) by some service owned or managed by the government? These are rational economic considerations, not gut level fear of robots and artificial intelligence.

A Chinese consumer may decide self driving cars are not an important issue because they rationally believe they will never happen. But they do not oppose self driving cars due to a fear of robot control. The Chinese are generally not in love with driving. Driving in China basically sucks, and if they can leave the driving to someone else, the Chinese are generally happy to do that. And if the someone else is a robot, they don’t care. The issue to the Chinese consumer is: how much will that robot cost? [Editor’s Note: Peter Hessler’s book, Country Driving: A Chinese Road Trip, makes for a great read on driving in China.]

The Chinese also do not generally make unreasonable requirements on the safety of a self driving car. In the U.S. and in Europe there is an unstated but very real demand that self driving cars must be perfect. Every accident involving a self driving car is head line news and endlessly reported online. At the same time the 40,000 U.S. deaths and the ~25,000 EU deaths per year from human controlled driving are taken as business as usual.

The Chinese regulators and public make no such unreasonable demands. One goal of the Chinese government is for self driving cars to reduce the current very high Chinese passenger vehicle accident rate (~260,000 people die on China’s roads a year). However, the goal is to reduce the accident rate by a reasonable percentage. No one in China demands self driving cars be accident free. It is assumed they will NOT be accident free. The issue in China is whether the rate of accidents will be at an acceptable level or not. In China, it is assumed that the accident rate will decrease due to autonomous vehicles, but no one expects that rate to be dramatically lower than the current rate. For that reason (and probably some others), accidents involving self driving cars simply are not news in China.

Finally, the Chinese are free of the Western (especially U.S.) need to assign blame for accidents involving self driving cars. U.S. legislation and discussion of self driving cars almost obsessively focuses on this issue. Who will pay if there is an accident? Will it be the software developer? The auto manufacturer? The vehicle owner? What if the accident is determined to have been caused by a flaw in the software? Or a flaw in the installation? Or a flaw in the smart transportation network? Or the result of hacking by a third party? Or by operator error? Or by circumstances beyond the control of any party? Or even something as relatively routine as failed brakes?

If you examine U.S. based discussions of self driving vehicles, you will see these issues are primary and this is certainly even more true among the lawyers. Self driving projects then focus on issues like the ethics of driving decisions, insurance coverage, liability and damage allocation. Though these are primary issues in the U.S., they hardly exist in China. I have 200 pages of Chinese government proposed rules and regulations for autonomous vehicles on my desk. I have five full length Chinese language textbooks on self-driving cars, all published in the last two years. The issue of liability and insurance is simply not discussed at all in these thousands of pages. It is a complete blank.

There are two reasons for this. First, the Chinese are generally far less concerned with assigning guilt than Westerners. In Chinese traditional morality, guilt is not the main focus of an enquiry of what to do when a person is harmed or injured. In China, the focus is on how the social equilibrium can be restored as quickly as possible. The damage is repaired and the parties move on. Guilt and the associated liability for guilt is usually not a fundamental issue. Second, the Chinese insurance system is a no fault system so there is no reason to assign guilt. Auto accidents do not give rise tot moral issues. The issues arising from auto accidents in China are usually clear: what was the damage and what sort of payment is required to restore the parties to their original situation. Lawyers are virtually never involved, the award is limited to economic compensation and there is no high value award for non-economic matters like pain and suffering.

From the U.S./Western side, the fear of robots, along with unreasonable safety demands and allocation of liability in a guilt based system create substantial barriers to developing self driving cars. In the U.S., these barriers are at least as significant as the considerable technical barriers. In China, these non-technical barriers do not exist. It’s not that they are reduced; they don’t exist at all.

China can therefore focus on the technical issues. It is the technical issues that will drive the development of the vehicle of the future. So thought Chinese companies are currently behind the West on the technical side, they can move forward free from so many of the non-technical barriers that will both slow down and increase the costs of autonomous vehicle development in the West. This means China will reign as the primary testing ground for new technical solutions in the self driving car field. So even if China is not the place where the technology is developed, China will be the place where the technology is applied in real world applications. This is already happening in the electric vehicle market and this same trend will continue in the self driving car market.

China film lawyerLast Tuesday, U.S. Trade Representative (and Trump appointee) Robert Lighthizer released a statement explaining that his office would seek to impose a second round of tariffs on Chinese imports, this time 10% tariffs on an additional $200B in imports. The first round of tariffs, which went into effect on Friday, July 6, imposed tariffs on $34B in imports, and was quickly matched by China’s imposition of tariffs on $34B in US exports to China.

The USTR is justifying its actions on the basis of the 200-page Section 301 report which detailed a wide range of allegedly unfair trading practices by the Chinese government, including forced technology transfer, theft of IP and technology, improper government subsidization, and lack of reciprocity.

It is difficult to find anyone outside China who disagrees with the substance of the Section 301 report, but it is difficult to find anyone outside the Trump administration who understands – let alone agrees with – the country’s blithe entry into a trade war. Ramesh Ponnuru, a senior editor at National Review (hardly a bastion of liberal thought), wrote a cheeky opinion piece in Bloomberg laying out what he saw as Trump’s Four Rules for Conducting a Trade War:

  1. Assume that you will win it effortlessly.
  2. Make sure your tariffs are designed to inflict maximum damage on your own country’s companies.
  3. Take on as many countries simultaneously as you can.
  4. Don’t feel that you have to make your negotiating demands clear.

The USTR has released a tentative list of 6,031 product categories that, in aggregate, allegedly represent $200B worth of Chinese imports. Included on this list, to the chagrin of almost everyone in the entertainment industry, is the following category: “Motion-picture film of a width of 35 mm or more, exposed and developed, whether or not incorporating sound track.” The list also includes motion picture films of a width less than 35mm, but it is silent as to whether this would extend to movies on digital media, which is how the vast majority of films are distributed these days. See Rule (4) above.

Industry observers have been trying to figure out what, if anything, this means to the Chinese film industry, the US film industry, and the interaction between the two. From an economic standpoint, putting tariffs on motion picture imports from China is solely a symbolic gesture. China would love to be exporting films in such quantities that these tariffs would hurt, but as we wrote in What Does the Chinese Film Industry Get From Hollywood?, Chinese films simply don’t do business in the U.S. In the past 10 years, the highest-grossing Chinese films in the U.S. have been The Grandmaster (2013, $6.6M), The Mermaid (2016, $3.2M), and Wolf Warrior 2 (2017, $2.7M).

Meanwhile, multiple U.S. films each year gross more than $100M in China.

Putting all this together, it seems possible (if not likely) that the Trump administration is simply baiting the Chinese government to retaliate against the liberal redoubt of Hollywood. See Rule (2) above. China would love to see Chinese films dominate the Chinese box office, and they certainly don’t care about protecting American business interests. But they also don’t want to do Trump’s dirty work for him.

At this point, all options are open to the Chinese government, and they have even more political cover to take whatever action they like. My guess is that the Chinese won’t do anything except use the threat of tariffs as an excuse to postpone the already-interminable negotiations over the revised film quota and profit-sharing arrangements. I’d do the same thing in their place. How could they possibly reach an agreement on film imports with the threat of retaliatory action hanging over the entire process? This way, the Chinese can have their cake and eat it too.

Of course, it’s also possible the Trump administration didn’t think about any of this too deeply and everyone is reading in complexity where there is none. Being There, anyone?

Autonomous VehiclesDevelopment of the self driving car is the centerpiece of the Chinese government’s plan to redesign its manufacturing and technology sector. The Chinese have coined the term Intelligent and Connected Vehicles (ICV) (智能网联汽车)as their own technical term for describing the China version of what is an international race towards a difficult technical goal. The ICV is an ideal goal for China because it combines elements of all three of its current key technology programs: Made in China 2025, Internet+ and the Artificial Intelligence Strategic Plan.

As is typical of the Chinese system, the central government seeks to place itself on the top of the system, providing guidance and control from the top down. In furtherance of this goal, the PRC Ministry of Industry and Information Technology together with a number of related PRC agencies just issued a comprehensive set of national guidelines (建设指南) to provide the framework for development of ICVs in China.

The full set of guidelines is as follows:

(i) the National Guidelines for Developing the Standards System of the Telematics Industry (Overall Requirements) (国家车联网产业标准体系建设指南 (总体要求)). (June 2018)

(ii) National Guidelines for Developing the Standards System of the Telematics Industry (Intelligent and Connected Vehicles) (国家车联网产业标准体系建设指南 (智能网联汽车) (December 27, 2017)

(iii) the National Guidelines for Developing the Standards System of the Telematics Industry (Information Communication) (国家车联网产业标准体系建设指南 (信息通信) (June 2018).

(iv) the National Guidelines for Developing the Standards System of the Telematics Industry (Electronic Products and Services) (国家车联网产业标准体 系建设指南 (电子产品和服务) (June 2018).

Though the Guidelines are detailed and complete, these are only guidelines. That is, this is a standard to be followed for the drafting of binding regulations and statutes. The Guidelines merely set out the path to be followed. The real work remains to be done.

To date, the most important regulation with substantive impact is the Intelligent and Connected Vehicle Test Management Practices (智能网联汽车测试管理规范) issued on April 12, 2018. Under this regulation, individual Chinese cities are permitted to develop standards that allow for on the road testing of autonomous driving vehicles on public roads. In response to this new regulation, Chinese cities that seek to host the development of ICVs are working with the players to host testing in their own city. The typical regional divisions that characterize Chinese technology development are already taking form:

a. Beijing has set up a licensing program for Baidu.

b. Shanghai has set a licensing program for Ali Baba.

c. Shenzhen has set up a licensing program for Tencent.

Each city is seeking to establish its own regional champion in this new area. To avoid being left behind, other Chinese cities are joining in to create their own ICV on road testing programs. For example, the city of Tianjin recently announced its own ICV testing program in collaboration with the Tianjin Intelligent Connected Vehicle Industry Research Institute. It is expected that other Chinese cities will follow suit, with all of them seeking to create a regional (not national) ICV champion.

This movement towards regional rather than national ICV champions is of course contrary to the MIIT goal. But the overall development of the Chinese vehicle market shows that regional rather than national development is the dominant trend. There is little prospect that the Beijing authorities will be able to do anything to stand in the way of these regional developments. Note that this move to city/regional based ICV fiefdoms is dramatically different from the experience in the United States. California recently opened its roads to self-driving car testing. In response, over 50 different manufacturers have chosen to conduct tests on California roads. Consistent with general U.S. policy, California makes no attempt to favor one company over the other. The market will choose the winner. The Chinese system is developing in exactly the opposite direction, where regional governments are picking their winner in advance. Developments over the next decade will show which system works best.

This then leads to my central theme in considering this issue. In the development of the ICV, technology is everything. The Chinese central and regional governments have plenty of money for developing this program. But that money will be used in classic Chinese fashion. It will be used to purchase land and to build factories. That is, the money will be used for hard infrastructure.

But the question for China is what will those factories actually do? Without the most advanced technology, the factories will do nothing more than build the sort of low standard electric vehicles that already clutter the roads of China’s second tier cities. For the second tier cities like Tianjin, the technology issue is even more acute because the players in Beijing/Shanghai/Shenzhen are not planning to share their technology. In this project, it is every region for itself. So each regional player is faced with a existential issue: after the factories are built, from where will the ICV technology come?

The search for technology will be intense. A huge company like AliBaba can perhaps develop the technology on its own. But that only works for the Shanghai fiefdom. What about everyone else? In response, Chinese regional governments, research centers and production companies will be scouring the world for the latest in ICV technology. Since China currently appears to be the major market for electric and ICV vehicles, foreign companies will need to decide whether or not they want to work in China. For those companies that decide to work in China, the real issue will come down to the issue we continuously raise on this blog. Will you retain control over the technology or will you give it away? Will you get paid for what you give away, or will you wrap it up as a gift?

This growing market for ICV technology is an opportunity for foreign companies. The demand will increase over time, making the market for the transfer of ICV technology to China a long term trend. The question for foreign companies is whether China is a market where a profit can be made or is it just a trap leading to bankruptcy?

Though U.S. companies continue to complain about IP theft and forced transfer of technology to Chinese companies, there are ways to avoid presenting your technology to the Chinese side as a gift. But avoiding this result requires two things. First, you have to accept that if you refuse to make the gift, the Chinese side may walk away and you will then be excluded from that market. Second, you have to do the work required to provide yourself with protection. That means entering into tough, enforceable contracts and making the required patentcopyright and trademark registrations in China. If greed blinds your eyes to the risk, then you will not do either and the result will be predictable.

Hong Kong ArbitrationEvery month or so, a lawyer will write me out of the blue with a “quick question” about a draft contract. Without a doubt, the most common “quick question” I (and the other China lawyers at my firm) get is asking me to “confirm” that Hong Kong arbitration would make the most sense for such and such type of contract. I usually respond to this question by explaining that for me to be able to confirm or disagree with their having chosen Hong Kong arbitration I would need to review the entire contract and know a ton more information. About half the time, the lawyer responds by asking like what? I then respond by saying that when the lawyers at my firm are trying to figure out the best venue (location) and method (arbitration versus litigation) to put into an international contract, we typically consider the following:

  1. Who the parties are.
  2. Where the parties are located.
  3. Applicable law.
  4. Contract language.
  5. The goals of the client. Money? IP protection? Something else?
  6. The likelihood that the client would breach the contract as compared to the likelihood the other side would breach the contract.
  7. The sort of disputes likely to arise.
  8. The language(s) spoken by the client and the other side
  9. The client’s wealth as compared to the wealth of the other side.
  10. The need to engage in discovery if there is a dispute.
  11. The need to bring in third parties to any dispute.
  12. The complexity/simplicity of likely disputes
  13. Appeal concerns.
  14. Confidentiality concerns.
  15. Concerns regarding speed of dispute resolution.
  16. Enforcement of judgment/award concerns.

Contracts cannot be reviewed in a vacuum.

Let me explain.

A very long time ago, a large manufacturing company client contacted me to help with an international product recall. This companies product had a faulty and potentially dangerous part that had been provided to it by one of its smaller suppliers. My first thought was that my client should seek reimbursement of the recall costs from this small supplier and its insurance company. Towards that end I asked for a copy of the supply contract as between my client and its supplier.

Unfortunately, the contract protected the small company in every respect. This surprised me because usually big companies impose its terms on their small suppliers. I explained to my contact at the company (an excellent international compliance person, but not a lawyer) why his company had allowed such an unfavorable contract to be used and now it was his turn to be surprised. He told me that his company had believed this was a really well drafted contract and they had recently stared using it with all of their new suppliers. My response was that it was one of the best drafted supply contracts I had ever seen and that was part of its problem; it had been incredibly well drafted but entirely in favor of the small supplier, not in favor of my client who was the recipient of the parts. I then asked who had drafted this contract (I was especially curious because I thought my firm had a lock on this company’s international contracts). His response was that no lawyer had drafted it; a non-lawyer high up in supply chain management had seen this contract when their largest supplier had required they sign it and he just figured it would be a really good contract because it came from XYZ company. My response was, yes, it is a great contract, but a great contract for a parts supplier, NOT for a parts recipient and when XYZ company required you sign this contract it was acting as a supplier. The client ended up paying every dollar of the recall.

What would happen if a lawyer were handed this contract for a one or two hour review from another lawyer without being provided with the context behind this contract? The lawyer would review it and say this is a great contract and I don’t see anything that needs to be changed.

Context can be equally crucial for dispute resolution clauses.

Over the years, our China attorneys have dealt with the following situations, the facts of which have been modified so as to negate any possibility of anyone recognizing the specific matter:

1. Tokyo Jurisdiction. An American company comes to us after learning that its Chinese manufacturer has started manufacturing and selling  the American company’s newest version of its core product. I read a provision in the contract to expressly state that any future iterations of the core product would belong to the Chinese company and I mention this to the potential client. The potential client then tells me that when it complained to its Chinese manufacturer about IP theft, the Chinese manufacturer cited to the same provision and said the product now belonged to them.

To make matters worse, the contract called for all disputes to be resolved in “Tokyo Superior Court.” I asked the potential client how it was decided Tokyo Superior Court would be the venue for any disputes and the potential client explained it as follows:

The Chinese company asked for disputes to be resolved by arbitration in Beijing and my lawyer said that we wouldn’t stand a chance there and so we refused. The Chinese company then proposed Singapore or Hong Kong arbitration and my lawyer countered with Tokyo Superior Court because it was the opposite [both with respect to the type of forum — arbitration versus court — and the location] of what the other side wanted.

Ugh. I then explained how no country other than China will allow for a lawsuit in its courts that has zero to do with its country and because this case would involve a US-based company going up against a China-based company on an issue with zero relevance to Japan, there is no way a Japanese court will allow itself to be a free (or nearly free) public forum for this dispute. I did not even bother to mention that there is no such thing as the Tokyo Superior Court or that even if the US company were to sue in Tokyo and get its case heard in Tokyo (which will never ever happen) and then win in Tokyo, no court in China would ever enforce the judgment because the Tokyo court never had any jurisdiction over the matter. The US company might be able to convince a Chinese court to take the case, but I doubt it, simply because China very much tends to enforce contracts no matter how silly they may be and I most Chinese courts would likely just toss the case for not having been filed in Tokyo as per the contract.

2. Toronto Jurisdiction. This is one of my favorites. I get an angry email from someone that essentially says as follows:

I read your blog regularly and carefully and you were wrong about Canada and that makes me wonder what else you have been wrong about. I read one of your posts where you talked about how you like to propose Canada for disputes because Chinese companies often will agree to that. Well the Chinese company we work with did agree to that but when it came time for us to actually sue them there, all of the Canadian lawyers told us that we couldn’t.

Future communications revealed that this company had — based on my having extolled the virtues of proposing Canada for arbitrations — believed it could list the Toronto courts as the jurisdiction for disputes between its US-based company and its Chinese counterpart. Just as would have been true in the Tokyo instance above, there is no way a Toronto court will hear a dispute between two foreign companies on a matter that has no relevance to Canada. Fortunately, the Canadian lawyers to whom this company went realized this and chose not to waste the US company’s time and money pursuing litigation in Toronto. I had to point out that we constantly emphasize that dispute resolution provisions must be fact and situation specific and that there is a big difference between what can be done in arbitration and what can be done in a foreign country’s courts. I didn’t — but I should have — pointed out the disclaimer here on our website:

The China Law Blog is for educational purposes and to give a general information and a general understanding of Chinese law. It is not intended to provide specific legal advice…. You should not use the China Law Blog as a substitute for competent legal advice from a licensed attorney.

3. Split Jurisdiction.  We get this one fairly often. The contract provides that the Chinese company must sue the United States company in a U.S. court and the U.S. company must sue the Chinese company in a Chinese court. The thinking behind this is logical but its execution is so flawed that we avoid these provisions like the plague.

These provisions initially seem to make sense because this sort of split jurisdiction appears to favor the U.S. company. If the Chinese company seeks monetary damages from the American company, it must go through the trouble of suing the American company in a U.S. court where the U.S. company will presumably get a fair trial. And on the flip side, the American company can sue the Chinese company in a Chinese court, which is (90 percent of the time, anyway) exactly where the U.S. company should want to be. For why this is the case, check out China Enforces United States Judgment: This Changes Pretty Much Nothing and China Contracts: Make Them Enforceable Or Don’t Bother.

But Chinese courts typically hold that this sort of split jurisdiction clause means there is in fact no jurisdiction in China. So if you really want jurisdiction to be in China, your agreement should be 1) be governed by Chinese law, 2) be written in Chinese and 3) provide for exclusive jurisdiction in China. This is not black letter law. This is just what actually happens on the ground in China’s courts and this is why our firm’s China attorneys provide for all three of these in all contracts where it is critical our client be able to sue in China.

But once again there is no clear answer as to what might be best for any given company’s specific situation. To properly evaluate whether you go with Chinese law in a Chinese Court (which is what we usually end up choosing to do), you need to consider your most important concerns. Is it more important you have an effective remedy against the Chinese company with which you are contracting or is it more important you make it as difficult as possible for the Chinese side to sue you? If your primary goal is to be able to enforce the contract against a Chinese company, you usually will want to provide for exclusive jurisdiction in China with Chinese law applying and the contract being in Chinese. But if your primary goal is to prevent the Chinese side from suing you, you should consider providing for exclusive jurisdiction in the United States. But if you do this, you must realize that because China does not enforce U.S. judgments, you may never be able to enforce it against your Chinese counter-party. It is these preferences that should help you decide the best jurisdiction provision for your contract. In any event, the split jurisdiction approach generally does not work.

4. Geneva Chamber of Commerce Arbitration. A very good client of ours came to one of our international litigators with a contract calling for arbitration before the “Arbitration Institute of the Geneva Chamber of Commerce.” Problem was the Geneva Chamber of Commerce did not have an Arbitration Institute nor did it handle international arbitration. Our client had taken a contract my law firm had written for them and made a few changes and simply re-used it on another deal. The contract my firm had written had called for disputes to be resolved before the Arbitration Institute of the Stockholm Chamber of Commerce, which is a very common forum for resolving disputes between Russian and American companies. So when my client went off and did an agreement with a Spanish company and the Spanish company refused to have the contract disputes resolved in Stockholm, my client just switched “Geneva” for “Stockholm” and called it a day. But then when it came time for my client to pursue arbitration we had to conduct massive research to determine how even to commence arbitration before an arbitral body that did not exist. We ended up deciding to file with the Swiss Arbitration Association in Geneva, and the opposing side vigorously contested our choice of forum. We actually were able to keep the case there, but only after incurring a large amount in fees fighting to do so.

5. South Carolina Arbitration in Chinese Under British Law. Yes you read it right and if you are not stunned by this, you should read it again. This is my all time favorite. U.S. company comes to us with an arbitration clause mandating arbitration in South Carolina in Chinese under British law. When I talked about how much it would cost to get three Mandarin-speaking arbitrators to South Carolina (assuming the other side doesn’t argue for some other Chinese language) and and the added costs of researching and arguing British law, the U.S. company — wisely — chose not to pursue the case. When I asked the company how it had chosen this particular dispute resolution provision they explained that they had taken it from one of their previous agreements. I didn’t say a word, but what I will say now is that a provision like this is a great way to discourage arbitration and sometimes that can make sense, but such a provision is a disaster if you are the one that ends up needing to sue. Again, context is everything.

Every once in a while when I say that I cannot opine about their having chosen Hong Kong arbitration for their specific contract, the attorney will write me back asking for “my general opinion regarding Hong Kong arbitration”. My response is that there are plenty of excellent arbitrators in Hong Kong but arbitration there is generally very expensive and, most importantly, it is seldom the most effective forum for enforcing a contract with a Chinese party.

Frankly, the biggest issue I have with Hong Kong arbitration is that far too often attorneys choose it not because it is the best forum for their client’s disputes, but simply because they are comfortable with it because it has a common law system very similar to the United States, Great Britain, Canada and Australia and the contracts and the arbitration can easily and logically be in English. Like everything else, whether these reasons make sense will depend on the entire context.

International IP litigatorOur China IP lawyers get a steady stream of emails asking what can be done to stop Chinese companies from selling “knock-offs” of their products. This is really two questions. What can be done to prevent Chinese companies from knocking off your products and what can be done to stop a Chinese company that has already knocked off your product. This post will address both questions.

I.  The Basics For Preventing Counterfeiting. 

Back in the retail stone ages (five or so years ago), when companies would come to my law firm for China trademarks to protect their brand names from Chinese copycats, we would tell them that applying for such a trademark would take about a week, but actually getting the trademark officially registered in China would take more than a year. We would then tell them that until their trademark is registered in China, we would be almost powerless to stop companies in China from using their brand name. Few voiced any concerns with this.

Fast forward a few years and now when one of our China trademark lawyers tells a client that securing a China trademark will take a year, those who sell online (which these days is almost everybody) rightfully get all nervous and want to know what to do in the meantime to protect against copycats. See China and the First to Market Fallacy for how incredibly quickly China companies can and do copy products and get them to market.

Our typical response is to talk about “building IP walls outside China.” If you are selling your product in the United States and in Spain you should focus on protecting those two countries, by among other things, securing trademarks in those two countries as quickly as possible. Though a U.S. or a Spain trademark technically will not give you any trademark protection in China, it can still help in getting offending ads removed from Chinese websites like Alibaba. If “your” product shows up on Alibaba and you have no registered IP, your chances of getting Alibaba or some other Chinese website to take it down are slim. But if you have a registered Chinese trademark that is being infringed by something online your odds of getting that offending ad taken down are good. If you have a Spain trademark and an Alibaba ad clearly targeted at Spanish consumers infringes on your Spain trademark, your odds of getting that ad taken down are not bad, which is a whole lot better odds than if you did not have the Spain trademark at all. The same holds true for the United States.

Of equal importance though is that if you have a Spain trademark on your product you can use that trademark to try to keep the offending product from China from reaching Spain. You can do this by working with Spain’s Customs and Border Protection Bureau, which is authorized to block, detain and seize incoming products that violate Spain and EU intellectual property rights. The United States and virtually all other EU countries have similar procedures. In many countries it makes sense to register your trademark from that country with its Customs office.

Registering your trademarks with China’s Trademark Office is the essential first step for just about any company that is having its product made in China or that faces a counterfeiting threat from China.. See File Your Trademark In China. Now., China: Do Just One Thing. Trademarks, and China’s Changing Trademark Environment. Why You Need To Register Your Trademark Now. Because China is a first-to-file country, until you register a trademark you have no rights in that trademark. But a trademark registration alone will not limit the spread of counterfeit goods. A trademark registration merely gives you the legal capacity to enforce your rights to that mark, and should properly be seen as one of the pieces in an overall strategy.

For any company concerned about counterfeit goods coming from China, the next step should be registering your trademark with Chinese Customs. This is not a legal requirement but a practical one: though China Customs officials have discretion to check every outgoing shipment for trademark infringement against the Trademark Office database, in reality they only check against the Customs database. No separate registration with China Customs means no enforcement by China Customs. See How To Register Your China Trademark With China Customs and China Trademarks: Customs Helps Those Who Help Themselves.

If you register your mark with Customs, they will contact you any time they discover a shipment of possibly infringing goods. At that point you have three working days to request seizure of the goods. Assuming you request seizure (and post a bond), Customs will inspect the goods. If Customs subsequently concludes the goods are infringing, they will invariably either donate the goods to charity (if the infringing mark can be removed) or destroy them entirely. The cost of destruction, and of storing the goods during the inspection process, will be deducted from your bond. Registration with China Customs generally takes three to five months and can only be done after China’s Trademark Office has issued a trademark certificate.

We cannot stress enough the importance of China trademarks and China NNN Agreements for any counterfeit prevention strategy. China patents and China copyrights should be an important part of your counterfeit prevention strategy as well, but in our experience, getting offending goods taken off websites is fastest, easiest and most likely if you have a China trademark. See China and Worldwide: Trademarks Good, Patents Bad. Or as one of our China IP lawyers is always saying: “You can probably survive a Chinese company selling a duplicate of your product and selling it for half of what you charge, but if that duplicate product also can legally use your company and/or brand name on it, you may never recover. A China-centric NNN Agreement works to ensure that your own supplier will not sell your products out its back door. Note that a Western-style NDA Agreement for China will probably decrease your IP protection, not increase it.

II.  The Basics for Stopping China Counterfeiting

I apologize in advance for this portion being U.S. focused. This is somewhat necessary for this portion of this post because so much of it deals with litigation and my law firm has litigators in only the United States and in Spain. And since I am not a licensed Spain lawyer, I will confine my discussion regarding IP litigation against Chinese companies to just the United States. Nonetheless, almost all of what I say below is applicable to varying degrees to most countries outside China, not just the United States.
You just discovered a Chinese company is knocking off your product. What do you do? If you are like most companies, you go to your regular lawyer and ask her what to do and if she is like most U.S. lawyers she probably does not know. So then what? At that point, you or your regular legal counsel should reach out to a lawyer experienced in fighting Chinese counterfeiters and experienced in cross-border litigation. There are a lot of options for going after Chinese counterfeiters and the key is usually choosing the right option or the right combination of options.
The right option is usually going to depend largely on your own individual situation. When one of our international IP litigators gets an email asking us to take on a China counterfeiting matter, we usually fire back with a slew of questions to try to learn more. Below are some of the more common questions we ask.
  • What IP registrations do you have and where?
  • Do you have any trademarks registered in China? Do you have any trademarks registered in any other country? Are these knock off products using your brand name or your company name or your logo? Do you have trademarks on any of these in China? Elsewhere?
  • Please describe your registered trademarks. Is the counterfeiter using any of these?
  • Do you believe you have any common law trademarks anywhere? Is the counterfeiter using any of these?
  • Do you have any copyrights? Are any of these copyrights registered in China? Are any of these copyrights registered anywhere else?
  • Please describe your registered copyrights. Is the counterfeiter using any of these?
  • Do you believe you hold any copyrights that are not registered anywhere? Is the counterfeiter using any of these?
  • Do you have any patents registered in China? Do you have any patents registered in any other country?
  • Please describe your patents. Is the counterfeiter infringing on any of these? If so, how?
  • Have you registered your IP with any customs offices in any country? If yes, please describe.
  • Do you know anything about the Chinese company you believe to be knocking off your products? Please describe any prior dealings you have had with this company. Do you have any contracts with this company?
Answers to the above questions (and many more) help our international IP litigators figure out how best to proceed.
The below are some of the options you might have for pursuing your China-based counterfeiters.
1. Pursuing administrative or litigation relief in China. This might be done administratively, via civil litigation in a Chinese court, or even criminally. If you have a contract with the Chinese company that is counterfeiting your products and that contract calls for arbitration of all disputes, arbitration will be another option for you.
2. Figure out who is importing the counterfeit products. Oftentimes the US importer is closely connected to the company in China that is knocking off your products — like a son or a daughter or a spouse so pressuring or suing the importer often can be effective with the Chinese company as well.
3. Suing Chinese companies in US court usually takes a long time because Hague service of process on Chinese companies is taking a long time, and with the trade war heating up, it’s likely to start taking even longer. It is already at the point where if you do not have a Chinese attorney constantly calling all the right people in China all the time to check on the progress of your Hague service, it probably will never happen. There are though sometimes creative ways to get around Hague Service of Process.
On top of this, getting a Chinese court to enforce a US judgment is going to be difficult, if not impossible and the US-China trade war likely will hurt you on this front as well. See China Enforces United States Judgment: This Changes Pretty Much Nothing. This means your suing for damages in a US court will oftentimes not be the right tactic for you to take against a Chinese counterfeiter. But a Chinese counterfeiter in a US court might allow you to seize funds or other assets belonging to the counterfeiter or get an injunction blocking its sales.
4. Official Chinese company records can be goldmines of information that you may be able to use to impress upon the Chinese company the need for it to stop copying your products. This is especially true if those records help you show US connections
of the company or its owners or officers or directors.
5. Section 337 cases filed with the International Trade Commission in Washington D.C. can be a great way to stop counterfeit products from entering the United States. See Stopping Infringing Products From China: Section 337 Cases. These cases can be pursued without having to serve the Chinese defendant under the Hague Convention service of process rules.
6. Serving takedown notices on the online sites that are selling the counterfeits of your products can oftentimes be fast and easy and effective, mostly depending on the existence and quality of your IP registrations. See e.g.,
How To Remove Counterfeits From Alibaba Register Your China IP.
Bottom Line: It’s never too early to take action to prevent Chinese companies from counterfeiting your products. And if you are hit with a counterfeiter, it is critical that you explore and weigh your options carefully.
For more on counterfeit products from China, check out China Counterfeiting: 8 Common Myths

China employment lawyersAs both a big-time sports fan and the son of an English Professor I’ve always reeled whenever anyone talked about “giving 110%.” So yeah, I realize something cannot be 200% dangerous — heck, I’m not even sure something can be 100% illegal — but I feel compelled to over-exaggerate (which word is also of dubious usage) to make sure this post gets read.

The reason I want to be sure this post gets read is because our China employment lawyers are seeing increasing instances where expat employees working in China are having their salaries “split” by their Chinese or foreign company employers. We strongly counsel our employer clients against doing this sort of salary splitting and we even more strongly counsel against expat employees accepting such splitting. For one very simple reason: it is illegal and it puts you at great risk.

Let me explain.

China employer taxes and benefits are steep. Very roughly speaking, for every 100 Yuan an employee in China gets paid, the employer pays out an additional 40 or so Yuan in employer taxes and benefits. In other words, about 40 percent. And for every 100 Yuan a China-based employee gets paid, the employer is supposed to withhold around 25 Yuan for employee taxes. In other words, about 25 percent. So imagine the savings if instead of paying an employee $100,000 on the China tax and benefit grid, you instead pay just $30,000. How though can a China employer achieve this savings while still paying its employees at market rate? I mean you cannot just pay a top tier foreign software engineer $30,000, or can you?

You can if you are willing to violate Chinese law by engaging in tax fraud. This is most commonly done by splitting the salary by paying the employee $30,000 in China and $70,000 via Hong Kong or the United States or wherever. Ten years ago — before China became considerably more sophisticated with its tax system and its ability to root out tax cheats, foreign SMES with employees in China (especially expat employees) would engage in this sort of salary splitting. You might have a company in Houston that would send an employee to China and have its WFOE in China pay that employee $30,000 in China while sending $70,000 each year from the US company to the employee’s US bank account.

China now employs various techniques to crack down on this sort of thing and in response to that it has become way less common to see a foreign company engage in such fee splitting. One of its best and easiest techniques is to simply call bullshit on the idea of a company being able to pay a top-tier expat software engineer $30,000 a year. The other is to offer a tax amnesty to your just- terminated employee to get him or her to report your tax fraud. Then armed with that, China will not so politely demand you immediately pay it all past taxes and benefits, plus interest, plus massive penalties.

But while foreign companies are for the most part ending illegal salary splitting, Chinese companies have been taking it up with somewhat of a vengeance. Ten years ago, it was rare for an expat to work for a Chinese company in China, but today that is commonplace. But it is also commonplace for Chinese companies to be unhappy/reluctant about high expat salaries and having to pay full taxes and benefits on that. This has led our China employment lawyers to now see a slew of expat employees being offered $100,000 with $70,000 paid to them through Hong Kong.

This has also led Chinese companies to come up with some very creative justifications for their illegal actions, in an attempt to quell any expat disquiet about participating in tax fraud. Their first “line of defense” is usually to say “everyone does this and your American lawyers simply don’t know China.” When this doesn’t work, they often propose the expat employee become a director or an officer of the Chinese company’s Hong Kong entity and get paid the $70,000 for doing that. Yeah right. Anyone who knows China law enforcement, especially China tax law enforcement, knows this is never going to fly. See this Forbes article, China’s Tax Authorities Want You.

What we are also seeing, most unfortunately, are a slew of expat employees accepting such split payment contracts to their massive detriment. We see this when the expat employee writes one of our China employment attorneys  for help against their China employer who just fired them or who is not actually sending any of the promised money via Hong Kong. These expat employees want to sue their China employer as though they have an employment contract for $100,000, when of course they don’t have such a contract because the Chinese employer is smart enough not to have put anything in writing about the $70,000 that was to have been sent from Hong Kong. Seriously, who is dumb enough to put their own tax fraud in writing?

This sort of non-payment has become so common I am now of the view that many (most?) China company employers that split salary payments do so not so much to engage in fraud as against the Chinese tax authorities, but rather to engage in fraud as against their expat employee. More than half the time when we get an email from an employee seeking our help in getting their $70,000 split fee payment, the employee has been working for her or his China employer for more than a year and that means their China employer saved about $100,000 over the last year (the $70,000 salary plus the approximately $28,000 in employer taxes and benefits it never had to pay) without violating a single law.

It’s like the perfect crime but it is not a crime at all. The employer simply managed to convince the expat to work at super low wages and there is no contractual record indicating otherwise. Sometimes there may be an email record, but the smart employer has made clear in its employment contract that the employment contract supersedes any prior written or oral promises or agreements. But even without that, Chinese law so favors the written and signed and chopped contract that not having such a provision likely won’t make any difference anyway. Many employers tell their employees they will make the $70,000 payment in one lump sum 6 or 12 months after the expat employee begins work, but then they never actually make the payment. Even without this promise, the expat employee does not want to quit because he or she believes doing so will mean they will never get the $70,000 — not realizing that continuing to work only puts them even deeper in the hole.

Then there are the instances where the employer does pay the employee out of country but stops for a while and then stops paying the out of China portion or fires the employee. The employee contacts our China employment lawyers believing he or she can sue his or her employer for damages based on a $100,000 salary. But how can they do this when their employment contract says their salary is $30,000? Are they going to stand up in a Chinese court and say, “excuse me, your honor, I know the contract says only $30,000 and I know my taxes show I have been paying income taxes on only $30,000” but this employer and I were together engaging in tax fraud against the Chinese government and so I just really feel like I am entitled to have this court enforce the oral agreement my employer and I used to defraud the Chinese government. Yeah, right.

All this very much reminds me of how in the old days when foreigners were not allowed to own real property in China they would buy real property in the name of their Chinese citizen girlfriends (it was pretty much always guys) to get around this prohibition. Then, once the girlfriend had the property, she would break up with her foreign boyfriend and keep the property, insisting that it was a gift. The foreigners would then contact my law firm wanting to sue their exes and we would have to tell them how we viewed that as folly because they would need to argue to the Chinese court that they had bought the real estate not as a gift to their girlfriends, but to have their girlfriends illegally hold the property in a sort of trust for them. Yeah, right.

Our Chinese employment lawyers frequently help expats with their China employment contracts. See China Expat Employment Contracts Because They Matter. A Lot. Even when we are not retained, we like to stay in touch with those who wrote us for employment contract help just so we can know what happens to expats who negotiate their own employment contracts. The below is an email we have used for those who admit to having entered into a split payment employment arrangement:

What your employer has done here is 100% illegal and it puts you at risk. Both you and them are engaging in tax fraud but all that should matter for you is that you are engaging in tax fraud — assuming your employer actually pays you outside China, which they often do not. Your employer may claim otherwise but there is no doubt about this. You are supposed to be paying China income taxes on all of your earnings attributable to your work as a China expat employee. Plain and simple. But under this arrangement (again, assuming you do actually get paid outside China what you have been promised) you will not be doing that. If I were you I would go to my employer and insist it change this payment plan and if it does not, I would consider getting a new job, and fast. Just this week I wrote here how China is — in response to the US-China trade war- – stepping up its hunt for Americans violating China’s law just as you are doing. Do you really believe China would not love to call out and penalize Americans right now for tax evasion?

I am sorry I have to be such a downer, but if you were to end up in jail or deported I would not want it weighing on me that I did not at least warn you about your risks.
Expat readers, please consider this post your warning.