China trademark lawyers

About a year ago, American Lawyer Magazine did an article, That Law Firm’s Website Might Not Be for a Real Law Firm on “a new white paper [that] examines a growing trend of fraudsters posing as attorneys or legal consultants online to exploit those seeking legal services.”  When it comes to China and Southeast Asia, that “growing trend” has reached epidemic proportions.

I say this because in the last year my law firm’s China lawyers have seen at least a five-fold increase in the number of instances in which American and European companies have been ripped off and greatly harmed by fraudsters who advertise their “China legal services” on the internet, usually with Google paid ads.

Just to be clear, I am not talking about the sites that charge $99 (or whatever) for template China contracts that are worth less than nothing. These companies provide a joke of a product but they at least provide what they say they are going to provide. For more on that, check out. China Contract Templates for $99 Each. As far as I know, these companies do not flat out steal your money but they oftentimes can be just as dangerous. These companies lead their clients to believe they are communicating with lawyers when in fact they are not. This means there is no attorney-client privilege and the odds of whoever does your legal work knowing your situation and your goals and having the capability to draft a cross-border document or file your trademark in the right category or form your company correctly are slim.

No, I am talking about flat-out criminals and fraudsters who will take your money and claim that they did what they were paid to do and then not provide you with any services whatsoever.

And again, just to be clear, I am not aware of a single instance where a legitimately licensed lawyer from any country has done this. No Chinese lawyers. No U.S. lawyers. No lawyers from any country. As far as I can tell those engaging in these schemes are not lawyers at all, though they often claim to be.

We first wrote about fake China lawyers more than a decade ago, in China: Where Even The “Law Firms” Are Fake. That post  was on fake Chinese lawyers taking money for never-filed trademark registrations:

There are those who take money to file trademarks in China and then simply run away. A new client told me he had sent about $750 to what he thought was a legitimate China law firm to have his company’s brand name registered. As soon as the first $750 hit Shanghai, he was asked to send an additional $600 to “cover the filing fees,” which he did.

A week later the website was down and the Shanghai “firm” was gone.

It turns out this scam is actually pretty common and it also turns out that in every case of which I am aware the scammers were neither licensed Chinese lawyers nor licensed Chinese trademark agents. In other words, they are just people who run China trademark registration scams.

It has continually gotten worse since then and as foreign companies move from China to other countries in Asia (Vietnam, the Philipines, Thailand, Cambodia, Malaysia, etc.) these scammers are moving as well.  I have heard multiple accounts of foreign companies that paid for trademarks or employment contracts or manufacturing contracts  or company registrations or various other things lawyers typically do for their clients, only to receive nothing in return and only to learn that the “law firm” or the “lawyer” they paid for their legal work never even existed. How many foreign companies believe their trademarks are registered in China or in Vietnam or wherever when in fact they never were? How many think they have registered companies in China or in Vietnam or wherever when they don’t? I don’t know the numbers, but I do know that the number of these fake law firms is on a rapid rise.

It is not that hard to avoid these sort of scams. Do some due diligence before you pay/hire a lawyer, especially if you will be paying upfront for something like a China trademark or a China WFOE where it may take you years to realize you were scammed. There are fast and easy steps you can take to confirm that your lawyers actually have a law license. Every U.S. state lists its licensed practitioners online in its Bar Director and most countries have something similar. Check to see how long they claim to have been in business as compared to how long they have had their website. One fake China attorney claimed to have more than 20 years experience but his website appears to have been online for a total of only 5 months. Read as much as you can online about the lawyer or the law firm you will be hiring. If you are looking to hire an international lawyer or law firm and you have a local lawyer, enlist that lawyer to conduct the due diligence on your behalf. See China Partner Due Diligence for some of the most basic things you can and should be doing before entering into any transaction.

Don’t let yourself be the next victim. Please!

China trademark registrationLast week, the Foshan Intermediate People’s Court awarded RMB 10 million (nearly $1.5 million) in damages to the well-known British luxury goods brand Alfred Dunhill, finding Chinese copycat brand Danhuoli liable for trademark infringement and unfair competition.

The press coverage (which apparently took its cue from the PR release) trumpeted the size of the award and the groundbreaking nature of the victory. To an observer unfamiliar with China trademark practice, both of these claims might seem odd in that the infringement was obvious, outrageous, and longstanding. The infringing company selected a name (“Danhuoli”) similar to Dunhill and then mimicked the elongated vertical lines and lower-case lettering of the Dunhill logo to create a copycat brand identity. And they were apparently successful at it, with more than 200 low-budget clothing stores (franchises, according to the South China Morning Post) in more than 61 cities across China. And just in case there was any doubt about their intent, the infringing company also created a Hong Kong parent company called Dunhill Group.

In the U.S. this kind of nonsense would last about as long as it took to file a TRO, but in China the road to enforcing trademark rights is long and frustrating. Chinese judges are reluctant to find trademark infringement unless the marks are identical, and even then it’s not guaranteed. Chinese judges are also reluctant to award high monetary damages because of the speculative nature of anything that can’t be proven with written evidence. So Dunhill is absolutely justified in feeling vindicated by the verdict.

But a landmark? I beg to differ. A landmark verdict is one that signals a change in the way cases are being decided. But this decision is no landmark, or if it is, it is too early to tell. Nor does this decision show that China is really serious about enforcing IP rights, because this decision is still the exception, not the rule. Check back in a year and let me know if every other decision since this one followed the same logic and came out in favor of the trademark owner.

Still, one detail about the Dunhill decision bears repeating: both companies had registered trademarks, but Dunhill’s was registered first (by decades). That fact alone signifies that Dunhill has had an active and forward-thinking trademark strategy for years. And they would never have emerged victorious in the latest dispute without superior trademark rights. See 8 Reasons to Register Your Trademarks in China.

A quick search of the CTMO database reveals that Danhuoli, whose entire business model is based on ripping off Dunhill’s trademark, is itself the subject of trademark squatting. It seems karmically appropriate.

China and Hong Kong legal systems
For commercial law purposes, think of Hong Kong as a different jurisdiction from the Mainland

Sometimes when we write posts we except a slew of emails and comments and get none. Other times we expect none and get a ton. I had no expectations regarding the post I did earlier this year on splitting expat employee pay between the PRC and Hong Kong — China Expat Pay: Splitting with Hong Kong is 100% Illegal and 200% Dangerous but we are still getting emails on that one, mostly from people who got burned by just such a split.

I started that post by noting how our China employment lawyers are seeing increasing instances of expat employees in China having their salaries “split” by their Chinese or foreign company employers. I then mentioned how 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.”

I had no idea how common this salary splitting is and how common it is for Chinese companies to insist on how it is perfectly legal. Since that post I alone must have received at least a half dozen emails from expats asking if there might be something different about their employment situation that would lead their potential China employer to insist that their salary splitting was fully legal.
Many of these people who wrote me did so after using my blog post to insist that the salary splitting being proposed was illegal.

In my post I talked about how Chinese companies usually respond when questioned regarding the legality of salary splitting with 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.

Now here’s the funniest part: two people who emailed me put my blog post in front of their potential China employers as proof that salary splitting is not legal and their potential China employers responded that we are “just American lawyers and we don’t know China.” Our lead China employment lawyer, Grace Yang, is Chinese and she graduated from Beijing University Law School and I have zero doubt that she 1) knows China employment law ten times better than the Chinese companies trying to cheat their expat employees and that she 2) is going to be a helluva lot more objective on this issue than the Chinese companies that profit from it.

In that post I stated that I saw this salary splitting as designed more to cheat the employee than the Chinese tax authorities:

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.

I am more convinced than ever that there are a bunch of Chinese companies out there that are hiring foreigners as employees on these split contracts with the plan to underpay them and then fire them. I say this based on the emails I have received saying essentially this. The following two are representative:
  • “Good article. A friend of mine working for a large Chinese tooling and injection molding company had something similar happen last week. His contract was with a Hong Kong company, but he worked in China under a China business visa.  His employer did not honor his contract (after 10 years of employment) by not paying his 2017 commissions and then terminating him without paying him any of the severance to which he would have been entitled had he been a legitimate China employee.”
  • Pretty much what you described happened to me. I was hired for $118,000 and told that $70,000 would be paid to me from Hong Kong six months at a time. After my first six months I did not get my $35,000 payment and after four months of my complaining about that they fired me, without paying me anything from Hong Kong ever. My written employment agreement said that my pay was $70,000 a year (no mention of money coming from Hong Kong). I went to an employment lawyer in Shanghai and he did not like my case even though I had emails vaguely talking about my “additional salary.” Lesson learned.

Like I said in my last post on this topic, be careful out there. But be careful not just with the Hong Kong scam involving employment contracts, but be careful any time you are doing any sort of deal with a Mainland China company and a Hong Kong company or component gets tossed into the deal. We see this all the time on all sorts of deals (especially licensing and manufacturing transactions) and they always introduce new risks. I will be writing on that fairly soon. In the meantime, check out Hong Kong: Toto, We’re Not in Mainland China anymore.

 

China employment law webinar

Our lead China employment lawyer, Grace Yang, will be leading a 90 minute webinar on what HR departments need to know about China employment law, and boy is that a lot. Go here to sign up.

It’s been about ten years since China enacted its “new” labor law and it is flat-out unbelievable how much has changed since then. I can remember how controversial it was back then when we first started writing about it. Way back in September, 2008, I wrote a post, entitled, China’s Brand New Labor Law Regulations. It’s All Here. I remember well getting an e-mail from a client (no less) angry at me for even writing about it. His argument was something along the lines that by my even writing about it as though it “might” be followed was a “wasteful joke” because all it would do is cause “paranoid” foreign companies to abide by the law and further damage their ability to compete against their China company peers.

My response was that we believed China would relatively quickly start enforcing its employment laws and would initially do so especially as against foreign companies. That was our theme from day one and many were unhappy about it. Emails poured in from people claiming we were writing about China’s employment laws just to gin up work for ourselves and it was ridiculous to believe China would ever enforce them and either we knew that and were trying to rip people off or we were just plain stupid. My response was always the same. I would emphasize that there were a lot of social and economic reasons for these laws and we fervently believed they would be enforced, though likely slowly and over time. I would then talk about how important it is for foreign companies to abide by Chinese laws.

I told you so!

Today (and probably for the last five years at least), virtually nobody operating in China is not mindful of its employment laws and, blissfully, I don’t think we’ve gotten any hate mail on such laws for nearly a decade. And our China employment law practice is booming.

In the early days of China’s employment laws, we divided the work among our team of China lawyers, but as enforcement of the employment laws increased and as the rules surrounding those laws proliferated and became highly localized, it became apparent we needed a lawyer who would focus on China employment law. See China Employment Law: Local and Not So SimpleGrace Yang is that lawyer for us. Grace has law degrees from top law schools in China and the United States and last year she wrote THE book on China employment law: The China Employment Law Guide: What You Need to Know to Protect Your Company. Buy it! 

Our China employment work these days consists mostly of the following:

  1. Helping foreign companies with employees in China avoid employment law problems, either from the Chinese government or from their own employees. In large part, Grace does this by performing employer audits and then remedying the mistakes found. See China Employment Compliance and Audits: THE New Big Thing.
  2. Helping foreign companies that come to us with a specific and usually urgent employee problem. These problems can range from fending off a lawsuit or a regulator to figuring out what to do with a bunch of employees that will be brought on via a merger deal or will be terminated due to an office or company shut-down.
  3. Helping expats negotiate enforceable contracts with their China employer.

About a third of our China employment law work comes from lawyers, about a third comes from HR professionals and about a third comes from company owners/managers and employees.

Now about this upcoming China employment law webinar. It’s going to be on Tuesday, October 23 at 1 p.m. Eastern Time and it has been approved for 1.5 general recertification credit hours toward PHR, SPHR, and GPHR recertification through the HR Certification Institute. It also will get you 1.5 PDCs for the SHRM-CP or SHRM-SCP.

It will be geared towards “HR, in-house counsel, financial officers, and company presidents.”

It is being put on by HR Webinar Company and they describe it as follows:

China’s employment laws are complicated and highly local. Foreign companies doing business in China face complex China labor and employment issues and questions every day – often without even realizing it. What works in the United States has very little in common with what works in China. Employment compliance has become one of the most important issues foreign companies face in China and it is the rare foreign company that gets it right. Employee disputes are becoming considerably more common and government enforcement is getting significantly more stringent. It virtually always costs less for your company to deal proactively with China employment law issues than to wait to address them only after they devolve into a dispute. It is therefore imperative that you understand the framework of China employment law and steps you can take to mitigate risk.

Please join Grace Yang as she helps you better understand the China employment law landscape. She will focus on helping you recognize key China employment issues and on giving you guidance on how to solve real-life China employment law issues and problems.

WHAT YOU’LL LEARN

This webinar will cover the following:

YOUR CONFERENCE LEADER

Your conference leader for “China Employment Law: What HR Needs to Know” is Grace Yang. Grace heads Harris Bricken’s China employment law practice and contributes a weekly column about China employment law issues for the multi-award winning China Law Blog. Grace received her B.A. degree in law from Peking University and her J.D. degree from the University of Washington School of Law. She represents both China employers and employees in their China employment law matters. Grace published a book entitled The China Employment Law Guide.

If you have China employees, you really do not want to miss Grace’s upcoming webinar.

China contract lawyerOne of the things I love about my work is the different sort of clients we get. Some of our clients care little to not at all about the rationale behind what we as lawyers do. Other of our clients prefer an explanation for everything. The other day, one of our China lawyers cc’ed me on an email she sent to a client who wanted to know more about the contract damages provisions (a/k/a liquidated damages) we had put into a number of contracts we had just drafted for this client. I am running that e-mail below (modified slightly) because it is relevant to most China contracts and therefore relevant for just about anyone doing business with China or doing business in China.

The PRC Supreme Court has ruled that contract damages are always subject to being adjusted to actual damages. Adjustment can be up or down, based on the facts. That is why we never provide for a contract damage amount that is high. We always draft  our contract damage provisions to comply strictly with the actual and foreseeable damages standard.

For the following reasons, we nearly always provide for contract damages (subject, of course, to the Chinese company on the other side going along with them):

1). Injunctive relief is extremely difficult to get in China.

2. One of the best ways to stop a Chinese company from infringing on your intellectual property rights (IPR) is with a prejudgment writ of attachment. But to to get that you need a reasonable standard for the amount of damage that will set the amount of the writ. Contract damages provides that reasonable standard. Though it may be adjusted later we draft them very carefully and conservatively and clearly so that is likely not to happen. The amount we specify in our contract damages provisions is both clear and fair and because of that it serves as a good basis for a prejudgment write of attachment motion.

3. Under PRC Supreme Court interpretations, contract damages is not a replacement for actual damages as proved at trial or as the basis for a final judgment. This renders the contract damages provision weak, but it does not render it meaningless because it provides the basis for the court decision on the damage amount. If the contract damage provision is reasonable and is based on a specific method of calculation that is ultimately based on an external fact (how many infringing items sold and their value), then it will be very unusual for a defendant to be able to convince a court to reduce the amount. On the other hand, if the contract damages is based on nothing or is clearly a penalty amount, the court will simply ignore it. When a court ignores the contract damages amount set forth in your contract, your having had such a provision does you more harm than good. See China Contract Damages: More Art Than Science.

For more on the benefits of contract damages provisions and how to draft such provisions, check out the following:

Vietnam manufacturing lawyerNearly four years ago — during a time when our international lawyers were seeing a big increase in Vietnam work from companies looking to diversify their manufacturing from China — I wrote a series of blog posts on sourcing product from Vietnam. Since that time, our Vietnam practice has steadily grown, until about five months ago when it exploded. In light of the rapidly increasing demand for information regarding sourcing product from Vietnam and in light of the dearth of such information, I am going to reprise and update those posts over the next few weeks.

This first post comes from March, 2015 and was — I believe –written from Ho Chi Minh City.

As my law firm’s Vietnam practice continues to grow, I have become fascinated with how companies decide on where to outsource their product manufacturing as between China and Vietnam, both for new products and for products currently being made in China. One of the reasons I am so fascinated by this is because so many factors must go into the decision and unless IP is paramount for the company, the legal issues are not usually central.

So I was delighted to read the post, 3 Key Factors for Sourcing in Vietnam, particularly since it is written by InTouch Manufacturing Services, a company I know to have substantial China sourcing experience.

That post starts out talking about how the media has been writing often of late about manufacturing shifting from China to Vietnam. It then notes that Nike now gets 42 percent of its product from Vietnam, as compared to 30 percent from China, widening the gap even since 2010. The post then presents the following wage chart from the Japan External Trade Organization showing that China factory workers make, on average, three times as much as factory workers in Vietnam.

Factory Wages in China and Vietnam

The post calls this wage disparity “significant for any labor-intensive product like footwear, garments, and electronics.” It is, but as I am always saying, if wages were the only factor, every company would be looking to start sourcing in Afghanistan, South Sudan or Yemen, and of course they are not.

Most importantly though, this post analyzes from a sourcing perspective the following three key issues involved in choosing between China and Vietnam.

1. Product Type. The post notes that “Vietnam has proven to be quite capable of producing labor-intensive products like footwear and is now starting to win over major technology companies for significant investments in more technical manufacturing.” However, though “capabilities and confidence in Vietnamese manufacturing are growing … China still maintains a significant competitive advantage.”

The post rightly warns those looking to shift production from China to Vietnam to consider “the risks posed by a [Vietnamese] workforce that is relatively new and inexperienced” and suggests asking “what might you be taking for granted in China now that you may find yourself struggling to manage or live without in Vietnam?”

2. Your Existing Supply Chain. The post rightly points out that Vietnam’s infrastructure is not as good as China’s and this could be particularly problematic for smaller companies that cannot essentially fund their own infrastructure:

Vietnam’s fragmented manufacturing industry makes it harder to identify suitable suppliers, especially for those new to Vietnam. Lack of basic infrastructure is a main cause of this fragmentation. Contrast that with China where you can find just about anything you want – and usually more than a handful of viable options that aren’t too far away from where you need them. With well-paved roads, 7 of the world’s 10 busiest shipping ports, and a massive network of high-speed and commercial rail lines, infrastructure in China is extremely well established.

*     *     *     *

Both countries pose their own unique challenges to foreigners looking to establish operations there, but the path is clearer in China. Tons of businesses have already set up shop and blazed the trail for mega corporations and small-time entrepreneurs alike. Potential foreign buyers and business owners of all sizes will have a relatively easier time finding guidance about China than for Vietnam.

This is very true and one of the things we are finding we are having to do for our clients looking to go into Vietnam is to connect them with appropriate people in Vietnam, far more often than we do for our clients looking to go into China.

3: Foreign-owned Manufacturers. The post discusses how so many of the “manufacturers in Vietnam established for export are actually foreign owned,” with a large portion of those owned or operated by Chinese or Taiwanese. Very true, and for more on that, check out this post, What’s Your Vietnam Strategy? on my time in Vietnam during last year’s anti-Chinese riots.

Interestingly, the post notes how this foreign ownership means that the time and energy you have spent “learning the nuances of Chinese culture and manufacturing will not have gone to waste. This makes it easy to transfer existing QC checklists, specification sheets, or other documentation that might have been written in English and Chinese. You’ll generally find that these factories also employ Vietnamese staff proficient in both English and Chinese.”

The post also wisely notes that with so many Chinese manufacturers themselves having set up in Vietnam, you should discuss with them how you “may be able to work with your Chinese supplier to keep some of the production processes in China, while outsourcing others.”

It makes for a really good read and I recommend you read it.

The same core things have remained the same for Vietnam, but there have been improvements on all fronts.

Product Type.  As expected, manufacturing in Vietnam is becoming increasingly sophisticated, to the point that it nears China standards for many products. Many of our clients that make clothing, shoes, furniture, doors and many sorts of housewares have been in Vietnam for years now, with great success and with rising manufacturing sophistication. Many of our clients that make kitchen appliances and electronics and more complicated household items (like door handles/locks) are either sticking their toes into Vietnam or are looking to do so.

Existing Supply Chain. China’s road and port transportation has improved since 2015 but it is still not even close to China in terms of capacity or reliability, especially for smaller companies. Vietnam has been discovered and even overrun with new manufacturing in the last few months and this is taxing its roads and its ports and its factories. Companies that have not experienced product delays in Vietnam for years are experiencing them right now and we expect that will only increase as more foreign companies that ship product to the United States (and even elsewhere) move production from China to Vietnam.

3: Foreign-owned Manufacturers. Still true. Many factories in Vietnam that cater to America and European and Australian companies are owned out of Taiwan.

One new thing about which you need to be careful these days is making sure your product made in Vietnam will actually be deemed to have been made in Vietnam for US tariff purposes. We are hearing of Chinese companies assuring their foreign buyers that they will ship their products to Vietnam (or Indonesia or Malaysia or Thailand or Hong Kong or Taiwan or Cambodia) and from there have them shipped to the United States and that doing this will make them “tariff free.” Having your made in  China products shipped to Taiwan or to Malaysia or to Thailand or to Vietnam or to anywhere else and then having those products shipped to the United States as though they are not from China can and does lead to massive fines and to JAIL TIME. Chinese factories are claiming either that this transshipping is either legal or that nobody ever gets caught, neither of which are remotely true. Do you really want to be legal advice about United States customs law from a Chinese factory with a massive incentive to sell you Chinese products and very little incentive to keep you out of jail?

US importers that falsely label the country of origin on their imports are subject to significant fines and penalties and to criminal prosecution. Lying about a product’s country of origin can subject you to 20 years in Federal prison. My law firm’s international trade lawyers are always pointing out that whenever the US increases tariffs on a product, the US Government knows there is an increased likelihood of illegal transshipping of that product and it prepares accordingly. The U.S. government is preparing to catch those who transship China products to avoid the new China tariffs and it will no doubt be tougher than usual on anyone they catch engaging in transshipping

The examples below are illustrative.

  • A US importer is told by its Chinese producer/exporter whose products will be covered by the China tariffs not to worry about the tariffs because the Chinese company will ship the product through Taiwan and list them as Taiwan products. The importer should decline this offer because if it imports this product knowing it is from China and not Taiwan, it will be criminally liable under U.S. customs law and subject to potentially massive damages under the U.S. False Claims Act. 
  • A US importer suspects its Vietnamese “producer” is not actually making anything, but rather simply transshipping product that comes from the Chinese company that owns it. The company visits the Vietnam facility and it does not appear anything is actually being produced there. The US importer raises this concern with the Chinese company which tells the US company that it can avoid any problems by being listed as the consignee of the products and not the importer of record since it is the importer who is at risk. This too is simply wrong information.

Transshipment is a crime and Chinese companies and their US importers can have very different interests when it comes to importing product into the United States. The Chinese company wants to ship product to the US above all else and the US importer should above all else want to avoid Customs trouble and stay out of jail. The Trump Administration has made known its desire to vigorously hunt down and prosecute transshipment claims.

Here’s the thing though. There is often a lot you can do to legally change the country of origin of your products, but the key here is legally. The other key here is that the rules for figuring out the appropriate country of origin are incredibly complicated and best left to an experienced and qualified US customs lawyer.

So though it may be possible for you to make minor (or major) changes in how you are having your products made so they can legally avoid the China tariffs, you need to tread carefully and not just go along with what your China factory is telling you to do. It’s your company and your money and your freedom that’s at stake here and this is not something on which you should be messing around and taking advice from anyone whose job it is to do anything but look out for your interests.

For my first post comparing China and Vietnam, you need to go way back to 2006 and to Vietnam — Tastes Like China Lite.

International business lawyers
Photo by George Baird

I had a sorta friend in college who smoked like a chimney and drank like a Supreme Court Justice. When people would point out the danger of his ways he would respond by emphatically noting that his grandfather also smoked and drank just as much and he was still alive and kicking at 88. Does anyone not see a problem with this analysis?

And yet, my firm’s international lawyers often hear something similar as an excuse for why some company or some person is doing XY or Z that is not legal. Sometimes they will add that so and so who is a native of the country in which they are doing business has told them that this or that is okay, which to me is the equivalent of relying on someone with no medical training saying it’s okay to smoke.

What has happened to Fan Bing Bing spurs me to mention the above. Fan Bing Bing is a terrific movie actress who recently got into BIG trouble with the Chinese tax authorities for having underreported her income via a dual-contract system in which only one contract is disclosed to the tax authorities. For more on this, check out China Movie Stars and The Two-Contract Problem. But it isn’t just movie stars that employ the two-contract tax dodge; many foreign companies and expats do as well:

Even if Fan Bingbing hasn’t done a single thing wrong (which is very possible), it wouldn’t be surprising to learn that tax evasion is rampant in the film business. Tax evasion is like a national sport in China. Mainland factories regularly misreport income by having payments go to a Hong Kong or Taiwanese holding company. So-called “independent contractors” in China rarely report their income because they and their foreign employer are both operating illegally. And the billion-dollar daigou business is profitable largely through tax and customs fraud.

Around once a month (and 4-5 times in December and January — not kidding), our international lawyers get a call from a foreigner in big trouble somewhere like China or Indonesia for having done something illegal. I myself have taken many of these calls and they usually start out with the person in trouble saying something like the following:

I always follow the law and I wanted to follow the law in __________ [country] but my ___________ assured me that this is how things are done in ___________[country] and so I reluctantly went along. And now I am in legal trouble for having done…..

The person who usually gets the blame is the accountant or general manager or even the person’s wife who is a native of whatever country in which the person is having his legal problems — I say “his” here because I cannot remember getting such a call from anyone not male. My tactic is to quickly push through this sort of discussion by bluntly saying, well yes, not paying your taxes or not doing X is illegal pretty much everywhere in the world and I am not aware of any country in the world where it is a defense to say that everyone else is operating illegally as well. So at this point, what I suggest is that we bring in a top-flight criminal lawyer and work on doing whatever we can to prevent you from going to jail and to reduce what you will need to pay.

Around ten years ago, A reader sent me an article regarding the Sri Lankan parents being denied the return of their 17 year old daughter by a United States judge because the family was unable to prove they were in the United States legally. The judge was denying the daughter’s return both for immigration reasons and because her parents’ credibility had been so damaged by their history of immigration untruths. The reader asked if we were aware of anything like this having happened in China or the United States with Chinese businesspeople and whether “something like this” can impact one’s business in China. I responded by listing out all sorts of examples we had seen where one’s immigration status has harmed a business.

Many years ago, I was involved in an international litigation matter involving two Russian fishing companies. One of the key witnesses for the Russian company on the other side was a woman who had secured a US visa based on her supposed extensive education and experience in the fishing industry in Russia. She had secured this visa by claiming a college degree from one of Russia’s best fishing institutes and by claiming to have spent many years working for one of its largest fishing companies. One of my firm’s crackerjack paralegals somehow acquired a copy of this person’s visa application and noticed that her college degree from a college in Town A in Russia had been stamped by someone in Town B in Russia. This was the equivalent of a Harvard degree with an official Yale stamp on it. In other words, it could never happen if the degree were not a fake.

Our next move was to depose this person and depose her we did. At her deposition, we asked her a series of questions intended to make clear we knew she had lied to get into the United States, including the following:

1. Who was your favorite professor? She said she had no favorite.
2. Name one of your professors. She said she could not remember a single one.
3. Name one professor at the entire college. She said she could not remember a single one.
4. Who was your best friend at college? She said she was too busy studying to have had any friends.
5. Name one fellow student at your college. She said she could not remember a single one.
6. List the classes you took. She gave a really vague answer.
7. Name some of the buildings on your campus. She could not remember a single one.
8. Describe the campus. She gave an incredibly vague description.

We asked the same sort of questions regarding the fishing company at which she had allegedly worked in Russia and we got the same sort of answers.

And guess what, this key witness for the other side never showed up to testify at trial, which greatly strengthened our case and probably helped us prevail. I have no doubt her failure to appear stemmed from her fear of her illegal immigration status being publicly exposed.

I was once contacted by a Russian-American company that wanted my firm to sue an American company over a debt. I pushed my client about skeletons in his and his company’s closet and he admitted he was in the United States on a student visa and so should not have been working at all. We talked about how his bringing this case would probably expose him to visa issues and how he should think long and hard before he brought it. He chose not to bring the case and instead to just walk away from a not insubstantial debt.

We have had to tell a number of foreigners in China the same thing when they have sought our help in collecting on a debt in China or in suing their Chinese partner for having run off with what the foreigner thought was its own business. If you or your business are not 100% legal in China, you have pretty much foreclosed your ability to sue anyone in China, no matter what they do to you. To put it bluntly, you are ripe for the plucking.

A handful of times (usually during periods of stepped-up visa enforcement), my firm has been contacted by foreigners with illegal businesses in China who have either been denied re-entry into China or have been told to leave. These people are desperately seeking our help to get them back into China. They are desperate because their profitable China based businesses cannot function without them. The odds of our being able to help them are slim.

One of the most underrated benefits of having a Wholly Foreign Owned Entity (WFOE) in China is that entity’s ability to hire foreigners and those foreigners’ ability to secure Chinese work visas (Z visas). These companies are legal and they have standing to sue and since their employees are working in China legally on Z visas, they have nothing to fear by testifying on the company’s behalf.

And we too have seen our share of double contracts. Many years ago, a European company hired us to sue an American company for having failed to pay around 2.5 million dollars for the sale of a used airplane (I have forgotten the exact amount). This company told us they had a written contract for this transaction and we told them we like their case. They then sent us the contract and instead of it listing the airplane price at $2.5 million, it listed it at $600,000. We raised the monetary discrepancy with the client who explained that “yes, this is what the contract says but the deal was for $2.5 million and the only reason it wasn’t written in the contract that way was because the other side insisted on it saying $600,000 to minimize its duties when it took the plane to its own country. We told them we were no longer interested in pursuing the case and as far as I know they ended up having to walk away from $2.5 million.

One of my favorite stories is when I went to Papua New Guinea to help a Sakhalin Island client secure the return of two helicopters. When I landed in Port Moresby, I was asked if I was in the country as a tourist or for business. The tourist visa was something around $35 and the business visa was something around $350, but I said “business” and I paid the much higher fee. I then flew to Goroka where I met the next day with the governor of the Eastern Highlands Province, Malcolm “Kela” Smith. I was told “Kela” means bald man. The first thing Mr. Smith did when I met with him was to check my passport. When it revealed I was there on a business visa, I could sense a change in his view of me. Though he never confirmed this to me, I am convinced that had my passport revealed I was in PNG on a tourist visa, Mr. Smith would either have had me thrown out of the country or he would have refused to meet with me because I was in the country illegally. Kela Smith ended up meeting with me and with my client and within a day or two we had a deal whereby my client would get his helicopters back.

With so many companies these days looking to set up in Asian countries with even weaker law enforcement than China, our international business lawyers are often finding ourselves stressing the advantages of scrupulously following a country’s laws even when doing so is difficult and expensive. Our experience is that this virtually always pays off in the end — economically, with stability, and with peace of mind.

The simple and obvious bottom line here is that if you are going to be doing business in a foreign country it pays to do so legally.

 

China IP lawyer

Time for another entry in what has become a running series of posts about wine in China. Thus far, the series includes:

  1. China, Wine and Tariffs
  2. China Trademarks: Wine Labels in China
  3. China Trademarks – The (Mis)Classification of Wine

I’ve written previously about the rampant counterfeiting of foreign wine in China, especially with well-known brands like Château Lafite, Château Latour, and Screaming Eagle. Because counterfeiting only comes to light when it is discovered by authorities (or brand owners), the data is sketchy on the actual amount of counterfeit wine on the market – it’s either anecdotal or extrapolated, which leads to widely divergent conclusions. Maureen Downey, often cited as the leading expert on wine fraud, said back in 2014 that the majority of counterfeits were limited to a few vintages of a few labels, and that the top 16 counterfeit wines were all European. Meanwhile, another wine fraud investigator stated last year that 20% of all wine in the world is counterfeit, which would mean approximately 6 billion bottles of counterfeit wine are sold each year – a lot more than a few vintages of a few labels.

For many wineries, the design of the label — that is, in addition to the name of the winery – is also an indication of the source of goods. A bottle of Château Lafite doesn’t just bear the name “Lafite”; it also has a picture of the château. The obvious way to protect the wine label from infringement is via a trademark registration for the label design (or at least the graphic elements common to each label). But almost every wine label would also be considered a creative work in fixed form, and therefore eligible for copyright protection.

As we wrote in China Copyright Law: We Need to Talk:

Copyright is an essential part of any substantive IP protection plan in China, but many companies fail to take an extremely important step: registering their copyrights in China. One of the most common misconceptions our China IP lawyers hear is that copyright registration in China is optional, because you do not have to file anything to have a valid copyright in China.

The moral of that post is just as true for wineries as for any other company – the best way to enforce your copyright in China is to register it. Counterfeiters are creative in their own way, and I’ve seen some fakes that combine one winery’s label design with a new (often fake) winery name. A trademark registration for your label may be sufficient to stop such a fake, but why not give yourself more ammunition?

As with any business decision, wineries should conduct a cost-benefit analysis before registering a copyright in China. If you are a small winery and/or don’t sell wine in China and never expect to, I wouldn’t bother registering any IP in China, let alone a copyright. But if you’re big enough to export wine to China, you’re big enough to protect your IP. And that means trademarks for your name and your label, and also a copyright for the label.

China entertainment lawyer

The pace of change is so rapid that it’s always hard to keep up with developments in China. What made sense last month often makes no sense this month. Here’s my attempt to make sense of what’s going on in video streaming right now.

1. More subscribers

As recently as four or five years ago it seemed that Mainlanders simply weren’t prepared to pay for online content. Advertising-supported delivery seemed the only commercially viable form of distribution. These days, millions of Chinese are prepared to subscribe, either to access the increased volumes of premium content now on offer or simply to avoid advertising. The rapid growth of mobile wallets like those provided by WeChat and Alipay is supporting this process. Whatever the reason, in 2017 online video revenues increased by 49% to $14 billion.

2. More streaming, less social media

Over the last five years we’ve seen a huge increase in traffic on VOD sites as Chinese people move over from social media to VOD. The 2018 WeChat Social Commerce Report says that increased engagement on video apps is causing the decreasing use of social apps.

3. VOD, and not TV, is now driving production

VOD platforms are pushing TV broadcasters aside with their production spends. Anke Redl, MD of CMM-I, says “VOD platforms have become production powerhouses. They are investing in other platforms and spending more on production costs. Their content creation spends now far exceed those of the TV stations”.

4. Big platforms are spending big on original content

According to Redl, “The VOD ecosystem has changed dramatically in the last few years. In the past, the platforms were more inclined to buy existing content, much of it foreign. As foreign content restrictions bite, they are now more careful about acquiring foreign content and more inclined to invest in local content”. Youku, Tencent Video and iQiyi, China’s three big OTT players, are all investing more in the production of premium content. In an interesting twist,  increased local production spend may be a way of allowing platforms to access more foreign content because their foreign imports must be a proportion of their local offerings.

5. Content prices are up

The transformation of China’s video market is driving up content acquisition prices. Platforms are now spending two or three times more per episode than they did two years ago. Per episode production spends are reportedly now in the range $1.6 to $2.4 million.

6. Content is local language, China focused

While there will always be demand for foreign content, Chinese people mostly like watching Chinese content. They are very happy with Chinese programs. This basic fact often comes as a surprise to foreigners. This is an underlying cultural preference that can’t be blamed on foreign content restrictions and import quotas. The good news for China’s producers and distributors is that the domestic market is large enough to show substantial returns on investment. The bad news, though, is that there is no foreign market for Chinese programs. A show that fails here has nowhere else to go.

7. Regulation of foreign content is increasing

No surprises there. The US-China trade war obviously isn’t helping. See this recent post for a summary of new proposed regulations. By the way, the Chinese aren’t the only ones restricting foreign content. Look at the new EU law requiring streaming platforms to carry 30% European content.

8. There is a growing market for non-exclusive foreign content deals

Quota places follow the imported programs, not the importing platform. Non-exclusive foreign content deals therefore allow more than one platform to benefit from a quota place. More and more of the smaller platforms are operating in this space. They will clear particular programs for a quota place, shop them around and then license them non-exclusively to bigger platforms. In this way the benefit of quota places is spread more widely across the market.

9. Capital markets are paying attention

Thomas Hui, CMC Holdings COO, says “Specialty and short form content platforms are gaining traction with viewers and in capital markets“. There sure has been a lot of activity at the big end of town. iQiyi raised more than $2 billion when it went public in New York earlier this year, while Tencent invested $1.1 billion in a single day — $461.6 million in Huya and $632 million in Douyu TV.

10. Despite it all, big China platforms are making losses

Subscriptions may be up but subscribers still remain in the minority. They accounted for only a quarter of total online video revenues in 2017, with advertising accounting for half. Tencent recently reported its first profit decline in more than 10 years, wiping more than $100 billion off its market capitalization. According to analysts referred to by The Information, Youku, Tencent Video and iQiyi are all operating at a loss.

China licensing lawyers

True confession. I have been writing too much about foreign companies looking to leave China and not enough about foreign companies looking to get into China. For the last few months, the work lives of the international lawyers at my firm have been inherently tilted towards those looking to leave China, rather than to get in. This is true for the following reasons:

  1. For every phone call or communication we get from a new client, we get 5-10 from existing clients.
  2. Existing clients do not call us to say “everything is going great in China, we’ll talk again soon.” That is not the nature of the lawyer-client relationship. No, they call us to say, “we have this problem in or with China, can you help us?”
  3. The overriding problem our clients have with China these days is the US-China trade war. It is important to note that this is true not just of our US clients, but of our European and Australian and Canadian and Latin American clients as well, because so many of those clients import made in China products into the United States.

But at the same time — and I actually this morning did the best I could with Clio and Lexicata (my law firm’s practice management and client intake software)– the number of companies contacting us to do business in China (including US companies) is much greater the first nine months of this year than the first nine months of last year — by every single possible metric. In other words, as one door is closing, another is opening.

I was reminded of this today after reading an article by Gordon Orr, entitled, Easier to Import into China? Quick aside: Gordon Orr is one of the 2-3 most knowledgable and most thoughtful writers on Linkedin and if you are not following him, you should go here and start doing so. His post needs no question mark because the answer is that it is easier to import into China today than last year and for many, cheaper too.

Orr answers his own question with “Two parts ‘YES,’ one part ‘NO,’ which translates for me to an overall “YES.”

Orr begins his article by discussing the “flood of announcements from China’s government” about how China wants to import more and of how it is moving to make imports easier. He then notes how China’s easing its lending requirements means Chinese companies are right now engorged with cash. All true.

Orr then notes how the following have increased and will continue to increase Chinese imports:

  • Streamlined customs clearance procedures to get product through at a faster pace. Investment at ports and airports will reduce logistical costs.
  • Actual tariff reductions from automotive to pharmaceutical will reduce end user prices by almost US$10bn with collected tariff rates falling to 7.5% from 9.8% last year. Tariffs for electronic equipment and machinery to 8.8% from 12.2%, duties for textiles from 8.4% from 11.5% and for paper products from 5.4% from 6.6%.
  • As trade ministers visit China, they are increasingly handed agreements to take back with them that open up access for products from their home market. For example, over the summer visits by Ministers from the UK led to announcements of the opening up of Chinese markets to UK dairy and beef products
  • Moves to make cross border ecommerce into China easier is an important move for many SMEs, for whom the cost of setting up to export to China has previously been prohibitive. The development of free trade “ports” to hold product in China duty free, the new ecommerce law holding the ecommerce platforms accountable for whether products sold on their platform are genuine, the upgrading of the teams within Alibaba and JD.com to reach out and market to potential exporters to China in dozens of countries globally have all helped SMEs to get to market at lower risk.

The bottom line is that now is a good time to be a seller of foreign products and services into China.

Our China lawyers are seeing how this import push is both directly and indirectly impacting foreign companies. The direct impact shows up with more foreign companies looking to sell into China and more companies seeing their China sales on the rise. The indirect impact shows up with more foreign companies doing brand and technology licensing and distribution deals with Chinese companies looking to leverage foreign technology and branding to their own Chinese customer base. Clio and Lexicata clearly bear this out as well, as our firm has (again, by every possible metric) seen a phenomenal increase in legal work for foreign companies doing licensing and distribution deals with China. We have even seen China be more encouraging of WFOE formations this last year than for perhaps a decade, both in terms of tax incentives and in terms of making the formation itself easier. China also recently liberalized its joint venture laws.  And just to be clear, we have neither heard nor seen American companies being treated any differently than other foreign companies on any of these fronts.

So yes, many foreign companies that manufacture in China are feeling pain these days, but foreign companies that sell in China or sell into China are thriving, perhaps like never before.

What are you seeing out there?