China employees during WFOE formation
Be safe. Hire after your China WFOE has been formed.

If you are a foreign (i.e., non-Chinese) entity with no legal presence in China, you cannot directly hire any employees in China. The basic rule is that you cannot hire a Chinese individual until after you have formed an entity (e.g., a WFOE) there and violating this rule can (and nearly always does) bring all sorts of bad things down on everyone involved. See Doing Business in China with Deportation or Worse Hanging Over Your Head.

What though do you do if you are in the process of forming your WFOE in China? Can you bring on employees during that time to assist with setup and other such things? Surely during this usually three to five month period, it is okay to bring on people and pay them as “employees” and then “convert” them over to legal status employees as soon as the WFOE is formed. Unfortunately, this is technically not allowed; there is no way for a foreign entity to hire a Chinese national “directly” unless and until it has an entity (a WFOE or a Joint Venture) in China. Sending illegal payments to your Chinese “employees” is not “hiring directly;” that is engaging in illegal activity before the WFOE is formed, and it is generally not a good way to start.

Though there is absolutely nothing in Chinese law that allows for “hiring” an “employee” before a WFOE is formed, the truth is that none of our Chinese lawyers have heard of anyone getting in trouble for this. This is not to say though that bringing on workers during the formation phase of your WFOE is not without risks. First off, past performance is no guarantee of future performance. Second, everything in China is somewhat local and that is particularly true of anything related to employment. See China Employment Law: Local and Not So Simple. In other words, what works in Shenzhen may not work in Shanghai, and vice-versa. And you must realize that for tax collection reasons the Chinese government is on a constant lookout for foreigners doing business in China without a WFOE and they have become exceedingly good at finding them.

The biggest risk of bringing on workers during the formation phase of your WFOE probably comes from the workers themselves. If things go well with them, no problem. But things very often do not go well with Chinese “employees.” Here is an all too common situation: a foreign company hires a Chinese person to work on the ground before the WFOE comes into existence. This Chinese person does something illegal in China and the foreign company informs the Chinese person that he is fired.  The Chinese person then says: “you cannot fire me because my engagement was illegal and that means you are operating illegally in China and everything I did that you say was illegal was done for the company and so you (the company) were doing illegal things too. I know more about these things because I am the one who was doing them but if I report them I won’t get in trouble for them, you will.”

If the foreign company terminates the employee that individual will no doubt files a lawsuit for unlawful termination AND report the foreign company to the Chinese government and then the WFOE and its management get in trouble, in addition to having to take the employee back because the termination was unlawful. The best resolution at this point is virtually always to reach a settlement with the “employee,” but because the “employee” has so much leverage in this sort of situation, the company usually has to pay quite a lot of money to extricate itself from the rogue “employee.”

Even after the WFOE is formed the new WFOE is at some risk of one of its pre-WFOE “employees” ratting it out for the pre-WFOE hiring, but that is much rarer. To ameliorate this risk, we always advise that you give your employees seniority and full other credit for any time spent working for your company during its pre-WFOE days.

Bottom line: Not bringing on Chinese employees directly while in the process of forming your China WFOE can be inconvenient, but it is always the safest route.

 

 

 

 

 

China Movie IndustryChinese film director Zhang Yimou has made some of my favorite Chinese-language films: Raise the Red Lantern, The Story of Qiu Ju, House of Flying Daggers, Hero, and more. He also produced the spectacular Opening Ceremony of the 2008 Olympics in Beijing, for which he is justly revered in China. Despite some recent missteps (The Flowers of War, The Great Wall) his credibility as an artist and Chinese cultural icon is nigh-unassailable.

Last week Zhang published an opinion piece in The New York Times titled “What Hollywood Looks Like From China” I’m not sure what to make of it. The piece contains some lovely metaphors and a call at the end for mutual cultural understanding. But the middle section, ostensibly a summary of the relationship between the Chinese and American film industries, reads like the opening statement in a trade negotiation: “But at the moment, a large discrepancy exists in that very few Chinese movies are able to enter the American market and attract a significant audience. Chinese audiences provide Hollywood with huge profits, but what does China’s film industry gain in return?”

The language is slightly ambiguous (by intention, I assume), but a fair inference is that the playing field isn’t fair, and it’s specifically unfair to Chinese films because American movies dominate the Chinese market and rake in the cash, but Chinese movies are prevented from gaining a foothold in the U.S. market.

Reading this sort of thing, I’m sure, makes Hollywood’s blood boil. For years, China has systematically and formally constrained the ability of foreign movies to enter the Chinese film market through a quota system and periodic blackouts on non-Chinese films. The films allowed in under the quota system receive only 25% of the net profits, and even those numbers are aspirational, as the box-office numbers are woefully underreported and payments are sometimes months or years late. An additional number of foreign films are allowed in as buyouts, which except in limited situations (e.g., Resident Evil) do not involve any revenue sharing. The number of buyout films has been increasing and is expected to hit an all-time high of 70 films this year. Long story short, even when US films do well in China (and they often do) most of the revenue stays in China with the Chinese distributors and exhibitors.

Meanwhile, Chinese films have essentially unfettered access to the US market. All it takes is a willing distributor, which could be a Chinese-owned distributor like China Lion. When you add streaming to the mix, it is theoretically possible for every single Chinese movie to be released in America and the Chinese filmmakers can receive whatever sort of profit-sharing arrangement they can negotiate.

And we haven’t even talked about content restrictions: China regularly censors content, whether it be lopping off several minutes (Logan), agreeing to show a movie then pulling it in the middle of its first showing (Django Unchained), or declining to show a movie altogether (Ghostbusters). By contrast, Chinese films are generally shown uncut in the US absent a specific agreement between the filmmaker and the distributor.

Zhang is absolutely correct about the box office disparity, though. Despite the restrictions in China, American movies still do huge business there – although Chinese movies continue to gain strength and popularity. And notwithstanding the openness of the US market, Chinese films continually fail to gain any traction in the U.S. market.

But so what? People watch what they want to watch. It’s not as if films from other countries do any better in the US. The list of top-grossing foreign-language films in the US since 1980 is dismal reading if you’re a foreign filmmaker: Crouching Tiger, Hidden Dragon is in the lead with $128M, but the next film after that (Life is Beautiful) only made $57M, and by the time you get to #11 the grosses are down to $20M. The market for foreign films in the US remains small and largely limited to two demographics: diaspora-driven audiences and arthouse audiences. Otherwise, Americans don’t want to watch movies with subtitles and won’t accept dubbed films. And although Crouching Tiger’s phenomenal success cannot be ignored, it is extremely hard to see it as anything but a once-in-a-lifetime event. Zhang Yimou should know this better than anyone; his films Hero (#3 all-time foreign film with $53.7M) and House of Flying Daggers (#26 all-time with $11M) benefited from the post-Crouching Tiger box office swell for Chinese films that ended nearly as quickly as it started.

It’s perfectly understandable for a country to support and protect its own filmmakers and retain its own cultural identity. If I had grown up in another country, I’m sure I would have mixed feelings about America’s cultural dominance. But justifying China’s protectionist measures by comparing relative box office percentages is an argument of false equivalents. Let’s not forget that foreign companies are prohibited from distributing films in China, and can only produce movies in China if they have a Chinese partner. Meanwhile, China’s Dalian Wanda Group, through its ownership of AMC Theatres, is the largest film exhibitor in the United States.

It’s reasonable to ask what the Chinese film industry gets from Hollywood. But it’s also reasonable to ask what the Chinese film industry should get. Many would argue that China is already getting more than its fair share. But as Zhang’s piece makes clear, that’s not how China sees it. Backup plans, anyone?

Sinosure, Leviton Law Firm, Brown & Joseph
Sinosure wants you

Sinosure and its US collection companies and law firms (mostly through Brown & Joseph and the Leviton Law Firm) seem to be stepping up their collection efforts against American companies that allegedly owe money to their Chinese suppliers.

First a bit of background on the Sinosure players that my firm’s international litigators see showing up again and again. I am providing this to give you background on how Sinosure typically handles its U.S. collection claims and on the people with whom you will likely need to deal.

The first to appear on behalf of Sinosure is usually an Illinois based company, Brown & Joseph. Brown & Joseph calls itself “a commercial and credit collection firm” and our clients pursued by Sinosure usually get an email from Brown & Joseph stating something like the following (I changed the company name and the amount to remove any identifiers:

Please allow this correspondence to serve as notice that this firm has been retained by China Export & Credit Insurance Corporation (Sinosure) on behalf of their policy holder Dongguan ________Sewing Machine, Ltd.

All further communications regarding this matter should be directed to my office.

The claimed amount of default is $345,862.23 in which the policy holder has now filed for credit insurance due to nonpayment.

Your immediate cooperation is needed to resolve this issue out of litigation. Pursuant to the attached Trust Deeds all rights have been assigned to Sinosure to collect this on their behalf.

Your failure to cooperate may result in future import and credit implications of goods from the People [sic] Republic of China.

With that being said, please review the attachments and acknowledge the invoices and amount owed of $345,862.23 for verification purposes.

In addition, I will anticipate your payment in full via wire directly to our firms [sic] escrow account. The wiring instructions are listed below. Please email me with the wire confirmation number and upon receipt I will confirm closure of this case.

Domestic Wire Transfer:

Routing Bank: First Bank & Trust, Evanston IL

ABA: 071925538

Account #: 4084168

Beneficiary: Brown and Joseph, LTD

If you are unable to remit payment in full, you will be required to contact me directly before the end of business tomorrow to discuss a reasonable payment plan for our client to review.

I look forward to your immediate response as I only have a limited time to resolve this file in my office prior to litigation.

This letter threatens both litigation against the U.S. company that allegedly owes money to a Chinese company and it also threatens to impact the U.S. company’s “future import and credit implications of goods from the People [sic] Republic of China.” I am not sure whether the threat to future imports and credit from China is deliberately unclear, but what Brown & Joseph seems to be saying here is that if you do not pay, Sinosure will cease providing insurance on your credit purchases from your Chinese suppliers. U.S. companies that buy products from China on credit need to take this threat very seriously.

Don Leviton seems to be the head attorney on Sinosure’s U.S. matters. Mr. Leviton’s Linkedin profile lists him as “counsel” to Brown & Joseph and also as a Principal at Atlas & Leviton. Here is Don Leviton’s profile on Brown & Joseph. Donald Leviton’s Avvo page lists him as a lawyer at the Leviton Law Firm in Hoffman Estates, Illinois. Here is what appears to be the Leviton Law Firm Website, but because it does not list any contact information nor any attorney names, it is possible this is not Donald Leviton’s law firm or that it was and no longer is. The Leviton Law Firm has this to say about commercial collections:

While not always possible, it was our philosophy and goal to negotiate amicable settlements and workouts between our clients and debtors in order that the parties may attempt to continue their business relationships in this very challenging economic environment.

Note how it says “it was” their philosophy. It’s not clear whether putting this in past tense is a typo, bad grammar, or if indeed its philosophy has changed. But I can tell you that from my firm’s dealings with Sinosure (when represented by Don Leviton or Leviton Law Firm or Brown & Joseph), I would use words like “relentless” or “unyielding” or even “tone deaf” to describe the philosophy of those who are tasked to collect a debt on behalf of Sinosure. I mention resolute and unyielding because it is difficult to impossible to get any monetary compromise and “tone deaf” because it is not uncommon for Sinosure to seek from foreign companies more than they appear to actually owe and then still not back down at all on the amount.

Elizabeth Dawson, who appears to be a Senior Account Executive, International Claims and Litigation, for Brown & Joseph seems often to be the first point of contact on a Sinosure collection matter. It is not clear whether Ms. Dawson is an attorney but I could not find an Elizabeth Dawson on Illinois’s roll of attorneys. Our clients pursued by Sinosure have also dealt with Michael Jones from Brown & Joseph, who also may or may not be an attorney. I cannot find information about Michael Jones online and so it is possible Michael Jones no longer works for Brown & Joseph and no longer represents Sinosure.

Brown & Joseph also seems to describe itself as a law firm and boasts of its international debt collection prowess and of its China expertise:

U.S.-Based Collection Law Firm.

Brown & Joseph, Ltd. is the leader in North American debt recovery for Chinese manufacturers who export goods all over the world. After 15 years of international recovery experience successfully handling cases for the groups that oversee credit insurance on exports, Brown & Joseph can offer significant resources that help to locate shipments, resolve disputes and gain immediate settlements, overcome language and cultural barriers, and recover money owed.

Our U.S. based firm has worked with many leading global trade credit insurers to reduce write-offs, protect their interests by legally securing debt in the local domicile, all while keeping your out of pocket costs minimal by working on a contingency basis. If there is no money recovered that is owed to you, there is no fee. Our contingency based fees for our recovery services (no success-no charge) apply the same to accounts whether the debtor company is foreign or domestic.

The #1 International Debt Recovery Agency in China

Over the past 11 years Brown & Joseph has come to be recognized as the #1 most effective collection firm recovering from U.S. businesses that owe international credit grantors….

Between China and the U.S., much like between any two countries, if you are not able to efficiently bridge [sic] gap between language and cultural barriers you will not succeed.  Brown & Joseph has succeeded. We currently have lawyers in both the U.S. and China and unlike most law firms, we perform all of our services on a results oriented contingency basis. We are only paid when we collect.

Am I the only one who finds it ironic that in the very sentence in which Brown & Joseph brags about being a bridge between language and cultural barriers it makes an obvious linguistic error?

So though should you do if Sinosure, Brown & Joseph, the Leviton Law Firm, Don Leviton, Michael Jones, Elizabeth Dawson — or, more likely some combination of these companies and people — are knocking at your door? There are many strategies you can employ but we are reluctant to reveal them online because we do not want to tip off the “enemy” to how we combat them.

I can though tell you that the first thing you should do is to make sure your intellectual property is in order in China, especially your trademarks. If Sinosure/Brown & Joseph/Leviton Law Firm/Donald Leviton/Michael Jones/Elizabeth Dawson are on your tail it is because a Chinese company is contending you owe it money. That Chinese factory is unhappy about not getting paid and one of the things it can (and often does) do to gain leverage against you is to register your brand name as its own trademark in China. If it does this, it will own “your” brand name as a trademark in China and this will allow it to stop your products from being made in China with your name on them and to stop products with your name on them from leaving China. See 8 Reasons to Register your Trademark in China. This sort of trademark usurping became so common in China it is now technically forbidden. Your factory company cannot register or hold your brand name as its own trademark. However, because pretty much every company in China is now aware of this prohibition, they also know exactly how to get around it. If you owe $345,000 to a factory in Dongguan, it will not register your brand name as its own Chinese trademark; instead, the owner of the Dongguan factory will get his cousin in Shenzhen to register your brand name as his company’s trademark, making it difficult to impossible for you to challenge it.

The best tactic is to register your brand names in China as a trademark NOW. See China: Do Just ONE Thing: Register Your Trademarks. And by now, I mean before Brown & Joseph or Leviton Law Firm demanding you pay Sinosure money you allegedly owe. But if you are too late for that and already in trouble with a Chinese company, if you act really quickly you may be able to preserve your name in China, but you need to be really careful. If your company is alleged to owe a factory company in Dongguan $345,000 and you have a trademark (or even a copyright or a patent) in China, those assets are sitting right there in China for seizure by whomever you owe the money. If a Chinese court enters a judgment against your company whatever China IP you have registered in your company’s name will be sitting right there in China available for seizure as payment of the judgment. What can you do to avoid this problem?

We have seen companies set up multiple companies with one of its companies buying products from China and another company owning its China trademarks. This can provide protection before you have a Sinosure debt collection, but if you are in the midst of such a problem the solutions get considerably more complicated.

The best protections against Sinosure are best enacted before you have a Sinosure problem. There are protections and defenses against Sinosure after it seeks to collect from you, but we cannot reveal those here because we do not want Sinosure and its minions to know what those are.

For more on dealing with Sinosure and China manufacturing disputes, check out China Sinosure: What You NEED to Know.

China online gaming laws
China online gaming laws

About a month ago, the Game Publishing Committee of China’s Audio-Video and Digital Publishing Association (中国音数协游戏工委) reported that China’s State Administration of Press, Publication, Radio, Film and Television (SAPPRFT) “holds a negative attitude” toward last-man-standing games like PLAYERUNKNOWN’S BATTLEGROUNDS (aka PUBG) and it would be difficult for this type of game to obtain a publishing permit in China. As we all know, “difficult” does not mean “impossible” and China’s gaming giant Tencent Holdings Ltd. has announced it will be bringing PUBG to China with a “socialist makeover.”

Though many gamers in China have had chicken dinners, PUBG has never been officially imported into China, meaning no Chinese government approval or local servers. Chinese gamers purchase PUBG (and many other games) through the widely popular gaming platform, Steam and play on servers hosted somewhere in the world other than China, like the US. This sometimes causes unstable network connections. Therefore, an official import is in demand.

  1. China prohibits Foreign investment in online game publishing.

As a basic rule, foreign companies are not allowed to invest in online game publishing in China. Reiterated in the 2016 Administration Rules for Online Publishing Service (2016 OPS Rules), online games are considered online publications and offering such publications via information networks is providing online publishing services. According to the Catalog for the Guidance of Foreign Investment Industries (revised in 2017), online publishing services fall under the industries where foreign investment is prohibited. Foreign developers, therefore, are prohibited from selling or operating online games directly in China.

  1. Licensing is key

Due to the restrictions stated above, foreign game developers must partner with a Chinese entity to enter the Chinese gaming market, and licensing is the way to go.

In choosing a China licensing partner, you want to first find out whether your potential licensee is qualified to sell and operate online games in China. Ideally, this potential licensee should own an Online Culture Business Operation Permit (网络文化经营许可证) and an Internet Publishing Service Permit (互联网出版服务许可证). If the licensee does not have these permits, it will not be able to apply to import foreign online games.

You will also need a solid licensing agreement to protect your legal rights and economic benefits. What we have previously discussed on China licensing agreements remains important and you should read the following:

Once a licensing agreement has been signed, the Chinese licensee will be in charge of registering your game with the Copyright Protection Center of China, applying for import approval, and the actual operation after the approvals. Since you as the foreign game developer will not be directly involved in these steps, it is critical you choose a Chinese partner capable of going through the complex approval process and operating your game smoothly.

  1. Approval authorities and content review

If you remember the fight over World of Warcraft years ago, you already know that GAPP (predecessor of the SAPPRFT ) and the Ministry of Culture (MoC) both asserted authority in approving the import of foreign online games.

As of now, approvals from both agencies are still required according to the 2016 OPS Rules and the Interim Measures for the Administration of Online Games promulgated by the MoC in 2010 (2010 Interim Measures). MoC focuses on the “cultural” perspective of the game, while the SAPPRFT focuses on the “publishing” side of things. Other than the nominal difference, it is unclear as to the exact role each of these two agencies plays in the approval process.

Overall, contents of online games are subject to censorship and games submitted for review must be fully developed and in their final operational version (or public beta version). The standard of content review is unclear. A few examples that may cause a failure to obtain approvals or the Chinese government to require further changes to a game include excessive violence, obscenity, compromising territorial integrity of the state (e.g. marking certain areas as independent countries), or discrediting the Chinese army. Again, an experienced Chinese game operator should be able to help the foreign developer avoid common pitfalls.

China’s online gaming industry is booming despite heavy regulations. Valued at $24.6 billion in 2016 (or more according to different market research reports) and growing. Like really growing. Strategic planning, choosing your Chinese partner wisely, and carefully negotiating and crafting your licensing agreement are nearly all that you need to navigate through this battlefield and earn your “chicken dinner.”

 

China Software as  Service SaaSThe market for software has shifted to the cloud. Using the Internet cloud, software products are no longer delivered as compiled programs installed on physical devices. The software is delivered online as an Internet-based service. This is known as Software as a Service (SaaS).

SaaS works fine when confined to the Internet of a single country or region such as North America or the European Union. The core concept of SaaS is that an open Internet exists on which SaaS can be built and delivered. But what happens when companies attempt to deliver SaaS into a closed Internet system?

That is the ultimate issue in providing an SaaS product in China. SaaS products not approved by the Chinese regulators are either blocked or in danger of being blocked. Gmail, Google Docs, Dropbox, and GitHub are all examples of SaaS products that are always at risk of being blocked in China. For SaaS products housed on servers located outside China, Chinese regulation makes active commercial exploitation difficult.

This applies to new SaaS products. Both IBM and HP are planning to roll out SaaS-based blockchain products. HP even calls their new offering “Blockchain as a Service.” Almost by definition, the blockchain system is intended to be global. But what happens when that service hits the closed Internet of China?

There is essentially only one way to deliver SaaS in China. The system must be housed on a server located in China and be licensed to a Chinese owned entity that has direct contact with Chinese customers.

The China server/China licensee model works like this:

1. The SaaS software is housed on a server located in China. This means the Chinese government will at all times have the right to access the server and inspect the contents of the software and all related data and information.

2. The SaaS service typically must be provided by a Chinese owned entity even though the regulations suggest this entity may be a Sino-Foreign joint venture.

3. The SaaS service is licensed to the Chinese entity in accordance with a very expensive and restrictive set of minimal requirements.

4. The SaaS software/platform has received the required approvals.

It has been difficult for many foreign SaaS developers to accept that the China server/China license model is in most cases the only way to sell SaaS products to Chinese consumers but the major SaaS players have already figured this out.

For example, the developers of video games have always been plagued by pirating in China. Game developers moved to the online model and developed the Massive Multiplayer Online Game model (MMOG), which is a form of SaaS. All of the major U.S. MOOG game developers now deliver their product in China using the China license model:

  • Valve Software’s Dota 2 is provided in China by Perfect World.
  • Blizzard Entertainment’s World of Warcraft is provided in China by Netease.
  • Riot Game’s League of Legends is provided in China by Tencent.

In the field of business software, Microsoft provides its Office 360 and Azure cloud service in China through a license with 21 Vianet.

Having accepted that a license in China is required, the real difficulties begin. The Internet infrastructure in China is quite advanced and due to the work of 21 Vianet and others, there is plenty of server space and bandwidth available for effective delivery of even the most complex SaaS products. The success of MOOG products in China is proof of this.

The real problem in China is in finding an appropriate partner/licensee. For the Chinese entity, operating as a licensee is expensive and technically demanding. So the real challenge in China is to find a licensee that is a) willing to take on the burden, b) has the technical capability to do the work, and c) the financial ability to take on the burden of ICP licensing, obtaining and maintaining approvals and then operating the complex server and software systems. Finding a willing licensee is oftentimes difficult for small SaaS systems and start-up products with no existing base of customers to provide immediate cash flow for the licensee.

For large, established SaaS providers, the issues are different but still significant. In this setting, due to the advanced technical requirements, the licensee will often be a direct competitor. So the challenge for large SaaS developers comes from managing the business in China, in protecting IP, and in dealing with the development and marketing of spin-off products. For many SaaS developers, these spin-off products are where the real value is generated.

In trying to evade the rules to avoid the China server/China licensee requirement, foreign SaaS developers are missing their opportunity to access the Chinese market. The real challenge is in finding ways to work within the China system in a way so the foreign SaaS developer both remains in control and earns a profit from China.

So resistance to China’s system for foreign involvement in SaaS is futile, but success is possible, so long as you get clear on what needs to be done.

China lawyers employment
No company is too small for China’s regulators

If you want to be a well-protected employer in China, you need a well-written China employment contract and a China-centric set of Rules and Regulations, no matter your company size. Your employer Rules and Regulations should, at minimum, address your employees’ important rights and obligations and labor disciplines. No matter how comprehensive your employment contracts, those cannot serve as a replacement for Rules and Regulations.

Our China lawyers are often asked whether a foreign employer with a tiny China workforce (say 1-19 employees) needs to have rules and regulations document. The emphatic answer is yes. Rules and regulations are in most places in China a flat-out requirement. And in those few places where they are not required (mostly in places foreign companies never go), they are still a necessity. But the main reason why you so need rules and regulations no matter how small your China operations is because for 99% of all things employer-employee in China, China does not make any distinctions between large and small companies. So just because you are small, it does not mean you are exempt from the requirement to have a set of employer rules and regulations. This is different from the U.S. and most of Europe where small employers generally enjoy a de minimis exception.

I would even argue that having a good set of rules and regulations is even more important for a small company than for a big one and this is simply because not having one is so risky and small companies are usually less able to take risks. If you are a massive multinational and ten of your employees each win USD$100,000 against you because you had no rules and regulations, you will easily survive. But if you are a small business the impact of having to all of a sudden cough up a million dollars, the situation could be really bad.

The reality is that China’s employment authorities may cut some slack for Chinese-owned companies but they do NOT cut slack for foreign-owned businesses no matter their size. So to the extent your China advisors or employees are telling you that they see certain companies get away with certain improper employment practices, there is a very high chance those companies that got away with such practices are Chinese companies. If you are a foreign employer, you are virtually always under stricter scrutiny and this means both that the Chinese government is more likely to go after you on employment issues and your own employees will be a lot more likely to pursue litigation against you because you are foreign company; the Chinese government likes to see money go from foreign companies to Chinese citizens.

When we tell our clients they need rules and regulations no matter how small they are, they sometimes ask us for a “template” set of rules and regulations they can modify for their own use. If only it were that simple. See China Contract Templates for $99 Each.

We completely understand why our clients are irritated with the need for rules and regulations (especially those who are China start-ups with 1-3 employees) and want to do whatever they can to keep their costs down. Unfortunately, there is not much we can do. The problem is that rules and regulations are important and for them to be effective they must be tailored to suit the specific industry and type of business and location of each employer. And this sometimes means that the rules and regulations for a ten-employee company can be longer and more complicated than the rules and regulations for a 1,000 person company.

No matter your size, as a China employer you need employer rules and regulations and the complexity and length of those will be based on more than just your size.

Sorry.

China Trademark Squatting

We are on record (and then some) about the importance of registering your trademark in China. In spite of our efforts — or perhaps because of them — nearly every week someone contacts us after discovering someone else has registered “their” trademarks in China.

Most people lump all such third party registrants together under the common rubric of “trademark squatters,” but in fact, the registrants can be separated into five distinct categories, and the appropriate response (and the likelihood of success) depends on the category in which category they fall.

 

Category One – The Extortionist

China’s laissez-faire attitude towards bad-faith trademark registrations has created a cottage industry for numerous “entrepreneurs”: individuals who register brand names belonging to foreign companies and then hold those brand names for ransom. Anyone who deals with China trademarks has run into this sort of trademark squatter. They have filed hundreds of applications, for a wide variety of brand names and in a wide range of Nice classes. The registrations may be for different sorts of goods or services than what the brand is known for. The trademark squatter has no connection to any of the brands, and no intention of ever using them in commerce. They are a classic non-practicing entity, and their sole intent is to monetize the trademark registration by selling it to the highest bidder. They will sometimes approach the trademark owner, or they may sell the trademark to another third party on one of China’s trademark clearinghouse websites. The prices can vary but US$10,000/registration is a common starting bid.

Such registrations are the very definition of bad-faith, and you would think they would be easy to invalidate. Not so. China is slowly getting better at dealing with these situations, but even in egregious cases, it’s far from a slam dunk. The typical route involves an invalidation proceeding and an appeal and then maybe another appeal. All of this can take years and cost thousands of dollars, and there’s no guarantee of success. It’s easy to see why many foreign brand owners just pay the money and move on, as with a nuisance lawsuit. Alternately, some brand owners will wait three years and file a non-use cancellation. See China Trademarks: When (and How) to Prove Use of a Mark in Commerce.

Category Two – The Counterfeiter

Companies find the first category of trademark squatter exasperating, but they find the second category infuriating. These squatters have registered foreign companies’ trademarks not to hold them for ransom, but to use them in commerce. Indeed, these squatters’ business model is to produce counterfeit goods they can sell in China (and in any other country where the foreign company has not registered its trademark) without fear of reprisal from the true brand owner – because the squatter legally owns the trademark in China! Sometimes they will sell the same kinds of goods as the true brand owner, sometimes not – it all depends on how well-known the brand is, and what the squatter thinks will generate more money for them. Oftentimes you’ll see these squatters register several foreign brand names in China, all in the same classes of goods. If one foreign brand is good, four are better.

It is usually more expensive for the true brand owners to purchase these registrations because the registrations are worth more to the trademark squatter. Moreover, a non-use cancellation will not succeed, because the marks are actually being used in commerce. It is sometimes possible to succeed with a bad-faith invalidation, but this will largely turn on whether the mark was well-known in China, which is a difficult thing to prove. For many years the de facto Chinese position has been that if foreign brand owners cared about their marks in China, they should have registered them there. Here, the alleged trademark squatter is using the mark in commerce and probably also employing people and paying taxes on its income. That looks a lot better to Chinese authorities than a sole-proprietor non-practicing entity who lives with his parents in Kunming or Kansas.

 

Category Three – The Stiff-Arm Competitor

The third category of squatter looks a lot like the second category – they file trademarks covering a certain, fairly narrow set of goods. But this type of squatter isn’t a counterfeiter and has no plans to use the marks in commerce. Rather, this squatter is your competitor, and their goal is to prevent you from entering the Chinese market (at least under your preferred brand name). The more specialized the market, the more likely this is to occur because everyone knows all of the other players. More than once I’ve seen a Chinese manufacturer in a specialized industry register the trademarks of all its European and American competitors. They then offer the competitors a Hobson’s choice: buy the trademark at a grossly inflated price (upwards of $250,000K) AND designate the competitor their exclusive distributor in China, or say goodbye to their brands in China.

The stiff-arm competitor often also oftentimes will threaten to block products manufactured with its trademark by anyone else from leaving China. In other words, they may threaten to effectively shut down your entire business worldwide by choking off your sole production point.

Brands that are actually well-known in China may have some success in wresting trademark registrations from such registrants, but as noted above that rarely happens. Most foreign brand owners in this position are out of luck. The argument that these trademark squatters gamed the system is not going to get much traction.

 

Category Four – The “Helpful” Supplier

Sometimes companies will find that their brand names have been registered by a familiar entity – their own supplier or distributor in China. If the supplier or distributor is still producing or distributing goods for the company, the proffered explanation is usually benign: the supplier or distributor registered the mark to prevent any rapscallion squatters from doing so first. This may be true, but the brand owner should wonder why the supplier/distributor didn’t inform them first and/or ask if the brand owner wanted to register the mark itself. Nonetheless, if the relationship is still positive, it is a relatively straightforward process for the supplier/distributor to assign the mark to the brand owner. Some suppliers/distributors will attempt to retain ownership of the trademark but this should be resisted.

If the relationship has turned ugly, which is usually the case when the trademark owner is a former supplier/distributor, a simple assignment may be difficult to procure. But this situation is the easiest one in which to prove a bad-faith registration. So long as you can prove the existence of a business relationship with the supplier or distributor (e.g., through purchase orders, contracts, and other documentation), it is quite likely the squatter will be forced to give up the registrations. Needless to say, the process is a lot easier if you have a signed, chopped manufacturing agreement or distributor in which the supplier specifically agrees not to register your IP. See China Trademarks and Your Chinese Distributor.

 

Category Five – The Coincidental Copycat

The last category isn’t really a traditional trademark squatter and arguably shouldn’t even be part of this list. Occasionally, someone in China registers “your” trademark because they came up with it on their own independently. This only happens with word marks – it is highly improbable two applicants would come up with the same logo by blind chance. In these cases, the trademark owner may be willing to sell the trademark, but if they’re not, there’s little you can do about it. The registrant simply followed the dictates of China’s Trademark Law: they were the first to file (not you), and so they get to keep the mark.

In sum: if you find that your brand has been taken by a trademark squatter in China, first determine the category they fit in, and then plot your strategy accordingly. Better yet, register your trademark right away and prevent having to strategize at all.

 

 

China contract templates for $99
China Contract Templates. Not Gonna Do It.

Now that I have your attention.

Neither our law firm nor any good law firm of which I am aware ever sells China contract templates. There are many reasons for this but foremost is usually that templates virtually never work for China and they often can be more harmful than having no contract at all.

And yet, our China lawyers are constantly getting asked for “templates” for even relatively complicated China deals. We have been asked for joint venture template agreements and our response to that is how can we even provide you with such a template unless and until you know what the terms of that agreement will be? I mean, we have done joint venture agreements where our client has contributed twenty million dollars to the joint venture and all they really wanted out of it is guaranteed product pricing for the next 15 years and we have done joint venture deals where our client has provided no money — just technology and equipment and in return gets 60 percent ownership of the joint venture and control over just about everything it does. Do you really think we have a template that covers every contingency?

Your lawyer’s value is oftentimes more in figuring out what a contract should say than in actually drafting it and the former usually takes as much or more time than the latter. Our China Manufacturing Agreements and our China Licensing Agreements are a great example of this and we get the “template question” a lot on both of these. We are also often asked by potential and actual clients whether it would save them money to have their in-house lawyer or their less-expensive local domestic lawyer draft such an agreement first and then have my firm’s China lawyers use that draft contract as our template. My answer to that question is usually something like the following:

We have drafted hundreds of China licensing agreements and manufacturing agreements and we don’t use any of them as a “template.” What we do is to first gather up the facts from our clients and figure out which of our many contracts — if any — we should use as a model in creating what will essentially be a new contract for you. Most of the time we end up pulling sections from multiple contracts for a new, highly customized contract. Our agreements have been specifically drafted for use in China and that means they are dual-language agreements with Chinese as the official language. We usually (but NOT always) draft them under Chinese law and we make sure to draft every provision to benefit you as a foreign company that is licensing its products or services in China or having its products manufactured in China. Our existing contracts are as close to ready as you can find and it, therefore, does not make sense for you to pay another lawyer who knows nothing about Chinese law to create a brand new English language contract which will not make sense for China. Not only would the money you pay that lawyer go to waste, but my law firm’s fees would increase because instead of our starting with our own Chinese and English contracts as models, we would be starting with an English language contract that will not be close to what makes sense for what you are looking to do in China. We would have to revise nearly every provision in the contract you give us to make it China-appropriate and it would likely take us twice as much time to do that than for us to just use our own previously drafted contracts as the foundation for yours. It is not helpful to us to have a common law contract [China is a civil law system] based on a highly idealized and impractical American/European practice that has no applicability or use in China.

China employment documents provide another good example of where templates fall short. We are often asked to draft China employment contracts for China WFOEs and China Joint Ventures. Our first response is to ask the potential client whether their Chinese entity already has a set of Rules and Regulations (sometimes called employer manual or employee handbook). If the answer to that question is yes, our lawyers will use those Rules to determine what should go into the employment contracts.

If the client does not have any Rules and Regulations our response is to say that we cannot draft the employment contracts standing alone; we need to draft both the employment contracts and a set of Rules and Regulations (and sometimes more). Our reasoning on this is three-fold. One, nearly all locales in China now require employers to have Rules and Regulations, especially those locales with more than a handful of foreign companies. Two, having an employment contract without any Rules and Regulations is like having a car without an engine; it just doesn’t work. Without such Rules and Regulations you can not discipline or terminate your employees and you are at great risk of your employment policies and decisions being fodder for employee-employer disputes. The third reason is both more personal and selfish: we do not want our law firm’s name associated with an imminent disaster. This third reason is also why good law firms do not sell templates.

After we explain the need for Employer Rules and Regulations, the client will sometimes request that we just use our “model Rules and  Regulations to keep costs down.” Again, we have to explain to them why we have no such model and why such a model can never work. Our typical response is something like the following:

Your Employer Rules and Regulations need to match what you are doing in China and where you are doing it. This means that for us to provide you with Rules and Regulations that will work we must gather up all sorts of facts before we can even start. If you are a factory in Qingdao, we cannot even use the Rules and Regulations we did for an accounting firm in Qingdao two months ago? Nor can we use the Rules and Regulations we did for a factory in Suzhou three months before. We cannot even use the Rules and Regulations we did for a factory in Yantai six days ago because even though Yantai and Qingdao are in the same province, their employment laws and practices do not align. And that factory in Yantai was really tough on its employees and I understand that it is important to you to be viewed as a great employer.

A China employer’s Rules and Regulations vary depending on the type of company, the type of employees, the goals of the company, and, most importantly, its location. Just by way of an example, the overtime rules are going to vary greatly for a CEO as compared to factory workers and those rules are also going to vary greatly as between Chengdu and Suzhou. We have many Rules and Regulations serve as appropriate starting points (usually in combination) but before we have any idea which of our many existing Rules and Regulations we can use to save time in drafting yours, we first need to know a lot more about you. We also must always make sure everything in the Rules and Regulations we provide to you is up to date and since the relevant laws and regulations constantly change in China, this itself is never automatic. After we have done all this we can start drafting your customized Rules and Regulations in both English and Chinese.

Oh, and one more thing. It is critical that both the English and the Chinese be well-written and clear because both languages will be important down the road. The Chinese is important because that is the official language and the language on which the courts and administrative bodies will rely. The English is also important, however, because your HR people will likely be using the English language portion in making their employee decisions.

I recently explained to an incredibly insistent emailer why we would not sell him any of our existing China contracts for him to use as a template:

We have never sold a China contract as a template and we never will. First off, it would be a huge disservice to you because we have literally hundreds of contracts for everything we do and unless you were to first retain us as your lawyers, we would not have any basis for determining which of these contracts makes sense for you even as a starting point. Our making that determination is itself providing you with legal advice and to do that we would first need to run a conflict check and then onboard you as a client and then work with you in determining the appropriate model contract. And here’s another thing: around half the time when a company thinks it needs a particular contract for what it is doing in China, it actually needs an entirely different one, and we only discover that after gathering up all the relevant facts. So take your case. You say that you need a distribution agreement but what you may actually need is a reseller agreement. And for us to even know that, we need a lot more information.

Second, whichever of our contracts we end up giving you will not be right for what you are doing and whatever changes you make to it will only make it even less right. There is a lot more to doing a deal with a Chinese company than simply sending it a contract and getting it to sign it. You first need to do at least basic due diligence to make sure the company you have been negotiating with is the same company signing your agreement and to make sure you have the company’s name and address correctly. This is often far more complicated than people think. At least 30 percent of the time the contracting party is actually a Hong Kong or a Taiwan entity and in those cases, a PRC contract does not even make sense. I am not going to sell you a contract that has a 30% chance of being for the wrong country! At least another 30 percent of the time we find irregularities in the company information and we need to investigate further to clarify. And then there are the times we determine there is actually no company at all and the Chinese “company” was actually a complete fraud. See China Fraud Season Starts Early This Year.

And what will you do when (not if) the Chinese company says it agrees with 12 of the 17 provisions you propose in your contract, but it wants you to make specific changes to the other five? You not only will not know how to make those changes (remember the official version of this contract is in Chinese), you likely also will not know whether it makes legal or even business sense for you to do so. Your changing one “small” provision could even render the entire contract unenforceable.

Just by way of one example: the contract damages provision is a critically important element of nearly all China contracts. It is often the key provision for ensuring that your Chinese counter-party abides by your agreement. See The Effective China Contract: Liquidated Damages for why this is the case. And yet we never know what to fill in as the amount of contract damages until the very last minute because that amount must be determined on a case to case basis, using all sorts of factors in making the determination. How will you fill in that amount when you do not even know the factors to use in determining it? And even if you had a list of those factors how would you know how to apply them? We could spend a few hours trying to teach you the factors and how to apply them, but in the end, your choice of an amount could never be nearly as good as ours because ours is based on decades of experience and thousands of China contracts. See China Contract Damages: More Art Than Science. A bad decision on this alone would weaken or even nullify the value of your even having a contract.

So no, we won’t sell you one of our contracts as some sort of template. The last thing we want is our law firm’s name associated with something we know cannot work.

Another lawyer in my firm once wrote the following email to a client to explain why we could not just pull a template off the shelf for them to give to their in-house counsel to use in drafting the contract needed:

We don’t use “templates” for our agreements. After a lot of analysis, IF we find what the foreign buyer is trying to do fits into a pattern from a previous transaction we have done, we will, of course, use an agreement from a previous transaction as a model for the current transaction. But even in the most basic transactions, what we do is to customize it for the current transaction.

In drafting pretty much any contract for China there are literally dozens of variables that can be combined in a nearly infinite number of configurations. So the final contract from one transaction may have no application to any other transaction. This is why providing a contract from a past transaction will have no benefit to the Western side and would likely only harm it.

And then there is the issue of dealing with the Chinese counter-party’s response. Did the Chinese side change the Chinese and not the English, as they so often do? Did the Chinese side redline in a way that the changes to the Chinese portion are even apparent? More importantly, are the Chinese side’s changes normal technical changes that are part of normal business practice (45 days to deliver a product instead of 30 days) or are their changes destructive to the whole approach, such as: “no, you do not own the technology, we do.” Or, “no, we won’t provide any warranty at all.” Or, “no, we own the molds, not you.” It takes a deep understanding of Chinese law and Chinese business to deal with these sorts things.

In drafting our contracts, we do usually pull some language from other contracts, such as confidential information language. However, the core agreement is almost always unique to the specific client before us and when we do use prior language, we nearly always revise it to customize it for the specific client and the specific transaction.

From having written thousands of China agreements, we know there are certain issues that need to be resolved pretty much every time. So we work with our clients to identify those issues and then we work with them on how they want to deal with those issues and then we put the agreement together to achieve the goals our client has told us it has. Of course, for some of these components, we use as a base some of the language that has worked in the past in China. This is the benefit of working with us: we know what works and we know what fails. But the resulting contract in each case is unique.

So in that sense, there is no template. There is just decades of experience in drafting agreements for doing business in China or for doing business with China. This is why whenever someone asks me to send them a “template” agreement I tell them I cannot because I have no way to know which of the nearly infinite number of alternatives they should follow. How will they pick and choose from a dozen options for a relatively simple provision? What is unique about their situation? Will the most common solution we have used in the past even make sense for them? Does it make sense for their industry? Their business? Their product? Their location? What if the law has changed? What if the law changes two days after we start drafting?

I usually propose to each client three options for every important issue and I usually come up with those three from about a dozen possible. Let’s suppose there are ten important issues in their contract — this is probably a fairly typical number. Each selection of an option affects all of the other options, often in ways we have previously encountered. Before the client answers the questions, we don’t know even what structure to use. After they answer the questions, the agreement that meets all their needs does not exist.

Our approach to China contracts is based on three supports: 1) Decades of China experience, 2) A deep understanding of the Chinese civil law system and the Chinese court system, 3) A deep understanding of how contracts actually work in China. If your in-house lawyer combines all three of these, you do not need us for your contract.

Now you know….

China employment law seminar
Please come to Grace’s talk on Thursday

Our lead China employment lawyer, Grace Yang, will be speaking at a Washington State Bar Association (WSBA) seminar in Seattle this Thursday, December 7. If you are in Seattle and doing business in China or even just thinking about doing business in China, I cannot urge you strongly enough to attend.

The full name of the talk is China’s Employment Law Landscape: What You Need to Know. And trust me when I say there is probably a lot you need to know. I say this because foreign companies doing business in China seem to get employment and labor law issues wrong maybe more than anything else. And, frankly, I don’t blame them. Until Grace joined our law firm, none of our China lawyers would touch most China employment law matters because none believed themselves qualified to do so. We were of the view that only lawyers who focus their practices on China employment and labor law should be touching such matters. The reason for this is simply because China’s employment rules and laws are highly localized and always changing and, most importantly, oftentimes unwritten. The unwritten part means that having a good relationship with the local labor and employment bureaus is absolutely key. See China Employment Law: Local and Not So Simple.

Grace has become our go-to person on everything related to China employment law. She splits her time between Beijing where she grew up and attended Beijing University Law School and Seattle — Grace has her J.D. law degree from the University of Washington. Grace recently wrote and had published (just a couple of months ago) what would best be described as a handbook on China employment law. The book is titled, The China Employment Law Guide: What You Need to Know to Protect Your Company and you can get it in either paperback or in a digital format. I always recommend you get the paperback version because it is the sort of book you want on your shelf for quick access whenever you have a China employment law issue and so you can easily share it among your HR team and your managers. Go here to Amazon to get your own. 

Grace’s talk will go from noon on Thursday until 1:30 p.m. and it will be at 600 Stewart Street, Suite 205 in downtown Seattle. To register in advance, go here, or show up at the event starting at 11:30 a.m. You will get 1.5 hours CLE credit for attending. The WSBA describes Grace’s talk 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 have come a dispute. As such, it is imperative that you understand the framework of Chinese employment law and steps you can take to mitigate risk.

At the beginning of this post, I said that if you are doing business in China or thinking of doing business in China you should attend this talk. I am sure this caused at least some of you to think that your attendance is not necessary unless you actually have employees in China. Wrong. As is mentioned in the seminar description in the proceeding paragraph, “foreign companies doing business in China face complex China labor and employment issues….every day — often without realizing it. Pretty much every month for the past five years some foreign company has called one of our China lawyers with an employment problem that arose because they did not realize they had an employee in  China. See Doing Business in China with Deportation or Worse Hanging Over Your Head to see what I am talking about.

More importantly, there has not been a single month in the last five years when some company has not come to us after having made a China employment law mistake. Because there are so many laws and rules (both national and local) and because China so heavily favors employees over foreign employers, the smallest and most technical mistakes can be game changers. Put simply: you have to get China’s employment laws exactly right but very few do.

I recently heard Grace give a similar talk as part of a webinar and it was fantastic (and the reviews from listeners supports me on this) and essential. If you practice labor or employment law, if you are interested in labor or employment law, if you have any interest in China or anything at all to do with China, I urge you to attend. And if you will not be in town — heck, even if you will be in town), I  also urge you to buy the book.

So just sign up here and go. We’ll see you there.

China sourcing agents
Sourcing agent? Yes or no.

As anyone who has ever worked with me knows (and as is true of many lawyers) I am a perfectionist. If a client comes to me for legal help for their China manufacturing, I almost always question them about their potential or actual product supplier(s) and how they found them. I ask these questions because I know from experience how important it is to choose the right manufacturer and I am borderline obsessed with making sure our clients have the right manufacturer for what they will be doing.

My favorite speech is on how to protect your intellectual property from China and I start that speech by talking about how the following three things matter most in this:

  1. Good partner (the Chinese company you choose)
  2. Good contracts with the Chinese company you choose
  3. Good registrations (register your trademarks and your copyrights and your patents in China, when applicable)

If choosing a good Chinese partner is important for protecting your IP, that choice is even more important for ensuring quality product on time.

So we now get to the proverbial question: how do you choose the right Chinese manufacturer? The baseline question then becomes whether you should find that manufacturer yourself or use a third-party sourcing agent to do so. Unfortunately, there is no one answer to this question. About all I can tell you here is that there are many bad sourcing agents and a few great ones and choosing a bad one is virtually always going to be worse than doing it all on your own. So if you do decide you need a sourcing agent, choose a good one.

Today though I am going to pull from an excellent post from the always superb Quality Inspection Blog. The post is aptly named, Sourcing from China 101, Part 1: Do You Need a Sourcing Agent? and if this issue is relevant to your China business, I urge you to go there and read the whole thing.

The post nicely lays out the following four options for companies looking to have their products made in China by a third-party manufacturer:

Options: Sourcing Agent vs. Buy Direct from China

According to the post, 80% of importers go direct and thereby “control the whole process, and avoid paying commissions to any middleman or agent.” It states and I agree that “if you are organized enough to manage suppliers . . . .and if you can satisfy the minimum order quantities (MOQs) of suppliers, this is probably the best option for you.” I would, however, add “knowledgeable enough” to this sentence.

The post then discusses how over 90% of sourcing agents get a hidden commission from the factory and it calls this “normal business” in China and how when things go wrong, sourcing agents “often tend to defend the factory!” I agree with this though the 90 percent figure may be a bit too high. But you get the point. In fact, this post quotes me using that same figure, though I used it more for rhetorical effect than as a hard and fast number:

Dan Harris has a similar view of most agents:

I often describe China sourcing agents with the following: “Ninety percent are crooks or incompetents and most are both of these things. But ten percent are worth more than their weight in gold.”

 

Perhaps most importantly, the post lays out key questions you should ask potential sourcing agents before you engage one:

  • How will they get paid, and by whom?
  • Will you be able to visit the factories before/during production?
  • Can they provide referrals or testimonials from satisfied customers who buy the same type of product as you? Make sure to contact two of them and get confirmations.
  • Do they do quality inspections by themselves? Or do they resort to a specialized third-party? Will you get a report every time?
  • Will you get an update every week on the production status?
  • Can they share their management system with you? You need to make sure they have processes in place. The vast majority of agents don’t follow any established procedures.
  • What guarantee do they offer in case a supplier scams you? If shipments are behind schedule? If you receive junk product in your warehouse?
  • Are they located in the area where your products will be sourced? (Do a quick search on globalsources.com and you will have an idea about the main area for your product category.)
  • If you keep re-ordering the same products from the same sources, will you pay less for the sourcing agent’s services after the first order?

These are all great questions. When our clients ask one of our China lawyers to refer them to “good sourcing agents,” we typically ask them two questions: What is the product for which you will be needing a sourcing agent and how do you want to pay the sourcing agent. Once we have answers to these two questions we can then provide them with a short list of potential sourcing agents.

We ask the first question because a sourcing agent that is great for sourcing clothes is not the right sourcing agent for sourcing medical devices. The good news on this score is that good sourcing agents don’t source products with which they are unfamiliar. So for instance, if we have a client that wants help sourcing an unusual product and we do not know offhand of any sourcing agents involved with that particular product, we will go to the good sourcing agents we do know and ask them for referrals.

We ask the second question because sourcing agents can charge differently and some are less flexible than others. Generally speaking, the more you pay up front, the less you will likely pay in total over time. Some sourcing agents require a large upfront payment to get started and others are willing to work on a percentage basis. Our start-up clients tend to prefer paying a percentage per widget manufactured and our bigger clients tend to prefer paying upfront.

Now you know….