China Hostage lawyers

I spoke last week at a Berkeley Law School class regarding hostage taking in China. I presume I was brought on to speak about this because I helped Professor Chris Carr write an academic article on hostage taking in China, Commercial Hostages: Local vs. Foreigner Business Disputes in China.

At my Berkeley talk, I divided China hostage situations into the following three categories:

1. Legal hostage taking in China

China actually allows foreigners to be blocked from leaving China if there is a pending lawsuit or a court judgment or arbitration award against the foreigner or the foreigner’s company.

2. Quasi-legal hostage taking in China

These are the cases where someone merely alleges that a foreign company or person owes them or their company money. In our experience, these allegations are always sufficient to give the local police an excuse to look the other way or even assist in the hostage taking.

3. Completely illegal hostage taking in China

These are the cases in which there is clearly no legal basis for holding a foreigner (or anyone else) hostage. These are the situations where someone falsely claims that a foreign company owes them $100,000 because they were injured while working there, or the cases where a foreign teacher is held hostage because a child was injured in a classroom of a Chinese teacher or where someone is held hostage for 100 percent legally choosing not to go forward with a business deal. We have been involved in episodes involving all of these facts and in our experience the local police always look the other way.

 

4. Hostage taking in China is incredibly common

To sum up, hostage taking of foreigners is incredibly common in China and the police will pretty much always either look the other way or assist. It is difficult to know how common hostage taking is in China, but a friend of mine who works at a risk consultancy in Shanghai (which is widely regarded as one of the safest cities in China for foreigners) tells me that his office averages around five hostage situations a month. If you Google “hostage taking in China” you will get 15,800,000 results.

We used to write about China hostage taking here on the blog but we stopped because it only got people angry. I bring this up because back when we did write about this, we would get 1-2 calls pretty much every month regarding China hostage taking a month. With everyone now realizing the very real risks of doing business in China, I am writing this post figuring the anger will be less this time and — quite frankly — because we do a bang-up business helping companies figure out their kidnapping risks and helping them to mitigate those risks.

There is though a bit of good news on the China hostage front. With way fewer foreigners in China now than previously, and with those who remain taking a generally more jaded view of China, it definitely feels like foreigner kidnapping has gone down in China. But just to be clear, I attribute this decline to these two things only, and certainly not to any conscious effort by anyone in China to reduce their number.

 

5. Hostage Taking in China is often done to collect on an alleged debt

In addition to my Berkeley Law School experience spurring me to write this post, the below email (greatly shortened and summarized) was also a catalyst:

American company had WFOE staffed with people with US passports. Company had financial problems and needed to file for bankruptcy in the United States. The company sent one of their executives to China to advise their suppliers that they were declaring bankruptcy and would be unable to pay their outstanding balances but these suppliers should file claims in US bankruptcy court.

As you can imagine, the Chinese suppliers did not take this well, and they stormed the office and are now holding the US citizens hostage – literally. It has been days now and neither the police nor the embassy will help to extract the people.

The whole thing was obviously not handled properly from the start but it also has turned ugly pretty quickly.

I’ll let you know how this turns out. I’m not involved. Just hearing most of this second-hand from a friend at the company.

I hope to write you a happy ending to this story when/if it resolves itself in a safe way but I am not so sure that day will ever come

Have you encountered similar experiences?

Here was my response:

Oh yes we have. Many times. But if we had been retained, our advise would have been so different that I would like to think things would have never reached this point. We would have told this company to get ALL of its personnel out of the country before letting suppliers know (from far far away) that it had just filed for bankruptcy and that payment would be slow, at best.

We actually blogged about a client in a similar situation in “China, We Have A Problem. A Mostly True Story. The key takeaway from that post is that the very first thing we emphasized was the need to get everyone out of town.

Many years ago, I had a similar situation where our client was alleged to owe money to a Vietnamese company. The Vietnamese company had shipped product to our client which we contended was defective and for which my client refused to pay. My client absolutely had to go to Vietnam to meet with other clients and he and I were both very concerned about what might happen to him there. My advice was that he not go, but he insisted that he absolutely needed to go.

That being the case, we decided the best approach would be for my client to sue the Vietnamese company in a US court, alleging the Vietnamese company owed my client money for defective product. Our thinking was this might help insulate the client from problems in Vietnam. If the Vietnamese company tried to have my client imprisoned for his company’s alleged debt, we would at least be able to point out that there was an ongoing dispute between the two companies and that the Vietnamese company was seeking to act against my client in Vietnam not to collect on an unpaid debt, but in retaliation for my client having sued. My client went to Vietnam without incident and a few months later we were able to settle all claims. We heard through the grapevine that the Vietnamese company had actually been intimidated into inaction by our lawsuit.

Way back in 2009, I wrote a post, with the somewhat tongue in cheek title, “Owe Money To A Chinese Company? No Need To Pay. It was on how foreign companies need not worry much about Chinese companies pursuing them overseas for unpaid debt. The gist of the post was that if you need to prioritize who to pay, you should put your Chinese creditors last. Even so, I stressed that this equation applies only if you do not have a “real presence” in China:

This is not to say, however, that foreign companies that do not pay may not face repercussions other than a law suit. For example, if you are a foreign company with a real presence in China, not paying a Chinese company might end up causing you real problems in China and you must consider this before choosing not to pay. Just by way of example, we represent a large Chinese manufacturer in an industry where there are only around five companies capable of manufacturing this particular product. Our Chinese client is owed millions by a US company and that US company figured it would not need to pay. What this US company did not figure was that our client would alert the other manufacturers of the non-payment and now none of those manufacturers will make product for this US company either. Once the US company started running out of product, it started paying our client again. On the other hand, if you have but a small presence in China and you can switch your manufacturing over to some other country….

I should have also made clear in that post that if you are not going to pay your Chinese company what it alleges you might owe it, neither you and everyone else in your company should leave China and not return until the alleged payment issue is resolved. This is the sort of thing I write in response to every single email I get from someone with a dispute with a Chinese company.

So what should you do if you have people being held hostage in China right now? You have essentially two choices. One, you organize a SWAT team to free them. Or two, you negotiate and then pay for their release. We have helped clients many times with both of these methods and, quite frankly, I much prefer the first one. You will though need to work with the US embassy in most cases because these hostages have been stripped of their passports and you will need a new one if your former hostage is going to be leaving China via airplane — but there are even alternatives to that.

What do you think?

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The large-scale shift to telework brought on by the COVID-19 pandemic is prompting businesses around the world to explore new avenues to engage with clients and friends. Harris Bricken is no exception, and we are happy to provide this podcast series: Global Law and Business, hosted by international attorneys Fred Rocafort and Jonathan Bench.

In Episode #33, we are joined by Adam Bathgate and Korin Knights, lawyers at the Bermuda office of Walkers, an international law firm. We discuss:

We’ll see you next week when we sit down with Uday Garg, managing partner at Mandala Capital.

If you have comments on this episode or if you’d like to suggest topics for future episodes, please email globallawbiz [at] harrisbricken [dot] com.

And please follow Fred and Jonathan on social media to stay informed on upcoming guests and topics:

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The visual presentations for this webinar can be found below:

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Biden won the election. So what will be the China policy of the new administration? Will Biden follow the lead of Trump and Pompeo? Will Biden return to the accommodating policy of the Obama/Bush era? Or will Biden dig new ground?

Biden and his team have carefully avoided tipping their hand on the direction the new administration will take on China. In the face of this uncertainty, both the current administration and its opponents have already starting pushing for their competing visions.  In the hope Biden will stay the course of the tough Trump China policy, the State Department under Mike Pompeo has issued a report that seeks to answer the question for Mr. Biden. The position is outlined in detail in a just-released policy report entitled The Elements of the China Challenge.

The Report describes the recent behavior of the PRC, both internally and internationally. The Report focuses on guidance for the appropriate response to China’s international challenge. The State Department describes China as an enemy, along the lines of the Soviet Union, post World War II, and it explicitly recommends a policy of containment, along the lines of the cold war system set forth in George Kennan’s “long telegram“. In support of this containment policy, the Report provides a detailed program of ten tasks the U.S. should take in response to China. Predictably, the PRC has condemned the Report as an example of outworn, cold war thinking with no application in the modern world.

As reported by the SCMP, China foreign ministry spokesman Zhao Lijian called  it “another anti-China lie concocted by Cold War fossils from the US State Department . . . .  [that] fully exposes the deep-rooted Cold War thinking and ideological prejudice of some people in the US, and also exposes their fear, anxiety and unhealthy mentality about China’s continuous development.”  He went on to add that the United States is “doomed to fail, and will eventually be swept into the garbage dump of history.”

Supporters of the “back to Obama/Bush”  U.S. seem to agree with China’s foreign ministry. They suggest Biden follow the lead of the Chinese foreign ministry and relegate the Report to the garbage dump. In Time for the West to revisit its China narratives, Politico provides an excellent example of this position.  Unfortunately for the opponents of the containment policy of the Report,  the Politico piece shows a lack of understanding about China and it fails to provide a practical alternative policy for the Biden administration. Rather than discussing the facts and policy contained in the Report, Politico simply blows off the Report with little more than a shrug of indifference, by asserting it “contains little that’s new.” Per Politico, even though the Policy Planning staff at Foggy Bottom are tasked with “innovation and creativity” within their agency, most of the Report “equates to the 2020 version of conventional wisdom about China, marshaling administration talking points that felt fresh two years ago but are well-worn now.”

This dismissal by Politico ignores the structure of the Report and makes us wonder whether the author even read the Report at all. The Report can be roughly divided into two sections. First, a factual statement of Chinese actions both domestically and internationally. These actions are described by the Report as a direct threat to the United States and the Western world. Second, and more important, the Report outlines a set of policies designed to contain the China threat. So there are two issues: the facts and the policy response to the facts.

We can first look at the factual issues. On the facts, the statement that there is “nothing new” must mean Politico agrees that the factual statements are correct. This is a somewhat shocking admission, since the facts stated in the report are a damning condemnation of China and the Party.  But, since Politico apparently agrees with the facts, we can turn to address the claim that the facts stated are not “new”. The truth is that the facts ARE new. This shows an important weakness in the Politico position and that of many other old line China watchers. These people see a China from the past, not the China under Chairman Xi and the revived Communist Party.

That Politico and others are so willing to ignore the actions of the Xi administration since 2016 is new, and it is this continued denial of the facts by U.S. China watchers that is a primary concern of the Report. The actions of China carried out during the Xi administration described in the Report represent a complete reversal of the policies of the previous administrations under Deng, Jiang and Hu. Under the previous administrations, the Party took a reduced role in society and the PRC did not seek to extend its influence outside its borders. Xi has taken the opposite position and I wrote about this in China Cybersecurity: No Place to Hide:

The primary goal of the Xi Jinping administration has been to reverse this trend. Through the efforts of Chairman Xi, the CCP is now the leader on everything. There is no limit on its role in directing all aspects of China. Accordingly, in 2018 the CCP constitution was revised to state:

The leadership of the CCP is the primary characteristic of socialism with Chinese characteristics. The Party, government, military, civil and education, north, south, east, west and the center, the Party is the leader on everything.

中国共产党的领导是中国特色社会主义最本质的特征,是中国特色社会主义制度的最大优势。党政军民学,东西南北中,党是领导一切的。

This statement is a rejection of the policy of Deng, Jiang and Hu. It hearkens back to the position of Mao Zedong as stated in 1962. 1962年1月30日,中国共产党中央委员会主席毛泽东扩大的中央工作会议.

Second, and just as important, these actions have been ignored by China watchers familiar with China as it operated under the Deng/Jiang/Hu system. They simply assume China today is just like China during their halcyon days of life and studies in China from 1984 to 2016. More critically, signs of change could be seen under the Hu administration, but these signs were ignored by those same China watchers. So the factual statement section of the Report cannot accurately be dismissed as “old news”. The Report states the facts bluntly and asks the question of all those who choose to ignore these facts: is this true or not? Politico declines to accept the challenge of contesting the facts. The Chinese government also declines to contest the facts.

So if everyone agrees on the facts, the only question then becomes what is the appropriate response of the U.S. to those facts. Per Politico, the “report generally describes China as a monolith, giving scant mention to the competing interests or equities that even a dictatorship must consider when making and executing policy, particularly in a large and complex country like China. There’s little about internal sentiment, or how the U.S. might leverage that to its advantage.”

Politico’s comments about competing interests in China makes no sense because the PRC is indeed a monolith. The Party is the leader of everything. There are scant competing interests in China in that there are factions within the Party that want to take control of the spoils, but Politico is not referring to  Party factions, since they are still within the Party. Perhaps Politico is referring to individuals within civil society that oppose some of the Party policies. But those opponents of the Party simply don’t count in China in terms of nation to nation policy development. Opponents to the Party do not represent a civil society group that can be courted or worked with to promote change. No color revolutions will be permitted in China. When Kennan wrote his “long telegram”, there were many dissident groups within the Soviet Union. Those groups were not relevant to Kennan, and they are not relevant to any U.S. government developing an overall policy towards China. Nor should they be.

The brutal truth about China is that, as in Stalin’s Soviet Union, any opposition to the Party as the leader of everything is directly confronted and destroyed. The examples are numerous and would be tedious to list.

We will though give one recent example. Sun Dawu created a business organization that resisted Party control. He was an open critic of Mr. Xi. This is what happened, as described by the Wall Street Journal, in China’s Detention of Entrepreneur Raises Fresh Concerns About Vulnerability of Private Firms:”Sun Dawu, the entrepreneurial founder of the Dawu Agricultural and Animal Husbandry Group, famed equally for his clear-eyed political commentary as for his business acumen, is the latest prominent Chinese public figure to be detained on charges of ‘picking quarrels and provoking troubles.’ Sun, his son, and at least 10 other high-level Dawu Group executives were detained on November 10.”

“Picking quarrels” means opposing the absolute will of the Party. As with the Soviet Union, the U.S. might have a policy of covert support for dissidents within China. But that is part of a containment strategy. It is not an alternative to the containment strategy outlined in the Report.

More generally, the Party is working hard to ensure there is no alternative civil discourse within China, forcing alternative views into the shadow world of dissident speech and writings. This is illustrated quite clearly by recent Party directives on control of private online media in China. Per the SCMP in Chinese Communist Party tells online media firms to put loyalty first, This recent policy directive from the Propaganda Office makes this bluntly clear:

Xu Lin, vice-director of the central propaganda department, told a media forum on Thursday that China must “resolutely guard against digitalization diluting the party’s leadership, resolutely prevent the risk of capital manipulating public opinion”.
“Digitalization could bring about changes in media but no matter what kind of media outlet, no matter if it’s mainstream or a commercially run platform, online or offline, big or small screen, there is but one criterion for guidance, there is no space outside the law, no enclave for public opinion,” he said at the annual China New Media Conference in Changsha, the capital of Hunan province.

Note two critical terms: “capital” means “private, civil society” and “law” means “the absolute will of the Party as expressed under rule by law with Chinese characteristics”.

Politico offers little more than a shrug and a smug dismissal as its response to the containment policy advocated by the Report. In what seems like an effort to remedy its failure of analysis, Politico lists a series of recommendations for the new Biden policy that come not from Politico, but from “experts” surveyed by Politico. Apparently this list of comments is intended to stand as Politco’s recommendation to the Biden administration for its China policy. If this is the plan, the plan failed.

Politco’s  list of the ways the U.S. should deal with Xi’s China all come from academics; There is not a single proposal from people who deal with the PRC government, the Party, or with Chinese businesses on a daily basis. For those of us who do deal with China every day in this way, the comments read more like fantasy than analysis.

The views expressed by the Politico experts read as not so thinly disguised efforts to have making money be the U.S. government’s guiding policy with China.  Many U.S. businesses that are eager to profit by investing in China and selling their products and services to China, and in having their products made at low cost in China are “hoping” for a return to the good old days of the first decade of this millennium, when they were relatively free to do all of these things. The Washington Post recently reported on how “Apple lobbyists are trying to weaken a bill aimed at preventing forced labor in China, according to two congressional staffers familiar with the matter, highlighting the clash between its business imperatives and its official stance on human rights.”  See Apple is lobbying against a bill aimed at stopping forced labor in China.

This sort of “make money” foreign policy makes sense for companies like Apple and their patrons like Politico, but this sort of  orientation can lead to false narratives about benign intentions of the CCP and actual conditions on the ground in China. This sort of thinking can “whitewash” the realities on the ground in China and no sound foreign policy can be built on sanitized facts  and apologist “analysis”.  Focusing on profits is what companies do, not a country that is “back and ready to lead world.

Most importantly, all this “hope” from Politico writers and the academics they interviewed assumes the U.S. attitude towards China is all that matters and the CCP’s position can be completely ignored. But even though Politico and its select group of academics want open engagement and an easy (and profitable) commercial relationship with China as the passive “factory to the world”, what happens if that is not what the CCP wants? What if what the CCP wants is total control both within and outside China? What if the CCP wants to exploit the outside world while maintaining a completely closed and predatory system within China? What happens if, when the chips are down, the CCP does not want our money? Or what happens if the CCP puts unacceptable conditions on our business relations with it? What if the Party says: you must purchase products made by Uyghur and Tibetan and North Korean forced labor and if you continue to complain about our forced labor or report on our genocide in Xinjiang, we will shut down all commercial relations with you. What happens then? Politico conveniently ignores all of this.

These concerns are not fantasies as this is happening in China today. Consider the recent attacks on the (foreign VIE funded) fin-tech sector, where Xi Jinping personally shut down the Ant Financial IPO and following that decision, the Party immediately issued new guidelines designed to exert control over the entire VIE financed private sector. The Party has shown little concern for innovation or financial alternatives or for private investors; its only concern is with maintaining its control. This is the future of China.

Outside China, the Party is already working to shut down of civil society and informed opposition to China practices as a condition for bilateral trade. Most recently the CCP essentially told the government of Australia to shut down its civil society or it would lose out on trade with China. See If you make China the enemy, China will be the enemy: Beijing’s fresh threat to Australia:

“[A leaked] government document goes further than any public statements made by the Chinese Communist Party, accusing the Morrison government of attempting “to torpedo” Victoria’s Belt and Road deal, and blaming Canberra for “unfriendly or antagonistic” reports on China by independent Australian media.

“China is angry. If you make China the enemy, China will be the enemy,” a Chinese government official said in a briefing with a reporter in Canberra on Tuesday.

[…] The list of grievances also includes: government funding for “anti-China” research at the Australian Strategic Policy Institute, raids on Chinese journalists and academic visa cancellations, “spearheading a crusade” in multilateral forums on China’s affairs in Taiwan, Hong Kong and Xinjiang, calling for an independent investigation into the origins of COVID-19, banning Huawei from the 5G network in 2018, and blocking 10 Chinese foreign investment deals across infrastructure, agriculture and animal husbandry sectors.”

The PRC is requiring Australia fix all these “problems” before normal trade will resume. Consider the issue here: the leaked document says: “If you make China the enemy, China will be the enemy.” The only conclusion we can take from this is that this document is intended to let the world (including the United States) know that every country must accept the will of China without complaint. The threat is that if  the Biden administration does not back down and comply with China’s dictates, China will declare China to be the enemy of the U.S. and it will behave the way an enemy behaves, not the way a strategic competitor behaves. The Report concludes that this has already happened.

Either way, the issue is what is the appropriate policy response in this entirely new characterization of the U.S. relationship with China. But what is most important is that it is the CCP that will make this decision, not the United States. Indeed,  the content of the threat to Australia shows China has already made the decision to put the U.S. on its enemy list if the U.S. does not comply by shutting down its open government, media and civil society. Though many businesses and academics (see Apple and Politico) seem willing (almost happy) to pay this price, it is highly unlikely the Biden administration will be. See America is back and ready to lead world, says Joe Biden.

It is not clear the Report’s China containment policy is the best approach for dealing with China, but it is clear Politico’s “take the money and ignore the rest” approach is not.

 

 

Don't Wait to Register Your Trademarks in China
Don’t Wait to Register Your Trademarks in China

George Santayana once said: “Those who cannot remember the past are condemned to repeat it”? Although the line was not about Chinese trademark law, it might as well have been. We have been beating the drum for years about registering trademarks in China (see here and here for a representative sample), but every time I start to think the subject has gone stale, a bunch of new matters come in that prove me wrong.

When people run into problems with China trademarks, it can often be traced to one of the following four misconceptions.

 

Misconception #1: US and EU Trademark Registrations Protect You in China

The first misconception is that a trademark registration in the U.S. or EU or some other jurisdiction will provide some protection in China. There is no such thing as a worldwide trademark; every country has its own trademark system, and your US or EU trademark has no bearing on your trademark rights in China. The one exception in China is for well-known brands, but this exception is so limited as to be meaningless. Starbucks had to litigate for years to prove it was a well-known brand, and even that was not a slam dunk.

 

Misconception #2: You Can Get “Your” Trademark Back by Showing You Used it First in China

The second misconception is that if a third party registers “your” trademark in China, you will be able to get it back by showing you used it first in China. China employs a “first to file” system for trademark registration, with virtually no protection for unregistered trademarks. In this respect, China’s trademark system is the opposite of America’s, where you gain some trademark rights by usage alone. In China, anyone can register “your” trademark and prevent you from using it, even if they are not even using the trademark. This happens all the time and it is legal under Chinese law. If someone registers “your” trademark first, that makes them (not you) the rightful owner of that trademark in China—and if you attempt to sell goods in China bearing that trademark, your goods could be seized because you are the one violating China’s trademark law. It’s not a bug, it’s a feature.

 

Misconception # 3. You Can Invalidate the Registration of “Your” Trademark Based on Bad Faith

The third misconception is that if one of your Chinese competitors registers “your” trademark, you will be able to invalidate the registration on the basis of bad faith. Although last year’s revisions to the Trademark Law theoretically strengthened the requirement that trademark applications be made in good faith, the Chinese Trademark Office still has a narrow conception of what constitutes bad faith. In the vast majority of situations, your only hope of successfully challenging an existing registration on a bad faith claim is to show that the owner of “your” trademark is (1) a business partner or (2) a serial trademark squatter. And even those two methods are far from foolproof. To show that someone is a business partner you need to prove that you had a business relationship before they submitted the trademark application — and without any possibility of court-ordered discovery, such proof can be elusive. It is equally difficult to prove that someone is a serial trademark squatter. If they have registered several hundred trademarks and do not appear to conduct any business related to the goods and services covered by those trademarks, then you have about a 50/50 chance.

If the owner of “your” trademark is just a Chinese competitor — which happens all the time, because who else knows the business better? — your options are highly unappealing: (1) you can buy the trademark from the competitor at a usurious price; (2) you can go into business with the competitor on unfavorable terms; (3) you can pick a new trademark and rebrand; or (4) you can stop doing business in China. The competitor has no incentive to do anything that would actually help you. We handled a matter in which a Chinese company registered the names of its three largest non-Chinese competitors, effectively taking those companies out of the market in China for a few years, at least under their own names.

 

Misconception # 4. You Need Not Register a Trademark in China if You Just Manufacture There

If you are having your products made in China and someone registers your brand name or logo as their trademark, they (not you) are the rightful owner of that trademark in Chin and this means they can cease your products and prevent them from leaving China for violating their trademark rights. This actually happens quite often and the perpetrator of this “theft” is usually tied to your own manufacturer.

 

If you care about what happens to your IP in China, you need to register your trademarks in China now. The Chinese trademark system only helps those who help themselves.

Ten Keys for preventing counterfeiting

For years, I worked on the anti-counterfeiting frontlines, helping brands take direct action against those who pirated their products. Of all the advice I can provide to brands based on that hands-on experience, the most important is to be proactive.

As I often told my clients, if counterfeits of your products are being sold to the public, you have already lost. Sure, there is a lot that can be done to ameliorate such a situation, but the time for action is way before that. The more you do before you face an infringement problem, the less likely you are to have an infringement problem in the first place, and the more tools you will have in your arsenal to stop an infringement problem once it starts.

This is not to say that proactiveness can ensure no counterfeits make their way into the streams of commerce—if a product is desirable, it probably will end up being copied on a scale that will lead to some knockoffs entering the market. But starting an anti-counterfeiting program when products are widely available is the definition of an uphill struggle—and it does not need to come to that.

At minimum, we recommend the following:

1. Register your trademarks (not in Madrid) and your copyrights in the countries in which your products are made and in the countries in which they are sold. And beware of service providers who will simply go through with the mechanics of filing trademark and copyright registration applications without considering important factors, as we discuss here.

2. Record your trademarks and copyrights with the customs authorities in the country in which your products are made and in the countries in which your products are sold as soon as your trademark and copyright registration is complete. This will let them know that they should be on the lookout for counterfeits of your goods, and will also help establish valuable channels of communication that can facilitate seizures and provide opportunities for training that will familiarize officers with your genuine products.

3. Do not allow your manufacturers to subcontract the production of your goods.

4. If you do allow your manufacturers to subcontract production of your products, enter into a separate agreement with the subcontractors that will protect your intellectual property.

5. Have a Manufacturing Agreement with your manufacturers that imposes liability on them in the event of infringement by any of their subcontractors.

6. Enter into a formal mold agreement that makes clear that your molds belong to you and that imposes a significant monetary penalty on the primary contractor if your molds disappear. See How to Protect Your Molds and Tooling When Manufacturing Overseas.

7. When contractors/subcontractors are changed, immediately seek to locate your molds and get them back. Do not wait. Much of the counterfeiting we see stems from missing molds.

8. Establish brand protection guidelines for your manufacturers to follow. Then audit your manufacturers to ensure compliance and detect problems. Invest in technology that helps foil counterfeiters, such as security features on products.

9. Monitor online sales of your products so if someone is selling counterfeits you will be positioned to stop them early. Keep your pulse on brick-and-mortar markets as well.

10. Educate consumers to serve as your eyes and ears.

If you do the above, your chances of having an intractable counterfeiting problem go way down. If you do not do the above, they go way up. It is that simple.

China manufacturing risks

1. Good Manufacturer, Good Manufacturing Contract, Good QC

We are always preaching that if you 1) choose a good manufacturer, 2) use a good Manufacturing Contract, 3) engage in good quality control monitoring, and register your trademark, the odds are overwhelming that you will do just fine in outsourcing your product from China.

The odds just went down.

Pre-COVID, I estimate that our law firm would receive two or three emails a month from someone who had sent money to a Chinese manufacturer and received no product. And of those emails, I estimate that pretty much all of them involved a relatively unsophisticated buyer who had done none of the three things listed out above.

 

2. COVID Has Made China Manufacturing Much Riskier

But since COVID, we have been receiving a lot more emails from buyers who have been burned by Chinese manufacturers but have a very different story to tell. These buyers have been burned by Chinese manufacturers with whom they have been dealing successfully for many years. The following is a fairly typical example:

I did not receive my most recent order from ____________ Chinese manufacturer. I have been dealing with ______________ for six years and we have never had a problem like this. We have had issues with them in the past but we were always able to resolve them. Now they are not even answering their phone. They owe us around $60,000.  Can you help?

I recently received the following email:

Two things I would love to get your opinion on:

1. As a director of a company that sources “promotional items” solely in China (assuming the quantity of goods is large enough), where else can we possibly be looking?  If we only did textiles I could set up in Vietnam or in Bangladesh; but we source plastic trinkets, low-end electronics, pens, lanyards, bags, and a variety of other LOW VALUE ADDED goods.  Is our only option to keep taking the price and tariff increases until someone finally starts making plastic toys and trinkets in another country?  From my experience these China manufacturers are NOT moving inland to cheaper places in China, but are instead just raising their prices or shutting down.  Keep in mind that the factories I’m working with are not huge Foxconn-like factories but private owned 50-150 employee factories.  What have you seen?

2. We work with over 100 factories a year in China. I’m trying to develop a plan on “How Not to Get Caught With Our Pants Down” where a manufacturer closes and takes our deposit, which happened to us three times in the last year as compared to zero times in the previous two years combined.  If a factory goes bankrupt I think the chances of us getting any kind of money back on a deposit no matter how well our written contracts are is low (maybe this is wrong?).  Our current plan is ‘hoping and praying’ on deposits less than $10k that wouldn’t really hurt our company, and making sure we send our QC team to visit the factory even if previously audited, for any deposits over $10k to ensure they have workers there, raw materials in storage, and are producing something. Does this make sense to you?

I would imagine many of your readers are facing similar situations.  It’s a scary time to be exporting from China.

I responded to this email by professing that I had no great solutions and that I would blog about it.

As for where to go, the answer is “that depends.”

 

3. How to Reduce Your China Manufacturing Risks

As for how to prevent yourself from getting caught holding the bag when your Chinese manufacturer disappears or what to do about it when that happens, I have the following advice, none of it great:

1. Redouble your due diligence in choosing a Chinese manufacturer. Check out the factory. Check out its company registration. Check out the rumors about it. Do whatever you can to try to gain a sense as to whether it is a company that is acting like it has a future. When our law firm conducts basic factory due diligence for our clients, we suggest they not move forward with their proposed supplier close to 40 percent of the time.

2. Reduce the size of your orders to the extent you can. This way whatever bag you end up holding will at least be a smaller one.

3. To the extent you can, try not to order anything in September, October or November. Chinese companies typically come up for renewal of various licenses in December and January and they often try to hold on up until the point they are supposed to pay these. That being the case, they take your money at the end of the year and then never ship and then cease to exist.

4. Increase your monitoring of the factory to make sure your product ships.

5. Do whatever you can to try to reduce the amount you pay upfront for your product. If you have been doing business with the same factory for five years and paying it 70% upfront, go to them and point out that you have always paid and ask to switch to a 30-70 or 50-50 payment plan.

Any other ideas out there?

international IP protection

One of our international IP lawyers is preparing a short talk for a client on protecting  IP rights internationally and she sent me a very short outline of what she will be discussing.

Here is that outline:

1. Register your IP as early as possible.

2. Do not sacrifice IP protection for speed — don’t jump into the market before you take care of your IP.

3. Have a well-crafted, reasonable, and feasible IP plan in place before anything goes wrong.

4. Keep your eyes open for infringement and listen to your distributors and agents.

5. Check up frequently on your licensees, distributors, agents, and manufacturers.

6. Conduct a cost benefit analysis of all reasonable protection and enforcement measures.

I like it.

You?

Global Capital Markets

Listen HERE or stream on SpotifyApple PodcastsGoogle PlayAmazon MusicStitcher, or Soundcloud!

The large-scale shift to telework brought on by the COVID-19 pandemic is prompting businesses around the world to explore new avenues to engage with clients and friends. Harris Bricken is no exception, and we are happy to provide this podcast series: Global Law and Business, hosted by international attorneys Fred Rocafort and Jonathan Bench.

In Episode #32, we are joined by Joel Gallo, CEO of Columbia China League Business Advisory Co., a cross-border transactions and management consulting firm. We discuss:

  • The deferential treatment to Chinese companies listed on U.S. stock exchanges and why that matters to the markets and investors.
  • The roles the Hong Kong, Shenzhen, and Shanghai stock exchanges play and how those roles have been changing in light of China’s reform and the opening up of its financial sector.
  • What is going on with global stock markets now as leading indicators of companies and global economies.
  • What increased interest in digital currencies within various countries’ governments will do to the global currency market.
  • Reading, listening, and watching recommendations from:

We’ll see you next week when we sit down to discuss venture capital in Southeast Asia with Uday Garg.

If you have comments on this episode or if you’d like to suggest topics for future episodes, please email globallawbiz [at] harrisbricken [dot] com.

And please follow Fred and Jonathan on social media to stay informed on upcoming guests and topics:

Just say no to corruption, but also understand what it can mean for your lawsuit
Just say no to corruption, but also understand what it can mean for your lawsuit

Let me put it right out there: most North Americans and Western Europeans do not understand court corruption. They have heard about it, of course, but they generally do not understand how it impacts their business. Otherwise they would not so frequently say there is no point in having a contract or bringing a lawsuit in such and such a country because it’s corrupt. Corruption influences (sometimes greatly) court cases, but not as often or as much as widely believed.

When dealing with corruption, one has to be sensitive to location, type of case, and relative influence of the parties. In other words, a $100,000 breach of contract case between a U.S. private company and a Chinese private company is much more likely to get a “fair trial” in a Chinese court in Shanghai than a case against a massive China SOE (State Owned Entity) involving stolen trade secrets that might have military applications in the small Chinese city in which that SOE is based. Sometimes this is due to corruption and sometimes this is due to what lawyers commonly call getting  home-towned. There are Wall Street lawyers who are as afraid of going to trial in a rural Mississippi court as US companies are of going to trial in China.

But when Americans think of a corrupt court they usually think of the opposing party paying a judge in cash for the ruling of their dreams. But it is rarely that simple and knowing how court corruption works can be important.

I was schooled in the “finer points” of court corruption by a very smart, very honest Russian lawyer friend of mine who used to practice law in the Russian Far East — where many a prosecutor and judge live in multi-million dollar mansions on $35,000 a year salaries. What he explained to me works pretty much the same in other emerging market countries with a less than pristine court system — or at least that is what lawyers in some of these countries have told me.

My schooling on Russian court corruption was in “real time” as it involved a real case and a real client. It has been many years so I may be a bit off on the numbers, but bear with me here. It is possible things have changed in Russia since then and it is also quite possible this information held true only for this one region in Russia. It is also possible I am the King of Prussia.

My client had a contract with a Russian company under which the Russian company clearly owed my client $2 million, but the Russian company was refusing to pay and all but challenging my client to sue it in a Vladivostok court, the only place my client could pursue its claims. Legally, my client’s case was about as close to a slam-dunk winner as you will see in a business dispute. But my client was rightfully concerned how corruption would influence its case.

Our Russian local counsel explained how we should view the case, corruption warts and all, and he did so by explaining the following:

Nine of the fifteen judges are corrupt. The other six are not. So we have a less than 50-50 chance of getting a fair trial. But I still like our case even before one of the corrupt ones. Our case is so strong that none of the corrupt judges will just give it to the other side without a very substantial payment. No judge wants to be thought of as corrupt and ruling against our client in this case will definitely raise eyebrows.

The Russian company will probably need to pay the lower court judge approximately $300,000 for the ruling it wants. And then we can appeal to a three judge appellate panel, made up of judges from throughout the province. A lower percentage of the appellate court judges are corrupt and those that are require large payments, especially on a case like this. The odds of all three of our appellate judges being corrupt are quite low. The odds this Russian company has close connections with any of the judges are lower than when all of the judges are based in its home city. This means that to try to bribe two of the three appellate judges will be risky and very expensive. Risky because, though rare, people sometimes do go to jail on bribery charges. Expensive because we are talking about three appellate judges. So in the end, I estimate that for the Russian company to be assured of winning through the appellate level, it will need to pay maybe a million dollars and there is a chance no amount under $2 million will work. And this ignores our ability to at least try to appeal to the Supreme Court in Moscow.

My numbers are obviously just estimates but what I am telling you is that though corruption is a factor, our job is to not allow our client to panic in the face of it. We can settle this case on good terms and that is what we should be trying to do. The Russian company would rather pay us to eliminate risk than pay judges and take on new risks.

We did end up settling the case and at a figure not all that much lower than what we would have accepted in the United States.

I am not by any means trying to minimize the impact of court corruption; I am merely trying to show that it oftentimes is not as overwhelming as it may initially appear.

Note also that we never discussed our client paying a bribe to anyone. That is always the worst alternative because it puts people at real risk of going to jail without anything close to a guarantee that it will even work. When our Russian lawyer said that people in Russia rarely get arrested for bribery, he was talking about Russians, not foreigners. Do you really think that you have the savvy to engage in risk-free bribery in a foreign country? I can tell you that none of my law firm’s international lawyers would make that claim.

Court corruption is a much bigger threat with cases that can reasonably go either way. In those situations — or so I am told — the lower court judges in Vladivostok (and this was many years ago) would have taken $15,000 to throw a case like the one we had, knowing nobody could be certain whether their decision was due to having taken a bribe or to the facts in the case. An interesting sidelight: this lawyer also told me that if after accepting a bribe the judge no longer felt comfortable in ruling in favor of the bribe-payer, he or she would return the funds before issue its ruling against the company that paid the bribe. In other words, the judges were (as he laughingly put it) “honest thieves.” On cases that are close to 50-50, appellate courts tend to favor not overruling the lower court.

Bottom Line. If you want to negate the impacts of corruption as much as possible, you use a contract that makes it all the more likely for you to prevail, just as you would want if there were no corruption at all.

What are you seeing out there?