China WFOE employment law
Get off on the right employment law foot when forming a China WFOE

Our China lawyers are constantly helping foreign companies set up companies in China — usually wholly foreign owned enterprises or WFOEs. As part of these WFOE formations, we help our clients with their employment matters that arise before, during and after the WFOE is formed. One of the things we always do for our WFOE formation clients is draft the employment documents they will need for their newly established WFOE.

When a WFOE is up and running, it needs employee agreements in place for all its employees. When we are called on to provide China employment law assistance to China WFOEs-to-be and freshly minted WFOEs, we usually recommend what we call an Initial Employment Package, which consists of the following for each employee:

  1. Employment Contracts
  2. Rules and Regulations
  3. Trade Secrecy and Intellectual Property Protection Agreements
  4. Sign Off Agreements, (acknowledging each employee’s receipt of the Rules and Regulations)

Having the above for your employees is crucial to operating as a WFOE in China with employees. If all you have is an employment contract, you are not fully protected. Specifically, your technical secrets or other trade secrets and the related intellectual property rights are not well protected as against your employees. And you likely will have no recourse against an errant employee no matter what the employee’s wrongdoing, since you do not have a set of China-centric Rules and Regulations to facilitate penalties or termination.

Your Rules and Regulations need to work for your specific locale(s), so if you have multiple locations in China, you need separate, standalone policies tailored for each location. Your employment contracts also should be localized. For more on the need to localize your China employment documents, see China Employment Law: Local and Not So Simple. We have worked with 1) companies with one WFOE and employees throughout China, 2) with companies with multiple WFOEs, one for each city, and 3) with WFOEs with branch offices in each city in which they have employees. Each of these structures require different documentation.

We also frequently draft non-compete agreements and these also virtually always need to be tailored to the specific situation, with that usually depending on the positions of the employees and their salaries and the shelf-life of the information that needs protecting.

Another common employment law issue we see with new WFOEs is what they can and should do with employees who work flexible hours. It is important to note that your new employees usually cannot be designated to work under China’s flexible working hours system until you have obtained the necessary government approval for the WFOE and it is up and running.

It pays to start with a strong employment law and document foundation for your China WFOE.






China lawyers for manufacturing

Having just returned to Qingdao after a fairly long absence, I met over the weekend with a group of expats engaged in various forms of manufacturing in China to get their  take on current conditions and their feelings about the future. The participants in the discussion were from many regions: United States, Canada, England, Germany, Norway, Finland, India, Pakistan, Spain and Italy.

The discussion was interesting because the opinions expressed were very consistent. Every person said that they were having problems with their manufacturing in China and that they were interested in diversifying into other countries. They identified the following issues as causing them problems in China:

a. Rising wages. When productivity is factored into the analysis, China can no longer be considered a low wage country. Many participants stated that on a purely wage basis, Chinese manufacturing is not significantly cheaper than parts of the United States.

b. Rising costs. The main complaints were directed at soaring rental rates and rising utilities costs. Many of these costs were formerly subsidized. These subsidies are being removed and the cost is being reflected in the price of manufactured products.

c. Declining manufacturing quality. All of the participants in the discussion agreed that instead of improving, the rate of manufacturing defects has risen over the past five years. This rise in defects has been coupled with a general decline in service from Chinese manufacturers.

d. Increase in scams. In recent posts (see part 6 here and follow the links to the previous five posts in this “Scam Week” series) we have discussed the rising number of scams our China lawyers are seeing involving both foreign manufacturers and investors. The participants in this discussion have also seen a rise in irregular practices in the manufacturing sector. Swapping out product components for lower quality items was a major complaint and these swaps are happening more now than five years ago.

Given the above complaints, I asked the participants “To what country would you choose to move your manufacturing operations?” Their responses to this question was surprisingly consistent: they all agreed they would move to Malaysia or Indonesia.

Given the above, I assumed that a move for all the participants was imminent. So I asked the natural question: have any of you actually moved your operations out of China to the countries you have identified or to any other countries in the world? The response was surprising to me. In spite of the consistency of their complaints, NONE of the participants had moved their manufacturing operations out of China. Most had tried some other country, with Viet Nam, The Philippines, Malaysia, India and Bangladesh being the most common countries explored. But every person in the group had abandoned these plans and had either kept their operations in China or moved their operations back to China.

The reasons given for the returning to China or just staying here were as follows:

a. Inadequate supply chain. For larger, established companies the primary reason was the lack of a good supply chain. They found it impossible to obtain all of the components required to manufacture on a consistent and price competitive basis.

b. Low productivity. Though wages in the other countries were lower than China, the skill in manufacturing and the quality of factories is low. When calculated by productivity, none of the alternative countries showed any benefit when compared to Chinese manufacturers who have been in the business for 20 or more years.

c. Lack of engineering and design support. Foreign buyers of product from Chinese factories routinely make use of the staff of the Chinese factory to deal with final design and commercialization of product. Molds and tooling are routinely designed and fabricated in China. Production prototypes are designed by the factory engineering staff. When factories in the other countries are approached about these services, the factory staff is eager to learn, but the expertise is simply not there.

d. Small scale production is not available. Many foreign buyers come to China to manufacture small runs of product. One participant said he had just worked with a local Qingdao manufacturer on a limited run of 100 items for a new product produced to test the market. When I asked him if he could have a short run like that done in any country other than China, his immediate answer was: “Of course not. I can get these items made in Viet Nam, but I have to order at least 10,000 items. I also have to provide my own engineers and design staff and it just does not pencil.”

Every participant in our meeting was extremely critical of current manufacturing conditions in Chine. Every participant expressed an almost ardent desire to move out of China. Every participant stated they had made at least one effort to move production to some other country in Asia. But in the end every participant also stated they are currently not able to leave China because no other country offers the conditions required for small and medium sized companies to produce their product.

The general conclusion from the discussion was that it may be possible for large multinationals to move their manufacturing operations out of China to other countries in Asia. But for the “near future,” for start ups and for small and medium businesses, China remains the only practical place to do outsource manufacturing. What does “the near future” mean? The general impression was that this current situation will last for at least five years. Of course, “five years” really means “we just don’t know.” Or to sort of quote Winston Churchill, China is the worst place to manufacture your product except for all the others.

China trademark lawyersYour brand name and your product name and your logo are almost certainly some of your company’s most valuable assets. Most companies realize this. Yet most companies do not realize how they put these things at extreme risk by exploring doing business with China without FIRST applying for a China trademark. And in the past year or so this risk has greatly escalated.

Let me explain.

China is what is called a first to file country.Companies need to know that China is a “first to file” country. See China Trademarks and the Real Meaning of First to File. This is by far the most important thing you need to know about China trademarks. First to file means that (with very few exceptions) whoever files for a particular trademark in a particular category gets it. Three examples of what this means and how horrendous this can be for your company will hopefully nail home this point

  1. If your company’s name is “Nuvealass” and you make widgets and you been manufacturing your widgets in China for the last two years and selling Nuvealass widgets in Europe, Canada and the United States for the last ten years and someone registers the “Nuveulass” trademark in China for widgets, that someone now owns the “Nuvealass” trademark. And what this means is that someone can stop your widgets from leaving China because your widgets violate its trademark. This is not a hypothetical example as this sort of thing happens all the time.
  2. If your company’s name is EFGH and you have a really great SaaS business and you are looking to go into China with that business and another company registers the EFGH name as its own trademark in the class for SaaS before you do so, the odds are overwhelming that you will never be able to use the EFGH name for your SaaS business in China. This is not a hypothetical example as this sort of thing happens all the time.
  3. If your company’s name is XYZ and you have a really great consulting company and you are contemplating having your business work for Chinese companies and another company registers the XYZ name as its own trademark in the class for consulting businesses the odds are overwhelming that you will never be able to use the XY name for your consulting business in China. This means that if you try to use the XYZ name for your business in China or even if you stay in the United States and market your XYZ business in China, your company is at risk of being sued for trademark infringement by the company that owns the XYZ trademark in China. This is not a hypothetical example as these sort of things happen all the time.

If you are thinking you are safe from all of this because you are a small company and hardly anyone knows who you are, you are simply wrong. Five years ago, maybe, but today, absolutely not.

Let me explain.

Because of this blog our China lawyers are always getting contacted by companies with China trademark problems, most of which we simply cannot solve. From these contacts I have determined the following:

1. A company that sends anyone to China is at real risk of having someone register its trademark in China. Why does this increase the risk? Somehow or other (and you can draw your own conclusions here) trademark trolls will learn of your business. How do I know this? Because in the past year or so it has become commonplace for American and European companies to get an email a few weeks after their China visit (just enough time for someone to file a trademark application) saying that “someone just sought to register your company name as a trademark in China.” These emails then suggest hiring the sender to prevent that trademark registration from going through. And here is where it gets interesting. Sometimes no trademark has been sought and the sender merely seeks to profit from the threat. Other times though, the sender (who almost certainly is connected with the company or person that has filed for the trademark) will then offer to help you purchase your company or brand name from the person or entity now in line for getting it in China. This situation gives rise to Rule Number 1: Apply for your China trademarks BEFORE anyone from your company sets foot on China soil.

2. A company that communicates with any company in China is at risk of losing out on securing necessary trademarks in China. Why does merely communicating with any company in China increase your risk? Because your communication is a tip-off that you are interested in doing business in China and that alone makes it valuable for someone to run off and file a trademark application to secure your company or brand name as their own China trademark. When a company in the midst of discussions with a China company calls me about those discussions, I always ask whether they have registered their company and/or brand name in China, and if they have not, I strongly encourage them to do so immediately.

Many times though their response is to provide me with one or more of the following reasons why they have nothing to fear:

a. “But the company we are dealing with in China is a really big, really reputable American company and surely that company would not damage its own name by running off and filing to secure a trademark in our own company’s name.” My response to that is that they are absolutely correct. Giant American company is not going to file for the trademark, but what about a poorly paid employee who hears about the deal? Do you really believe there is no risk of that employee having his or her cousin go off and seek to register your company name as his or her own trademark in China? If you think this is impossible, you have not done much business with China and you are not a regular reader of this blog. See Bad Faith Trademark Registration In China. Good Luck With That.

b. But the company we are dealing with would not run off and register my company’s name as a trademark in China because it knows if it does that it would damage its relationship with our company. Not true. First, an errant employee of the company could go off and have a cousin or friend register the trademark, totally outside what either company wants. Second, one would think this would be true, but we have seen too many instances where it is not. In fact, we have seen many instances where the Chinese company applies for the trademark and then when negotiations or the relationship with the foreign company are not tilting in the Chinese company’s failure, it pulls out the trademark registration as a negotiating ploy. What if things are going well and the foreign company learns of how the Chinese company filed for a China trademark in the foreign company’s own name? In that situation, the Chinese company will say it “did that to protect you” and then offer to give it to you for the mere filing fee.

Rule Number 2: Apply for your China trademark before anyone in China (or ideally, anywhere else as well) has any clue that your company is looking to do anything in or with China. 

Got it?

Artificial Intelligence AIFor more than a decade, the Chinese government has been working to push the Chinese manufacturing sector up the value chain. More recently, the push from the central government has become more formalized, resulting in the 2015 issuance of the State Council manufacturing modernization manifesto: Made in China 2025《中国制造2025》(State Council, July 7, 2015). Made in China 2025 focuses less on the types of products to be manufactured and more on the methods of manufacturing. It is okay to continue making rubber duckies, so long as the process for doing so is modernized. That is, massive automated factories churning out thousands of identical items with minimal human intervention.

The Chinese government has made clear it believes the largest and most successful manufacturing companies in the world have achieved that status in large part through software/information technology. This has led China to focus on artificial intelligence (人工智能). The Chinese government experienced what Will Knight at the MIT Technology Review has termed China’s AI Enlightenment. The process started with the issuance by the State Council of A Next Generation Artificial Intelligence Development Plan (新一代人工智能发展规划 July 8, 2017) setting forth a plan for AI development in China. The plan will progress in three stages, concluding in 2030. The final goal is ambitious: by 2030, China’s AI theories, technologies, and applications will lead the world, making China the world’s primary AI innovation center.

We are now in Stage 1 of the AI Plan, covering the period from 2018 to 2020. The first stage plan has been issued by the PRC Ministry of Industry and Information Technology (MIIT). The plan is set out in the Three-Year Action Plan for Promoting Development of a New Generation Artificial Intelligence Industry (2018–2020) (促进新一代人工智能产业发展三年行动计划 (2018-2020年)(December 12, 2017, Ministry of Industry and Information Technology (MIIT), Science and Technology Department).

Artificial intelligence is a vast field. The term means many things to many people. To cut down the field and make its objectives clear, the 3 Year Plan proposes concentrating on seven technical sectors:

  1. Intelligent Connected Vehicles (ICV) (智能网联汽车). It has long been a goal of the PRC government to push its huge but technically primitive domestic auto manufacturing sector into new directions. The electric car program has not been successful, so MIIT has begun to push ICV technology. This is embodied in its recent Guide for Establishing an ICV System (Discussion Draft) issued by MIIT in June, 2017 ( 智能网联汽车 国家车联网产业标准体系
    建设指南 (智能网联汽车)(2017 年)(征求意见稿)(MIIT, June 12, 2017)
  2. Intelligent Service Robots (智能服务机器人). This is not manufacturing robotics and automation.
  3. Intelligent Unmanned Arial Vehicles (UAV, i.e. drones) (智能无人机). This focuses on drones rather than self-driving vehicles (passenger autos and trucks).
  4. Computer Aided Medical Imaging Diagnosis Systems (医疗影像辅助诊断系统). If China cannot develop more doctors, maybe they can automate the diagnostic systems.
  5. Video Image Recognition (视频图像识别). This technology includes facial recognition, a major focus of recent PRC government efforts for surveillance and control.
  6. Artificial Audio Intelligence (AAI) (智能语音). This is a major focus of Tencent/Wechat as part of their most recent cloud computing platform. In the U.S., this sector is focused on smart homes. It is not clear what Tencent is planning.
  7. Computer Translation (智能翻译). AI got its start at MIT with John McCarthy in the 1950s. A major focus of the MIT project was machine translation. They failed, setting AI research back for decades. The problem still has not been solved.

Many of the hot topics in AI are not mentioned in the Three-Year Plan. For example, there is no mention of machine learning, neural networks, custom AI IC chips and other recently fashionable technologies. Perhaps this is being done and simply has not been mentioned. Or perhaps the list of potential projects has been pruned to allow for more focus. As I have noted above, some of the choices are surprising, focusing on problems different from what we might expect.

It is always difficult to know what conclusions to draw from PRC government issued development plans. The typical plan is full of buzz words and lofty aspirations and short on specifics, like who will do it, how will it be done, and how will funding be arranged? The Three-Year Plan is no different. In fact, the ratio of buzz words to concrete planning is higher than in most.

In this case, by looking at the list of fields that will be promoted, we can though gain at least some insight into the current direction of AI development in China. The key thing to understand is that AI development is already taking place in China. Chinese companies like Baidu and Tencent and Alibaba are not waiting for government support. They are obtaining funding outside China and they are moving forward aggressively in developing products in the AI sector.

I see two big questions regarding AI in China. One, will Chinese universities and company R&D departments develop the theoretical underpinnings of AI, or will the Chinese remain dependent on the research done in other countries? Two, as with information technology in general, the AI sector in China is dominated by private companies neither owned nor controlled by the Chinese government. This lack of control has allowed these companies to take an innovative and market directed approach toward their development of AI. Will the Chinese government allow this independence to continue and what will be the impact if the government seeks to get more directly involved in these private companies?

How do you see the future of AI in China?


Doing Business in Myanmar Burma

Robert Walsh, sometime Seattle resident and long-time friend of our law firm (we worked on a number of China deals together and we — Dan and Steve — met up with him on our last trip to Myanmar), has spent the last four years in Myanmar, where he operates a vibrant business consultancy. Robert is fluent in Chinese and Korean and, amazingly enough, Burmese (multiple dialects), having learned Burmese while working in the U.S. Embassy in Yangon many years ago.

Robert has been sending us email updates from Myanmar for some time and we post some of them on here. Back in 2014, it was Myanmar: Open For Business? and in 2013, it was Myanmar Foreign Investment. Difficult And Expensive, But Opportunities Are There. In our 2013 post I mentioned that my law firm had “been involved in a few Myanmar matters, but truth be told, Myanmar is a difficult place in which to do business and many of the companies going there are bigger companies mostly looking to get in now and make money later. In the last year.” Since that time, our Myanmar work has actually shrunk as interest in Myanmar by SMEs has greatly waned and their non-China Asia focus these days seems to be more on Thailand and Vietnam. Early last year, in A Report from Myanmar from an old China Hand I talked about how much had changed, due in large measure to the relaxation of sanctions.

Today’s post is on how optimism is waning as things just keep getting worse.

1. The electricity situation here is going to get worse before it gets better.

a. Foreign oil & gas companies are pulling out of their offshore blocks en masse. They had a requirement to drill or walk away, and they are walking away. Low gas prices drive part of it, but also the royalties schemes with the Burmese government are the other part. Prevailing wisdom is that they will return later when the blocks go up for bid again, and offer a lot less and drive a harder bargain with the Burmese government.

b. Several of the schemes for producing more electricity have hinged on gas coming in from offshore. The 2 gas turbine plants running are getting their gas for free from the government, from the Yadanar fields that have been in production since the 90’s.  But production is dropping in quantity and quality and Thai TPP has first call on it. 

c. The government has given a green light for companies to do LNG, but the only credible one is led by Total. We have already been approached by one group of unqualified Burmese rent seekers who have had a gas turbine project on the back burner for more than 4 years, who now say that they want to add a LNG gasification plant.  They are offering nothing more than a 60-acre parcel that they don’t seem to own yet, but want 20% equity in the thing.

d. Coal is what the IFC and world bank are pushing the government, but there is a lot of grassroots-level pushback. A lot of communities have suffered pollution from coal-burning cement plants, and there is concern for waterways as well. Still, a so-called “clean coal” plant would be 5-7 years in the making, and would also require importing all the coal, as there is no source of suitable coal in the entire country.  

e. All of this, and electricity demand is growing 15-20% year-on-year.  The government still subsidizes costs of electricity and consumers pay very little of the costs of delivery. Last year the costs of subsidies were north of $900 million, with $358 million of that for Rangoon Division alone.  The government will not grant a power purchase agreement (PPA) to any foreign or domestic provider that covers CAPEX and running costs, let alone allow for a decent return, so private power providers are staying away. Raising rates for the consumer to the point where costs of delivery are covered is regarded as political suicide.

f. With the above in mind, consensus is that it may be as late as 2025 before we see something positive in the electricity sector.

2. Politics in general. 

a. The consensus is that Burma’s political reforms plateaued more than a year ago and are in fact in a gentle backslide. Readers will note that National League for Democracy head Daw Aung San Suu Kyi (ASSK) has been stripped of a few honors, and is in fact held in some mild disdain by many outside the country. 

b. In her defense, the military still holds control of the key ministries of defense, home affairs, and borders.nationalities. I can tell you from long and painful experience that out in the provinces it’s still 1965, as all of the authorities at the state, district, township, all the way to the village level are still appointed by the military-led home affairs ministry. 

c. On the other hand, ASSK has been decidedly unwilling to weigh in on the racial strife in Rakhine state, and her attitude towards the various ethnic armed groups is pretty much “it’s my way or the highway”. As a result of her unwillingness to play a part the groups that have any combat power at all have taken to the field again. None want to sign the national ceasefire agreement until they get what they want. The only signatories to the agreement are groups that have not fired a shot in anger for decades. Still, some trouble has recently been brewing with signatories the Karen National Union, who are pissed at Burmese Army encroachment into territory that was agreed to be off-limits.

3. Everybody and his brother wants to build and operate special economic zones and industrial parks.

Here, there, and everywhere.  Even the Korean government Ministry of Land & Housing is doing a 600-acre park(KMIC/ Korean Myanmar Industrial Center) about 100 miles north of Rangoon, jointly with a Korean private company.

a. We cannot understand the drive for these parks, especially in areas where the roads and other infrastructure, -to say nothing of electrical power availability- are in general lacking.

b. A key thing, one I focus on whenever I talk to developers of these things is: “Which companies have already weighed in as tenants?”.  The answer is invariably “nobody yet”. 

c. A lot of the developers are either ignoring or worse yet, -ignorant- of certain facts about Burmese workers.  They are not highly mobile, like the hundreds of millions of Chinese who gravitate to Shenzhen and other Chinese megacities for work. My best guess is that 4/5th of these parks are sited in areas where labor is going to be a problem.

d. For the garment manufacturing sector, the lack of US GSP for textiles and garments has really slowed things up. Last week the government passed a daily minimum wage of MMK 4800 (USD $3.63), and the factory owners bitched a blue streak. 

4. When Trump tore up the TPP.
Many describe this action as “pressing pause on American plans for Asia”. Well, the Chinese have not pressed pause, but rather accelerated plans. Not too long after Trump’s inauguration ASSK spent time in Beijing getting initiated into resumption of Burma’s status as a Chinese client state.  

a. The Chinese are now everywhere in Burma, pursuing developments that are all rather land-intensive.  In addition to the Kyaukhpyu SEZ up on the NW coast, they are going after another 4-5 developments each over 5000 acres.  What they all have in common is a lack of focus on fundamentals.

b. For its part the Burmese government is overwhelmingly receptive to all of this, as the Chinese are looking at other big-ticket infrastructure things that no other donor government is looking at doing.

c. As an aside, the current Burmese government still does not issue sovereign debt. A lot of the ADB and other sovereign wealth fund loans have gone to private concerns like Yoma/FMI.

d. And of course the Chinese are in no way, shape, or form inclined to carp on Burma’s human rights situation.
e. I was on a 4-month project in Magway division last summer, and a cast o’1000’s of Sinopec people were all over Burma’s onshore oil patch doing seismic work. In another year parts of the division are likely to become a forest of drilling rigs.

5. FDI is flat, and declining.
But the Burmese do not seem to understand how to incentivize investment, because they are so bound to the cronies; they simply will not allow investment conditions that might conceivably afford a foreign company an advantage over locals. 

a. The only exception to the rule I can see is telecoms, with Ooredoo and Telenor getting licenses in early 2014. But those two companies were flummoxed to see the Japanese KDDI/Sumitomo step in and work with the legacy government MPT to revitalize what should have been a failing competitor. And more recently the Vietnamese Army VietTel paired with the Burmese Army UMEHL to form a 4th contender, MYTel/MecTel.  

b. Some sectors like mining still require foreign companies to take on local partners, most of whom offer little in the way of value. Still, in the border areas controlled by favored (and not-so-favored) ethnic armed groups, there’s not shortage of dirty smash & grab mining operations. Most are for gold, some for tin, others for antimony.

c. Oddly enough, the areas where completely level free market playing fields exist are the areas under government-granted autonomy to the various ethnic armed groups, e.g. DKBA, KNU, and the UWSA areas (as noted above).

d. As of a few weeks ago the US was waaaaaay down the DICA-published list of investment source countries. If you can get its website to kickstart itself, the Directorate of Investment and Company Administration is here.

e. Entertaining to read was the 2017 State IG report on AmEmbassy Rangoon. According to the IG report:

-There are now around 127 American direct hires assigned to the embassy, and an additional 388 or so as local hires/local nationals. I have no idea what they do all day. None whatsoever. Our prospects and prestige here have pretty much sunk that low; it’s possible that nobody in the Hitler’s Bunker-modeled embassy building knows this.

-The embassy has at least 71 leases for housing for which it pays at least $10.7 million a year. Just this number makes the embassy the single biggest American economic player in Burma. If all that is spent on office space for USAID and its contractors is figured in, we could be talking north of $100 million/year just for expatriate quality-of-life maintenance. Staggering. Naturally USAID’s contractors bill back all of that overhead, which is likely deducted from whatever was allocated for Burma aid. That would explain why I don’t see much evidence of USAID doing anything in the areas of Burma I work and know best.

-Puzzling is that the IG points out that 5 people in the embassy produce 5 different translated local media reports per day. I guess foreign service officers no longer read newspapers in the local language at the start of their work day. (The report does note that language training prior to assignment only enables our diplomats to engage in greetings and informal chit-chat) Go here for the whole thing.

6. We do indeed have an American Chamber of Commerce chapter here, but most members are local companies.
The chamber does not do a hell of a lot. The New Zealand and French chambers are very active and do a much better job of engagement. Still, American involvement in Burma’s economy is waaaaaaaay down the list, as reflected in the Myanmar Investment Committee’s monthly stats. China (of course), Korea, and Japan are the big hitters. In terms of American economic activity, Coca-Cola is the most visible.
a. We do have a Hard Rock Cafe now, started by a couple of Crony Princelings, but as they can’t seem to properly manage it, and are usually out of a lot of menu items, the place is not popular.
b. Other US brands here are Ford (RMA Group Thailand) and Chevy (AA Medical Group). Neither brand is exactly punching above its weight against used Toyota products and the Korean offerings. Nearly 2 million cars have gone on local roads since the last letter. The government is now wisely stipulating that cars coming in be less than 2 years old and be left-hand drive (the majority are Japanese used cars less than 7 years old, and right-hand drive).
-I bought the very first off the local assembly line Suzuki Super Carry Kei truck. The Japanese cleverly used the way-back machine to incorporate 1960’s design and technology which is dirt-simple and appropriate for Burmese countryside conditions. Electronic nothing, points and condenser, carburetor. $5700 delivered, with Rangoon city plates, vice triple that for a used truck from Japan.
 Burma Law Firm
c. Out in the sticks where I work, US farm machinery manufacturers have once again screwed the pooch by not sending in an “A Team”; they’d rather find a local dealer and half-assed support it. Kubota owns the market now, having figured out a way to offer financing to whole villages for a package of everything needed to plant and harvest rice. Older Burmese farmers have nostalgia for Ford and John Deere tractors, and every once in a while I run across the bones of one of these in out-of-the-way places.
-I had a major jade mining company looking for new heavy trucks; could not get any US maker on the plane to come for a meeting. That $57 million all-cash deal went to Komatsu. The buyer had been vetted for all sorts of US Treasury stuff, so that could not have been the problem.
d. As with China, we have KFC and Pizza Hut, franchised from YUM! by local moneybags Serge Pun’s FMI/Yoma. Both are popular but face stiff competition from Lotteria and other established local and foreign brands. FMI/Yoma spent awhile sorting out the supply chain, as YUM! actually has standards for what goes in their food.

7. Americans are leaving.
A few weeks ago we had American lawyer Eric Rose announce that he was throwing in the towel. He had been one of Burma’s biggest boosters, and carried a lot of water when it came to sanctions lifting. He will be missed.

As always, if any you should find yourself in Burma, I’d be more than happy to help.

China AttorneysBecause of this blog, our China lawyers get a fairly steady stream of China law questions from readers, mostly via emails but occasionally via blog comments as well. If we were to conduct research on all the questions we get asked and then comprehensively answer them, we would become overwhelmed. So what we usually do is provide a super fast general answer and, when it is easy to do so, a link or two to a blog post that may provide some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.

Though China’s economy is — for the most part — doing well these days, competition among factories is intense and we are seeing the divisions between winners and losers accelerating. Well-run factories that actually appreciate good contracts are growing. Poorly run factories which make their razor thin margins by skimping on materials or with tax sleight of hand, seem to be crashing. These crashing companies are dangerous as they are desperate and that leads to frequent problems. This is my somewhat long-handed way of saying that our China lawyers are getting record numbers of emails from disgruntled foreign product buyers, usually asking us to help them recover money they are owed.

In nearly all cases, we have to tell them that we do not believe we can help them and that paying us even to try would be throwing good money after bad. At some point in our email conversations they often ask “what then should we do” and our response is usually the following:

Three things. One, if you are going to continue manufacturing in China, but with someone else, you should not let on that you have a problem with your existing factory. And if you have already told them of your concerns, start downplaying them, and fast. You do not want this factory to start taking measures to make it difficult for you to go to another factory. For more on this, I suggest you read Why Changing China Suppliers Can Be So Risky. Most importantly, if you have not already registered your trademarks in China (and maybe your design patents as well), do so immediately. You do not want your old factory to get those and they often do. See Make China Trademarks a Priority. Two, do NOT go to China to try to resolve your dispute with your existing supplier. For why this is so important, check out China Product Defects, Lawsuits, Hostage Taking and Exit Ban: Please, Please, Please Read This! Three, don’t buy again from China without first conducting at least basic due diligence on your supplier and getting China-specific manufacturing contracts in place. See China Manufacturing Contracts: Not So Simple.

China employer audits China employment lawyers

As I have previously written, no (foreign) employer is too small for China’s regulators and in some respects the smaller you are, the more you need one. I say this because when a company with 5,000 employees has a problem with five employees, it’s not that big a deal, but when a five-employee company has a problem with two employees, it can be such a big and costly problem as to cost the company its China business. 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.

China’s employment laws are strict and protective of employees at all companies, especially those that are foreign-owned. If you as an employer fail to follow all mandatory employment laws, your employee will pursue you regardless of your size. Our China employment lawyers constantly get questions from China employers after they have been reported and/or sued by an employee China employee — mostly Chinese but increasingly non-Chinese as well.

The below is an amalgamation of the sorts of emails we frequently receive:

I cannot believe that I just got served with a lawsuit by one of my former Chinese employees. We are a small business and we pay all our taxes and we have always treated all of our employees right, including this one. We paid her really well and we were never late with her wages and we even gave her extra vacation days. We also paid all of her mandatory employee benefits and a few optional ones as well. We always did our best with her. And then she quit, completely voluntarily, and yet she is now suing and claiming we owe her double her monthly wages for not having a written employment contract with her? As you can see, her demand is totally unreasonable.

We then have to explain that with no written employment contract the employer stands virtually no chance in this arbitration.

It is not uncommon for foreign employers in China to state that they have done or are “doing their best” with respect to treating their employees well and following China’s complicated (and localized) employment laws. The problem is that neither the Chinese government nor its courts nor arbitral bodies care how hard you try. Your other law-abiding actions are not a mitigating factor in determining the penalty you will need to pay for having failed to enter into a written contract with your employees or for whatever other violation you may have committed.

The burden is on you as the employer to ensure you have a proper written employment contract fully executed by the parties. The best practice is to have your new employee sit down and sign a hard copy of the employment contract on her first day and you then retain an original copy of the fully executed contract for your records.

Consider this hypothetical. Employer asks Employee to sign a hard copy of the employment contract during the on-boarding process. Employee says: I will need some time to review this and I will take it home to read and I will return a signed copy. Employer says okay, but the Employee never returns a signed copy. Employer never makes an effort to “track down” that contract. Employee sues months or years later seeking a penalty from the employer for failing to use a written employment contract. Under this scenario, the Employer will be liable to Employee for failing to execute a written employment contract. If this sort of scenario sounds unlikely to you, let me just tell you that nearly every time we audit a company’s employment situation we find some percentage of employees working without signed contracts.

Now same facts as above, but Employee returns a signed copy with a fake signature. What will happen? Based on real cases with similar facts, Employer will probably be held liable for an employer penalty because there is no written employment contract bearing Employee’s actual signature, unless Employer has convincing evidence Employee faked the signature to “cheat the system” (which is a high evidentiary bar to meet).

If you are not sure you have current written employment contracts for all your employees, now would be a good time to check on this and fix it.

China lawyers IP
Don’t gift your IP to China

When working on complex contract manufacturing agreements, most of our clients tell us their main goal is to protect their intellectual property. This is particularly true for designers of start-up products where much of of their IP consists of trade secrets and know-how that require a formal agreement with the manufacturer. However, as we work with the client, we frequently learn that the client has already gifted their IP to the Chinese manufacturer. Making a gift to your family and friend is a nice gesture. But no foreign designer of a product intends to make a gift to a Chinese factory owner. The gift is unintended, and the consequences are virtually never good.

Here is what usually happens. We begin drafting the contract manufacturing agreement. In our standard set of questions, we ask about the status of molds. The client then reports something like the following: “We have already provided the designs for our molds to our  Chinese manufacturer and the manufacturer has already fabricated the molds. The current issue is focused on payment for the molds.”

We then ask our client about its plans for commercializing their product idea and fabricating production prototypes. The client then reports: “We have been working with the manufacturer for months to fabricate a production prototype. The manufacturer agreed to engage its own engineers and designers for this process. We now have two prototypes and we are ready to begin production. The only issue now is how to pay for the work on the prototypes.”

In both cases, we ask the following sorts of questions:

  • What form of documentation did you use in connection with providing your confidential design information to the manufacturer?
  • What did you do to formally protect your IP?
  • What did you do to make clear you own the entire design in the molds?
  • What did you do to make sure you own all of the design work that went into the design and manufacture of the prototype?

Far too often, our client answers with something like this: “The only documentation we have in place is a simple purchase order  for the molds. There is no documentation at all relating to the prototype. We were told that using purchase orders at this stage is standard so we did not think about it.”

The above scenario with slight variations is almost standard for start-up companies making their first foray into China’s manufacturing market. We then have to tell our client something like the following: “You indicated your primary goal is to protect your intellectual property. But, by providing your design data to your Chinese manufacturer with no documentation and by allowing the Chinese side to design and fabricate molds and prototypes, you have effectively given your IP to the Chinese manufacturer. The issue for us now is to determine whether or not the manufacturer will agree to return this gift. Sometimes they will, usually they will not.

In this setting, it is possible for the Chinese manufacturer to appropriate the product and to begin producing the product in its own name. When the foreign designer protests, the Chinese manufacturer points out that it did the actual design and fabrication work for the molds and it also did all the design and fabrication work for the product prototype. And since it did all of this work, it owns the design. And here’s the thing: legally, so long as the Chinese manufacturer does not infringe on the registered trademark of the foreign party, it is generally free to manufacture the product and sell it wherever it wants.

Absent formal written agreements, litigation in most countries to determine who owns what in terms of the product is fact intensive with the eventual outcome usually unclear. The lack of clarity simple kills off the chances for most start ups to market its product effectively. So when this situation happens to a foreign start-up, it can mean commercial death. The Chinese side is counting on this. A dead company cannot support litigation required to resolve the issue. Even for well established companies, this situation can cause substantial economic damage, since the effective marketing of a new product is made so difficult.

In most cases, however, the Chinese manufacturer is not interested in selling the product under its own name; what it usually wants is to create a situation where the foreign buyer does not have the option to have its product manufactured by any other manufacturer. The Chinese manufacturer wants to ensure it is the sole entity with the right to manufacture the product. By getting this it essentially has the pricing power of a monopoly on manufacturing the product.

Here is how it works out on the ground. At some point, the foreign buyer decides it wants to change to another manufacturer because a) the manufacturer substantially raises its price, b) the product is consistently defective, or c) the manufacturer cannot keep up with the required production volume. The foreign company wanting to go to a new manufacturer requests its existing manufacturer transfer its molds and the product prototype to the new factory.

The manufacturer refuses to comply with this request. The manufacturer says: “we own the design of the molds and we own the design of the product prototype. We will agree not to manufacture the product for ourselves or for any third party. On the other hand, you are not free to take the molds and prototypes to any other factory. You can only manufacture the product if you use our manufacturing services to do so. In legal terms, the Chinese manufacturer is saying it will provide an exclusive license to the foreign company to manufacture a product for which the design is owned by the Chinese side.

If the foreign buyer insists that it wants to move its manufacturing elsewhere, some Chinese manufacturers will say that the foreign buyer is free to start from scratch with a new factory. Other Chinese manufacturers will take a harder line and state that manufacturing the product in any other facility is an infringement on its IP and it will take action to prevent that infringement. In the last couple of years, more and more Chinese manufacturers are doing whatever they can (usually via cease and desist letters and litigation) to make manufacturing by others impossible. Either way, if the product is complex in any way, the foreign buyer is in a situation where it is required to work with the original Chinese manufacturer. This then means the foreign buyer can take no practical action to deal with the various issues that caused them to want to move to a new manufacturer. In particular, the foreign buyer is helpless in dealing with a price increase.

Many clients are skeptical when we explain this situation to them. They simply cannot believe they gifted their most valuable asset to another company. Some tell us that their Chinese manufacturer is an honest and upright company that would never act in the ways set out above. Others say that since they paid for the work, it must be the case that the Chinese factory will recognize that the foreign side owns the design and is free to take the molds and prototypes to any other factory for manufacturing.

In our experience, the situation is quite different. In the past decade, in every case on which any of our China lawyers have worked, the Chinese factory took one of the positions outlined above and refused to back down. In other words, once you have gifted your IP, you should not expect the Chinese side will graciously return the gift. Once the gift has been made, the Chinese side will keep the gift and make use of the gift to its advantage.

What does the manager of the start-up tell its investors after having given away the IP at the core of its product and its business? Our China attorneys have had to help with these sort of conversations and we probably hate these conversations almost as much as the managers themselves.

So in an effort to make life easier for product manufacturing start-ups we fervently propose you EARLY ON make use of the following agreements when working with Chinese manufacturers:

These agreements should be executed in advance of any transfer of design information to the Chinese manufacturer. Purchase orders come at the end of the process, not at the beginning. Unless you want to gift your IP to your Chinese manufacturer without realizing it. Oh, and while you are at it, you should seek to register your trademarks in China and look into registering your design patents (and maybe other patents) in China as well.

China joint venture lawyers
Smile. The fake China joint venture scam is easily avoided.

Our China lawyers have over the last few months have been getting way more emails and phone calls from foreign companies (U.S. and European) either telling us they’ve been scammed or seeking our assistance in determining whether they are about to get scammed.

Anyway, in recognition of this recent in scamming, I am writing (again) about the sorts of scams we usually see, along with providing tips on how to avoid them. In Part 1, I wrote about the scam of tricking someone to come to China to sign a deal. Part 2 was on the scam of getting money for supplying products and then supplying nothing or, more commonly, something that isn’t even close to what the foreign company bought and paid for. Part 3 was on the switched bank account, which is — by far — the most difficult to avoid scam. Part 4 was on a scam where a Chinese company gets you to provide it work or services (or perhaps even product) in return for stock or stock options that you can never really own because you are a foreigner. Part 5 involved a fairly recent, increasingly common, and highly sophisticated scam whereby a Chinese company claims to be interested in investing in a foreign company but in reality it has that interest only so far as it can use it to steal your IP.

This part 6 post is on what we call the fake China Joint Venture, and it is an oldy but a goody and — dare I say it — one of my favorites. The reason I say it is one of my favorites is because anyone who falls prey to it brings it on themselves, at least in part. Our China lawyers have seen this one quite often and as far as I know, it has always involved an American company, which I fear says something about American naïveté.

This scam is really very simple and it pretty much always goes down the same way. It starts with a Chinese company convincing a foreign company to do a joint venture. The foreign company then contributes something to the joint venture to secure its ownership stake in it. This contribution virtually always consists of money, but it also often involves other assets as well, such as intellectual property, equipment, personnel (usually unpaid) or know-how. The Chinese company says it will handle the setting up of the joint venture and the foreign company readily agrees to this.

But instead of actually setting up a real joint venture with the foreign company having an actual ownership stake in the new company, the Chinese side simply takes the assets from the foreign company and does nothing official towards forming a joint venture. Most of the time the Chinese company never even sends the foreign company any remotely official documents regarding the alleged joint venture, but sometimes it sends fakes. Either way, the end result is that the foreign company believes it to be the part-owner of a China joint venture and it starts acting accordingly.

Usually for years everything is fine, but then the foreign company begins to wonder why it has never received any money whatsoever from the joint venture when it now seems to be doing so well. So they contact their supposed joint venture partner (the Chinese company) and then when they fail to get any answers, they contact a China lawyer to look into bringing a lawsuit. The China lawyer does some quick research (and by quick, I mean really quick) and then realizes there is no joint venture.

In some circumstances it may be possible to sue individuals and companies outside China for fraud but for that to work you need for the foreign country to have subject matter and personal jurisdiction and even if both of these jurisdictions are present, one must still effect service of process under the Hague Convention and, perhaps most importantly, have some means of collecting on any judgment awarded. Foreign courts are not going to be quick to claim jurisdiction over the ownership of a company in China and Chinese courts are certainly not going to be very quick to say that a foreign court has the power to determine ownership of Chinese companies. All this combines to mean that in most instances the duped party has no good recourse.

How do you avoid this scam happening to you? Very very simple. You retain a qualified lawyer early on to make sure a real joint venture gets formed with your company as one of its owners.

China trademark lawyersIn part one of this two-part series, we discussed the general strategy when filing a non-use cancellation, and the steps you can take to increase your odds of success. In this concluding second part, we’ll discuss the timing of non-cancellation filings, and a specific strategy when dealing with a trademark squatter.

Unless motivated by spite, people file non-use cancellations to eliminate trademarks that stand in the way of their own trademark applications. They do so at one of two times: before filing an application (to eliminate potential obstacles) and after their application has been rejected (to eliminate cited obstacles).

In an ideal world, you would link a cancellation to a trademark application so that the CTMO examiner (or TRAB panel, as the case may be) would note the linkage and suspend their efforts until the cancellation was decided. But we do not live in an ideal world, and the CTMO does not suspend examinations or appeals until cancellations are decided. Instead, you have to work out the timing yourself and play the odds that the non-use cancellation will be decided first.

It’s an inexact science. If you are appealing a rejection, the window to file an appeal is so short that you have little choice but to file the appeal and non-use cancellation at the same time. But if you haven’t filed an application yet, the best way to ensure that the cancellation will be decided first is to file the non-use cancellation, wait a few months, and then file an application. Don’t wait too long, though: once the trademark owner has been notified (usually within 2-3 months of filing the non-use cancellation), they might file their own (new) application. Many applicants don’t bother trying to game the system; they file a non-use cancellation and a trademark application at the same time, and if they are unlucky enough to have the application examined first, they just file an appeal, secure in the knowledge that the cancellation will definitely be decided before the appeal is.

Filing a non-use cancellation against a trademark squatter has some unique challenges. Many trademark squatters never use the mark in commerce: their sole goal is to monetize the trademark by selling it to the “real” trademark owner, or to the highest bidder on the secondary market.

A trademark squatter could take a couple actions to foreclose the possibility of a non-use cancellation. First, they might sell a few branded goods via e-commerce, thus satisfying the use in commerce requirement. The CTMO does not require much evidence to satisfy the use requirement, and in my experience they won’t look past the basic facts to determine whether the evidence reflects a bona fide arms-length transaction (versus a fake sale to a friend or relative). Still, it takes some effort to create and maintain this evidence, and not all trademark squatters do it.

Second, the trademark squatter could file another, identical application before the three-year term is up, thereby preserving their rights with a new application even if the first registration is cancelled. But two can play that game. The real trademark owner could also file an application before the three year term is up – and then file a non-use cancellation exactly three years after registration. Sure, the application may be initially rejected if it’s decided before the cancellation, but you can then file an appeal, and the cancellation should be complete by the time the appeal is decided. This strategy takes time to execute, and it is not without risks. (What if the trademark squatter filed a new application before you? What if the cancellation fails because the trademark squatter actually had used the mark in commerce?) But if it works, you can retrieve the mark at a much lower cost, without involving the courts, and without having to pay off a trademark squatter. Or if you don’t want to wait for the various proceedings to wrap up, you could use the pending filings as leverage to negotiate a lower price from the trademark squatter.

Yes, it would be nice if China provided recourse against trademark squatters by more straightforward means. The letter of the Trademark Law provides remedies against trademark applications filed in bad faith: trademark oppositions (for pending applications) and invalidations (for existing registrations). But in the real world, trying to take on trademark squatters head-on has a very low chance of succeeding. Unless you’re willing to pay tens of thousands of dollars to retrieve “your” trademark, using the Chinese trademark system against them is usually the best hope.

Needless to say, cancelling a trademark squatter’s registration is predicated on the assumption that the squatter hasn’t used the mark in commerce. The more research you can do before filing a non-use cancellation, the better. Because if the squatter has in fact used the mark such that they can defeat a non-use cancellation, they’ll probably increase the sale price, figuring that you must really want the trademark.