Yesterday in China Lawyers: The Fakes and the Quasi-Fakes, I wrote about how “with the recent decline in China’s economy we [the China lawyers at my firm] have in the last few months been seeing a precipitous increase in a new sort of “China lawyer” problem: Chinese law firms that seem to know nothing about international law representing foreign companies shockingly badly at shockingly law prices.
I then explained the sort of thing we are seeing by using the following three examples:
1. Three different companies write ask us to challenge the rejection of their China trademark applications. A quick perusal tells us that they have zero or virtually no chance of prevailing because someone else clearly beat them to the trademark for which they filed. Our response to them is something like the following:
There is virtually no chance of our being able to prevail on an appeal of your trademark rejection. In fact, in our view, it never made sense for you to file for this trademark at all. I am sorry that your company wasted time and money on this application and we suggest you not waste more time and money appealing the rejection. Instead, we propose that you retain us on an hourly basis to work with you in figuring out your other options.
We then hear enough back from these companies to enable us to piece together the following scenario:
These are all small companies with not much money. They chose ultra-low cost Chinese law firms (at least I think these are Chinese law firms) online. The law firms they chose are not on any map of leading Chinese law firms and their pricing reflects this. These law firms were contracted to try to register XYZ as a trademark and that is exactly what they did, but NOTHING else. These law firms provided no legal counsel regarding whether it made sense for these companies to register XYZ as a trademark in China. These law firms provided no legal counsel to these companies regarding the class and subclasses in which XYZ should be registered. And perhaps most importantly, these law firms appear not to have conducted any trademark search before filing for these trademarks, which trademark search would have told an experienced and legitimate law firm with information that would have sent them back to these companies to discuss alternative approaches. Two of these companies told us that they trusted their law firms because they touted their “direct connections” to China’s trademark office. I explained to them that every Chinese law firm can make that same claim and that a good Chinese law firm would probably never make that claim.
2. Companies pay a Chinese law firm (at least I think it’s a Chinese law firm) a ridiculously low fee for a WFOE registration and get ridiculously little help with that. Let me explain. Foreign company pays Chinese law firm to help them with their WFOE registration. Chinese law firm sends foreign company an incredibly bad translation and tells the foreign company to fill it out. The foreign company has no idea how to fill it out and asks for help from the Chinese law firm. The Chinese law firm provides no help either because it essentially refuses to do so or because it has no ability to do so. Foreign company then comes to us and in about five minutes we suggest that they not even bother with a WFOE registration either because they (1) do not need a Chinese WFOE at all or (2) cannot afford to pay the real costs of a real WFOE registration (which involves about 100 times more than just filling out and submitting an application. See How to Form a China WFOE: A Roadmap) or pay the real costs of operating a WFOE in China or (3) cannot legally form a WFOE in China for what they are seeking to do in China. See Forming a China WFOE: Needed or Not.
3. Companies that pay a Chinese law firm (at least I think it’s a Chinese law firm) or an online template mill an absurdly low price for a China manufacturing agreement (such as a China NNN Agreement, China Manufacturing Agreement, China Product Development Contract, China Mold Ownership Agreement) or China Employment Contract or China Distribution Contract or various other agreement and then come to my firm asking us “to review it.” When they attach the contract they want us to review (which they do most of the time) we super quickly review it and tell them that it is not a good contract and that if they need a good contract they will need to pay us to start completely over, if that is even possible — usually it isn’t because they and their Chinese counter-party just signed it!
Well yesterday’s blog post led to a slew of foreign companies asking us to review their contracts and for me to draft a new email based on my review of three different NNN Agreements, all with similar shortfalls that made them 100% worthless for protecting the foreign company’s IP. These NNN Agreements had the following clear flaws (most had all of these, some had some of these:
- A provision stating that the supplier is specifically allowed to pass on the foreign company’s confidential and trade secret information to any “sister companies” and to any “business partners.“ Think about this for just a second. This means that your Chinese supplier can form a sister company in a week (it probably already has one) and then freely turn over whatever information you gave them. This is known as an exception big enough to drive a truck through. But it gets worse. It also allows your supplier to turn over to a “business partner” whatever information you provided to it. In other words, it can go to whomever it wants in China or anywhere else in the world and strike a deal with that company (maybe that deal is that it sells your confidential information for $1000) and that is okay because that company is a “business partner” of your supplier.” These sister companies and business partners are then under no obligation whatsoever to keep your information secret. They are legally free to do with your information whatever they wish. This is a super common loophole used to allow Chinese companies to disseminate confidential information without violating the agreement. This loophole makes your NNN Agreement 100% worthless.
- Not satisfied with this first provision, these agreements also include a contract damages provision that provides for a super-low amount of damages for any violation of the NNN Agreement and reads as though the foreign company cannot get damages beyond the super-low amount set forth in the contract. So in other words, even if you could possibly win a lawsuit (and you can’t), your win will be limited to such a small damages amount that there would be no point. For how to properly handle a contract damages provision in your China contract, check out On the Importance of Contract Damages in China Contracts.
- They contain a choice of jurisdiction clause so vague that even if you were to sue in a case you cannot win (and if you were to win it would still not be worth suing), it is not at all clear where you should sue and your supplier will be able to force you to incur substantial attorneys’ fees and tie you up for months trying to get the courts sort that out. See Super Common China Contract Mistakes.
For what a proper NNN Agreement (for most countries, not just China) should look like, check out China NNN Agreements .
My advice to all of these companies was that they seek to register their brand name in China as quickly as possible because having their product copied is bad enough, but it is even worse if that product can legally have “your” company’s brand name on it. See China Trademark Registrations Are the Bare Minimum (Still) where I say that when this happens to a company it is often “lights out” for them. I make this suggestion because so often when we see a manufacturer try to scam a foreign buyer out of its product designs we also see that same China manufacturer (using a proxy) run off and apply for a China trademark for the foreign company’s brand name.
About half of these companies then wrote back to ask how they can get the trademarks by themselves from China’s Trademark Office (CTMO). The answer is they cannot. Only licensed Chinese lawyers and trademark agents can apply for a trademark in China. Trust me though when I say that this is a good thing because I doubt very much that there is anyone out there not trained as a China lawyer or China trademark agent who could do even a halfway competent job at trying to secure a China trademark.
Be careful out there.