International lawyers on social media

A lot is happening these days in and with China and around the world. Earlier this year, much of our legal work centered around helping our clients deal with the US-China trade war. That truly feels like ages ago, as today, — working remotely — our international lawyers have been consumed with helping companies (and NGOs and even countries) figure out how best to source PPE and coronavirus testing products. In addition to this PPE sourcing, a huge part of our practice is now focused on helping companies deal with the myriad of legal issues that have arisen from the coronavirus. For more on this, please check out our coronavirus law page.

The coronavirus is making people sick and killing people. It also is disrupting company plans and actions. Our social media pages reflect all this, oftentimes with a much stronger and more controversial viewpoint than on here where we are at constant risk of the great firewall. On social media you will see a lot more controversy and a lot more individualism as between our various lawyer-writers. There we can let loose and fully express ourselves, and we do.

It is also on social media where we get the most heat. It is there that we are constantly accused of hating China and being China apologists. Truth is that we both love and hate China — not so different how we feel about the rest of the world as well. We all have spent huge chunks of our lives in China and working to smooth relations between China and the rest of the world. It is from this where we have come to love China.

But we are above all else lawyers trained to analyze things objectively and to advocate for our clients. And we have also been trained to give our clients the truth as best as we can and then work with them in using that truth to plan their next moves and help them enact. This requires we not be emotional or loyal to any one side of anything before we have completed our research. This requires we sometimes defend China and at other times that we be harshly critical of it.

Please understand though that we uniformly believe that people are people and there are good and bad people everywhere. And so you will never see us point out something horrible that has happened in China and ascribe that to the Chinese people. We may ascribe it to a government that encourages and/or condones that horrible thing, but not to the people.

Things are tough in China right now as huge swaths of the world are either mad at China for having suppressed news about the coronavirus, rather than suppressing the virus itself. Many are also angry at China for even today not telling the truth about the numbers. When we say this, some people get angry. When we talk about Xinjiang and Hong Kong, people get angry. Way back in October, 2018, in Would the Last Company Manufacturing in China Please Turn Off the Lights, we started emphatically telling people how China had become far riskier and why they should be looking at other countries to make their products. This angered many as well. We had been beating that drum on social media before that and we have been beating it ever since. See e.g., our June, 2019 piece, Has Sourcing Product From China Become TOO Risky?

Without a doubt, the two biggest issue most companies that do business in or with China are facing these days is whether to stay or go and/or whether to continue having their products manufactured in China or diversify production elsewhere.

Increasing exclusions and harassment of foreigners is influencing these decisions and every day we get emails from foreigners who tell us that they are leaving China solely for this reason. See “They see my blue eyes then jump back”– China sees a new wave of xenophobia. The Chinese government is working hard to convince the world and its own citizens that the US Army started the coronavirus to “stop China’s rise” and many in China seek revenge against the foreigners they perceive to have done this. Foreign parents in China with kids find this particularly distressing. And yet, China is a huge country and its economy is roaring back. Many of our clients are “splitting the difference” here by setting up and/or growing their businesses in China, but doing it more than ever with trusted locals instead of expats. China has literally banned the entrance of all foreigners so for the immediate future, foreign companies have no choice in this.

On the manufacturing front, the big issue is diversification. China’s factories going dark during the peak of the coronavirus have convinced foreign companies that manufacture exclusively in China that they must diversify. Really diversify. China’s greatly restricting the export of coronavirus medical equipment as a political tool has angered millions and will accelerate the push to move manufacturing away from China. See Buying Face Masks and Other PPE from China Just Got a LOT Tougher.

But the coronavirus will eventually dissipate and that will create new opportunities for companies looking to do business in China or grow their business in China. And on that, we remain optimistic. Once the world truly gets past the coronavirus — and that day will someday arrive, the CCP will very likely make efforts to tamp down on racism, just as it did so successfully earlier in this decade with respect to the Japanese, French, Norwegians, and South Koreans. We see China coming back better than before for foreign businesses. Some say the coronavirus will only isolate China but we see it eventually having the opposite effect. We see China opening up more to the world and becoming more flexible regarding foreign businesses operating on its soil. We constantly talk about these sorts of things on social media and we will be writing about them on here as well over the next few weeks. Despite all of China’s problems right now, we remain bullish on China overall, at least for the long term.

In an effort to remain visible to our many readers in China, we are careful about what we write here on the blog. There are words we avoid using and topics we avoid discussing on here because we want our reach to include China and if China does not like something, its government has this “magical” ability to make it go away. And there is a lot China does not like these days. Facebook and Linkedin and Twitter give us a much greater ability to speak freely. The below is a quick update and listing of what we are doing these days outside this blog.

Linkedin. We have a thriving China Law Blog Group on Linkedin that serves as spam-free forum for China information, networking, and discussion. This group is always growing and now totals more than 12,500 members.

The members of our Linkedin group are fairly evenly split between those who live and work and do business in China and those who do business with China from the United States, Australia, Canada, Europe, Africa, the Middle East and other countries in Asia. Some are international lawyers and some are China lawyers, but most are businesspeople and some are academics (students or professors). We have senior level personnel (attorneys and executives) from large, medium, and small companies and tons of mid-level and junior personnel as well.

What truly separates us from most (all?) of the other Linkedin China groups is that we remove anything that smacks of spam or is not relevant for those doing business with or in China. Our hewing to such a tight line on what we permit means we do not get a large volume of postings, but this also means we do not waste people’s time on drivel or business pitches. If you want to learn more about doing business in China or with China, if you want to discuss China law or business, or if you want to network with others doing China law or business, I urge you to and join our China Law Blog Group on Linkedin. Please do join us there.

Individually, many of us post often on Linkedin about China matters and we are also always accessible there. You can find our China lawyers and China trade specialists on Linkedin as follows, some of whom post there more than others:

My personal Linkedin page has just a shade under 10,000 followers and that has led me to post more often there on all things China. I welcome new followers and new connections, though I warn you that I tend to be slow in responding to connection requests. I promise not to overwhelm you with posts: I post roughly 3-5 times a week.

Facebook. Our China Law Blog Facebook page, is thriving as well with just under 25,000 followers (this is its number of “likes”). We use Facebook to post interesting, important and entertaining articles about China. Posts there get a lot of comments and discussion, often heated. We tend to be very open and opinionated and free-wheeling there. With so much going on with China and Hong Kong these days, our Facebook page has become a key source. I urge you to go there and “like” us so you can benefit from what we are doing there.

I am also now posting a lot on Twitter at @danharris. I left Twitter for many years but I am now happy to be back as I enjoy the sheer immediacy of it. I most definitely do not hold back there but I also post on non-China things from time to time. I also urge you to check out and follow Fred Rocafort from my firm as well, (@RocafortFred). Until recently, Fred was living in Hong Kong/the PRC and his tweets (oftentimes in both English and Spanish) do a great job of bridging the various gaps between HK, the PRC and the West. In addition to posting on China and Hong Kong, Fred also often posts about Latin America. Jonathan Bench (@jonathan_bench), who spent around five years living in China and now splits his time between Seattle and Salt Lake City, is also a frequent poster on Twitter about all things China and all things international business and I urge you to follow him too. We also have a China Law Blog feed, @chinalawblog and it would be great if you were to follow that too.

Very soon we will be announcing a new podcast/webcast on international law and business that will be hosted by two of our international lawyers and we are also planning an online Q&A session on How to protect yourself when sourcing personal protective equipment and coronavirus testing equipment from overseas, especially China. We will alert you on here and on our social media regarding the dates for both of these things.

In the meantime, we look forward to discussing China and the world with you online!

China's New Foreign Investment Laws

It’s been nearly two months since China’s new Foreign Investment Law (FIL) took effect, bringing sweeping revisions that ostensibly make China more hospitable to foreign investors. But has anything really changed? Or is the new law just window dressing?

The coronavirus outbreak has provided a convenient (and unassailable) rationale for anything that is or isn’t happening in China, and it may be months before we get a clear answer. But even before the coronavirus took center stage, the new law felt like a soft opening. The FIL is basic legislation on foreign investment and does not provide detailed guidance for foreign investors. Yes, China’s State Council issued Implementation Regulations and the Supreme People’s Court issued judicial interpretations regarding the FIL, but both were scant on concrete details.

Still, existing foreign invested enterprises (FIEs) and foreign entities planning new investments in China should at least understand what the law purports to do. We have outlined below some of the most notable changes, and how (or if) foreign investors will be affected.

National Treatment

One of the FIL’s key precepts is national treatment; under the FIL, China will implement a “pre-establishment national treatment and negative list” system. “Pre-establishment national treatment” means that foreign investors will be treated no less favorably than Chinese investors at the “entrance stage,” so long as the invested industry is not on the negative list. Thus far, China has not defined the term “entrance stage,” but it likely means the period before an entity has received a business license, when (for instance) it is applying for permits and/or providing evidence of qualifications that must be approved before the entity can operate in a regulated industry.

The Implementation Regulations provide that government agencies shall not discriminate against foreign investors regarding required permits or licenses unless laws or regulations provide otherwise. Unless laws or regulations provide otherwise – an exception big enough to swallow the entire provision! In many industries, foreign investors are not outright prohibited by the negative list, but receive quite different treatment. For example, foreign investment in construction of commercial airports requires pre-establishment permits as well as compliance with various Civil Aviation Administration rules. Does the passage of the FIL require these strictures to be repealed or changed? Or will they continue to exist in the same form as before?

National treatment is one of those phrases that sound good but is meaningless without context. Under the FIL, “national treatment” does not mean any changes will be made to the negative list, nor that discriminatory rules will be repealed in industries that aren’t on the negative list. It just means Chinese government agencies cannot officially discriminate against foreign-owned entities because they are foreign-owned. But Chinese agencies are masterful at unofficial discrimination, as any foreign entity that has tried to get an arbitral award enforced in China can attest. Without meaningful instructions and followup from the national government, nothing will change and many of the attractive sectors will remain closed or highly restrictive to foreign investment.

Enforcement of Government Contracts

Over the years, numerous Chinese government entities (usually local municipalities) have promised foreign investors preferential treatment, only to renege or renegotiate after a leadership change or government reorganization. Article 25 of the FIL explicitly requires local governments and government agencies to honor all contracts legally entered into with foreign investors and FIEs, and provides that if changes in circumstances cause the local government to breach a contract, the government shall compensate foreign investors and FIEs their damages. Right. We look forward to the first lawsuit filed under this provision.

Changes in Corporate Governance

On Jan. 1, 2020, when the FIL came into effect, a set of laws and regulations that specifically applied to FIEs (WFOEs, equity joint ventures and contract joint ventures) were repealed en masse. Now FIEs are only subject to China’s Company Law, Partnership Law and the other laws that regulate business organizations. Under the FIL, a business entity’s corporate governance depends on its form (i.e., whether it is a corporation, LLC, or partnership), not whether it is foreign- or Chinese-invested.

The FIL provides a 5-year grace period for FIEs whose corporate governance is inconsistent with the Company Law, Partnership Law or other business organization laws to come into compliance. This grace period is most applicable to JVs; those not formed as a separate legal person may need to reorganize as a company or partnership; and all will need to change to shareholder governance. JVs will also be able to retain some flexibility after the 5-year period. For example, after a JV reorganizes, any agreement regarding ownership or its transfer, allocation and distribution of profit and losses, and distribution of assets after liquidation may remain effective.

Validity of Contracts

According to the Supreme People’s Court judicial interpretation on the FIL, a court should not nullify a contract regarding a sector not on the negative list because of lack of approval or registration, but should nullify a contract regarding a sector on the negative list. That said, Investment contracts regarding sectors on the negative list can still become effective if the parties take necessary corrective measures (i.e., revising so that the contract no longer relates to a sector on the negative list) before courts adjudicate the case. Finally, if a contract concerned a sector on the negative list, such contract can still be effective if such restriction is removed before a court issues a decision.

Open Questions

Putting the concept of “national treatment” front and center in the FIL is a positive sign, but it doesn’t seem to have much follow through yet. Non-Chinese companies investing in China face far more restrictions than do Chinese companies investing in countries outside China. The list of industries on the negative list still contains a number of attractive, popular sectors. And the FIL hasn’t even addressed the issue of foreign ownership of Chinese companies. For instance:

  1. What will happen if a foreign company wants to purchase 10% of the ownership interest of a private Chinese company?
  2. What will happen if a private or public Chinese company wants to issue stock options to foreign national employees?
  3. What is the legal basis for prohibiting the foreign purchase of stocks on the Shanghai/Shenzhen exchanges?

Summary

In part, the FIL is an attempt to clean up legislative clutter – both by removing the laws specifically regarding WFOEs and JVs and by specifically superseding previous legislation regarding foreign investment. From that standpoint, the FIL is a welcome and long-overdue piece of legislation. But it’s far too early to tell whether the FIL will provide meaningful changes (let alone opportunities) for FIEs in China.

China lawyers on social media To put it mildly, a lot is happening these days in and with China. What is true this morning about a region in China or a company in China or a factory in China, may no longer be true this afternoon. The coronavirus is making people sick and killing people. It also is disrupting company plans and actions. Our social media pages reflect all this, oftentimes with a much stronger and more controversial viewpoint then on here. It is there — free of the great firewall — that those of us who write on here can fully express ourselves, and we do.

It is also on social media where we get the most heat. It is there that we are constantly accused of hating China and being China apologists. Truth is that all of us for China Law Blog both love and hate China. We all have spent huge chunks of our lives in China and working to smooth relations between China and the rest of the world. It is from this where we have come to love China.

But we are above all else lawyers who have been trained to analyze things objectively and to advocate for our clients. All of us have been trained to give our clients the truth as best as we can and then work with them in using that truth to plan their next moves and help them enact. This requires we not be emotional or loyal to any one side of anything before we have completed our research. This requires we sometimes defend China and at other times be harshly critical of it.

Things are tough in China right now. The coronavirus is ripping through parts of the country and impacting everything and China has done a poor job in dealing with it. When the virus first struck in Wuhan, the Chinese government focused on suppressing news about it, rather than suppressing the virus itself. Even today, it is not telling the truth about the numbers. When we say this, some people get angry. When we talk about Xinjiang and Hong Kong, people get angry at us. Way back in October, 2018, in Would the Last Company Manufacturing in China Please Turn Off the Lights, we started emphatically telling people that China had become far riskier and that they should be considering other countries to have their widgets made. Needless to say, this angered many as well. We had been beating that drum on social media before that and we have been beating it ever since. See e.g., our June, 2019 piece, Has Sourcing Product From China Become TOO Risky?

Without a doubt, the two biggest issues most companies that do business in or with China are facing these days are (1) where to have products made and what to do to prepare for the end of the coronavirus. The Coronavirus Is Wreaking Havoc on Supply Chains and companies that once depended fully on China are realizing they must diversify. Really diversify. But the coronavirus will eventually dissipate and that will create new opportunities for companies looking to do business in China or grow their business in China. And on that, we are really positive and optimistic.

We see China coming back better than before for foreign businesses. The Chinese government has been more encouraging of foreign businesses in the last few months than in a long time and we see that continuing. Some are saying the coronavirus will isolate China but we see it having the opposite effect. We see it leading to China opening up more to the world and becoming more flexible regarding foreign businesses operating on its soil. We constantly talk about these sorts of things on social media and we will be writing about them on here as well over the next few weeks. Despite all of China’s problems right now, we remain bullish on China overall.

In an effort to remain visible to our many readers in China, we are careful about what we write here on the blog. There are words we avoid using and topics we avoid discussing on here because we want our reach to include China and if China does not like something, its government has this “magical” ability to make it go away. And there is a lot China does not like these days.

Facebook and Linkedin and Twitter give us a a much greater ability to speak freely and because we have greatly ramped up what we do on social media.

Linkedin. We have a thriving China Law Blog Group on Linkedin that we maintain as a spam-free forum for China information, networking, and discussion. This group is always growing and now totals nearly 12,500 members. I urge you to join it.

We have had some great discussions there, as evidenced both by their numbers (some have gotten more than 100 comments) and by their substance. Our discussions range from people asking and trying to answer questions like, “why is it so difficult to do business in China” or ”what do I need to do to get my Chinese counter-party not to breach my contract” to the ethereal, like “when will we know China is taking innovation seriously?” Mostly though the focus is — not surprisingly — on doing business with China or in China.

The members of our Linkedin group are fairly evenly split between those who live and work and do business in China and those who do business with China from the United States, Australia, Canada, Europe, Africa, the Middle East and other countries in Asia. Some of our members are international lawyers and some are China lawyers, but most are businesspeople and some are academics (students or professors). We have senior level personnel (attorneys and executives) from large, medium, and small companies and tons of mid-level and junior personnel as well. This diversity enlightens the discussions, though, honestly, I sometimes wish the discussions were more rigorous than they are, but I attribute the lack of discussion rigor more to the location (a group on Linkedin) than to anything else.

What truly separates us from most (all?) of the other Linkedin China groups is that we remove anything that smacks of spam or is not relevant for those doing business with or in China. We have become so proficient at shutting down spam that hardly anyone even tries to sneak spam past us anymore. Our hewing to such a tight line on what we permit means we do not get a large volume of postings, but this also means we do not waste people’s time. If you want to learn more about doing business in China or with China, if you want to discuss China law or business, or if you want to network with others doing China law or business, I urge you to and join our China Law Blog Group on Linkedin. The more people in our group, the better the discussions. So please do join us there.

Individually, many of us post often on there about China matters and we are also all always accessible there. You can find our China lawyers and China trade specialists on Linkedin as follows, some of whom post there more than others:

My personal Linkedin page has just a shade under 10,000 followers and that has led me to post more often there on all things China. I welcome new followers and new connections, though I warn you that I tend to be slow in responding to connection requests. I promise not to overwhelm you with posts: I post roughly 3-5 times a week.

Facebook. Our China Law Blog Facebook page, is thriving as well and heading towards 25,000 followers (this is its number of “likes”). We use Facebook to post interesting, important and entertaining articles about China. Posts there get a lot of comments and discussion, often heated. We tend to be very open and opinionated and free-wheeling there. With so much going on with China and Hong Kong these days, our Facebook page has become a key source. I urge you to go there and “like” us so you can benefit from what we are doing there. Plus, I really want us to get to 25,000 likes!

I am also now posting a lot on Twitter at @danharris. I left Twitter for many years but I am now happy to be back as I enjoy the sheer immediacy of it. I most definitely do not hold back there but I also post on non-China things from time to time.I welcome more followers there as well.  I also urge you to check out and follow Fred Rocafort from my firm on Twitter as well, (@RocafortFred). Until recently, Fred was living in Hong Kong/the PRC and his tweets (oftentimes in both English and Spanish) do a great job of bridging the various gaps between HK, the PRC and the West. Jonathan Bench (@jonathan_bench), who spent around five years living in China and now splits his time between Seattle and Salt Lake City, is also a frequent poster on Twitter about all things China and I urge you to follow him as well. We also have a China Law Blog feed, @chinalawblog and it would be great if you were to follow that too.

Many of us are also on WeChat and I will be doing a separate post on that once I gather up the requisite information on who among us is active on that social media platform as well.

We look forward to discussing China with you online!

Three Steps to Forming a China WFOE

Our China corporate lawyers are often asked about the steps it takes to form a China WFOE. So often, in fact, that we long along drafted a stock response to that question and we are sharing that response below. Please note that the below is a generic roadmap for WFOE formation and the exact details for forming a WFOE in China will depend on, among other things, the WFOE’s business scope and the city/district in which the WFOE will be formed. Just as a for instance, a trading WFOE will have additional steps relating to import/export procedures.

If all goes smoothly, the overall WFOE formation process usually take 2-5 months. We do not break down the timelines for each of the steps below because those times can greatly vary, usually depending on how long it takes to prepare the financial information, to negotiate the lease, to obtain documents from the landlord, to authenticate relevant documents, and to validate the corporate structure. The MOFCOM authorities have lately been very efficient at processing WFOE applications and once you provide them with all required and requested information in the exact format they need/want, you usually will have a response back in 2-3 weeks. It is the time necessary to get to the point of giving the WFOE authorities all that they need that can take so long.

The below are the three steps necessary for forming a China WFOE.

 

Generic WFOE Formation

 

Step One. Name Approval Application
  1. WFOE Investor(s): corporate structure chart, authenticated corporate documents, passports and other documents identifying key personnel.
  2. Business Scope: define scope of business.
  3. Registered Capital: determine amount of capital to be invested, pursuant to financial projections.
  4. Total Investment Amount: determine maximum investment amount (capital + investor loans).
  5. Capital Contribution Timeframe: default is within 30 years.
  6. Proposed Chinese Name(s) for WFOE: at least 6-10 choices.
  7. WFOE Address: dependent on lease/office space.
  8. Name Approval Application Form: prepared by your lawyers, signed by client.
Step Two. The Formation Process
  1. Select accountant.
  2. Select bank.
  3. Draft labor and employment documents: employment agreements, WFOE rules and regulations, non-compete agreements, confidentiality agreements, etc.
Step Three. Post-Formation
  1. Open bank account.
  2. Carve chops.
  3. Open social insurance accounts and begin tax reporting.
  4. Other post-formation activity as relevant.

 

For more on the issues you will face in forming your WFOE in China, check out the following:

Sometimes you read an article and it gets so many things wrong that you just can’t stay silent.China trademark lawyers
A recent article on Cult of Mac, Apple pulls popular iOS game after Chinese company steals its name, is as inaccurate about China as anything I’ve seen in a long time, combining ignorance, sloppiness, and an anti-China bias.

The problem starts with the headline: “Apple pulls popular iOS game after Chinese company steals its name.” Anyone with an elementary understanding of English grammar would understand this to mean that Apple had kicked a popular iOS game out of the App Store because a Chinese company stole Apple’s name. Not true. Here, “its” actually refers to a third company called Playsaurus, which we are told “didn’t break any App Store rules or regulations. But thanks to a shady Chinese company, its [sic] game had to get the boot.”

According to the article, the Playsaurus game, Clicker Heroes, was “a hugely popular game with a ‘very positive’ rating on Steam after a whopping 47,000 reviews.” It  “held a place in the App Store for almost four years, earning decent cash …. until a Chinese company called Shenzhen Lingyou Technology Co., Ltd., trademarked the Clicker Heroes name in China — then asked Apple to pull the original game.”

Let’s unpack this quote sentence by sentence.

First sentence. “We don’t have the resources to fight a legal trademark battle in China so I guess that’s the end of our game.” Did Playsaurus even check on what it would cost to “fight a legal trademark battle in China”? Our China trademark lawyers have fought a ton of similar battles in China, and all for $5,000 or less, so I think it’s fair for me to wonder. I will note that based on this article, Playsaurus may not have had a strong case, but that’s a problem with facts, not resources.

Second sentence. It looks like we can’t challenge it…. [because] It appears that China’s trademark/IP laws are completely different from any Western countries [sic], and Apple just has to do what they say.” Wow. Apple just has to do what “they” say? I read this to essentially say that Apple has to submit to the PRC’s will, implying that China runs the world. Is Playsaurus really saying that China controls what Apple does? And why would Cult of Mac repeat a patently uninformed statement stating that China’s IP laws are completely different from the laws of any Western country? In fact the complete opposite is true: the first to file system is the majority system worldwide, followed by civil law countries. Only common law countries (basically, England and its former colonies like the United States) follow the first to use system. Under a first to use system, the first to use a brand name or a product name will usually be deemed to have superior trademark rights for that name. Both systems have advantages and disadvantages. I personally prefer a first to file system because it is easier to look at the trademark register for the relevant country to see if anyone beat you to the name, as opposed to having to conduct a comprehensive common law search to determine whether anyone is already using the name you wish to use.

Instead of acknowledging that Playsaurus went into the Chinese market without understanding China’s IP system, this article instead propagates the false idea that China is the only country in the world that would award a trademark to the applicant who filed first.

Third sentence. “If you make a game, unless you have ridiculous resources to spend on registering properly in China in advance, you just have to accept China to be a loss. Someone there will steal it.” Again, this article reiterates a quote from Playsaurus without providing context, i.e., fact-checking. In fact, Playsaurus could have spent a modest amount to register “点击英雄” and “Clicker Heroes” as trademarks in China, and would have thereby avoided the issues and the economic losses it has suffered from not having done so. What’s “ridiculous” about that? Either Playsaurus still doesn’t understand China’s IP system, or they’ve been getting bad legal advice. Frankly, I highly doubt Playsaurus ever contacted a China trademark lawyer, which they really should have done a long time ago.

Moreover, in cases of trademark infringement, Apple doesn’t typically require an app be pulled from all App Stores worldwide, but rather just the country(ies) in which the app is infringing. Here, the app should only have been pulled from China. And when I went to look at the Reddit discussion from which this article was pulled, lo and behold: Apple had agreed to restore the app worldwide except in China.

Bottom Line: China is a difficult country in which to protect your IP but it is quite possible to do so, but doing so does involve some work and some money, but typically not all that much of either. But if you sit around and do nothing, you should expect to have China IP problems not because it’s China, but because that’s the way things go pretty much everywhere in the world, including China.

For more on the importance of registering your product name or your brand name as a trademark in China, check out the following:

China lawyers
Because 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 or phone calls 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 quick general answer and, when it is easy to do so, a link or two to a blog post that provides some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.

A few weeks ago, I was discussing the need for one of our tech clients to have an NNN Agreement with its China counter-party before even sitting down to talk. The in-house legal counsel then asked me why an NNN Agreement was even necessary because she had read that China’s trade secret laws are very well written and very sophisticated. Like any experienced lawyer asked a really good question for the first time, my mind went blank and I responded with a time filler: “Great question,” I responded. I then mouthed something about how it is always better to have something in writing than to just rely on a law.

And then I got on a roll, explaining the below to her.

  1. Our NNN Agreements protect a lot more than just trade secrets. They protect whatever it is you want to protect. Trade secrets include only very specific things and it is not entirely clear even what those things are. If you want to be sure what you want protected will be protected, you need an NNN Agreement.
  2. Our NNN Agreements are contracts. Trade secret protections are not. China’s courts are very experienced in handling breach of contract cases. They are far less experienced in handling trade secret cases. If our NNN Agreement says Chinese Company cannot do this with X and it does this with X, they have clearly breached the contract. With a trade secret case we would need to prove that what you had was a trade secret (and that is not likely going to be easy) and that it violated China’s trade secret laws by doing so.
  3. Chinese companies know and fear NNN Agreements written in Chinese under Chinese law and with clear-cut and enforceable damages provisions. They don’t particularly fear China’s abstract trade secret laws.
  4. China’s trade secret laws are not that great anyway. Yes, what is there is good, but they are not as comprehensive as they should be and the lack of case law does not help either.
  5. I cannot underrate the difficulty in coming up with admissible evidence for China trade secret cases. Our international litigation team has many times been tasked with coming up with evidence for China trade secret cases and unless you have done this before, you probably cannot even grasp how difficult this is and whatever you use for evidence will be challenged by the other side, that much is pretty certain. I am going to make up a number here (there is no other way to do this short of analyzing thousands of cases) but I would estimate that Chinese courts accept as evidence less than half of what American courts accept. Because trade secret cases depend so much on evidence, this will likely be a problem.

Bottom Line:  China trade secret protection is something to look to only if you do not have a good NNN Agreement to protect you. Note also though that it does make sense (and can be very important) to have trade secrecy agreements with your employees.

 

China’s new e-commerce law, which took effect January 1, 2019, threatens to upend the entire daigou business model. As we’ve written previouslydaigou are individual shoppers who purchase goods overseas and then bring them back in their luggage for resale in China. Estimates of the value of goods brought into China this way each year ranges from about $6 billion to upwards of $100 billion.

The new e-commerce law requires anyone who sells products online to (1) register in China and in the country where they purchase goods and (2) pay all required taxes. If the law is strictly implemented and enforced, this would be the end of daigou, because the vast majority of daigou sales are online, and with few exceptions the daigou business model requires tax evasion.

Most of the articles about daigou refer to their wares as grey market goods. This is, at best, misleading. The term “grey market” suggests the existence of a legal loophole or ambiguity. But China’s rules on import tariffs, sales tax, and consumption taxes are quite clear: if you import goods into China, they are subject to tariffs. If you resell goods in China, they are subject to tax. If daigou paid the proper duties and taxes, they would have no business because they could not compete on price with legitimate importers. The major exception would be for goods that were difficult or impossible to buy directly in China.

It’s true that from a trademark standpoint, China has no per se prohibition on parallel imports. See China Trademarks: Counterfeit Goods and Parallel Imports. But this is irrelevant to the question of tax fraud.

As we have noted previously:

China has attempted to crack down on illegal grey market importation through a number of means, including (1) higher taxes on goods brought in by travelers as part of their luggage, (2) lower taxes on goods imported through legitimate channels; and (3) increased penalties for those caught falsifying customs declarations.

Will this new attempt be more successful? Early indications are that it has teeth. Customs officials began cracking down on the import side last fall with enhanced inspections of luggage at airports. Rumors began flying on social media, and then, after LVMH informed investors of such inspections in a conference call last October, luxury goods companies’ stock prices slumped across the board, falling somewhere between 3 and 10 percent later that day.

How and when the e-commerce sites will implement the new law is yet to be seen. Many daigou are already migrating away from “classic” e-commerce and into social media or instant messaging, where they describe their products using code words. You would think this, plus the increased scrutiny at the border, would marginalize daigou as a viable sales option – if you make something difficult enough, only the true believers will remain. But I have learned not to be surprised by the ability of Chinese entrepreneurs (and consumers) to turn on a dime in response to changing market/regulatory conditions – to say nothing of their willingness to ignore tax laws.

It may be more difficult for luxury brands to adapt. I had previously posited that although manufacturers might not be concerned about relying on daigou sales, they should be.

It boggles the mind why any company – let alone a major luxury brand – would have a market entry plan dependent on third parties successfully committing tax evasion. See Grey Market Goods and China, Part Two. But that’s exactly what some brands did, and now they’re scrambling to put together a “real” China strategy. Just for the record, my firm’s China lawyers have always advised against relying on this strategy.

Meanwhile, the trade war lurks as subtext. Right now products brought in by daigou are unofficial in every sense. If they are reported and taxed, then China would reduce its trade imbalance by a significant amount AND increase tax revenues. Easier said than done, even in China. But the trend is clear.

China Trademark

Like most countries, China has a use requirement for trademarks: to remain valid, a trademark must be used in commerce at least once every three years. But as we wrote in China Trademarks: When (and How) to Prove Use of a Mark in Commerce:

Unlike the United States, China does not have an affirmative requirement to prove that a trademark is being used in commerce. You do not have to prove use for a trademark application to proceed to registration, and once a trademark is registered you do not have to prove you are still using it to maintain or renew the registration.

China does require proof of use in certain circumstances. The most well-known circumstance is when a trademark is challenged for non-use; at that point a trademark owner has two months to provide evidence of use in the three years prior to the non-use cancellation being filed. (You can’t start using the mark after receiving the notice.) Another circumstance is when a trademark owner is suing a third party for trademark infringement and trying to prove damages. If you can’t show that you have been using the trademark yourself, it’s difficult to convince a Chinese court that you lost money due to another party’s infringement.

In my previous post, I outlined the general sorts of documents that could be used as evidence of trademark use. The Chinese Trademark Office (CTMO) has recently released a document that categorizes acceptable and unacceptable forms of evidence of trademark use in China, helpfully titled Explanations on Submission of Evidence of Trademark Use (提供商标使用证据的相关说明).

Acceptable trademark use on goods includes:

  1. on goods or their packaging/labeling, or including the mark on product tags, manuals, brochures, or price lists;
  2. in documents relating to the sale of goods, such as contracts, invoices, bills, receipts, import/export documents, inspection/quarantine certificates, and customs clearance documents;
  3. on the radio or television, in widely distributed print publications, or in other media;
  4. on billboards, mail, or other forms of advertisements; and
  5. at exhibitions or trade fairs, including printed matter or other material.

Acceptable trademark use on services includes:

  1. on the premises where services are offered, including on service brochures, signboards, decorations, staff attire, posters, menus, price lists, coupons, office stationery, letterheads, and other articles related to the services;
  2. on documents associated with the services, e.g., invoices, remittance advice, service agreements, repair and maintenance certificates;
  3. on the radio or television, in widely distributed print publications, or in other media;
  4. on billboards, mail, or other forms of advertisements; and
  5. at exhibitions or trade fairs, including printed matter or other material.

The above is not an exhaustive list, but for good measure the Explanations note that the following does not constitute acceptable trademark use:

  1. documents relating to a trademark’s registration, including any statements by the trademark owner about its exclusive rights to such mark;
  2. use in private commerce (i.e., not openly);
  3. use on complimentary items;
  4. assignment or licensing of the trademark without actual use by the licensee; and
  5. de minimis use of the trademark merely for the purpose of maintaining the registration of the trademark.

The last item is perhaps the most controversial and subjective, because trademark squatters have been known to make a single Taobao sale of an item to themselves (or to a relative) so they have evidence of use in China. In the past, such use, which to most rational people would be considered both de minimis and in bad faith, has sometimes been deemed acceptable by the CTMO. That being said, such lax rules have also redounded to the benefit of legitimate trademark owners who have not been scrupulous about keeping records and find themselves in need of last-minute evidence of use. But the trend now is for the CTMO to be stricter about de minimis use, and not consider it sufficient proof to maintain trademark rights.

All of the above evidence must come from China, which almost always means the evidence must be in Chinese and be capable of authentication by the issuing entity. This makes sense: to prove use in China, you need evidence from China. A purchase order from a US company (even if it includes the trademark) is unacceptable. An invoice from a Chinese company that specifies the goods but does not mention the trademark is similarly unacceptable.

Most companies selling products in China have no problem providing the necessary evidence. It’s the companies that only manufacture in China that have problems, because they often have no acceptable documentation from China that includes the trademark. Don’t be one of those companies. Think about how you can best gather up your evidence and do so. Now.

China movie quotaAs Bloomberg reported last week, China’s propaganda ministry (now in charge of all media-related activity in China) has approved an additional seven foreign films to play in China this year in excess of the 34 film quota. These newly approved films will play theatrically on a revenue-sharing basis, and include the animated films The Grinch and Spider-Man: Into the Spider-Verse and the John Cho thriller Searching.

We have previously expressed our skepticism about China’s film quota system on a number of levels:

  1. As an actual quota (the number of revenue-sharing films each year often exceeds the quota, at the Chinese authorities’ whim).
  2. As a meaningful restriction on foreign films (foreign films are also allowed to play in China on a “buyout” basis, and as that market has become more competitive, the “buyout” terms for stronger foreign films have begun to approach the revenue-sharing terms asymptotically).
  3. As a useful shorthand for the foreign film business in China (the quota applies to all foreign films, but its slots are largely taken up by Hollywood product; China unilaterally controls release dates and imposes unannounced blackout periods; and China has historically been months if not years late in making revenue-sharing payments).

Increasing the number of quota films is seen as a win for Hollywood and perhaps even a sign of conciliation in the ongoing US-China trade war. But those issues are ancillary at best. China does not care one whit about promoting American films and it is actively trying to bolster homegrown films while weaning Chinese audiences off Hollywood blockbusters. That said, Chinese officials deeply care about economic growth and are invested in the narrative that China will soon replace the United States as the top-grossing territory in the world for theatrical box office. And right now China simply does not have enough quality movies ready for theaters, so to meet its own box office projections, its path of least resistance is to bring in more Hollywood fare, because it knows demand for those movies already exists.

Bringing in more American movies to satisfy latent demand infuriates Hollywood, because it is patently obvious they could have a larger market share if China would only let American films play without restriction. A China free of content restriction will never happen and perhaps it shouldn’t. France and Canada (to name a couple longtime American allies) both have long-established and uncontroversial rules favoring local content. Canadian radio stations are required to ensure that a significant percentage of the content they play is by Canadian artists; for instance, commercial radio stations must have at least 35% Canadian content between 6am and 6pm on weekdays. This is also known as the Bryan Adams Guaranteed Employment Regulation. It cuts like a knife, but it feels so right.

But I digress. The point is that we shouldn’t expect China to grant American films unfettered access to the China film market, even when China does not have enough quality film content of their own.

Why doesn’t China have enough content right now? In part, this may be an unforeseen consequence of the Fan Bingbing scandal. Once it became clear that China’s film and television productions would be under greater government scrutiny for tax evasion and other financial improprieties, a significant number of motion pictures either postponed or shut down production. I will leave it as an exercise for the reader to divine the reasons, but we are now several months out and theaters don’t have enough Chinese-language films that they want to exhibit.

The lack of Chinese content won’t last, but Hollywood still owes Fan Bingbing a big thank-you. They can start by getting Jessica Chastain’s 355 back on track.

China trademark registration

In a recent Quick Question Friday, I addressed whether a trademark application for a color device (aka logo) should be in color or black-and-white. As I wrote,

According to trademark practice in China, registration of a black and white device in China would protect the logo regardless of the actual color scheme used on the device, and for that reason we typically recommend our clients file an application for the black-and-white version of their trademark.

The exception is if the color scheme for the device is part of the trademark, such as UPS’ brown-and-beige, FedEx’s purple-and-orange, John Deere’s green-and-yellow.

But you know what can’t be protected in China? A single color. Article 8 of China’s Trademark Law reads as follows:

An application may be made to register as a trademark any mark, including any word, device, any letter of the alphabet, any number, three-dimensional symbol, colour combination and sound, or any combination thereof, that identifies and distinguishes the goods of a natural person, legal person, or other organization from those of others. [bold added for emphasis]

We’ll ignore the quaint British spelling of “color” and focus instead on the important word: “combination.” What this means is that China will only approve a trademark registration for a combination of colors, i.e., two or more colors used together. So Tiffany blue is not protectable in China. Or T-Mobile magenta. Or Owens-Corning pink. Or UPS brown (aka Pantone Matching System 462C), which is protected in the U.S. by U.S. Trademark Reg. No. 2,901,090 for transportation and delivery services, as applied to the surface of delivery vehicles and uniforms.

For most companies that use color marks, the requirement of a color combination isn’t an issue. For most, the color isn’t itself an essential part of the trademark. And for those that do consider color an essential part of the trademark, the color is already in a combination or can be easily made to be part of a combination.

So though UPS can register the color brown by itself as a trademark in the United States, in China it would have to use the brown-and-beige color combination. And though Caterpillar may want a trademark for the particular shade of yellow it uses on its logo and equipment, it could instead register the yellow-and-black combination that appears on its “Cat” logo as a China trademark.

To register a color combination as a trademark in China, the application must include a color sample as well as a Pantone color. And the color combination must be sufficiently distinctive with respect to the covered goods/services. Trying to register red-and-gold as a color combination on wedding services in China would not get you far.