I am a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

I mostly represent companies doing business in emerging market countries. It has taken me many years to build my network and it takes constant communication and travel to maintain it. My work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, setting up a legal framework to move slag from Canada to Poland's interior, overseeing hundreds of litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt.

I was named as one of only three Washington State Amazing Lawyers in International Law, I am AV rated by Martindale-Hubbell Law Directory (its highest rating), I am rated 10.0 by AVVO.com (its highest rating), and I am a SuperLawyer.

I am a frequent writer and public speaker on doing business in Asia and I constantly travel between the United States and Asia. I most commonly speak on China law issues and I am the lead writer of the award winning China Law Blog (www.chinalawblog.com). Forbes Magazine, Fortune Magazine, the Wall Street Journal, Investors Business Daily, Business Week, The National Law Journal, The Washington Post, The ABA Journal, The Economist, Newsweek, NPR, The New York Times and Inside Counsel have all interviewed me regarding various aspects of my international law practice.

I am licensed in Washington, Illinois, and Alaska.

In tandem with the international law team at my firm, I focus on setting up/registering companies overseas (via WFOEs, Rep Offices or Joint Ventures), drafting international contracts (NDAs, OEM Agreements, licensing, distribution, etc.), protecting IP (trademarks, trade secrets, copyrights and patents), and overseeing M&A transactions.

international lawyersOur international lawyers draft more NNN Agreements than any other agreement. These agreements are used to protect your confidential information. They protect confidentiality and they protect against the company or person to whom you reveal the information from using that information to compete against you or go around you to your own customers or clients. The three Ns are for Non-Compete, Non-Circumvent, and Non-Disclosure. These contracts are commonly used before revealing anything important to anyone, such as your technology, designs, or customer lists, whether those qualify for trade secret protection or not.

Because our international attorneys so often draft NNN Agreements, we have a template email we send to our clients (modified each time to suit the particular situation) explaining the customized NNN Agreement we have just drafted for them and explaining what they should do with that agreement going forward. The below is such an email and I write about it because it not only explains in a real life way how NNN Agreements should be employed, it also explains what makes NNN Agreements different from a traditional NDA Agreement and why NNN Agreements are so important.

Attached please find an English/Chinese draft NNN Agreement for use with [XYZ company]. My comments follow:

  1. This is not a traditional US-style NDA agreement. A traditional NDA agreement relies on the concept of trade secrecy. Under this sort of an agreement only something that qualifies now and later as a trade secret is entitled to protection. As a practical matter, the information you will be disclosing will almost never meet the technical legal standard for trade secrecy. Therefore this NNN takes a different and more effective approach. We write this to prevent your counter-party from using the information you give them in competition with you.
  2. The agreement has no set term. In other words, [XYZ Company] can NEVER use your confidential information; it is a permanent obligation.
  3. The agreement holds the receiving party [XYZ Company] liable for any damages caused by a related party in violation of the agreement as if the act were committed by the receiving party.
  4. The agreement provides for contract damages in a specific monetary amount for every act of breach. This provision provides two primary benefits. First, it makes clear to [XYZ Company] that it will face real and quantifiable consequences each time it breaches the NNN agreement. Second, a specific monetary amount provides for a specific minimum level of damages which then provides a court with the basis for a pre-judgment seizure of assets. A credible threat of your seizing [XYZ Company] assets greatly increases the likelihood of [XYZ Company] abiding by your NNN agreement. Note that this amount needs to be a reasonable pre-estimate of your damages as a result of XYZ Company’s violation of the NNN. The amount we have set for contract damages in your contract is fairly standard for this sort of transaction in _________ [country].
  5. Note that this agreement gives you the right to enter into an NNN with a subcontractor. Note also though that regardless of whether you  enter into such a separate agreement, the receiving party will be liable for any damages caused by a subcontractor in violation of this agreement on the same basis as if the act were committed by the receiving party.
  6. I was able to confirm [XYZ Company’s] name and address information against the relevant government website. According to available government data, ________’s title at the company is manager and executive director and I have inserted this information into the agreement.
  7. If XYZ Company accepts the terms of the agreement, you should go first by signing and dating this agreement and then sending it to [XYZ Company]. You should wait until you get this agreement back, fully executed, before you disclose any confidential information. 

Please review and get back to me with any questions.

International Education Law

A couple years ago we wrote a four part series on establishing an international school in China. In part 1, Establishing International Schools in China: The Basics, we discussed the complications foreign parties typically see when trying to start a school in China. In part 2, Establishing International Schools in China: A Deeper Dive, we focused on what it takes to start a School for the Children of Foreign Workers. In part 3, Establishing International Schools in China: A Deeper Dive (Continued), we discussed Sino-Foreign Cooperative Schools and Chinese Private Schools. In this, my last post in this series, I look at future trends for international schools in China. In Part 4, Establishing International Schools in China – Future Trends, we wrote about some of the distinctive issues foreign schools face in China. We also sometimes write about the legal issues stemming from teaching overseas. See e.g., Teaching English In China: Be Careful.

Many of our lawyers and staff attended international schools or are sons or daughters of teachers or professors. I spent my junior year of high school at Robert College in Istanbul, a year studying Spanish at LAE Madrid, and 8 months studying French at the Institut de Touraine. All three are amazing schools and these were some of the best years of my life. My father taught English Literature at a liberal arts college for 36 years. Our law firm has a long history of representing universities and international schools on their international legal work, ranging from helping them set up in foreign countries to licensing technology they’ve developed to foreign companies.

Our writings and our legal work and our various international school connections mean we get 10-20 emails every month from people teaching around the world. These emails can roughly be divided into the following four categories:

  1. Visa issues.
  2. Employment contract issues.
  3. Medical and landlord issues.
  4. Starting a school issues.

Recognizing that most of these teachers are not wealthy, our lawyers strive to do their best to give responses that contain actionable advice with the limited time and information we have. The below reflects how we typically handle the four most common categories of foreign teacher emails.

1. Visa Issues. We almost always have to punt on visa issues because our immigration law expertise is mostly limited to business immigration to the United States, with a smattering of additional knowledge gleaned from the transactional work we do in Asia and in Europe. Since none of us have deep immigration law knowledge relevant for foreign teachers our response is usually to urge them to seek out a local immigration lawyer for assistance. I know from my own experience in other countries that there is a veritable ton of bad and outdated immigration law information on the internet and an hour or two with a lawyer who actually knows this area of law can be invaluable. This pretty much true of all aspects of international law. See China Law Online: It’s All Wrong.

2. Employment contract issues . The typical email we get will say something like “I am a teacher in China and I have been fired for taking a day off because my sister came to visit. Can my school do this?” Our response to this sort of email will usually be something like the following — changed quite a bit for brevity and for emphasis:

I have no idea whether your school can or cannot and for us to know we would first need to make sure we do not represent the school at which you worked (because if we did, we could not represent you) and then we would need to read your contract and then compare that as against the local laws and the province’s laws and China’s laws and then maybe speak with the local employment authorities as well. If it does turn out that the school illegally terminated you we would then need to figure out exactly what we can do about that. Likely that would be registering a complaint with the appropriate Chinese governmental body and using that to try to pressure your employer to take you back, which is very unlikely to happen. When you are not taken back we would then need to look into suing the school. If we did sue the school and you won, we might get an order saying the school needs to take you back and we might get some really small amount in damages. Then again we might also lose. Your school may or may not abide by the order.

The problem with the above is that at some point your China visa may be revoked and you will need to leave China. And win or lose, you challenging this school may lead to you never getting a job in China again and going through the above will be time consuming and expensive.

3. Medical and landlord issues. These emails often come down to money. “The hospital wants $400” or my “landlord wants to raise rent by $100 a month.” As a father, my responses to these are usually nine parts paternalistic, one part legal.

4. Starting a school issues. The typical email will come from someone who has been teaching English in China or in Vietnam or in Poland or wherever and they now want to know what it will take for them to start a school in one of these countries. The below interaction is an amalgamation and it is typical:

English Teacher: We would like to open a school for foreign students _________. There is a small but growing group of foreign parents in the city looking for foreign education options for their children.

We are unlikely to get the enrollment needed to have our own campus. Can we legally share school grounds with a local primary school (public/private) if our students do not follow the Chinese curriculum? If we can’t, then I guess we are out of luck.

My second question concerns whether your law firm could handle the process, assuming it is feasible and how much it would cost.

Our response: We have helped set up many foreign school companies in China but we’ve never dealt with your question on sharing space in [China fourth tier city]. My guess is that you can share facilities with the local school, but only if your school has its own separate address. I say this because most cities require you have your own address for any WFOE (the company we would need to set up to own and operate youor school), but things like this tend to be very local.

As for how much this will cost, I would estimate it will cost at least $30,000. This estimate would be for our China lawyers and China business specialists (all of whom have substantial experience in setting up foreign schools throughout China) to research and figure out what you can and cannot do, form the company, secure various governmental approvals, register your trade names and logos, help on the lease and other agreements with the entity that owns the existing facility, draft your employee contracts and your employer rules and regulations, and the various other legal matters that invariably arise when starting a school company in China, including all sorts of discussions with local government officials.

If – as it sounds – the ability to use the facility will make or break this deal, I would propose we start by figuring out whether that is or is not possible. We would do that by researching the applicable laws and then by confirming with the local authorities that our reading of the laws corresponds with theirs. If you can tell us more about the potential space we can get back to you with an estimate for our handling this discrete issue.

If you have any additional questions, please don’t hesitate.

Pretty much every time we then get something back from the teacher saying that the costs and/or the complications are more than they expected and they will need to re-think.

As much as I dislike being the one to hit them with reality, I take comfort from believing it is better they get the truth than to have them waste time and money on a project they are will not finish.

 

China foreign investment lawyers

MEH.

For weeks now, our China foreign investment lawyers have been getting a steady stream of emails regarding China’s now approved new law on foreign investments. Those emails can very roughly be divided into two camps:

  1. Those (mostly from our own clients) asking us what it will mean.
  2. Those (mostly from China Law Blog readers) using this law as proof that we either “exaggerate how unfair China treats foreign companies” or that we “have become way too cynical about China.”

This post strives to answer both email strains.

The new law sounds good but the devil will be in the details and like everything else related to China laws the details will be in its enforcement. But right off the bat, you can color me highly skeptical.

China has never treated foreign companies remotely the same way it treats domestic companies. China’s entire economic system is based on this and, if anything, things have mostly gotten worse for foreign companies in the last 5-10 years. Why should things all of a sudden change now? Because China is under tremendous pressure from both the United States and its own declining economy to stimulate foreign investment.

But China — like pretty much every country in the world — does not like being told what to do by a foreign power or even by a declining economy. This, coupled with China’s long history of failed promises to open up more to foreign businesses, makes me doubt it is really serious this time either. And reading between the lines of how this law got approved and even when it will actually become law make me doubt China’s enthusiasm even more.

In China approves new foreign investment law designed to level domestic playing field for overseas investors, The South China Morning Post highlights the following red flags:

  • “Beijing rushed the legislation through the country’s largely ceremonial legislature in an effort to fend off complaints from the United States and Europe about unfair trade practices. The new law was first introduced as a draft in 2015, but its progress picked up markedly from the middle of last year to address issues identified by Washington as part of the US-China trade war.”
  • “At the same time, the wording of the law, which will replace three foreign capital laws – the Law on Sino-Foreign Equity Joint Ventures, the Law on Sino-Foreign Contractual Joint Ventures and the Law on Foreign-Capital Enterprises – passed between 1979 and 1990 in the early years of China’s process of reform and opening up, is quite general, leaving many details to be addressed in other regulations and implementation procedures.”

In other words, this is an effort China started in 2015, but now it all of a sudden (under the pressures mentioned) above, has decided to embrace. Enthusiasm matters because without enthusiasm there will be no enforcement. Heck, this law is not even set to go into force until 2020 and it needs all sorts of supporting rules and regulations in the meantime. Enthusiasm matters because without the enactment of the supporting rules and regulations there will be little to nothing to enforce.

The SCMP article ends with an amazing quote from “He Weifang, an outspoken law professor at Peking University” who questions whether China’s existing government structure will adequately enforce the new law:

“We need democratic supervision and justice to ensure enforcement if there are any regulations issued later. Enforcement really relies on structural changes and an independent judicial system. So, I cannot say that I will be more optimistic when more regulations come out,” he said.

“It would be even worse if we lack the implementation mechanism after we enact a law, because the outside world will not trust you no matter what law you enact in the future. We need checks and balances to ensure enforcement, otherwise, all well-intentioned enactment of laws will end in vain.”

He is, of course, 100% right.

Addressing the cynicism question, all I can do is quote what an audience member once said at a China event I attended: “For those of us who have been dealing with China for more than a decade and have therefore been involuntarily trained to ignore the smoke and just wait for the fire, can you please just tell me what you have seen that has actually changed with ….” This proposed law is smoke that may or may not ever become fire and even if it does become fire, it may be nothing more than a match that soon blows out.

Is this new law an effort to improve the chances of a China trade deal? How strong will this law be if there is no trade deal? How strong will it be if there is a trade deal?

At this point, the best strategy is probably just to wait and see.

China tax lawyersThe tax man cometh and taketh away. ALWAYS.

There has been a lot of press lately of how China is reducing business taxes to stimulate its declining economy. This is all well and good but when it comes to taxes — especially China taxes — there ain’t no such thing as a free lunch.

Yes, China is reducing various VAT rates and mandatory employer pension contributions but it also is moving ever apace in tightening up its tax enforcement capabilities and these enforcement changes will and already has impacted foreign businesses more than the tax reductions. As our regular readers know, we have for at least a decade written about how China has consistently and inexorably tightened its laws and tightened its law enforcement, especially as against foreign companies. See e.g., Doing Business in China Without a WFOE: Will the Defendant Please Rise.

Official Chinese publications on its tax decreases talk of how tax collections will actually rise, due in part to changes in law to force individuals and businesses onto China’s tax “grid” and due to stepped up tax enforcement. For an example of legal changes that will bring “hidden” businesses to light, check out China’s Daigou Shopping Model: This is the End, My Friend…. The Bank of China recently issued a notice requiring China’s banks to report all transactions exceeding certain amounts with the plan for some of the accounts involved in those transactions to be turned over to the tax authorities for further investigation. Foreign companies, I’m talking to you. China has also enacted various laws to name and shame and penalize individuals connected with businesses that fail to fully comply with China’s increasingly stringent tax laws.

Foreign businesses operating in China can and must protect themselves by doing the following (somewhat obvious) things:

  1. Determine whether they are or are not doing business in China. If you have anyone on the ground in China on behalf of your company the odds are good that you are doing business there and you owe all sorts of taxes for that. See againDoing Business in China Without a WFOE: Will the Defendant Please Rise.
  2. Hire a good accounting firm and a good bookkeeper to make sure you are doing everything right on your China taxes.
  3. Don’t listen to anyone but your own accountants and bookkeepers and lawyers about what you should be doing regarding your China taxes.
  4. Just because you know of others who are not paying certain taxes does not in any way justify your not paying those taxes.
  5. Be wary of anyone — either inside or outside your company — who in any way minimizes the need to pay China taxes.

At the end of 2018, in How’s Your China WFOE? Please Check, we wrote of how “at the end of every year, our law firm always gets a slew of emails and phone calls from foreigners in big trouble in China.” The post then talked of how “in past years the trouble has mostly involved unpaid taxes, usually with the following sort of scenario:

Foreigner (disproportionately Northern European) calls to say that they are in their home country for the holidays and they have learned that the “tax man” has come by and is extremely unhappy about the company not having reported all of its China earnings. The person wants to know whether it is safe for him (it has 100% of the time been a male) to return to China. Three more minutes of talking reveals that this company has not even come close to paying its China taxes and the person on the other end of the line “justifies” this by saying his Chinese accountant told him that “nobody pays these taxes.” I very dispassionately tell this person that I don’t know what percentage of foreign companies pay their China taxes, but that the China attorneys at my firm advice all our clients to pay all their taxes and that is in large part because China LOVES going after foreign companies that don’t pay all their taxes AND has gotten really good at catching those that don’t. I then tell him that he absolutely should not go back to China unless and until his company has cleared up all back taxes, with interest and with penalties. I got only one such phone call (so far) this year.

Though we are not even three months into 2019, it feels like we have gotten more tax trouble calls this year than all of 2018 combined. These are calls involving employer taxes, company and personal income taxes, and custom duties (especially). And in nearly every instance the problem has stemmed from a foreign company (so far just North American and European companies) not paying taxes based on some misguided belief that no taxes were owed. Do not choose your accountant based on an “ability” to save you money. Choose an accountant who provides you with the real life advice you need.

Tomorrow I am going to write about flat out bad China WFOE formation companies and how those same companies show up again when it comes to providing flat out bad China tax and accounting advice and how those two things are so intimately tied together.

In the meantime, be careful out there.

China bribery. Don't. Just Don't.

I’ve become obsessed with the college cheating scandal that has so far implicated Hollywood celebrities, a high-end lawyer from a Wall Street Law Firm, a “slew of CEOs,”  among others.

I am sorely tempted to use this scandal as a teaching moment on how we Americans need to look more deeply at the rising inequality and unfairness in our country, instead of falling back on comfortable tropes like how we are the land of opportunity. But I recognize this is probably not the place for that.

So I will instead use it as a teaching moment on why bribery is dangerous and even pointless.

Back in 2017, we did a post, China Bribery. Not Smart and Not Necessary. In that post I started out talking about how it is wrong to contend that contracts are not needed in China because of court corruption. I then talked of how most Americans don’t understand how court corruption usually works in breach of contract cases, using a Russian litigation matter my firm had handled as an example. The point of that post and this one was that paying bribes is never wise:

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

I then wrote about how after a talk I gave in Cleveland that touched on bribery and corruption I discussed China bribery with “an audience member, Kimberly Kirkendall, who had commented to the audience that in her experience many of the times where she was aware of someone having paid a bribe in China they had done so essentially because they wanted to, not because it was necessary they do so.” I mentioned to Ms. Kirkendall “how some companies seem almost to delight in paying bribes but that our China lawyers — believe it or not — had never once been asked to pay a single bribe in China, even though we are constantly dealing with the Chinese government to register trademarks and copyrights and WFOEs and Joint Ventures. Kimberly commented on how foreigners sometimes brag about paying bribes and how troubled she was by that. I then mentioned how stupid and risky it is to pay bribes in China.”

In that post I quoted extensively from something Ms. Kirkendall had written on bribery that I very much liked:

In China 30 years ago it was very common to incentivize someone to do their job by giving them a gift. Why? The China of the late 1980’s and into the 90’s was a communist economy that relied on 95% government controlled business. And in that communist economy there was very little difference between the salary for the GM of a factory and the guy who mopped the floor. So how were they compensated for their relative value to the organization? The GM could “gift” some of the company’s products to someone else, who often then re-gifted that to someone they wanted to influence and so on and so forth. By gifting them, the GM was able to get a slightly larger apartment, or their child in a better school, or some other economic benefit. People recognized their relative power in the economy by giving and/or accepting gifts. Sometimes cash, but frankly there wasn’t a lot of cash to go around. Much of this was actually bartering, trading your goods/access/influence for someone else’s.

In the booming late 1990’s and into the early 2000’s, as people were allowed to own a business in China, things changed a bit. How do you move a government owned or controlled economy to a privately held one? Where do individuals get the money to buy apartments or companies if they weren’t making much cash beforehand? In this period of transition there were many instances of people using their power and influence for economic gain. From how these government companies were taken private (and ownership and shares divided up) to how people came up with the money to buy apartments or build new ones. In this environment people in high positions saw the money being made and they wanted their share – and now there was the cash to pay them.

Towards the late 2000’s and into today, we are looking at a China where many people (but not all) are in a position to make money in direct ways. Through entrepreneurship, increased education and wages, investment, taking risks on new ventures, or changing jobs to accelerate their careers. Much of the population are no longer stuck in a powerless place where bribes are their only way to obtain value from their position of authority. Certainly it still exists, and there are still people who feel that they can’t get ahead so they exact a little extra money on the side.

When I hear that a US company has used bribes I start wondering about the reason for the bribe. Was it a payment to someone to do his or her job or a payment for them not to do their job? In almost every instance these days, it seems it is the foreigner who initiates the bribe. The below examples of matters on which I personally worked highlight the important difference between these two reasons.

Example: A U.S. company was importing components from China, using both its own team in China to find suppliers and control the orders and a trading company. The US management came to our China team for help in figuring out why some in their company were claiming that they needed to use a trading company for some of their China business, even though the trading companies were increasing costs by taking their own payments from the transactions. They wanted to know why they were paying a trading company to buy and export goods when they could do all of that themselves. It turned out that a group within the company wanted to utilize lower HTS custom codes for export to save money and Chinese Customs didn’t agree with that custom code classification. The US company was using the trading company to pay China customs a bribe so they could export their products under the “wrong” code and save money. In other words, there was no need to pay bribes, just a desire.

Example: A company was setting up a factory in China and the local government was concerned about air emissions from its manufacturing process. In the U.S. the company had shown that emissions were well within range of EPA guidelines. The local Chinese agency was not convinced and asked for more tests and documentation. The company was left with options – see if there was an “economic incentive” that would encourage the regulatory official to approve the paperwork, or spend a few months and thousands of dollars doing the research to prove their manufacturing met the guidelines. They chose the “economic incentive” route. Again though, an example of a company choosing to pay a bribe out of a desire to get a government official not to do his or her job, not a bribe necessary to get that official to actually do his or her job.

The point I am trying to make here is that the excuse foreigners make about having no choice but to pay a bribe rarely if ever holds true. The foreign companies I hear about paying bribes had plenty of choice; they simply chose wrong. They were not responding to a request for money but offering money as an incentive for a Chinese worker to deviate from his or her professional responsibility.

I agree.

I cannot resist shamelessly plugging my alma mater, Grinnell College, from where my wife also graduated and from where my youngest daughter will in two months be graduating. I am plugging Grinnell College because it is one of a small number of U.S. colleges and universities that truly has a “need blind” admissions policy and will meet the financial needs of all its American students. Wikipedia defines need-blind admissions as a “policy in which the admitting institution does not consider an applicant’s financial situation when deciding admission. Generally, an increase in students admitted under a need-blind policy and needing financial aid requires the institution to back the policy with an ample endowment or source of funding.” In other words, schools that are not pay to play.

If you are not only troubled by parents paying bribes to get their kids into a school, but also troubled by the daughters and sons of the wealthy being more likely to get admitted or being able to fund their education, you should consider one of the following schools that are both need-blind and meet the full demonstrated financial needs of their students (per Wikipedia):

Your thoughts?

China manufacturing lawyers

Like most lawyers, I am hyper logical. That’s our training and that is who we are. We like order and we like clear explanations for when there is disorder. Clear enough so that we know how to prevent future disorder.

China is not terribly orderly, but well over 95% of the time, the problems foreign companies face in and with China are neither new nor unpreventable. Put another way, when I look at what has gone wrong for foreign companies in China I can usually find a number of things the foreign company  should have done differently to have prevented the problem or to have ameliorated it or at least to have positioned itself to have had real recourse once it occurred. Note that positioning yourself to have “real recourse” is often the single best way to prevent a problem in the first place. See e.g., You Need an Enforceable China Contract No Matter How Much You are Feeling the Love and You Need an Enforceable China Contract No Matter How Much You are Feeling the Love, Part 2. Or on the flip side, check out A Lifetime Sentence for Operating in China Without a Lawyer, Well Sorta, where we discuss the case of someone who is not allowed to leave China and highlight all the things this person did wrong to cause his present situation.

So when someone calls one of my firm’s China lawyers with a China problem for which they are entirely blameless my world gets rocked, at least just a bit. I mean, if that were to happen all the time, there would be no need for people to pay for lawyers, right? The one area where our China attorneys most often see this is when a foreign company has had a great relationship with its China factory for ten or twenty years and then all of a sudden the factory just disappears. What was the foreign company supposed to do? Fly out and visit its factory every two weeks to make sure everything was still okay? Get real.

So I was delighted the when a fellow lawyer sent me the link to a blog post titled, 10 Red Flags Your China Supplier is Going Bankrupt, as this post succinctly lays out the following warning signs for spotting a China manufacturer in trouble:

  1. Excess capacity.
  2. Poor lead times.
  3. Layoffs before the Chinese New Year.
  4. Workers aren’t being paid.
  5. Turnover has been rising for weeks.
  6. New payment terms.
  7. Quality is slipping.
  8. Phone calls and emails go unanswered
  9. Factory abruptly changes location.
  10. High customer complaints.

All of these make sense but I particularly like the following for the following reasons:

##3, 4 and 5. Layoffs, turnover and workers not being paid. If the people with whom you regularly work at your China supplier are disappearing or you hear of workers complaining, ghosting very well is about to happen. Our China manufacturing lawyers have seen this before.

#6. New payment terms. Almost always a sign of a factory in rapid decline or a bank switch scam. Either way, beware.

Any additions to the above?

Thailand manufacturing lawyers Vietnam

Way back in October, 2018, we wrote a post, Would the Last Company Manufacturing in China Please Turn Off the Lights, with the following as its lead paragraph:

The title is an exaggeration, of course. But with my law firm’s international lawyers fielding a steady stream of client requests for help with leaving China for Vietnam, Thailand, Malaysia, Cambodia, India, The Philippines, Indonesia, India and Turkey (mostly), it does sometimes feel as though within three years nobody will be making widgets in China anymore.

It then noted how the international manufacturing lawyers at my law firm have been getting a steady stream of reporters asking us to connect them with our clients that are leaving or looking to leave China. We tell them that for various reasons, none of our clients will be willing to discuss their leaving China and then they usually tell us that they “understand.” See How To Terminate Your China Supplier: Very Carefully and How to Leave China AND Survive.

It then notes how when we write about China economic problems we get hit with invective claiming we are making this stuff up either because we hate China or because we are trying to generate business for ourselves. But guess what people

Also in October, 2018, in response to questions our international lawyers were getting I wrote the following:

I see a lot of foreign companies leaving China now and I see that exodus as continuing. It would hardly be an exaggeration to say that on at least one level, nearly all of our clients would — at least in theory — like to cease having their products made in China. Part of this is due to the hassles and the hard times they have gone through in China and part of this is due to the grass always being greener on the other side. But to a large extent, these (hurt) feelings are mostly irrelevant. What’s relevant is whether these companies can do their manufacturing in a country other than China and whether their company would be better off doing so. I think that in large part the answer to the second question will more often be yes than no but the answer to the first and more important part will more often be no than yes. Put simply, most of the companies currently having their products made in China have no choice. No country right now comes close to matching China for its combination of manufacturing sophistication and low cost and until this changes, the overwhelming bulk of companies having their products made in China will continue to do so.

Further proof of this trend comes from China’s most recent export numbers, which — as this blog has predicted would be the case — continue to rapidly decline. See China’s exports fall more than 20% in February (CNBC) and China February exports tumble the most in three years, spur fears of ‘trade recession. 

I see three big things keeping somewhat of a lid on a manufacturing exodus from China. One, capacity. Countries like Thailand and Vietnam are literally getting overrun by American and European companies seeking to move their manufacturing there and it has gotten to the point where if you do not use a sourcing agent with really good factory contacts in these countries you will likely find it difficult to impossible to find a factory willing to take on your product manufacturing. Two, capability. Countries like Thailand and Vietnam have for years been great at manufacturing certain things and not others. They are both rapidly improving in their capabilities, but they are not at China levels, at least not yet. Three, knowledge and soft infrastructure. Many foreign companies already know China and know how to get a widget made there. Far fewer know Thailand or Vietnam or Indonesia, etc. And even if you don’t know China, it can be amazingly easy to navigate on your own and there are countless people out there who are super knowledgeable (and many who most emphatically are not) to help you. See China Manufacturing: To Sourcing Agent or not to Sourcing Agent, That is the Question. Our clients were having so many problems finding good people to help them with Vietnam and Thailand that we brought in house our two most trusted Thailand and Vietnam people.

If you are going to up and leave China for another country, you will need the very same protections in whatever country you go as you need for China, but specifically tailored for whichever country to which you are going. This may include the following:

  1. An NNN Agreements before you reveal your product specifications or design or customers or any other trade secret.
  2. A Mold/Tooling Ownership Agreement if you will be bringing your molds or tooling from China to the new country or if you will be paying (either directly or indirectly) for new molds or tooling in the new country.
  3. Product Development Agreements if you will be working with your new manufacturer to modify an existing product or create a new one.
  4. Manufacturing Agreements with whomever new who will be making your product. Go hereherehere, and here for what that entails
  5. You will need to register your trademark to protect your brand name and your company name and your logo in whatever new country you will be going. This will likely be the most important thing you do.
  6. design patent or a utility patent
  7. copyright. Usually not needed, but when it is, it’s very important.

And for a good overall read on what your company should be doing NOW in light of China’s plunging economy, check out China’s Economic Slowdown and YOUR Business: The Times they are a Changin’ — which we wrote back in September when many (most?) were denying there was any slowdown at all.

What are you seeing out there?

 

 

China tourism law

Kimberly Kirkendall,  a CPA with a ton of China experience and the CFO of Cleveland’s China Chamber of Commerce — and just an overall China powerhouse  —  posted the following on Linkedin the other day:

I’m in Sanya – often called China’s Hawaii. Talking about the island’s development (they’re aiming for both resort and tech) got me thinking about competition in the region. Hainan is a major destination for Chinese – for holidays, for retirees and companies for retreats. But they don’t have the volume of foreign travelers you see in Thailand or Vietnam. Why? The answer foreigners give is “its still China” – what’s that mean? Thailand, to western ears their language is soft. The resort areas cater more to foreigners than Thai’s, and the culture seems gentle, more calm body language. It feels like a relaxing holiday. The visa requirements are simpler. But Vietnam doesn’t have those same “attractions” – visas are difficult, it’s a “hustle” culture like China, and the language sounds similar to western ears. But the resorts are mostly foreign owned with foreign visitors. So….is it fundamentally because foreign travelers want to feel at home, not too far out of their normal? The Chinese wealthy population has made Hainan its destination, does that keeps foreigners away? Mexico is similar, the biggest resort destinations are ones w/ mostly foreign (Cancun) more than local (Puerta Vallarta) guests. Me? I prefer local, PV is my destination. What do you think?

As soon as I saw it I knew I would need to post on it, so here goes.

I love visiting Vietnam with my family. It’s one of my favorite countries in the world. I love the “hustle” of Ho Chi Minh and the history of Hanoi and the beauty of Halong Bay and the food and the people and its beaches and….. Hoi An is one of my favorite places in the world and if I were capable of living in a place with less than 2 million people and less than 30 good sushi restaurants, Hoi An would probably be first on my list. I also love visiting Thailand with my family.  I love the hustle of Bangkok and the beauty of Chaing Mai and Chaing Rai and the food and the people. And my family and I obviously love Mexico because we go there all the time. To Mexico City, to Guanajuato, to San Miguel de Allende, to Merida, to Puerta Vallerta and to Cancun (where a very good friend of mine lives) and I can hardly wait to go to Oaxaca next month for ten days to eat and enjoy the amazing food and art. But China, sorry but no. My wife and youngest daughter once joined me there for a couple of weeks and they both enjoyed Beijing (the Forbidden City is amazing, of course) and Shanghai (who doesn’t love the Bund?) and Qingdao and Dalian, but nobody has mentioned going back.

My eldest daughter and her boyfriend (now husband) did a six month Asia trip after they graduated college. Two words about my daughter: Project Manager. That is her job and that is her. She is the world’s best planner, the world’s best researcher and the world’s most organized person. If you want to know what sheets to buy for your bed you should ask her because she will have thoroughly researched it. If you want to know where to scuba dive in Asia, ask her because she will have thoroughly researched it and done it. When her and her friends go anywhere, she plans the trip and assigns the tasks. Her six month trip included Vietnam, Taiwan, Indonesia, Malaysia, Singapore, Thailand (where I and my wife and my youngest daughter met up with them), Myanmar, and Japan. No China, even though she has never been there. I’ve never asked her why. I just assume her extensive research convinced her that all these other countries would be a better use of her limited time and money.

Why is China not a popular tourism destination for Westerners? The following 14 reasons immediately spring to mind:

  1. It’s really crowded.
  2. People push. I mean really push.
  3. People yell. I estimate I’ve seen more yelling matches in China than the rest of the world put together.
  4. People try to cheat you. Often.
  5. People don’t talk to you just to talk to you; they talk to you mostly just to “hustle” you.
  6. You will not be made to feel welcome, not even by hotel and restaurant staff.  See A Post In Which I Bitch (Yet Again) About China Hotels.
  7. It’s polluted. Like really polluted. Like incredibly polluted in some places.
  8. It has major food safety issues.
  9. Bathrooms. Need I say more?
  10. You need a visa before you go.
  11. So much of China’s physical history has been destroyed and what is left is often neither well presented for Westerners nor easily accessed.
  12. China is a difficult place for foreigners who do not speak Mandarin and who do not like group tours.
  13. China executes foreigners for drug offenses.
  14. Slow and blocked internet.

My law firm has offices in Barcelona, Spain (and we just opened an office in Madrid as well) and Beijing. Pretty much every week someone will longingly engage me in a conversation about Spain, wanting to tell me about their trip to Barcelona or to Seville or to Madrid or to San Sebastian or to Mallorca or to Valencia (where one of our lawyers will be going for his vacation next week). I don’t recall a single time anyone has done the same about China. Most of our lawyers have visited our Barcelona office, including those whose work has little to nothing to do with Spain. None of our lawyers outside our China law team have ever talked of going to Beijing.

Those of us who constantly go to China for business know both how to minimize and deal with the problems listed above, but can you not understand why most people prefer not to have to deal with these sorts of things on their two weeks off from work? Kimberly, would you really tell someone who has never been to China to go there? Do you dispute any of the above? And if even only 5-6 of the above are true — and with all the incredible places to go in the world — does it really make sense for people to spend their limited tourism time and money on China?

Is the tourism trouble/reward ratio far better than I’ve painted it above? Is China merely undiscovered and ready to go viral as a tourist destination once people realize how wonderful it really is? Or do you agree with the picture I’ve painted?

Let ‘er rip people.

Product sample contractIn Part 1 of this series, we wrote about how the product development stage is fraught with risk for foreign companies manufacturing overseas and yet frequently neglected. In Part 2, we wrote about how foreign companies \routinely use NNN agreements in the factory search stage and Manufacturing Agreements (ODM, CM and OEM) for the production stage, but rarely use Product Development Agreements during the product development phase because they often do not realize they are in that stage or because they believe their NNN Agreement will protect them. We then explained why this often is a big mistake, the results we often see from this “big mistake” and, most importantly, how to avoid it. In Part 3, we wrote about how when manufacturing overseas, the manufacturing contracts that make sense for you and your company are the manufacturing contracts that make sense for YOU and that is not usually going to be what you read on the internet nor what some other company tells you it did nor what you tell some law firm you need nor what some law firm wants to sell you.This part 4 is a riff on an interview I did for Global Sources the other day focused on getting a product sample before you buy. This interview is titled, Expert talk part 3, Dan Harris: Buy samples, cover all the bases and its preface notes how a “common thread” with my two previous interviewees was that “product samples can spell the difference between a successful sourcing journey and an importing disaster.” It then gives the following quotes from the two previous interviewees:
  • As John Niggl put it, “Buyers who skip the product sampling stage do so at their own peril. The benefit that comes from being able to “try before you buy”—review and approve a sample before committing to an order—is simply too great.”
  • Gary Huang, meanwhile, underscored the importance of product samples by comparing it to an audition where you can get a glimpse of quality and capability.

Well I’m here to tell you somewhat the opposite. Product samples are overrated. Sort of.

I am not going to deny that product samples are valuable and I am not going to tell you not to get product samples. No. Product samples are valuable and you should get them. But, from a legal perspective, they can be both highly risky in terms of your IP and worthless in terms of protecting you from bad quality.

Let me explain via the interview, with the interview questions in italics and my answers in normal font (modified slightly to enhance your reading pleasure)

Global Sources: What’s your take on buying product samples from overseas? What are the challenges?

Dan Harris: As a lawyer, three things always scare me about foreign companies having a sample made by an overseas factory:

First, does the foreign company have an enforceable agreement that will stop the overseas factory from copying the foreign company’s product and selling it around the world?

Second, did the foreign company apply for a trademark in the manufacturer’s country (China, Vietnam, Thailand, Indonesia, etc.) before it revealed its brand name to its manufacturer? This is critical because the first to apply for a trademark in most countries gets it, regardless of whether the foreign company previously registered its trademark in its home country. See e.g., China Trademarks: Register Yours BEFORE You Do ANYTHING Else.

Third, many foreign companies just assume that if they get a good sample the products will match the sample and if they do not, they will be legally protected. Neither of these are true, though.

Global Sources: Do you have a story of sample orders gone wrong?

Dan Harris: Our manufacturing team have definitely seen nightmare scenarios. The most common is when a foreign company has an overseas factory make the molds and make the sample and then learns that the overseas factory is using the molds for itself and selling the product either to competitors of the foreign company or direct to consumers.

Often when this happens (surprise, surprise), the overseas factory is also supplying bad quality products to the foreign company. This way the overseas company can not only sell the foreign company’s own products, it can sell better quality products than the foreign company.

Global Sources: Despite these challenges, what benefit do buyers get out of product samples?

Dan Harris: You can use samples to determine whether the factory is capable of meeting your quality standards. The problem is that one factory might have another factory make your sample and then pass it off as its own. This is particularly common in China where factories are so often clustered by product. Foreign company buyers should be certain to protect their IP by using an enforceable NNN Agreement and by seeking to register their company name, brand name and logos in the country in which their manufacturer is located and they should do this before they reveal any of those to anyone overseas. See e.g., China Contracts: Make Them Enforceable Or Don’t Bother. And if you are going to legally obligate your overseas factory to make your products to the specifications of your initial sample, you need an enforceable written contract mandating that it do so.

Global Sources: A buyer gets samples from three or more manufacturers. All samples meet his requirements and he’s satisfied with quality? Which manufacturer does he work with?

Dan Harris: I am a big believer in having the client visit the factory and meet with the people in person. This usually tells you a lot. See Overseas Product Sourcing: Being There.

Global Sources: How can Harris Bricken [my law firm] help buyers with the sample order stage?

Dan Harris: We help with the contracts and the IP registrations. I have to note that the biggest change we have been seeing from our clients in terms of buying products from overseas is that they very much want to start buying from countries in Asia beyond China (such as Vietnam and Thailand and Indonesia and the Philipines) and from Eastern Europe and Latin America.

Bottom Line: Product Samples can be great for determining whether an overseas factory has the capability to make your product at the quality you want, so long as the product sample you are given actually comes from the particular overseas factory with which you are dealing. But just getting the sample has its IP and other risks against which you should be protected early.

China lawyersPotential clients often ask our China lawyers, “what’s the worst thing that can happen if I don’t do ________.” My usual response is I don’t know or you get sued or you get arrested or you will never be allowed to leave China.” See Doing Business in China with Deportation or Worse Hanging Over Your Head. Whenever I mention prison or getting stuck in China forever I can “hear” the eyes roll on the other end of the computer or the phone because few take this risk seriously.

Guess what people. Get over your First World rule of law biases and start dealing with the real world, or as a friend of mine who regularly deals with China hostage situations is always saying, “this is China.”

The “this” about China hit me hard today via our China Law Blog Facebook page (go here to check that out where, purely coincidentally, my most recent post is how the portion of my Chinese TV interview from yesterday where I discussed hostages in China was completely deleted). Anyway, here is today’s story and it is filled with absolutely critical lessons for anyone doing business in China AND for anyone doing business with China who has any intention of ever going to China.

So I wake up this morning with a Facebook message from someone in trouble in China asking us to publicize his situation on our blog to help in a fundraising campaign. The fundraising campaign is here and it is titled, Being wrongfully sued and not allowed to leave China and rather than have me tell the story, I will pull it word for word from this campaign (see below) and then “unpack” it. Just as an aside, I visited the Getty museum in Los Angeles about a week ago and our tour guide used that word (unpack) before analyzing each and every painting and sculpture. The first time she used it I loved it but by the tenth or so time I hated it. This being your first time….

In 2013/2014, we started a personal training fitness gym in Shenzhen, China with 3 foreign partners. The initial agreement and plan between the partners was to grow the gym, however 2 years into operation, due to a variety of factors beyond our control, we could no longer afford to operate the business at the standard that we wanted. We had to pay high costs and find a way to close the business while respecting the staff and community.

The attempted transfer and closing process took many months while we interviewed potential investors and people who wanted to take it over. It ultimately came down to a young Chinese man who had spent many months in the gym, wanted to own his own gym and was getting to know the operations and the members. Unfortunately for us, this man’s intentions were not honest, and he manipulated the situation to his favour. Since we are foreigners in China, we were not knowledgable about certain legal processes and trusted him in this transfer. He devised a way to take over the business by paying the business’s then upcoming bills due, and some debts owed – amounting to RMB 217,000 (approx US$ 32,000). He then wrote up a pre-agreed contract stating that the RMB217k was a loan and that the business and equipment would serve as collateral should the loan not be paid back. Since we wanted to simply move on from the business, and were not able to handle the expensive monthly overhead, we agreed to this process, meaning we received nothing in the end for a business we had spent 3 years building, but would be free of the business liability.

This Chinese man is a loan shark, and once we had parted ways with him, believing everything was agreed to and wrapped up, we moved on with our lives.

Fast-forward two years, and unbeknownst to us, this man had filed a lawsuit, claiming that the business owed him the RMB 217k. The case was filed, and was ruled in his favor, since we had no knowledge of the case and thus never showed up to court to contest this man’s false version of events. It wasn’t until John tried to leave the country that we came to find out about its conclusion as he was told that he would not be allowed to leave China. In China the legal system greatly favours Chinese, and the entire case was processed and closed without our knowledge and thus no response from us, and as it stands now we are being ordered to pay a whopping RMB 250k ($40K).

We want to chance to set the record straight and show the court the documentation which shows the agreement we had and how this man has committed fraud. We want to re-open the case, and respond to the verdict that was passed without our knowledge. In order to fight the case we need to hire a lawyer and pay court costs and so are asking our family, friends and any citizens of the world who can support our cause and pursuit for the truth.

Initially we are trying to raise RMB 55K ($8K) to cover the legal and court fees, so we can do everything possible to clear our good name and release the government hold on John’s passport. This will be a long, difficult battle but we will keep you updated every step of the way and maintain full transparency throughout this process.

Thank you so much for taking the time to read this, and for your support, whether financial or just by sending positive energy and thoughts our way.

Now for the legal unpacking (that’s only by second time with that word) and an analysis of what likely went wrong and what probably should be done to try to solve it. The quotes from above are in normal font and our analysis is in italics.

  1. “He then wrote up a pre-agreed contract stating that the RMB217k was a loan and that the business and equipment would serve as collateral should the loan not be paid back. Since we wanted to simply move on from the business, and were not able to handle the expensive monthly overhead, we agreed to this process, meaning we received nothing in the end for a business we had spent 3 years building, but would be free of the business liability.”  Mistakes: Not using a lawyer with this contract. Based on the above, it very much appears that this was a loan contract for RMB217k and this person(s) did not fully realize that. Any competent lawyer could have told them that. I am guessing the contract was in Chinese — why wouldn’t it be as it was a Chinese transaction —  and that may also explain why it was not fully understood. Or maybe it was a situation where eagerness took precedence over common sense. Who knows? Bottom line is that you should never sign a contract without fully understanding it and you should virtually never sign a contract without the assistance of a qualified lawyer.
  2. Fast-forward two years, and unbeknownst to us, this man had filed a lawsuit, claiming that the business owed him the RMB 217k. The case was filed, and was ruled in his favor, since we had no knowledge of the case and thus never showed up to court to contest this man’s false version of events. Mistakes: Maybe none, or maybe this person received notice of the lawsuit but did not realize what it was. I say this because Chinese courts tend to be very good at getting their notices out and they also tend not to rule until it has been confirmed that notice was received.
  3. It wasn’t until John tried to leave the country that we came to find out about its conclusion as he was told that he would not be allowed to leave China. Mistakes: Chinese law allows the government to not allow people to leave who owe money. This is why our China lawyers are constantly telling people not to go to China if they MIGHT owe money and to get the hell out of China as quickly as possible if they are there. See Maybe Owe Money To China? Don’t Go There. 
  4. In China the legal system greatly favours Chinese, and the entire case was processed and closed without our knowledge and thus no response from us, and as it stands now we are being ordered to pay a whopping RMB 250k ($40K). Mistakes: I’m guessing a Chinese defendant would have had the same result as it sounds like a fairly garden variety loan agreement and this amount probably included interest and perhaps attorneys’ fees as well.
  5. We want to chance to set the record straight and show the court the documentation which shows the agreement we had and how this man has committed fraud. We want to re-open the case, and respond to the verdict that was passed without our knowledge. In order to fight the case we need to hire a lawyer and pay court costs and so are asking our family, friends and any citizens of the world who can support our cause and pursuit for the truth. Mistakes: Is it even possible to re-open the case at this point? I do not know but I doubt that it is. I could be wrong about this, but it seems to me that this person is doubling down on his mistakes by again not hiring a lawyer to figure out the best way to get out of this. Let’s just suppose it is not to late to try to “re-open” the case. In most countries of which I am aware, to be able to re-open a case like this you must not only show that you were not given notice of the case you also must show that if the case were to be re-opened that you have at least some chance of overturning the ruling on the merits. If this is a legal and valid and garden variety loan agreement, that chance may very well not be there. If re-opening the case is going to be impossible, no money should be spent on that route. It probably should instead be spent on trying to strike a deal with the lender and in return for whatever payment he accepts, a settlement agreement is signed (this settlement agreement should be in Chinese and pursuant to Chinese law) and then used to get the hold on leaving China lifted. 

But in the end, this person does need money to hire a Chinese lawyer (probably ideally based in whatever city in which the lawsuit was brought) to figure out how to figure out the situation and help this person get out of China.