Photo of Dan Harris

Dan Harris is internationally regarded as a leading authority on legal matters related to doing business in China and in other emerging economies in Asia. Forbes Magazine, Business Week, Fortune Magazine, BBC News, The Wall Street Journal, The Washington Post, The Economist, CNBC, The New York Times, and many other major media players, have looked to him for his perspective on international law issues.

China lawyersAs many of you probably know, UCLA basketball players LiAngelo Ball, Cody Riley and Jalen Hill, were arrested in China last week on suspicion of stealing sunglasses from a Louis Vuitton store in Hangzhou. President Trump claims their fast release from custody stems from his having personally asked Chinese President Xi Jinping to intervene in the case.

Whether President Trump was or was not responsible for the quick release of these three players (I am convinced he was), what should those without such presidential connections do when similarly arrested in China. We recommend the following:

1. Contact your Nearest Embassy or Consulate. Your first step should usually be to contact your nearest embassy or consulate, but recognize that it will be limited in the assistance it can provide. Foreigners arrested in China are subject to Chinese laws, not the laws of their own country. This should be obvious, but not everyone knows this.

Your embassy or consulate should be able to help you with the following:

  1. Providing you with a list of local attorneys who speak your native language
  2. Contact your family, friends or employer
  3. Visit you in jail and provide you with reading materials and maybe food.
  4. Monitor your situation in jail and help ensure that you are being treated appropriately.
  5. Provide you with an overview of the local criminal justice process

2. Hire a Local Criminal Attorney. You will need a local attorney. This means if you are arrested in Qingdao you need a Qingdao criminal lawyer and not a Shanghai one. China has many terrific criminal lawyers and they usually require relatively low upfront flat fees to take on a new matter for a new client. This means it is usually relatively easy to find a good and cheap Chinese criminal lawyer, but few speak English.

It is absolutely critical that you get a good local criminal lawyer as quickly as possible. Far too often when our China lawyers get contacted regarding a criminal law situation in China, the detainee or the detainee’s friends or family believe that because the arrest was a “mistake” no lawyer is needed. Some claim they do not need a lawyer because they or someone they know has sufficient guanxi to handle the arrest lawyer-free. Even if these people are right (and they pretty much never are), it still behooves them to get a good local criminal lawyer immediately.

No ifs ands or buts: if you are arrested in China, you need a local criminal lawyer and fast. 

How do you find such a lawyer? That depends. By way of an example, one of our China lawyers was recently retained to find a criminal lawyer in a small Chinese city. This lawyer immediately emailed all of the China lawyers in our firm and we all emailed our China lawyer contacts in various cities to ask for the names of recommended Chinese criminal lawyers in this small Chinese city. The client ended up hiring a lawyer who was mentioned multiple times by the Chinese lawyers we know.

3. Contact Family and Friends but Keep Them Quiet

Sometimes you want your family and friends on the outside to scream up and down about your arrest. Sometimes that is the worst strategy possible. It is generally a good idea not to publicize your case unless your local criminal lawyer instructs you to do so. China is not going to release you because your hometown newspaper is saying you are being held unfairly. Instead, your publicizing the unfairness of your arrest might just cause the local prosecutor or court to double down. But see here for a case where the strategy was to generate bad publicity for the arresting country.

4. Hire an Attorney in Your Home Country (Sometimes) 

Our China attorneys get contacted by arrested Westerners maybe ten times a year. If the matter is something like a shoplifting arrest, we usually do little more than provide our client with a few tips and find them a good local criminal lawyer and sometimes good local translator. This is the case for nine out of ten. But in some cases — when the Westerner arrested is from the United States or Spain or Germany where we have our own attorneys — we do considerably more.

By way of one example, our firm a few years ago represented an American charged by China with massive financial fraud. We stayed involved in this case from its beginning through sentencing (note that more than 99 percent of those charged with a crime in China end up being convicted). For this client we did the following:

  • Found him a top-tier criminal lawyer. This lawyer did not speak Chinese and so we often served as the intermediary.
  • We often served as an intermediary with the US Consulate.
  • We would communicate with the detainee’s family in the United States
  • We gathered up key mitigating documents from the United States and other countries outside China.
  • Perhaps most importantly, we explained China’s legal system to the detainee and his family and, in particular, the huge benefits of admitting to the crime and setting up a procedure to reimburse those who harmed by the crime and a rehabilitation plan. We also explained China’s sentencing and early release laws and the importance/benefit of reimbursing the victims so as to get a sentence term that allowed for early release.

Bottom Line: If you or someone you know are arrested in China, take it very seriously and act quickly.

Best China Blogs
Goodbye Peking Duck.

The Peking Duck blog officially closed today. I am not the sentimental type and to a great extent, everyone knew this day would soon arrive. But yet today is still a sad day.

The Peking Duck was at one time one of the two or three best and most honest blogs on China. Through that blog, I got to know its author Richard Burger and I am proud to think of him as a friend. Richard and I most certainly did not agree on many things (though there were many things on which we did agree), but I ALWAYS appreciated his blog posts because they were also so “real.” They were also always so very well written and so insightful. Richard always was and still is a class act.

When we first started our blog way back in January, 2006, and for a long time after that, no day would go by without our reading Peking Duck, as it (along with a few other blogs that are also no more (many of which Peking Duck lists in its farewell post) was the zeitgeist of China.

If you wanted to know China, you read Peking Duck. It was that simple

To give you some idea of how important we viewed the Peking Duck, I note that this is the 40th time we have cited to it in a blog post and that from 2006 to  2008, we cited to it 23 times, which I am guessing was more any other publication. If we were having a tough time coming up with a good topic for the day, we knew we could pretty much always find something worthy of discussion on Peking Duck.

Richard never pulled a punch yet he, like so many of us back in “those days”, were so infused with optimism. Sorry, but it was a better time.

Not surprisingly, Peking Duck’s last paragraph nails it:

It was a thrilling ride. I used to love waking up to hundreds of new comments. It was a real community. But all good things must end, and I probably should have shut down the site a few years ago instead of allowing it to slowly die on the vine. Thanks so much for joining me here. I’ll miss all of those who contributed to The Peking Duck — the site was more about the participants here than it was about me. What a great experience it was. Thanks again.

It is with considerable sadness that I join the long line of people mourning the final demise of Peking Duck and wishing Richard all the best in his offline life.

It was indeed a “great experience.”

 

China e-commerce law
Earlier this week, in China E-Commerce: Resistance is Futile, we set out what will likely be the new rules for foreign.

I could not have scripted better responses to that post as I personally received emails from what I would describe as “both ends of the spectrum.”

The first email is from a European businessperson I know who has been doing business with China for 25+ years and living in China for at least a decade. He has become pretty cynical about China and the focus of his email was on how China is setting everything up to “screw us foreigners”: Here is his email:

Great post as usual. It nicely encapsulates what I see happening here with everything. China is re-writing its laws to make its own companies rich and to screw us foreigners.

On the flip side, I got the following email from a very experienced China lawyer essentially saying nearly the opposite:

Exactly. The intelligent way to approach China is to figure out what is their plan and then work that plan to your advantage. Fighting against the plan is futile. Working with the plan can result in a lot of money. Google decided to fight, and they are gone. Microsoft finally decided to go with the plan and they are still in the middle of the China system.

When I say these sorts of things I get accused of being too negative and I would bet you will get that reaction to this post. But I do not view it negatively at all. It outlines a clear plan to success in China. It’s just that the plan follows a basic path outlined by the PRC government and Alibaba and the other rules of the PRC Internet. There is lots of money to be made and there are many things to be done to make the deals and to protect IP and similar.

That was our exact point with the post. There are great opportunities to make money on China e-commerce but to do so you must follow China’s rules. You can complain about those rules all you like, but the real issue is whether you are going to jump in and seize the opportunity (flawed though it is) or not. What’s your answer?

Earlier this year, I attended Alibaba’s Gateway ’17. The theme of that event was that there is easy money to be made by Western companies selling their products on Tmall and on Taobao. There is most definitely a lot of money to be made but it is debatable how easy it is to make it. I don’t know about you, but I doubt that any of our long list of clients who are making money in or from China — be it via China e-commerce or otherwise — would ever claim it to have been easy. And yet, I also doubt that any of them would say that it has been so difficult as to not be worth it.

The bottom line is that selling your products to China consumers via e-commerce will not be as easy or as cheap as selling your products to U.S. or EU consumers. But is that enough to stop you? In our next post, we will talk about what you should do to protect your IP before you start selling online to China.

 

China WFOE Formation
How to name a China WFOE

Strange but true: WFOE formations are seasonal and fall is for our law firm always the busiest time of the month for WFOE formations. Like clockwork every year, companies come to us in September and October seeking our help in getting their WFOE formed “by the end of the year.”

This plethora of WFOE formations has meant a correspondingly large number of e-mails from our China lawyers to our clients explaining the steps required to form a WFOE in China. Because these emails are helpful to anyone forming a WFOE in China or even just considering doing so, I will from time to time run some of those on here. Today’s email is about choosing a name for your WFOE.

It is necessary to select a Chinese language name for your WFOE. In choosing the name, please note the following:

1. In China, only the Chinese language name has any legal status; as a legal matter, the English is not relevant. This means you can use any English language name you want.
2. Chinese company names follow this rigid structure: [City of formation] Company Name [business type] [Company Ltd.]
So, an English equivalent of a typical Chinese company name would be: Shenzhen ABC Consulting Co. Ltd.
The elements in [] square brackets are fixed by the local government. This means the only thing we need determine now is the Company Name. Since as you can see, company names can get rather long, it is usually best to limit the Company Name part to 3 or 4 Chinese characters at most.
3. The company name must be different than any other company registered in your same kind of business. It is often surprising how many good names are already taken. For this reason, the local authorities require we submit AT LEAST five alternative names and they (and we) prefer ten alternatives if possible.
4. There are two approaches to selecting a Chinese company name. You can pick a descriptive name or you can pick a name that has no meaning but is intended to reproduce only the sound of the parent company name. When descriptive names are used, investors often make the mistake of choosing names that are too long. As noted above, the name should be limited to three or at most four Chinese characters.
5. You will need a native speaker of Chinese to assist you in choosing the names. Some companies simply work this out with their current staff. Some companies hire a public relations or a branding company to work with them on the issue. Note that your Chinese company name will become your identity, so a careful choice is advised. We can give you names of some branding companies with whom we have worked on China matters.
6. When you have chosen your names please submit them to us for a preliminary review. We check to see if there are any obvious conflicts with existing names and we also can give you some advice on the suitability of the names selected. We will then work with the local government to devise the full Chinese name to be used on the WFOE registration papers.
We realize this WFOE naming process can be somewhat confusing and so we urge you not to hesitate to reach out to any of us for further assistance on this or on anything else on which we are working to form your China WFOE.
China Lawyers
China Law Blog is getting “social.”

When we first started this blog we would fairly often get hundreds of comments on one post. With the changes in how so many of you actually see our posts and the importance of social media, those days are over. Or at least they have diversified.

As part of that diversification, we have ramped up what we do on social media as well. we started a China Law Blog Group on Linkedin to create a spam-free forum for China networking, information, and discussion. That group is always growing at it is now has more than 11,500 members and the number and quality of our discussions keep rising as well.

We have had some great discussions, as evidenced both by the numbers (we’ve had discussions with 50-100 comments) and on their substance. Our discussions range from the practical (“why is it so difficult to do business in China” or ”what do I need to do to get my Chinese counterparty to follow my contract) to the ethereal (“when will we know China is taking innovation seriously”).

The group has a large contingent of members who live and work and do business in China and a large contingent of members 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 China lawyers, but the overwhelming majority are not. We have senior personnel (both China attorneys and executives) from large and small companies and a whole host of junior personnel as well. We have professors and we have students. These mixes help elevate, enliven, and enlighten the discussions.

What I think truly separates us from most (all?) of the other China groups on Linked, however, is how we block anything and everything that even smacks of spam. We have become so proficient at not allowing spam to see the light of day that hardly anyone even tries to sneak anything past us anymore.

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 check out our China Law Blog Group on Linkedin and join up. The more people in our group, the better the discussions. Click here and join us!

Our China Law Blog Facebook page also just keeps on growing and it now has more than 19,000 likes/followers. We use that page  to go a “bit wild” because there is no massive government there to restrain us. That page deals with China law, sure, but it also deals with politics, tourism, food and fashion, business, culture, language, and just about anything else China-related. Our goal with that page is to educate and entertain. Please check out our Facebook page too, by clicking here.

And last and least, after a three-year hiatus, I went back on Twitter and I even occasionally post there as well, especially to promote our own firm’s China and international events. Click here for that.

China lawyers
Hague Service of Process in China

Just read an excellent post over at the Letters Blogatory blog. The post is entitled Service of Process and the Unauthorized Practice of Law and it is on how service of process companies so often mess this up to the detriment of their clients. It also asks whether these companies are engaging in the unauthorized practice of law and hints that they are.

The post starts out talking about the lawyer-blogger’s recent experiences with international service of process botched by service of process companies:

I have come across several cases recently where a plaintiff, or more likely the plaintiff’s lawyer, had hired a “vendor” or a contractor to serve process abroad, and where it seemed clear to me that the “vendor” had given the client bad advice or where the vendor had not done a good job effecting the service. For example, I’ve seen vendors submitting requests for service to a foreign central authority and then, after the client asks why service hasn’t been completed, informing the client that service in the country in question might take a year. The client then moved for leave to serve by alternate means, which is perhaps what the client should have done in the first place with its money. Or else I’ve seen a vendor lash out at a foreign central authority’s refusal to execute a request for service rather than try to understand the legal basis for what the foreign central authority is saying.

Ditto for the international lawyers at my firm as we too have recently seen a quasi-onslaught of bad or delayed service of process attempts on Chinese companies. We typically see these sorts of things at about year one of failed service when the client-company  turns to its lawyer and says: “it’s taken more than a year and we are nowhere in effecting service, would you please find someone who can help us on this?”

The post then starts asking questions about whether these service of process vendors may be operating outside the law by practicing law without a license: “To what extent do the things we do in international service of process constitute the practice of law? Or conversely, to what extent are the “vendors” doing things they shouldn’t be doing unless they are lawyers?”

Good theoretical questions, to which I will eventually provide a very practical “answer” below. The post then posists how the serving of process is not the practice of law when it consists of little more than going to someone’s house and handing them court papers. I 100% agree because as the post notes, this does not involve any “real legal judgment.” But as noted in the post, “the decision of what form of service to use, especially in cases of service abroad, is most certainly a decision that requires legal judgment, at least in many cases”:

Suppose you say you want to serve via the foreign central authority. There are some logistical questions about how long the process will take, what fees must be paid, etc. But there are other more significant questions for the lawyer: Will the methods of service the foreign state is likely to employ satisfy due process requirements in the US? Does the case seek the kind of relief, e.g., punitive damages, or is it the kind of dispute, e.g., a tax dispute, that will lead certain foreign states to refuse to execute the request? And if you want to use an alternate method of service permitted by the Convention, similar questions arise.

To we China lawyers, the “money” portion of the post is when it discusses a vendor who spends a long time trying to effect service, only to mention after getting paid and after having submitted the service of process request to China’s central authority how incredibly long service of process is now taking on Chinese companies. See Serving A China Company Under The Hague Service Convention: Have Fun With That where we said service takes one to five months. Those were most certainly the good old days, however, as it is taking a year or more now. There is also the very real issue in any United States case against a Chinese company as to whether the case is even worth pursuing, because so often it is not. See China Enforces United States Judgment: This Changes Pretty Much Nothing

Now for my practical answer on the unauthorized service of law question. The real issue is not so much whether these service of process companies (which are typically great for serving process domestically) are engaged in the unauthorized practice of law or not. To me the issue is whether you as a company want to entrust your multi-million dollar (or even $200,000) case to a non-lawyer to figure out the best way to effect service that complies with the Hague Convention, the requirements of the court in which your lawsuit is pending and the foreign country in which the defendant is going to be served. And if you are a domestic litigation lawyer facing these same issues, do you a year down the road want to explain why you used what is essentially a specialized messenger service to effect complicated international service? I sure wouldn’t.

Doing Business in China
Doing business in China: Middle of the road

The World Bank just came out with its 312 page “Doing Business” report, ranking 190 economies on just about every measure possible. It is important to note that the rankings are based on the ease of doing business for domestic companies and not for companies seeking to do business in a foreign country.

I skimmed the methodologies the World Bank used to rank these 190 economies and I am impressed. But in the end, I have to admit that I tend to judge these sorts of rankings by looking at the countries I know to determine whether the rankings match what I see as the realities, and this World Bank ranking absolutely does.

China came in at 78th, which seems about right to me.

  • Singapore — 2nd
  • South Korea — 3rd
  • Hong Kong — 5th
  • Japan — 34th
  • Mongolia — 62nd
  • Vietnam — 68th

Singapore and Hong Kong make complete sense to me as those are indisputably two of the most pro-business countries in the world. South Korea is pretty good for foreign companies but I am surprised to see it ranked so high. Japan’s ranking makes sense to me, but Mongolia and Vietnam seem a bit high to me and I would actually rank them behind China. But my knowledge stems from representing foreign companies and perhaps those countries are different for domestic companies.

The United States ranked sixth and that seems about right. Spain, where my firm has an office, ranked 28th, and that seems about right also. Germany, where we do a lot of work, ranked 20th and that too seems right.

Here’s something in the rankings I know many of you will find amazing: China ranks 5th in the world in terms of enforcing contracts. Fifth out of 190 economies. I think that ranking is too high, but it does strongly reinforce a point we are always trying to make on this blog: contracts work in China, so long as they are drafted for a China court. See China Contracts: Make Them Enforceable or Don’t Bother.

What do you think of these rankings?

China IP lawyersI had essentially the same call recently involving European IoT start-up companies that might at this point better be termed “wind-down” companies.

Their stories are an old one and one we have covered and warned about at least a dozen times on here, including in a post directed specifically at Internet of Things companies, entitled,  China and The Internet of Things and How to Destroy Your Own Company. These two companies either did not read that post or they failed to take it seriously. To make a long story short, these two companies were working with Chinese companies to produce two internet of things devices and both companies eventually succeeded. Problem is that when they did, the Chinese companies essentially told them “adios” (I am right now in the Madrid airport on my way to Lisbon for a big lawyer conference) and left these two European companies with pretty much nothing at all.

To make a long story short, these two companies were working with Chinese companies to produce IoT devices and both companies eventually succeeded with their products. Sort of. The problem is that when they wrapped up development on the IoT products, the Chinese companies with which they were working essentially told them “adios” and left these two European companies with pretty much nothing at all.

I am going to digress a bit here, so please bear with me. One of my favorite poems is called “beware:” do not read this poem, by Ishmael Reed and that poem nicely encapsulates what happened with these two European companies. Here is that poem and below that, I explain the connections. Enjoy.

tonite, thriller was
abt an ol woman , so vain she
surrounded herself w/
many mirrors
it got so bad that finally she
locked herself indoors & her
whole life became the
mirrors
one day the villagers broke
into her house , but she was too
swift for them . she disappeared
into a mirror
each tenant who bought the house
after that , lost a loved one to
the ol woman in the mirror :
first a little girl
then a young woman
then the young woman/s husband
the hunger of this poem is legendary
it has taken in many victims
back off from this poem
it has drawn in yr feet
back off from this poem
it has drawn in yr legs
back off from this poem
it is a greedy mirror
you are into the poem . from
the waist down
nobody can hear you can they ?
this poem has had you up to here
belch
this poem aint got no manners
you cant call out frm this poem
relax now & go w/ this poem
move & roll on to this poem
do not resist this poem
this poem has yr eyes
this poem has his head
this poem has his arms
this poem has his fingers
this poem has his fingertips
this poem is the reader & the
reader this poem
statistic : the us bureau of missing persons re-
ports that in 1968 over 100,000 people
disappeared leaving no solid clues
nor trace     only
a space     in the lives of their friends
I cite to this poem because I am desperate to get people to stop essentially losing their companies to their Chinese counterparts and I figure listing out a full poem and then analyzing it will help people remember. I will admit to being desperate here and just plain tired of having to pass on horrible news to what once were up-and-coming start-up companies.
Just as the woman in the poem gets so enamored with herself that she loses her existence, these two companies became so enamored with their technology and their work on their technology, they too lost their existence. The woman was swallowed by the poem and the European companies were swallowed by the Chinese companies with which they worked. Neither the woman nor the European companies really think about what they are doing until it is too late. Not until the Chinese company had taken
the European companies figurative head, arms, fingers, and fingertips did it think about what it had done, but by that point they had essentially ceased to exist.
The final paragraph of the poem describes what happens every day to tech companies that go into China unprepared and all willy-nilly. Their attempts to fuel their dreams destroy their reality. They disappear, “leaving no solid clues nor trace only a space in the lives of their friends.”
Let us now return to the facts and discuss some relatively easy solutions.
Both these European companies had what they saw as great ideas and they both started working with Chinese companies to realize those ideas. One company worked with its Chinese “partner” for more than a year. The other for about a year. Both companies seem to be (have been?) made up of 2-4 people who had dedicated the last year or so of their lives to getting their devices off the ground and to market. Yet right before their products became ready to launch, their Chinese factories jettisoned them and chose to go it alone with the European companies’ devices.
The European companies wanted to know whether the China lawyers at my firm could help. I told them that was “both doubtful AND expensive.”

Technology companies dealing with China tend to make more and bigger mistakes than companies in other industries. The ethos of tech companies is to focus on building things (be it software or hardware or some combination of both) as quickly as possible, and not worry much about anything else. In an effort to preserve oftentimes limited funds, tech companies tend to be reluctant to spend money on anything (including legal fees) that does not directly help them develop their product and get it to market. I completely understand this, including how this usually makes sense when operating purely domestically in the United States and in Europe. But this way of doing business can and too often is disastrous when dealing with China, where it is usually impossible to “fill in” a legal foundation later.

Internet of Things companies are the new poster children for how to operate incorrectly when doing business with China.

I say this with regret because our China attorneys LOVE Internet of Things companies. We love IoT companies because we so often love and use their products and because the work we do for them is typically so cutting-edge and interesting. IoT companies looking to manufacture in China often require assistance with the following:

If you need more proof on how much our China lawyers love IoT companies, check out China and the Internet of Things: A Love Story. The best thing (for us anyway) is that just about all IoT products are being made in China — more particularly, in Shenzhen.

But back to the sad part. What is so terrible is that IoT companies seem to relinquish their intellectual property to Chinese companies more often, more wantonly, and more destructively than companies in any other industry I (or any of my firm’s other China lawyers) have seen. Ever, and by a stunningly wide margin. And the thing is, it is not as though these are big companies with a whole host of other products or IP they can turn to in a storm. No. Most of these IoT companies shrivel up and die after their IP goes “poof” in China.

In describing IoT companies and their problems to others, The following interaction, taken from at least a half-dozen real-life examples in just the last few months (and the last few months before that and the last few months before that and the last few….) should be at least somewhat instructive:

IoT Company: We just completed our Kickstarter (sometimes Indiegogo) campaign and we totally killed it and so now we are ready to get serious about protecting our IP in China.

One of our China Lawyers: Great. Where are you right now with China?

IoT Company: We have been working with a great company in Shenzhen. Together we are working on wrapping up the product and it should be ready in a few months.

China Lawyer: Okay. Do you have any sort of agreement with this Chinese company regarding your IP or production costs or anything else?

IoT Company: We have an MOU (Memorandum of Understanding) that talks about how we will cooperate. They’ve really been great. They told us they would enter into a contract with us whenever we are ready.

China Lawyer: Can you please send us the MOU? Have you talked about what your contract with the Chinese company will actually say?

IoT Company: Sure, we can send the MOU. It’s one page. We haven’t really talked much about the contract beyond the obvious and what we need to do to get the product completed.

China Lawyer: Okay, we will look at your MOU and then get back to you with our thoughts.

Then, a few days later a conversation like the following ensues:

China Lawyer: We looked at your “MOU” and we think there is a good chance a Chinese court would view that MOU as a contract. For why we say this, check out Beware Of Being Burned By The China MOU/LOI. And the Chinese language portion of the MOU (which is all a Chinese court will consider) is different from the English language portion. The Chinese language portion says that any IP the two of you develop (the IoT company and the Chinese manufacturer) belongs to the Chinese company. So as things now stand, there is a good chance the Chinese company owns your IP, at least in China. Therefore, there is no point in our writing a Product Development Agreement because your Chinese manufacturer will almost certainly not sign that.

IoT Company: I’m not worried. I think you have it wrong. I’m sure they will sign such an agreement because we orally agreed on this before we even started the project. (We get some sort of variation on this response at least 90 percent of the time).

China Lawyer: That’s fine, but I still think it makes sense for you to first make sure the Chinese company will sign a new contract making clear the IP associated with your product belongs to you, because if they won’t sign something saying that, there is no point in our drafting such a contract and, most importantly, there is no point in your paying us to do so.

So far not a single such IoT company has come back to us saying their Chinese manufacturer will sign such an agreement. Not one.

The situation with the two European companies has also become par for the course. In this situation, the IoT company is farther along in its product development and actually ready to sell what it perceives to be its product. This situation is exemplified by the email below, which is an amalgamation of various emails received by my firm’s China attorneys:I am hoping your firm can help us figure out the best course of action going forward. [A description of their company and their IoT product then follows, along with how they ended up going with a particular Chinese manufacturer and why they failed to seek out the advice of a China lawyer until now. This description too often involves their domestic attorney having said he or she would turn them over to a “China specialist” as soon as that “becomes necessary.”]

I am hoping your firm can help us figure out the best course of action going forward. [A description of their company and their IoT product then follows, along with how they ended up going with a particular Chinese manufacturer and why they failed to seek out the advice of a China lawyer until now. This description too often involves their domestic attorney having said he or she would turn them over to a “China specialist” as soon as that “becomes necessary.”]

We do not have any contracts in place with our current manufacturer. We started our relationship with our current manufacturer a year ago. He told us that POs are contracts in China and our lawyer confirmed that. We sent our Chinese contract our design and we paid for the molds and he shipped us the products. We recently learned that he has been using our product pictures as marketing material on Alibaba and selling our products all over the world. I also just learned that he has filed for a design patent for our design in China.

When I confronted him about this he basically admitted to everything but essentially said he had no intention of changing and if we go to a new factory to try to make our product, he will shut that down.

We’re filing design patents in the US. If we continue to work with him during this period, which agreement would help us get the best protection?

Since he already claimed our designs in China, will that prevent us from working with a new manufacturer? Do you advise we work with a new manufacturer at this point?

Our response is usually something like the following:

A PO is not really a contract in China; it is the placing of an order. Unless your PO speaks to IP (which would be unusual), it probably will not help us much. On top of this, some Chinese courts do not see POs as a contract at all and some Chinese courts will not even look at a document not in Chinese. The ideal is a Chinese language contract sealed by the Chinese company.

Our biggest concern is that this manufacturer has filed for a design patent for your product. This will no doubt pose problems for you and for any new Chinese manufacturer you might seek to use. Depending on how far along your present manufacturer is in the patent process, it may be able to sue you and your Chinese manufacturer for patent infringement damages and to force production of your product to cease. At a minimum, your Chinese manufacturer will be able to cause you all sorts of problems unless you can stop or invalidate his design patent. There is a good chance this Chinese manufacturer “owns” your product in China and it can use that ownership to control what you do there.

If you seek to go to a new manufacturer you can be pretty sure your old manufacturer will NOT give you the molds you think you bought from it and it will use its design patent to try to block your products from leaving China. It also very well may sue you for patent infringement in a Chinese court. In the meantime, making your product in China will be a high-risk proposition.

Did you register your company or brand name or logo as China trademarks? If not, there is a good chance your Chinese manufacturer registered those as well, but for various reasons under the name of what appears to be an unrelated company. If it did that, it will probably be able to stop anyone from making your products in China with “your” company, brand name or logo on them or on its packaging. No matter what else you do, you should consider retaining us right away to see whether it is not too late for us to secure key China trademarks for you. I urge you to read this on China trademarks.

We usually (but certainly not always!) end up advising these IoT companies to seek to do some combination of the following, none of which are great ways to go and some of which do not work at all for some companies:

  1. Leave China entirely and start manufacturing in some other country.
  2. Seek to block or invalidate the Chinese manufacturer’s design patent.
  3. Try to strike some sort of deal with the Chinese manufacturer whereby the Chinese manufacturer assigns the patent(s) and trademarks to our client who in return agrees to keep using that Chinese manufacturer to make x amount of product for x number of years.
  4. Try to get the Chinese manufacturer to sign a contract that makes clear what IP belongs to our client and makes clear the Chinese manufacturer’s limitations on using our client’s IP. We typically do this with a China-centric OEM Agreement.
  5. Go to a new manufacturer in China. If you do this, you almost certainly will not have your molds and there is a good chance your existing manufacturer will cause you a lot of trouble by suing or threatening the new manufacturer.

Don’t let the above happen to you. For more on how you can prevent this, you should, at a minimum, read and heed China NNN Agreements and China Product Development Agreements. NOW!

 

How to stop counterfeit products from China
Wall out counterfeits of your products

When American and European and Australian companies would come to my law firm for China trademarks to protect their brand names from Chinese copycats, we would tell them that applying for such a trademark would take about a week, but actually getting that trademark could take more than a year. We would then say that until they actually get their Chinese trademark we would be pretty much powerless to stop companies in China from using their brand name. Most didn’t bat an eye at this

E-commerce has changed that, such that now when one of our China trademark lawyers tells a client that securing their China trademark will take a year, those who are selling their product online (which these days is almost everybody) push back and want to know what to do in the meantime to protect against copycats.

Our response, simplified a bit, is to say that they need to focus on “building IP walls outside China.” So for example, if they are selling their product in the United States and in Spain (where I am right now, having just attended a conference put on by our Barcelona lawyers) they should focus on protecting those two countries. The way to do this is to, among other things, secure trademarks in those two countries as quickly as possible.

Though a U.S. and a Spain trademark will not, technically, do a thing in terms of trademark protection in China, it can still be valuable in getting offending ads taken down off Chinese websites such as Alibaba. If “your” product shows up on Alibaba and you have no registered IP, the odds of your getting Alibaba to take it down from an Alibaba website are slim. If your product shows up on Alibaba and you have a registered Chinese trademark that is being infringed by something on an Alibaba website, the odds of your getting that offending ad taken down from Alibaba are good. If you have a Spain trademark and there is an ad on Alibaba clearly targeted at Spain that infringes on your Spain trademark, your odds of getting that ad taken down from Alibaba are not bad, which is a whole lot better odds than if you did not have the Spain trademark at all. The same holds true for the United States.

Of equal importance though is that if you have a United States trademark on your product you can use that trademark to try to keep the offending product from China from reaching the United States. You can do this by working with US Customs and Border Protection, which is authorized to block, detain and seize incoming products that violate U.S. intellectual property rights. The EU and Spain have similar procedures.

One of the best ways to get US Customs on your side to block incoming infringing goods is to secure a registered US trademark and then record that trademark with US Customs and Border Protection. If you record your trademark with US Customs, it will go into its database and if US Customs spots incoming product that infringes on a trademark in its database, it will usually not allow the offending product to go through customs and it will alert you to its arrival. The notice to you from US customs will usually include the names and addresses of the manufacturer, exporter and importer.

And all this for the low low cost of around $200. Once you get your China trademark, you should consider registering that with China Customs to get that government agency working for you on the China side to help prevent infringing product from leaving China in the first place. See How To Register Your China Trademark With China Customs.

For effective IP protection, think 360°.

China factory visits/China lawyers
China factory visits. Get on that plane

One of the things our China lawyers are always telling our clients is that they should visit their China factories. Such a trip is critical for the following four reasons:

  1. Visiting your China factory emphasizes that you care. Why should your China factory care if it doesn’t believe you care?
  2. Visiting your China factory makes you a human being and not just a purchase order. This decreases your chances of getting bad quality products.
  3. Visiting your China factory is a great opportunity to see product quality (or a lack thereof) and to work on product quality.
  4. I guarantee the value of what you learn from such a trip will exceed the cost of taking it.

I believe — based strictly on feel and not hard evidence, and without doing any accounting for other variables — that foreign companies that visit their China factories have 90% fewer factory problems than those that don’t. Now before you challenge this, note that we as China attorneys do not make a penny more from our clients that make these visits. In fact, we make less, and yet here we are making clear how important this is.

I have had countless clients go on and on about how much they learned from visiting their China factories, but nobody has ever told me they regretted having made such a visit — not even those who left China convinced they needed to cut ties with their existing factory.

But what should you do on such a visit? My answer is that above all else you should spend time getting to know your Chinese counterparts as this is what will help you down the road. But this is also a great opportunity for you to see what your China factory can do. Can it make your next generation widget, or should you be looking elsewhere? Does your China factory look efficient, or does it look like it has almost no clue? Does it look and feel financially healthy or should you be concerned about your next order?

For a whole host of specific questions that may make sense for your business, I urge you to check out the following:

What do you find most important about your China factory visits?