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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 Manufacturing Agreements
China Manufacturing Agreement Questions

Our China lawyers are always working on some China manufacturing matter or another. Those matters typically involve what I internally call the manufacturing trifecta: China NNN Agreement, China Manufacturing Agreement, and China Trademark.

For each of these matters (and for just about anything we do), the first thing we try to do is to get a general sense of the client and the project. We typically achieve this by starting out with a broad set of questions that are loosely tailored to the client and the client’s project, with very few assumptions by us.

Once we receive and analyze the client’s answers to our broad questions, we then come back with a set of hyper-focused questions, the answers to which should allow us to start drafting the contract or filing the trademark. The below is a slightly revised email that went out this week to a client regarding its China Manufacturing Agreement. I am running it here because it nicely highlights some of the basic issues that go into manufacturing in China and, correspondingly, some of the basic issues that go into drafting a China Manufacturing Agreement.

To get started, please provide the following basic information:

Please provide a basic statement in reasonable detail regarding your plan for your manufacturing project in China. This statement should include at least the following:
a. What is the product or products? How will you provide specifications for this product or products? I note that your company sells a large number of products. Which of these, in general terms, will be made in China?
b. Who will be manufacturing this product or products? What is the current status of your relations with your Chinese manufacturers?
c. What quantities per year will you be buying of this product or products?
d. Will you be using one factory or several factories?
e. Do you design the product or products, or do you brand Chinese designed product, or do you do both?
f. Who is responsible for production design? Who will own the result of that design process?
g. How do you plan to monitor the manufacturing process?
h. What entities will be the retail customers for the product or products? Will you sell a) to distributors, b) to retailers, c) direct to the public? Or some combination of these?
i. What are the pricing and payment and shipment terms?
j. How do you deal with basic business terms: price, quantity, delivery dates and similar?
k. What registered IP do you have that is embodied in the product or products? Where is such IP registered? IP means patents, trademarks, copyrights, and trade secrets.
l. Do you make use of molds, jigs or other tooling in the manufacturing process? If yes, what is your current procedure for dealing with such items?
m. What are your specific business concerns related to manufacturing in China?
After I get your responses to these questions, I will then provide you with a more focused set of questions.
Sinosure, Leviton Law Firm, Brown & Joseph
Sinosure wants you

Sinosure and its US collection companies and law firms (mostly through Brown & Joseph and the Leviton Law Firm) seem to be stepping up their collection efforts against American companies that allegedly owe money to their Chinese suppliers.

First a bit of background on the Sinosure players that my firm’s international litigators see showing up again and again. I am providing this to give you background on how Sinosure typically handles its U.S. collection claims and on the people with whom you will likely need to deal.

The first to appear on behalf of Sinosure is usually an Illinois based company, Brown & Joseph. Brown & Joseph calls itself “a commercial and credit collection firm” and our clients pursued by Sinosure usually get an email from Brown & Joseph stating something like the following (I changed the company name and the amount to remove any identifiers:

Please allow this correspondence to serve as notice that this firm has been retained by China Export & Credit Insurance Corporation (Sinosure) on behalf of their policy holder Dongguan ________Sewing Machine, Ltd.

All further communications regarding this matter should be directed to my office.

The claimed amount of default is $345,862.23 in which the policy holder has now filed for credit insurance due to nonpayment.

Your immediate cooperation is needed to resolve this issue out of litigation. Pursuant to the attached Trust Deeds all rights have been assigned to Sinosure to collect this on their behalf.

Your failure to cooperate may result in future import and credit implications of goods from the People [sic] Republic of China.

With that being said, please review the attachments and acknowledge the invoices and amount owed of $345,862.23 for verification purposes.

In addition, I will anticipate your payment in full via wire directly to our firms [sic] escrow account. The wiring instructions are listed below. Please email me with the wire confirmation number and upon receipt I will confirm closure of this case.

Domestic Wire Transfer:

Routing Bank: First Bank & Trust, Evanston IL

ABA: 071925538

Account #: 4084168

Beneficiary: Brown and Joseph, LTD

If you are unable to remit payment in full, you will be required to contact me directly before the end of business tomorrow to discuss a reasonable payment plan for our client to review.

I look forward to your immediate response as I only have a limited time to resolve this file in my office prior to litigation.

This letter threatens both litigation against the U.S. company that allegedly owes money to a Chinese company and it also threatens to impact the U.S. company’s “future import and credit implications of goods from the People [sic] Republic of China.” I am not sure whether the threat to future imports and credit from China is deliberately unclear, but what Brown & Joseph seems to be saying here is that if you do not pay, Sinosure will cease providing insurance on your credit purchases from your Chinese suppliers. U.S. companies that buy products from China on credit need to take this threat very seriously.

Don Leviton seems to be the head attorney on Sinosure’s U.S. matters. Mr. Leviton’s Linkedin profile lists him as “counsel” to Brown & Joseph and also as a Principal at Atlas & Leviton. Here is Don Leviton’s profile on Brown & Joseph. Donald Leviton’s Avvo page lists him as a lawyer at the Leviton Law Firm in Hoffman Estates, Illinois. Here is what appears to be the Leviton Law Firm Website, but because it does not list any contact information nor any attorney names, it is possible this is not Donald Leviton’s law firm or that it was and no longer is. The Leviton Law Firm has this to say about commercial collections:

While not always possible, it was our philosophy and goal to negotiate amicable settlements and workouts between our clients and debtors in order that the parties may attempt to continue their business relationships in this very challenging economic environment.

Note how it says “it was” their philosophy. It’s not clear whether putting this in past tense is a typo, bad grammar, or if indeed its philosophy has changed. But I can tell you that from my firm’s dealings with Sinosure (when represented by Don Leviton or Leviton Law Firm or Brown & Joseph), I would use words like “relentless” or “unyielding” or even “tone deaf” to describe the philosophy of those who are tasked to collect a debt on behalf of Sinosure. I mention resolute and unyielding because it is difficult to impossible to get any monetary compromise and “tone deaf” because it is not uncommon for Sinosure to seek from foreign companies more than they appear to actually owe and then still not back down at all on the amount.

Elizabeth Dawson, who appears to be a Senior Account Executive, International Claims and Litigation, for Brown & Joseph seems often to be the first point of contact on a Sinosure collection matter. It is not clear whether Ms. Dawson is an attorney but I could not find an Elizabeth Dawson on Illinois’s roll of attorneys. Our clients pursued by Sinosure have also dealt with Michael Jones from Brown & Joseph, who also may or may not be an attorney. I cannot find information about Michael Jones online and so it is possible Michael Jones no longer works for Brown & Joseph and no longer represents Sinosure.

Brown & Joseph also seems to describe itself as a law firm and boasts of its international debt collection prowess and of its China expertise:

U.S.-Based Collection Law Firm.

Brown & Joseph, Ltd. is the leader in North American debt recovery for Chinese manufacturers who export goods all over the world. After 15 years of international recovery experience successfully handling cases for the groups that oversee credit insurance on exports, Brown & Joseph can offer significant resources that help to locate shipments, resolve disputes and gain immediate settlements, overcome language and cultural barriers, and recover money owed.

Our U.S. based firm has worked with many leading global trade credit insurers to reduce write-offs, protect their interests by legally securing debt in the local domicile, all while keeping your out of pocket costs minimal by working on a contingency basis. If there is no money recovered that is owed to you, there is no fee. Our contingency based fees for our recovery services (no success-no charge) apply the same to accounts whether the debtor company is foreign or domestic.

The #1 International Debt Recovery Agency in China

Over the past 11 years Brown & Joseph has come to be recognized as the #1 most effective collection firm recovering from U.S. businesses that owe international credit grantors….

Between China and the U.S., much like between any two countries, if you are not able to efficiently bridge [sic] gap between language and cultural barriers you will not succeed.  Brown & Joseph has succeeded. We currently have lawyers in both the U.S. and China and unlike most law firms, we perform all of our services on a results oriented contingency basis. We are only paid when we collect.

Am I the only one who finds it ironic that in the very sentence in which Brown & Joseph brags about being a bridge between language and cultural barriers it makes an obvious linguistic error?

So though should you do if Sinosure, Brown & Joseph, the Leviton Law Firm, Don Leviton, Michael Jones, Elizabeth Dawson — or, more likely some combination of these companies and people — are knocking at your door? There are many strategies you can employ but we are reluctant to reveal them online because we do not want to tip off the “enemy” to how we combat them.

I can though tell you that the first thing you should do is to make sure your intellectual property is in order in China, especially your trademarks. If Sinosure/Brown & Joseph/Leviton Law Firm/Donald Leviton/Michael Jones/Elizabeth Dawson are on your tail it is because a Chinese company is contending you owe it money. That Chinese factory is unhappy about not getting paid and one of the things it can (and often does) do to gain leverage against you is to register your brand name as its own trademark in China. If it does this, it will own “your” brand name as a trademark in China and this will allow it to stop your products from being made in China with your name on them and to stop products with your name on them from leaving China. See 8 Reasons to Register your Trademark in China. This sort of trademark usurping became so common in China it is now technically forbidden. Your factory company cannot register or hold your brand name as its own trademark. However, because pretty much every company in China is now aware of this prohibition, they also know exactly how to get around it. If you owe $345,000 to a factory in Dongguan, it will not register your brand name as its own Chinese trademark; instead, the owner of the Dongguan factory will get his cousin in Shenzhen to register your brand name as his company’s trademark, making it difficult to impossible for you to challenge it.

The best tactic is to register your brand names in China as a trademark NOW. See China: Do Just ONE Thing: Register Your Trademarks. And by now, I mean before Brown & Joseph or Leviton Law Firm demanding you pay Sinosure money you allegedly owe. But if you are too late for that and already in trouble with a Chinese company, if you act really quickly you may be able to preserve your name in China, but you need to be really careful. If your company is alleged to owe a factory company in Dongguan $345,000 and you have a trademark (or even a copyright or a patent) in China, those assets are sitting right there in China for seizure by whomever you owe the money. If a Chinese court enters a judgment against your company whatever China IP you have registered in your company’s name will be sitting right there in China available for seizure as payment of the judgment. What can you do to avoid this problem?

We have seen companies set up multiple companies with one of its companies buying products from China and another company owning its China trademarks. This can provide protection before you have a Sinosure debt collection, but if you are in the midst of such a problem the solutions get considerably more complicated.

The best protections against Sinosure are best enacted before you have a Sinosure problem. There are protections and defenses against Sinosure after it seeks to collect from you, but we cannot reveal those here because we do not want Sinosure and its minions to know what those are.

For more on dealing with Sinosure and China manufacturing disputes, check out China Sinosure: What You NEED to Know.

China contract templates for $99
China Contract Templates. Not Gonna Do It.

Now that I have your attention.

Neither our law firm nor any good law firm of which I am aware ever sells China contract templates. There are many reasons for this but foremost is usually that templates virtually never work for China and they often can be more harmful than having no contract at all.

And yet, our China lawyers are constantly getting asked for “templates” for even relatively complicated China deals. We have been asked for joint venture template agreements and our response to that is how can we even provide you with such a template unless and until you know what the terms of that agreement will be? I mean, we have done joint venture agreements where our client has contributed twenty million dollars to the joint venture and all they really wanted out of it is guaranteed product pricing for the next 15 years and we have done joint venture deals where our client has provided no money — just technology and equipment and in return gets 60 percent ownership of the joint venture and control over just about everything it does. Do you really think we have a template that covers every contingency?

Your lawyer’s value is oftentimes more in figuring out what a contract should say than in actually drafting it and the former usually takes as much or more time than the latter. Our China Manufacturing Agreements and our China Licensing Agreements are a great example of this and we get the “template question” a lot on both of these. We are also often asked by potential and actual clients whether it would save them money to have their in-house lawyer or their less-expensive local domestic lawyer draft such an agreement first and then have my firm’s China lawyers use that draft contract as our template. My answer to that question is usually something like the following:

We have drafted hundreds of China licensing agreements and manufacturing agreements and we don’t use any of them as a “template.” What we do is to first gather up the facts from our clients and figure out which of our many contracts — if any — we should use as a model in creating what will essentially be a new contract for you. Most of the time we end up pulling sections from multiple contracts for a new, highly customized contract. Our agreements have been specifically drafted for use in China and that means they are dual-language agreements with Chinese as the official language. We usually (but NOT always) draft them under Chinese law and we make sure to draft every provision to benefit you as a foreign company that is licensing its products or services in China or having its products manufactured in China. Our existing contracts are as close to ready as you can find and it, therefore, does not make sense for you to pay another lawyer who knows nothing about Chinese law to create a brand new English language contract which will not make sense for China. Not only would the money you pay that lawyer go to waste, but my law firm’s fees would increase because instead of our starting with our own Chinese and English contracts as models, we would be starting with an English language contract that will not be close to what makes sense for what you are looking to do in China. We would have to revise nearly every provision in the contract you give us to make it China-appropriate and it would likely take us twice as much time to do that than for us to just use our own previously drafted contracts as the foundation for yours. It is not helpful to us to have a common law contract [China is a civil law system] based on a highly idealized and impractical American/European practice that has no applicability or use in China.

China employment documents provide another good example of where templates fall short. We are often asked to draft China employment contracts for China WFOEs and China Joint Ventures. Our first response is to ask the potential client whether their Chinese entity already has a set of Rules and Regulations (sometimes called employer manual or employee handbook). If the answer to that question is yes, our lawyers will use those Rules to determine what should go into the employment contracts.

If the client does not have any Rules and Regulations our response is to say that we cannot draft the employment contracts standing alone; we need to draft both the employment contracts and a set of Rules and Regulations (and sometimes more). Our reasoning on this is three-fold. One, nearly all locales in China now require employers to have Rules and Regulations, especially those locales with more than a handful of foreign companies. Two, having an employment contract without any Rules and Regulations is like having a car without an engine; it just doesn’t work. Without such Rules and Regulations you can not discipline or terminate your employees and you are at great risk of your employment policies and decisions being fodder for employee-employer disputes. The third reason is both more personal and selfish: we do not want our law firm’s name associated with an imminent disaster. This third reason is also why good law firms do not sell templates.

After we explain the need for Employer Rules and Regulations, the client will sometimes request that we just use our “model Rules and  Regulations to keep costs down.” Again, we have to explain to them why we have no such model and why such a model can never work. Our typical response is something like the following:

Your Employer Rules and Regulations need to match what you are doing in China and where you are doing it. This means that for us to provide you with Rules and Regulations that will work we must gather up all sorts of facts before we can even start. If you are a factory in Qingdao, we cannot even use the Rules and Regulations we did for an accounting firm in Qingdao two months ago? Nor can we use the Rules and Regulations we did for a factory in Suzhou three months before. We cannot even use the Rules and Regulations we did for a factory in Yantai six days ago because even though Yantai and Qingdao are in the same province, their employment laws and practices do not align. And that factory in Yantai was really tough on its employees and I understand that it is important to you to be viewed as a great employer.

A China employer’s Rules and Regulations vary depending on the type of company, the type of employees, the goals of the company, and, most importantly, its location. Just by way of an example, the overtime rules are going to vary greatly for a CEO as compared to factory workers and those rules are also going to vary greatly as between Chengdu and Suzhou. We have many Rules and Regulations serve as appropriate starting points (usually in combination) but before we have any idea which of our many existing Rules and Regulations we can use to save time in drafting yours, we first need to know a lot more about you. We also must always make sure everything in the Rules and Regulations we provide to you is up to date and since the relevant laws and regulations constantly change in China, this itself is never automatic. After we have done all this we can start drafting your customized Rules and Regulations in both English and Chinese.

Oh, and one more thing. It is critical that both the English and the Chinese be well-written and clear because both languages will be important down the road. The Chinese is important because that is the official language and the language on which the courts and administrative bodies will rely. The English is also important, however, because your HR people will likely be using the English language portion in making their employee decisions.

I recently explained to an incredibly insistent emailer why we would not sell him any of our existing China contracts for him to use as a template:

We have never sold a China contract as a template and we never will. First off, it would be a huge disservice to you because we have literally hundreds of contracts for everything we do and unless you were to first retain us as your lawyers, we would not have any basis for determining which of these contracts makes sense for you even as a starting point. Our making that determination is itself providing you with legal advice and to do that we would first need to run a conflict check and then onboard you as a client and then work with you in determining the appropriate model contract. And here’s another thing: around half the time when a company thinks it needs a particular contract for what it is doing in China, it actually needs an entirely different one, and we only discover that after gathering up all the relevant facts. So take your case. You say that you need a distribution agreement but what you may actually need is a reseller agreement. And for us to even know that, we need a lot more information.

Second, whichever of our contracts we end up giving you will not be right for what you are doing and whatever changes you make to it will only make it even less right. There is a lot more to doing a deal with a Chinese company than simply sending it a contract and getting it to sign it. You first need to do at least basic due diligence to make sure the company you have been negotiating with is the same company signing your agreement and to make sure you have the company’s name and address correctly. This is often far more complicated than people think. At least 30 percent of the time the contracting party is actually a Hong Kong or a Taiwan entity and in those cases, a PRC contract does not even make sense. I am not going to sell you a contract that has a 30% chance of being for the wrong country! At least another 30 percent of the time we find irregularities in the company information and we need to investigate further to clarify. And then there are the times we determine there is actually no company at all and the Chinese “company” was actually a complete fraud. See China Fraud Season Starts Early This Year.

And what will you do when (not if) the Chinese company says it agrees with 12 of the 17 provisions you propose in your contract, but it wants you to make specific changes to the other five? You not only will not know how to make those changes (remember the official version of this contract is in Chinese), you likely also will not know whether it makes legal or even business sense for you to do so. Your changing one “small” provision could even render the entire contract unenforceable.

Just by way of one example: the contract damages provision is a critically important element of nearly all China contracts. It is often the key provision for ensuring that your Chinese counter-party abides by your agreement. See The Effective China Contract: Liquidated Damages for why this is the case. And yet we never know what to fill in as the amount of contract damages until the very last minute because that amount must be determined on a case to case basis, using all sorts of factors in making the determination. How will you fill in that amount when you do not even know the factors to use in determining it? And even if you had a list of those factors how would you know how to apply them? We could spend a few hours trying to teach you the factors and how to apply them, but in the end, your choice of an amount could never be nearly as good as ours because ours is based on decades of experience and thousands of China contracts. See China Contract Damages: More Art Than Science. A bad decision on this alone would weaken or even nullify the value of your even having a contract.

So no, we won’t sell you one of our contracts as some sort of template. The last thing we want is our law firm’s name associated with something we know cannot work.

Another lawyer in my firm once wrote the following email to a client to explain why we could not just pull a template off the shelf for them to give to their in-house counsel to use in drafting the contract needed:

We don’t use “templates” for our agreements. After a lot of analysis, IF we find what the foreign buyer is trying to do fits into a pattern from a previous transaction we have done, we will, of course, use an agreement from a previous transaction as a model for the current transaction. But even in the most basic transactions, what we do is to customize it for the current transaction.

In drafting pretty much any contract for China there are literally dozens of variables that can be combined in a nearly infinite number of configurations. So the final contract from one transaction may have no application to any other transaction. This is why providing a contract from a past transaction will have no benefit to the Western side and would likely only harm it.

And then there is the issue of dealing with the Chinese counter-party’s response. Did the Chinese side change the Chinese and not the English, as they so often do? Did the Chinese side redline in a way that the changes to the Chinese portion are even apparent? More importantly, are the Chinese side’s changes normal technical changes that are part of normal business practice (45 days to deliver a product instead of 30 days) or are their changes destructive to the whole approach, such as: “no, you do not own the technology, we do.” Or, “no, we won’t provide any warranty at all.” Or, “no, we own the molds, not you.” It takes a deep understanding of Chinese law and Chinese business to deal with these sorts things.

In drafting our contracts, we do usually pull some language from other contracts, such as confidential information language. However, the core agreement is almost always unique to the specific client before us and when we do use prior language, we nearly always revise it to customize it for the specific client and the specific transaction.

From having written thousands of China agreements, we know there are certain issues that need to be resolved pretty much every time. So we work with our clients to identify those issues and then we work with them on how they want to deal with those issues and then we put the agreement together to achieve the goals our client has told us it has. Of course, for some of these components, we use as a base some of the language that has worked in the past in China. This is the benefit of working with us: we know what works and we know what fails. But the resulting contract in each case is unique.

So in that sense, there is no template. There is just decades of experience in drafting agreements for doing business in China or for doing business with China. This is why whenever someone asks me to send them a “template” agreement I tell them I cannot because I have no way to know which of the nearly infinite number of alternatives they should follow. How will they pick and choose from a dozen options for a relatively simple provision? What is unique about their situation? Will the most common solution we have used in the past even make sense for them? Does it make sense for their industry? Their business? Their product? Their location? What if the law has changed? What if the law changes two days after we start drafting?

I usually propose to each client three options for every important issue and I usually come up with those three from about a dozen possible. Let’s suppose there are ten important issues in their contract — this is probably a fairly typical number. Each selection of an option affects all of the other options, often in ways we have previously encountered. Before the client answers the questions, we don’t know even what structure to use. After they answer the questions, the agreement that meets all their needs does not exist.

Our approach to China contracts is based on three supports: 1) Decades of China experience, 2) A deep understanding of the Chinese civil law system and the Chinese court system, 3) A deep understanding of how contracts actually work in China. If your in-house lawyer combines all three of these, you do not need us for your contract.

Now you know….

China employment law seminar
Please come to Grace’s talk on Thursday

Our lead China employment lawyer, Grace Yang, will be speaking at a Washington State Bar Association (WSBA) seminar in Seattle this Thursday, December 7. If you are in Seattle and doing business in China or even just thinking about doing business in China, I cannot urge you strongly enough to attend.

The full name of the talk is China’s Employment Law Landscape: What You Need to Know. And trust me when I say there is probably a lot you need to know. I say this because foreign companies doing business in China seem to get employment and labor law issues wrong maybe more than anything else. And, frankly, I don’t blame them. Until Grace joined our law firm, none of our China lawyers would touch most China employment law matters because none believed themselves qualified to do so. We were of the view that only lawyers who focus their practices on China employment and labor law should be touching such matters. The reason for this is simply because China’s employment rules and laws are highly localized and always changing and, most importantly, oftentimes unwritten. The unwritten part means that having a good relationship with the local labor and employment bureaus is absolutely key. See China Employment Law: Local and Not So Simple.

Grace has become our go-to person on everything related to China employment law. She splits her time between Beijing where she grew up and attended Beijing University Law School and Seattle — Grace has her J.D. law degree from the University of Washington. Grace recently wrote and had published (just a couple of months ago) what would best be described as a handbook on China employment law. The book is titled, The China Employment Law Guide: What You Need to Know to Protect Your Company and you can get it in either paperback or in a digital format. I always recommend you get the paperback version because it is the sort of book you want on your shelf for quick access whenever you have a China employment law issue and so you can easily share it among your HR team and your managers. Go here to Amazon to get your own. 

Grace’s talk will go from noon on Thursday until 1:30 p.m. and it will be at 600 Stewart Street, Suite 205 in downtown Seattle. To register in advance, go here, or show up at the event starting at 11:30 a.m. You will get 1.5 hours CLE credit for attending. The WSBA describes Grace’s talk as follows:

China’s employment laws are complicated and highly local. Foreign companies doing business in China face complex China labor and employment issues and questions every day – often without even realizing it. What works in the United States has very little in common with what works in China. Employment compliance has become one of the most important issues foreign companies face in China and it is the rare foreign company that gets it right. Employee disputes are becoming considerably more common and government enforcement is getting significantly more stringent. It virtually always costs less for your company to deal proactively with China employment law issues than to wait to address them only after they have come a dispute. As such, it is imperative that you understand the framework of Chinese employment law and steps you can take to mitigate risk.

At the beginning of this post, I said that if you are doing business in China or thinking of doing business in China you should attend this talk. I am sure this caused at least some of you to think that your attendance is not necessary unless you actually have employees in China. Wrong. As is mentioned in the seminar description in the proceeding paragraph, “foreign companies doing business in China face complex China labor and employment issues….every day — often without realizing it. Pretty much every month for the past five years some foreign company has called one of our China lawyers with an employment problem that arose because they did not realize they had an employee in  China. See Doing Business in China with Deportation or Worse Hanging Over Your Head to see what I am talking about.

More importantly, there has not been a single month in the last five years when some company has not come to us after having made a China employment law mistake. Because there are so many laws and rules (both national and local) and because China so heavily favors employees over foreign employers, the smallest and most technical mistakes can be game changers. Put simply: you have to get China’s employment laws exactly right but very few do.

I recently heard Grace give a similar talk as part of a webinar and it was fantastic (and the reviews from listeners supports me on this) and essential. If you practice labor or employment law, if you are interested in labor or employment law, if you have any interest in China or anything at all to do with China, I urge you to attend. And if you will not be in town — heck, even if you will be in town), I  also urge you to buy the book.

So just sign up here and go. We’ll see you there.

China sourcing agents
Sourcing agent? Yes or no.

As anyone who has ever worked with me knows (and as is true of many lawyers) I am a perfectionist. If a client comes to me for legal help for their China manufacturing, I almost always question them about their potential or actual product supplier(s) and how they found them. I ask these questions because I know from experience how important it is to choose the right manufacturer and I am borderline obsessed with making sure our clients have the right manufacturer for what they will be doing.

My favorite speech is on how to protect your intellectual property from China and I start that speech by talking about how the following three things matter most in this:

  1. Good partner (the Chinese company you choose)
  2. Good contracts with the Chinese company you choose
  3. Good registrations (register your trademarks and your copyrights and your patents in China, when applicable)

If choosing a good Chinese partner is important for protecting your IP, that choice is even more important for ensuring quality product on time.

So we now get to the proverbial question: how do you choose the right Chinese manufacturer? The baseline question then becomes whether you should find that manufacturer yourself or use a third-party sourcing agent to do so. Unfortunately, there is no one answer to this question. About all I can tell you here is that there are many bad sourcing agents and a few great ones and choosing a bad one is virtually always going to be worse than doing it all on your own. So if you do decide you need a sourcing agent, choose a good one.

Today though I am going to pull from an excellent post from the always superb Quality Inspection Blog. The post is aptly named, Sourcing from China 101, Part 1: Do You Need a Sourcing Agent? and if this issue is relevant to your China business, I urge you to go there and read the whole thing.

The post nicely lays out the following four options for companies looking to have their products made in China by a third-party manufacturer:

Options: Sourcing Agent vs. Buy Direct from China

According to the post, 80% of importers go direct and thereby “control the whole process, and avoid paying commissions to any middleman or agent.” It states and I agree that “if you are organized enough to manage suppliers . . . .and if you can satisfy the minimum order quantities (MOQs) of suppliers, this is probably the best option for you.” I would, however, add “knowledgeable enough” to this sentence.

The post then discusses how over 90% of sourcing agents get a hidden commission from the factory and it calls this “normal business” in China and how when things go wrong, sourcing agents “often tend to defend the factory!” I agree with this though the 90 percent figure may be a bit too high. But you get the point. In fact, this post quotes me using that same figure, though I used it more for rhetorical effect than as a hard and fast number:

Dan Harris has a similar view of most agents:

I often describe China sourcing agents with the following: “Ninety percent are crooks or incompetents and most are both of these things. But ten percent are worth more than their weight in gold.”

 

Perhaps most importantly, the post lays out key questions you should ask potential sourcing agents before you engage one:

  • How will they get paid, and by whom?
  • Will you be able to visit the factories before/during production?
  • Can they provide referrals or testimonials from satisfied customers who buy the same type of product as you? Make sure to contact two of them and get confirmations.
  • Do they do quality inspections by themselves? Or do they resort to a specialized third-party? Will you get a report every time?
  • Will you get an update every week on the production status?
  • Can they share their management system with you? You need to make sure they have processes in place. The vast majority of agents don’t follow any established procedures.
  • What guarantee do they offer in case a supplier scams you? If shipments are behind schedule? If you receive junk product in your warehouse?
  • Are they located in the area where your products will be sourced? (Do a quick search on globalsources.com and you will have an idea about the main area for your product category.)
  • If you keep re-ordering the same products from the same sources, will you pay less for the sourcing agent’s services after the first order?

These are all great questions. When our clients ask one of our China lawyers to refer them to “good sourcing agents,” we typically ask them two questions: What is the product for which you will be needing a sourcing agent and how do you want to pay the sourcing agent. Once we have answers to these two questions we can then provide them with a short list of potential sourcing agents.

We ask the first question because a sourcing agent that is great for sourcing clothes is not the right sourcing agent for sourcing medical devices. The good news on this score is that good sourcing agents don’t source products with which they are unfamiliar. So for instance, if we have a client that wants help sourcing an unusual product and we do not know offhand of any sourcing agents involved with that particular product, we will go to the good sourcing agents we do know and ask them for referrals.

We ask the second question because sourcing agents can charge differently and some are less flexible than others. Generally speaking, the more you pay up front, the less you will likely pay in total over time. Some sourcing agents require a large upfront payment to get started and others are willing to work on a percentage basis. Our start-up clients tend to prefer paying a percentage per widget manufactured and our bigger clients tend to prefer paying upfront.

Now you know….

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.