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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 AttorneysBecause of this blog, our China lawyers get a fairly steady stream of China law questions from readers, mostly via emails but occasionally via blog comments as well. If we were to conduct research on all the questions we get asked and then comprehensively answer them, we would become overwhelmed. So what we usually do is provide a super fast general answer and, when it is easy to do so, a link or two to a blog post that may provide some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.

Though China’s economy is — for the most part — doing well these days, competition among factories is intense and we are seeing the divisions between winners and losers accelerating. Well-run factories that actually appreciate good contracts are growing. Poorly run factories which make their razor thin margins by skimping on materials or with tax sleight of hand, seem to be crashing. These crashing companies are dangerous as they are desperate and that leads to frequent problems. This is my somewhat long-handed way of saying that our China lawyers are getting record numbers of emails from disgruntled foreign product buyers, usually asking us to help them recover money they are owed.

In nearly all cases, we have to tell them that we do not believe we can help them and that paying us even to try would be throwing good money after bad. At some point in our email conversations they often ask “what then should we do” and our response is usually the following:

Three things. One, if you are going to continue manufacturing in China, but with someone else, you should not let on that you have a problem with your existing factory. And if you have already told them of your concerns, start downplaying them, and fast. You do not want this factory to start taking measures to make it difficult for you to go to another factory. For more on this, I suggest you read Why Changing China Suppliers Can Be So Risky. Most importantly, if you have not already registered your trademarks in China (and maybe your design patents as well), do so immediately. You do not want your old factory to get those and they often do. See Make China Trademarks a Priority. Two, do NOT go to China to try to resolve your dispute with your existing supplier. For why this is so important, check out China Product Defects, Lawsuits, Hostage Taking and Exit Ban: Please, Please, Please Read This! Three, don’t buy again from China without first conducting at least basic due diligence on your supplier and getting China-specific manufacturing contracts in place. See China Manufacturing Contracts: Not So Simple.

China joint venture lawyers
Smile. The fake China joint venture scam is easily avoided.

Our China lawyers have over the last few months have been getting way more emails and phone calls from foreign companies (U.S. and European) either telling us they’ve been scammed or seeking our assistance in determining whether they are about to get scammed.

Anyway, in recognition of this recent in scamming, I am writing (again) about the sorts of scams we usually see, along with providing tips on how to avoid them. In Part 1, I wrote about the scam of tricking someone to come to China to sign a deal. Part 2 was on the scam of getting money for supplying products and then supplying nothing or, more commonly, something that isn’t even close to what the foreign company bought and paid for. Part 3 was on the switched bank account, which is — by far — the most difficult to avoid scam. Part 4 was on a scam where a Chinese company gets you to provide it work or services (or perhaps even product) in return for stock or stock options that you can never really own because you are a foreigner. Part 5 involved a fairly recent, increasingly common, and highly sophisticated scam whereby a Chinese company claims to be interested in investing in a foreign company but in reality it has that interest only so far as it can use it to steal your IP.

This part 6 post is on what we call the fake China Joint Venture, and it is an oldy but a goody and — dare I say it — one of my favorites. The reason I say it is one of my favorites is because anyone who falls prey to it brings it on themselves, at least in part. Our China lawyers have seen this one quite often and as far as I know, it has always involved an American company, which I fear says something about American naïveté.

This scam is really very simple and it pretty much always goes down the same way. It starts with a Chinese company convincing a foreign company to do a joint venture. The foreign company then contributes something to the joint venture to secure its ownership stake in it. This contribution virtually always consists of money, but it also often involves other assets as well, such as intellectual property, equipment, personnel (usually unpaid) or know-how. The Chinese company says it will handle the setting up of the joint venture and the foreign company readily agrees to this.

But instead of actually setting up a real joint venture with the foreign company having an actual ownership stake in the new company, the Chinese side simply takes the assets from the foreign company and does nothing official towards forming a joint venture. Most of the time the Chinese company never even sends the foreign company any remotely official documents regarding the alleged joint venture, but sometimes it sends fakes. Either way, the end result is that the foreign company believes it to be the part-owner of a China joint venture and it starts acting accordingly.

Usually for years everything is fine, but then the foreign company begins to wonder why it has never received any money whatsoever from the joint venture when it now seems to be doing so well. So they contact their supposed joint venture partner (the Chinese company) and then when they fail to get any answers, they contact a China lawyer to look into bringing a lawsuit. The China lawyer does some quick research (and by quick, I mean really quick) and then realizes there is no joint venture.

In some circumstances it may be possible to sue individuals and companies outside China for fraud but for that to work you need for the foreign country to have subject matter and personal jurisdiction and even if both of these jurisdictions are present, one must still effect service of process under the Hague Convention and, perhaps most importantly, have some means of collecting on any judgment awarded. Foreign courts are not going to be quick to claim jurisdiction over the ownership of a company in China and Chinese courts are certainly not going to be very quick to say that a foreign court has the power to determine ownership of Chinese companies. All this combines to mean that in most instances the duped party has no good recourse.

How do you avoid this scam happening to you? Very very simple. You retain a qualified lawyer early on to make sure a real joint venture gets formed with your company as one of its owners.

China lawyers for China scamsOur China lawyers have over the last few months have been getting way more emails and phone calls from foreign companies (U.S. and European) either telling us they’ve been scammed or seeking our assistance in determining whether they are about to get scammed.

Anyway, in recognition of this recent in scamming, I am going to write (again) about the sorts of scams we usually see, along with providing tips on how to avoid them. This is part 5 of the series. In Part 1, I wrote about the scam of tricking someone to come to China to sign a deal. Part 2 was on the scam of getting money for supplying products and then supplying nothing or, more commonly, something that isn’t even close to what the foreign company bought and paid for. Part 3 was on the switched bank account, which is — by far — the most difficult to avoid scam. Part 4 was on a scam where a Chinese company gets you to provide it work or services (or perhaps even product) in return for stock or stock options that you can never really own because you are a foreigner.

This part 5 involves a fairly recent, increasingly common, and highly sophisticated scam whereby a Chinese company claims to be interested in investing in a foreign company but in reality it has that interest only so far as it can use it to steal your IP.  The Chinese company usually starts out by claiming a strong interest in sending over a lot of money in return for a small ownership interest in your company. Many times, the Chinese company will talk about how its investment is not for short term profits, but to help you do an IPO from which everyone will get rich. This all sounds good, but with this comes usually comes something like the following from the Chinese company:

Our company will become one of the owners of your U.S. entity. And since we will be co-owners of the technology underlying your product, there is no reason for you to protect the technology from us. There is no reason to enter into any sort of confidentiality agreement (like an NDA or an NNN Agreement). We do not want legal or financial hurdles to get in the way of the IPO that will make us all wealthy.

So the foreign company provides its technical information to the Chinese company it now sees as its partner and benefactor. In return, the Chinese company starts using your IP and never funds its alleged investment. And for good measure (and to set itself up for a force majeure defense), the Chinese company will often then blame the Chinese government for its inability to get money out of China to fund the investment.

By using this “fake investment” technique, the Chinese company has legally or quasi-legally acquired the technology while paying little or nothing for it and there is nothing the foreign company can do. And it is true that foreign investment from Chinese companies must be approved by the Chinese government. So what is there to say?

On the software side, we usually see the the Chinese company offer to invest a large sum in the foreign company and as part of its grand plan, it will propose to set up a company in China that will eventually be owned by the foreign company. It will then arrange for the software technology to be released to the Chinese entity without restriction. Why should the foreign company spend time and money licensing its software to this Chinese company that it will eventually own a part of in any event. Oh, and this Chinese company will surely be doing an IPO very soon anyway.

In this scheme, there are various delays in getting approval for both the investment in the foreign company and in providing for foreign ownership in the Chinese entity. After two or three years of delay, and after the Chinese company has extracted all of the technology/information it requires, it apologizes for being unable to secure Chinese government approval to invest in the foreign entity and for not being able to give the foreign company any ownership in the Chinese entity because foreign investment in Chinese domestic companies is pretty much prohibited. See yesterday’s post on the China Stock Option Scam.

The end result is that the Chinese company has acquired the foreign technology virtually free of cost and there is usually nothing the foreign company can do about that.

For another common way in which foreign companies are tricked out of their IP, check out China and The Internet of Things and How to Destroy Your Own Company.


China stock options lawyer
Don’t be tempted by ths China stock option scam

Our China lawyers have over the last few months have been getting way more emails and phone calls from foreign companies (U.S. and European) either telling us they’ve been scammed or seeking our assistance in determining whether they are about to get scammed.

Anyway, in recognition of this recent in scamming, I am going to write (again) about the sorts of scams we usually see, along with providing tips on how to avoid them. This is part 4 of the series. In Part 1, I wrote about the scam of tricking someone to come to China to sign a deal. Part 2 was on the scam of getting money for supplying products and then supplying nothing or, more commonly, something that isn’t even close to what the foreign company bought and paid for. Part 3 was on the switched bank account, which is — by far — the most difficult to avoid scam.

This part 4 is on what our China team calls the China stock option scam — a relatively new, relatively sophisticated scam that has left many tech people and small tech companies in its wake.

This scam starts out with a Chinese company offering stock ownership as an alternative form of payment. The typical scam usually goes like this. The Chinese company — usually in the tech sector — is in desperate need of the expensive skills or knowledge of a foreign person or entity. The Chinese company tells the foreign tech people or entity that it “needs your services but because we are just a start up we will need to pay you in stock instead of cash.”  So, instead of paying cash, the Chinese company offers founders’ stock or employee stock options in their Chinese entity. Just as is the case with Silicon Valley founders stock/stock options, the idea here is that the Chinese entity will go public (“do an IPO”) and the stock it has given out will then provide its recipients with big returns.

Unfortunately, this is nearly impossible because foreigners cannot own stock in Chinese domestic companies not already listed on a stock market. So any such option or stock transfer is void from the start. Foreigners are not permitted to be shareholders of Chinese domestic companies, nor does China recognize the concept of nominee shareholders. Chinese companies will also use this Silicon Valley approach of offering a stock option package as a key benefit in the employment package. By offering stock options, the Chinese company can pay less and secure greater loyalty, while still exploiting the skills and extracting the knowledge of foreign individuals in developing an innovative software or other high tech product.

This exploitation/extraction period typically lasts one to three years, at which point the Chinese company tells the foreign individual, “sorry, the Chinese government has now informed us that we cannot issue stock options to you.” Sometimes, to better hide the scheme, the Chinese company will propose a series of fantasy work arounds, such as elaborate nominee schemes illegal under Chinese law. These proposals often convince the foreign person to waste another year or two with the Chinese company. But, in the end, the result is always the same. The Chinese company defaults on its promise to provide the foreign individual with stock in the company and the foreign individual is left high and dry. Since the founders stock/stock option scheme was void from the start, there is nothing the foreigners can do to enforce their rights in China, since they never had any such rights.

A similar scam is often perpetrated on foreign entities. The foreign entity has a technical service of great value to the Chinese tech company. The Chinese company then says: “We need your services, but we are growing so fast we simply don’t have the ability to pay you in cash for that. However, since we are growing so fast, it is certain we will soon do an IPO on the Shanghai stock exchange. So, instead of paying you in cash, we will agree to pay in you in stock options. Our stock will in the end give you way more money and by working with us, you will gain entry into the lucrative Chinese market and highly profitable work with other Chinese companies will follow.”

This scam results in the same sad result as the employee stock option scam. First, as with employee stock options, a foreigner cannot own stock in the Chinese entity, so the option is void from the start. Second, the private Chinese entity never does an IPO on the Shanghai market, so the whole concept was an illusion. Third, the only thing the foreign entity achieved was to identify itself as an easy mark and there will be no future profitable work available to it in China. Finally, the foreign company does not figure out the scam until after it has already transferred its service or valuable information to the Chinese entity.

There are a couple of elegant variations Chinese entities use to implement the Chinese stock scam. In the rare case where a private Chinese company actually completes an IPO, the listing is on a foreign exchange: usually either Hong Kong or the United States or London, where due to Chinese law requirements the actual listing entity is not the Chinese company for which stock options or stock were purportedly given. Instead, the listing entity is some form of subsidiary or other affiliate of the Chinese company, so that when the IPO does actually take place, the holder of the scam option or stock in the Chinese company can legitimately be told: “your stock option (or stock) is with the Chinese parent company; you do not have an option with the affiliate actually listed. Sorry.”

For all intents and purposes, private companies in China are  locked out of China’s domestic IPO market. See this Wall Street Journal article from yesterday. On the other hand, such companies have become attractive targets for private equity financing. But the story here is the same. The private equity financing occurs in China, resulting in a big payout to existing shareholders of the Chinese entity. The foreign stock option holder looks for an equivalent benefit. The Chinese entity then responds: this was a private equity deal, not an IPO. You did not own any stock at the time of the private financing, so you are not entitled to any benefit.

The way to avoid this scam is easy. Do not accept promises of stock options or stock in a Chinese company in place of employment compensation or payment for services. Any Chinese company that makes the offer of payment in stock is either ignorant of the requirements of Chinese law or intentionally committing fraud. Either way, foreign individuals and companies should refuse to work with a Chinese company in return for stock or stock options.

UPDATE: I got the following email today:

Nice series. There’s a new variation that has been tried on me and that’s blockchain “tokens” in a Chinese company “about to do an ICO” in lieu of cash. Since China takes an incredibly dim view on ICOs as a fund raising mechanism, this is an even more fraught method of “payment” than sham stock options. Of course the answer is “well, we’re doing our ICO outside of China, to which the response is “the company won’t be worth much if you’re in prison, though, will it?”

Good point.

China lawyers China scams
Muster your forces against China scams

We constantly write about this particular China bank scam  because our China lawyers constantly get contacted by smart companies that have fallen victim to it. I personally received two emails in the last month from companies (one that were bilked out of between $63,000 and $155,000.

Last year the Wall Street Journal wrote about how there has been an increase in criminals break into email accounts and change bank-account information to capture payments intended for suppliers:

The increasing prevalence of the schemes has drawn the attention of law enforcement. Attackers who once pretended to be executives directing subordinates to transfer money are using new techniques, including malicious software to break into email systems and redirect the payments, said Rick Alwine, a supervisory special agent with the Federal Bureau of Investigation’s Cyber Division.

And as the Wall Street Journal noted, these bank account scams are increasing and most involve China:

In an analysis of 44 recent fraudulent transfers, 84% of the transfers went to accounts in China and Hong Kong where it is more difficult for victims to recover their money, the FBI alert said. The FBI says it has logged nearly 18,000 reports of business email scams since 2013 accounting for $2.3 billion in losses, and complaints about these scams more than tripled last year, compared with 2014.

The Wall Street Journal describes these scams as follows:

When the buyer sends an order, the scammers step in, ultimately intercepting the seller’s invoice and changing payment instructions before sending it back to the buyer. With the modified invoice, funds are sent to the criminals instead of to the seller.

This scam usually involves your regular Chinese supplier asking you to make a payment or payments to a new bank account, though it sometimes can involve your very first payment to a new Chinese supplier. Then even after you make the payment or payments, your China supplier insists you still owe it the full amount (oftentimes with added fees) because it never received your payment. When you explain to your China supplier that you in fact did pay it, your supplier points out that the bank account to which you sent the funds is not theirs and that you still owe the money.

The Wall Street Journal article then discusses how easy they can be to pull off and how difficult they are to stop, but provides no solutions;

True business email compromise is almost invisible to both victim companies involved in the transaction,” he said. “It’s going to take a lot more effort to stop it than a simple reminder to phone the CEO before wiring money on his behalf.

But there are solutions and they do involve a lot more than reminding your people “to phone the CEO before wiring money on his behalf. We advocate every business do the following to minimize its chances of falling victim to this common scam:

  1. Get to know your suppliers who speak English (if you don’t speak Chinese) and get your supplier’s landline phone numbers as that cannot be hacked. Call if you have any concerns.
  2. Get your supplier’s bank account information in advance and ask them to refer to “bank account information document” on their invoices, rather than listing out full bank details every time.
  3. Check your bank account every day, maybe even twice a day. If you catch a wire early enough you can sometimes stop it.
  4. Do a first small wire to confirm the account.
  5. If possible, paying your Chinese suppliers to their bank accounts in mainland China as that is generally safer than paying them overseas, be it Hong Kong, Taiwan or anywhere else.
  6. Have a special procedure set up with your suppliers for confirming bank account changes .
  7. Have an internal procedure for confirming all payments over a certain amount.
  8. Get an insurance policy that covers computer hacking or fraud and make sure it covers this sort of scam. We actually have had good luck convincing insurance companies that they need to pay off on such policies.

What can you do if you have already been victimized? We do the following when retained by a company victimized by this fraud:

1. We determine whether there are any insurance claims to be made. This is usually your best chance of recovering all your losses, but do not expect your insurance company to pay without a fight. We help by explaining to the insurance company how these scams happen and why you are entitled to coverage under your policy and we get the Chinese supplier to help as well.

2. We try to get some monetary contribution from your Chinese supplier by letting it know that it was (or might have been) their computer system the scammer hacked and therefore it should pay at least some of our client’s loss. Much depends on our client’s relationship with its Chinese supplier and on what the Chinese supplier perceives its future relationship with our client will be.

3. We work with our client to minimize problems with its Chinese supplier and if that relationship needs to be severed, we counsel them on how to do so without creating all sorts of new problems. See Why Changing China Suppliers Can Be So Risky.

4. We seek to determine if there is any chance to recover anything from the perpetrator. This is an expensive and time-consuming process and there must be a lot of money involved for it to make much sense. Nonetheless, we find that our at least having run this option to ground helps immensely in dealing with both the Chinese supplier and with our client’s insurance company, neither of whom want to pay anything until they are convinced that our client has done everything it could do to try to recover from the crooks themselves.

Be careful.

China lawyersPractically every month one of my firm’s China lawyers will get an email or a phone call from someone who bought an expensive chemical from a Chinese company only to receive baking powder. One very savvy chemical industry client once told me that “more than 95% of the China companies selling chemicals online are fraudsters and many of these companies are not really even in China.” I have no doubt that this person was exagerating for effect, but another such person I know insists that the percentage does scrape 50 percent. But all this is old news and if you want to read an in-depth post we did on one particular such scam go to Anatomy Of A China Scam. Just The Facts.

What is also old news is how there is a long history of Chinese fishing companies (much fewer than 95%, that I know) sending over large amounts of spoiled fish and then claiming the fish went bad en route due to no fault of theirs.

But here’s the “new news”: the sending of “junk” instead of real product has spread to pretty much every industry in China and ordering your products from reputable online sites provides little to no protection. Our China attorneys have consistently found that ordering products from a Chinese manufacturer listed on a site that claims to screen its vendors or claims to provide you with recourse provides little to no added protection.

The below email (modified so as not to reveal anyone) is 100% par for this new course:

Hello, Not sure what to do here with my situation, I’m very flustered here. I worked with a reputable company in China to manufacture window awnings [I made this up] on which I have a U.S. patent pending and also have trademarked.  I received samples from them and all was good. I placed an order for 5000 pieces and they are of the wrong material, warped and the sections that are supposed to open freely do not operate correctly because of the wrong material. I spent hundreds of thousands on this order and now they will not get back to me. They told me they were going to rework the products because they knew there was an issue. Now I have all this product that is useless that I cannot sell and I am paying storage on all of it because I am hoping still to be able to return it. I did use ______________ to find them and but it seems they cannot do much to help me. I’m out so much money and yet still trying to get a new product to market but that is proving really difficult because I have been hurt so badly financially. Can you help.

My response to these sort of emails is usually very short and it consists of my explaining that the odds are overwhelming that we cannot help them and that they should think long and hard before throwing good money after bad. I then mention something along the lines of how they should not order from China again without doing a lot of things differently than the first time.

But here I can say a more about why this sort of thing happens and what you can do to prevent it from happening to you.

  • These things happen because the buyer does not conduct due diligence on the seller. It is that simple. I swear, half the time when I get an email like the above and I spend 2 minutes searching out the Chinese company on the internet I find multiple instances of fraud committed by the same Chinese company.
  • Almost always the Chinese company that committed the fraud does not really exist. In other words, it is not registered anywhere in China or if it is registered as a real company in China it is registered for something like plumbing repairs, not for manufacturing window awnings.
  • These fraudsters are smart and there are good reasons why they spend the money to send you something instead of nothing at all and why they at first claim they will remedy the problems and why they so often continue to make that claim. The reasons are usually two-fold. One, sending even really bad product is less likely to lead to criminal charges than sending no product at all. If the police come by the Chinese fraudster can say, “I sent them the product they ordered. It’s not my fault those Americans/Europeans/Australians are so picky.” Two, by stalling they can keep their scam alive for much longer. They’ve paid for advertising and for a website and they’ve even bought the really bad product (be it spoiled fish, baking powder or bottom of the line window awnings) and they want to maximize these expenditures
  • Be careful when establishing business relationships with a new company. Do as much due diligence as you can. Send people you trust to do a site investigation of the manufacturing site.  Do a site inspection on goods before payment. Make sure the company exists and is legally able to conduct the business for which you will be paying it.
  • Use a contract that actually works for China and that sets forth clearly what you are buying and what happens if your China supplier fails to comply. See China Contracts: Make Them Enforceable Or Don’t Bother and China Contracts that Work.
  • Know the market price of whatever it is you are seeking to purchase before you purchase it. Do not trust a company that gives you unreasonably low price quote.
  • Consider a small trial order to reduce your risk. The problem with this though is that many scammers will provide you with a good trial and then scam you when you order the full amount. But if you combine this with a contract that works for China and proof that the company actually exists and is operating legally, you will be lowering your risks.

One more thing that warrants its own special mention. Do not buy product from China without first registering your trademark in China because many of the fraudsters that are sending out bad product are now also registering YOUR brand name and/or product name and/or logo in China as THEIR trademarks in China and then coming back later seeking to sell you these trademarks (for a lot of money) under threat of blocking your products from leaving China for violating THEIR trademarks. See 8 Reasons to Register Your Trademarks in China. We do not have concerte proof that it is the same people both times but it has happened far too often for me to ascribe it to coincidence.

An ounce of prevention is worth a pound of cure.


China scamI do not know why but over the last couple months our China lawyers have seen an absolutely massive increase in emails and phone calls from foreign companies (mostly U.S. but with a much larger percentage of European than in the past) either telling us that they’ve been scammed or seeking our assistance in determining whether they are about to get scammed. And when I say “massive increase,” I mean that our attorneys are seeing probably five to ten times the number we usually see. Does anyone know why this might be the case?

Anyway, in recognition of this recent increase in scamming, I am going to write (again) about the sorts of scams we usually see, along with providing tips on how to avoid them.

I cannot help but start out with what may just be the oldest scams out there and one that is roaring its ugly head with a vengeance again: the “you need to come to China to sign the contract or for a signing ceremony scam.”  This scam has been around forever and yet Western companies still fall for it.

The scam consists of the Chinese company (actually, in every instance when our firm has done any investigation at all we immediately learn there is actually no real Chinese company there) luring the Western company in with promises of big money for services (or sometimes products) to be supplied by the Western company. There is just one small hitch: the Western company must go to China, virtually always to some tiny village in China, (never Beijing or Shanghai or Shenzhen, or even Tianjin or Qingdao) to sign the contract. The last two I saw (both from yesterday) were in villages of 20,000 and 80,000 people.

Why must the Western company go to China to sign a contract when business with Chinese companies constantly gets done without an in-person signing? The following are the reasons usually provided:

  1. Chinese custom. It would be rude if you don’t come. Note that of the thousands of China contracts in which my law firm has been involved, maybe around two percent have involved in-person signings and all (or at least most) of those were because our client finalized the agreement with the Chinese company while it had its personnel already in China, have either been either huge, or have required the foreign company to get to work in China pretty much immediately thereafter or
  2. We need to do this in front of Chinese government officials, for one reason or another. Note that I can recall only two instances where our contracts were signed in front of government officials and those didn’t need to be. They just were because the transactions were so large and so vital to the local economy and doing so was a way of improving government relations going forward.
  3. The contracts need to be notarized by a Chinese notary and for that they need to be signed in front of a Chinese notary. Complete lie.

Why does the Chinese company want the Western company to go to China? How does the Chinese company possible benefit from this? Based on the Western companies that report back to us after they have been scammed, the following are the most common:

  1. Western company personnel will be put up in a local hotel for 4-5 days and the bill will be maybe ten times what it should have been. The hotel and the scammers then split the take. This is not to mention the multiple celebratory banquets that also are grossly over-billed and paid for by the foreign company.
  2. The fake notary charges a percentage of the deal, typically USD$8,000 to $15,000. The Western company believes it must pay this for the deal to go through.
  3. The Western company is subtly told that for the deal to go through, government officials must be paid and it is legal for a foreign company to pay them. Complete lie. If these were really government officials and you do really pay them, you are risking jail time in both China and most likely in your home country as well.
  4. Some third party is necessary for the deal for some reason and the Western company must pay that third party. Really?

For more on this particular scam, check out the following:

How do you prevent this scam from happening to you? Easy. You conduct basic due diligence on the Chinese company before you get on the airplane. Long before. The first thing you do is determine whether your China counter-party even exists as a registered China company or not and if by some small feat it does actually exist, you make sure it can actually conduct the business it is seeking to do with you. And when you discover that it doesn’t, you end all communications.

You have been warned. Again.

More tomorrow….

China trademark and patent registration

The title to this post is a gross oversimplification meant to prove a point or, more accurately, disprove a myth. I cannot tell you how many times I’ve had companies swoon over the idea of spending big money to secure a patent and pooh-pooh my suggestion to spend small money to secure a trademark. Honestly, most of these companies don’t really get it.

Let me explain.

  1. Patents are virtually always expensive to get and virtually always expensive to protect.
  2. Trademarks are virtually always inexpensive to get and a lot of the time inexpensive to protect.

Let me further explain, first with patents:

  1. Securing a patent (other than a design patent) typically costs three to four times what a trademark costs. This is true in China, the United States, Europe, Canada, Mexico, wherever.
  2. If you believe someone is violating your patent and you send them a cease and desist letter to get them to stop doing so, there is a pretty good chance they will claim there is no violation. And after you explain to them why there is a violation, there is still a pretty good chance they will  explain to you why you are wrong. If their orthopedic device is exactly like yours but for some relatively unimportant button somewhere, they will claim that relatively unimportant button is actually important and it means they are not violating your patent.
  3. If you go to the e-commerce sites on which they are selling the orthopedic device that almost certainly does violate your patent and you ask that e-commerce site to take down the infringing product, the odds are good that site will tell you that they are not patent lawyers and you will need a court order or a judgment for them to take it down. This is generally true of tall the leading e-commerce sites around the world.
  4. The above means that if you want to stop your competitor from selling what you see as the infringing orthopedic device you must sue and you likely will need to hire an expensive expert to prove the infringement. Few things in life cost more than patent litigation, and since my law firm does patent litigation, I know whereof I speak on this.

But trademarks are much simpler and much cheaper:

  1. Securing a trademark typically costs 1/3 to 1/4 less to secure than a patent. This is true pretty much everywhere.
  2. If you believe someone is violating your trademark and you send them a cease and desist letter to get them to stop doing so, there is a decent chance they will stop, especially if they are not in the counterfeiting business. If I brand my orthopedic devices “The Harris Special Orthopedic Device” and secure trademarks for that name and someone else uses that very same name, they are going to have a tough time claiming they are not violating my trademarks — assuming I have the registered trademark in the relevant countries.
  3. If you go to the e-commerce sites and request that the product that is violating your trademark be taken down (and it is in fact violating your registered trademark), there is a very good chance it will be taken down. This is generally true of the leading e-commerce sites around the world. Take the “Harris Special Orthopedic Device” as the example. It does NOT take a lawyer to know that if I have the registered trademark in China and the United States for “Harris Special Orthopedic Device” (in the right class), anyone else selling “Harris Special Orthopedic Device” in China or the United States (that did not come from me) is violating my trademark. My law firm’s success rate in taking down offending trademarks is really really high.
  4. And should you choose to sue for a trademark violation, proving the trademark violation is oftentimes relatively easy.

Oh, and one more thing. To grossly generalize. patent protection in China courts tends not to be as strong as in either the United States or Europe. Whereas China trademark protection tends to be surprisingly strong.

There. I’ve said my piece.

Your thoughts?

China AttorneysBecause of this blog, our China lawyers get a fairly steady stream of China law questions from readers, mostly via emails but occasionally via blog comments as well. If we were to conduct research on all the questions we get asked and then comprehensively answer them, we would become overwhelmed. So what we usually do is provide a super fast general answer and, when it is easy to do so, a link or two to a blog post that may provide some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.

Our China attorneys frequently get phone calls and emails from people wanting to know what they should discuss with Chinese manufacturers they are considering for their manufacturing.

In response to this question, I usually send out the below list which succinctly sets forth the bulk of the terms most companies should be concerning themselves with when outsourcing their manufacturing to China. These are the sorts of things that need to  go into your China Manufacturing Agreement.

Not everything on this list will be relevant to your company and obviously some items will be more important to  you than others. This list is in English only and once you have honed it to suit your particular situation, it oftentimes will make  sense for you to put it into Chinese as well, so as to  reduce the likelihood of any misunderstandings. The terms set forth below come from a very lage and very sophisticated  client of ours and they are very much particularized to the particular industry, the particular situation, and the particular company. Your mileage will most definitely vary. My goal in providing this list is more to get you thinking about what’s important for your company than anything  else.

For more on China manufacturing term sheets, check out China OEM Manufacturing Agreements. What Should Go In Your Term Sheet? and China OEM Agreements. Ten Things To Consider.




Very short description of product goes here.

1 year with automatic annual renewal; provided BUYER may terminate without cause on 60 days written notice and SELLER can terminate without cause on 180 days written notice.



Yes, during the term of the agreement, as long as SELLER can meet capacity and quality requirements; provided, BUYER may manufacture its own devices at its own manufacturing facility.



BUYER’s requirements; provided, BUYER supplies a 6-month, non-binding rolling forecast and a 3 month binding forecast.  Forecast will be provided 3rd day of each month.   BUYER willing to agree to a reasonable production cap reflecting anticipated demand.



Must be placed no later than 45 days prior to requested delivery date; SELLER may not reject any order.



First 2 POs, we will pay 30% of purchase price when PO placed and the remaining 70% will be paid 30 days after the shipment received.  Remaining shipments in first  year net 30 days from receipt of invoice.  After first year, net 60 days from receipt of invoice.



FOB Port (Shanghai) to BUYER’s designated marine carrier; risk of loss and title to pass to BUYER upon delivery to carrier.  Time is of the essence.  SELLER responsible for any fines incurred by BUYER from retailers for late delivery caused by SELLER (as long as PO placed sufficiently in advance of required lead time).  SELLER will properly complete all shipping documents and maintain a record of such documents for 3 years after delivery.



SELLER will properly label all shipping documents with the customs classifications codes supplied by BUYER.



To be agreed upon and will be set forth in schedule. SELLER cannot increase pricing without BUYER consent.  All prices stated in US dollars and payments made in US dollars.  Parties will meet and confer every 6 months to review pricing and determine whether price change warranted. 



SELLER will continually endeavor to reduce costs of manufacturing, packaging and shipping to port.  All savings to be split 50/50 between SELLER and BUYER (savings already addressed in development agreement)



All finished products and every individual part used to manufacture or package the products must meet BUYER specifications, which will be attached to and form a portion of the agreement.  If a supplier changes a specification to a commodity or part used to manufacture product, the change must be communicated to and approved in writing by BUYER.



Each and every part used to manufacture, label, or package the products must be approved in writing by BUYER. SELLER may not change a part without BUYER’s written consent.  All materials and parts suppliers must also be approved in writing by BUYER and represent in writing that are in compliance with wage regulations of their jurisdiction of manufacture and that they do not use child, slave or prison labor to make their materials and parts.




Must meet all BUYER requirements (to be supplied by engineering).



BUYER shall provide SELLER with FCPA compliance manual and SELLER shall abide by it.



SELLER will be responsible for ordering all materials and parts and maintaining an adequate inventory to meet forecasted demand.  SELLER will be responsible for all costs of storing and maintaining inventory.  In the event of termination or expiration, BUYER shall pay SELLER for the reasonable wholesale cost of any materials or parts that are custom made or unique to the BUYER products.



SELLER to maintain 30 day supply of each type of product at all times at its cost.  BUYER has no obligation to pay for it until it is delivered to BUYER’s carrier.  BUYER will buy back safety stock remaining within 60 days of expiration or termination of agreement.



Addressed in Development Agreement



BUYER will have the right, no less than twice annually, to conduct unannounced quality assurance inspections of SELLER’s facilities and books and records to ensure compliance with this agreement.



Addressed in Development Agreement.



All parts and finished product shall be warranted free from defects in materials, workmanship and manufacturing for a period of one year from date of manufacture.  BUYER will have option of repair, replacement or refund and can return defective product at any time within 1st year regardless of when discovered by BUYER or its customers.  SELLER responsible for all costs to return defective product to SELLER.



SELLER to indemnify BUYER for:  (1) all actions and omissions of SELLER and Employees; (2) manufacturing and materials defects; (3) BUYER’s breach of agreement, reps and warranties; and (4) damage to Tooling caused by SELLER.



SELLER will maintain a US-based policy of insurance, including CGL, products and completed operations of not less than $1MM per occurrence with an umbrella of not less than $30MM.  Must maintain during agreement and for 10 years thereafter.



Neither party liable for consequential, special or incidental damages or lost profits, or business opportunity.



CONFIDENTIALITY  Subject to NNN Agreement and will tie the OEM to NNN.

Limited to manufacturing only.  SELLER can’t use for own benefit and will inform BUYER if it discovers use of BUYER’s IP by any 3P.  Will reasonably assist BUYER in asserting any rights BUYER may have against such 3P.



SELLER may not assign obligations under agreement (even in connection with change of control) without BUYER consent.  BUYER may freely assign.


LABOR No slave, prison, child labor.  Wages in accordance with all applicable laws.

China lawyers and attorneys
China’s legal system has changed. Get used to it.

BREAKING NEWS: The China of today is different from the China of  1999. Okay, so you knew that, right? Are you sure? Just like you know your 22-year-old kid is now an adult but in your mind is still 14 or 15 years old? Have you really caught up with today’s China or do you at some level still view it as it was one or two decades ago? I ask these questions after reading a China Skinny article, entitled, Why is it Popular? Dolce & Gabbana’s Fail Uncovers Restored Chinese Pride? This article talks about a “recent Dolce & Gabbana ad campaign” that was not taken well by China’s netizens:

China’s netizens took to social media, condemning D&G for its apparent espousal of backward and racist associations with China. The overwhelming sentiment was that the China photographed perpetuated Western viewpoints of an underdeveloped, dirty and inferior land. The people wanted to know: why was their country still represented by tuk-tuk drivers and pudgy, awkward tourists? The photos had gone global, posted on D&G’s western media like Instagram and Facebook, and the people were mad.

The article goes on to explain why China’s citizens were justified in their views regarding the ads, by citing the following:

A short drive from the scene of the Beijing photos could take you to the site of a $2.1b A.I. research park to host 400 businesses and churn out $7.6b in annual output by 2023. The chair of the US Defense Innovation Advisory Board recently spoke plainly on the subject of the rise in China’s A.I. capabilities; “By 2020, they will have caught up. By 2025, they will be better than us. By 2030, they will dominate the industries of A.I.”

Or you could pop down to the Beihang University and its School of Astronautics and discuss China’s plans to have nuclear-powered space shuttles by 2040 which will “colonise the solar system.” These feats are just a drop in the ocean of advances which have driven China’s rise on the world stage and a fiercely proud population that no longer sees a reason to back down.

Good points.

The legal front is no different. Hardly a week goes by where one of my firm’s China lawyers does not have to explain to someone how much China has changed, usually involving one (sometimes more) of the following, along with my own typical quick response.

1. “I’ve heard that it’s fine to operate in China without having a China business [typically a WFOE or a Joint Venture] because they will never catch you or if they do you can usually get off just by paying the person $500.” My Response: Twenty years ago, maybe. Now, if you get caught doing business in China without you and your company (and even those who work for you in China) will be in big trouble. See Doing Business in China with Deportation or Worse Hanging Over Your Head. And note that going into China via Hong Kong hasn’t really worked in most situations for a decade. See A Hong Kong Company Is NOT a Mainland China Company and a Hong Kong Trademark is NOT a Mainland China Trademark. And paying bribes has always been a really bad idea for a whole host of reasons. See China Bribery. Not Smart and Not Necessary.