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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.

Hong Kong ArbitrationEvery month or so, a lawyer will write me out of the blue with a “quick question” about a draft contract. Without a doubt, the most common “quick question” I (and the other China lawyers at my firm) get is asking me to “confirm” that Hong Kong arbitration would make the most sense for such and such type of contract. I usually respond to this question by explaining that for me to be able to confirm or disagree with their having chosen Hong Kong arbitration I would need to review the entire contract and know a ton more information. About half the time, the lawyer responds by asking like what? I then respond by saying that when the lawyers at my firm are trying to figure out the best venue (location) and method (arbitration versus litigation) to put into an international contract, we typically consider the following:

  1. Who the parties are.
  2. Where the parties are located.
  3. Applicable law.
  4. Contract language.
  5. The goals of the client. Money? IP protection? Something else?
  6. The likelihood that the client would breach the contract as compared to the likelihood the other side would breach the contract.
  7. The sort of disputes likely to arise.
  8. The language(s) spoken by the client and the other side
  9. The client’s wealth as compared to the wealth of the other side.
  10. The need to engage in discovery if there is a dispute.
  11. The need to bring in third parties to any dispute.
  12. The complexity/simplicity of likely disputes
  13. Appeal concerns.
  14. Confidentiality concerns.
  15. Concerns regarding speed of dispute resolution.
  16. Enforcement of judgment/award concerns.

Contracts cannot be reviewed in a vacuum.

Let me explain.

A very long time ago, a large manufacturing company client contacted me to help with an international product recall. This companies product had a faulty and potentially dangerous part that had been provided to it by one of its smaller suppliers. My first thought was that my client should seek reimbursement of the recall costs from this small supplier and its insurance company. Towards that end I asked for a copy of the supply contract as between my client and its supplier.

Unfortunately, the contract protected the small company in every respect. This surprised me because usually big companies impose its terms on their small suppliers. I explained to my contact at the company (an excellent international compliance person, but not a lawyer) why his company had allowed such an unfavorable contract to be used and now it was his turn to be surprised. He told me that his company had believed this was a really well drafted contract and they had recently stared using it with all of their new suppliers. My response was that it was one of the best drafted supply contracts I had ever seen and that was part of its problem; it had been incredibly well drafted but entirely in favor of the small supplier, not in favor of my client who was the recipient of the parts. I then asked who had drafted this contract (I was especially curious because I thought my firm had a lock on this company’s international contracts). His response was that no lawyer had drafted it; a non-lawyer high up in supply chain management had seen this contract when their largest supplier had required they sign it and he just figured it would be a really good contract because it came from XYZ company. My response was, yes, it is a great contract, but a great contract for a parts supplier, NOT for a parts recipient and when XYZ company required you sign this contract it was acting as a supplier. The client ended up paying every dollar of the recall.

What would happen if a lawyer were handed this contract for a one or two hour review from another lawyer without being provided with the context behind this contract? The lawyer would review it and say this is a great contract and I don’t see anything that needs to be changed.

Context can be equally crucial for dispute resolution clauses.

Over the years, our China attorneys have dealt with the following situations, the facts of which have been modified so as to negate any possibility of anyone recognizing the specific matter:

1. Tokyo Jurisdiction. An American company comes to us after learning that its Chinese manufacturer has started manufacturing and selling  the American company’s newest version of its core product. I read a provision in the contract to expressly state that any future iterations of the core product would belong to the Chinese company and I mention this to the potential client. The potential client then tells me that when it complained to its Chinese manufacturer about IP theft, the Chinese manufacturer cited to the same provision and said the product now belonged to them.

To make matters worse, the contract called for all disputes to be resolved in “Tokyo Superior Court.” I asked the potential client how it was decided Tokyo Superior Court would be the venue for any disputes and the potential client explained it as follows:

The Chinese company asked for disputes to be resolved by arbitration in Beijing and my lawyer said that we wouldn’t stand a chance there and so we refused. The Chinese company then proposed Singapore or Hong Kong arbitration and my lawyer countered with Tokyo Superior Court because it was the opposite [both with respect to the type of forum — arbitration versus court — and the location] of what the other side wanted.

Ugh. I then explained how no country other than China will allow for a lawsuit in its courts that has zero to do with its country and because this case would involve a US-based company going up against a China-based company on an issue with zero relevance to Japan, there is no way a Japanese court will allow itself to be a free (or nearly free) public forum for this dispute. I did not even bother to mention that there is no such thing as the Tokyo Superior Court or that even if the US company were to sue in Tokyo and get its case heard in Tokyo (which will never ever happen) and then win in Tokyo, no court in China would ever enforce the judgment because the Tokyo court never had any jurisdiction over the matter. The US company might be able to convince a Chinese court to take the case, but I doubt it, simply because China very much tends to enforce contracts no matter how silly they may be and I most Chinese courts would likely just toss the case for not having been filed in Tokyo as per the contract.

2. Toronto Jurisdiction. This is one of my favorites. I get an angry email from someone that essentially says as follows:

I read your blog regularly and carefully and you were wrong about Canada and that makes me wonder what else you have been wrong about. I read one of your posts where you talked about how you like to propose Canada for disputes because Chinese companies often will agree to that. Well the Chinese company we work with did agree to that but when it came time for us to actually sue them there, all of the Canadian lawyers told us that we couldn’t.

Future communications revealed that this company had — based on my having extolled the virtues of proposing Canada for arbitrations — believed it could list the Toronto courts as the jurisdiction for disputes between its US-based company and its Chinese counterpart. Just as would have been true in the Tokyo instance above, there is no way a Toronto court will hear a dispute between two foreign companies on a matter that has no relevance to Canada. Fortunately, the Canadian lawyers to whom this company went realized this and chose not to waste the US company’s time and money pursuing litigation in Toronto. I had to point out that we constantly emphasize that dispute resolution provisions must be fact and situation specific and that there is a big difference between what can be done in arbitration and what can be done in a foreign country’s courts. I didn’t — but I should have — pointed out the disclaimer here on our website:

The China Law Blog is for educational purposes and to give a general information and a general understanding of Chinese law. It is not intended to provide specific legal advice…. You should not use the China Law Blog as a substitute for competent legal advice from a licensed attorney.

3. Split Jurisdiction.  We get this one fairly often. The contract provides that the Chinese company must sue the United States company in a U.S. court and the U.S. company must sue the Chinese company in a Chinese court. The thinking behind this is logical but its execution is so flawed that we avoid these provisions like the plague.

These provisions initially seem to make sense because this sort of split jurisdiction appears to favor the U.S. company. If the Chinese company seeks monetary damages from the American company, it must go through the trouble of suing the American company in a U.S. court where the U.S. company will presumably get a fair trial. And on the flip side, the American company can sue the Chinese company in a Chinese court, which is (90 percent of the time, anyway) exactly where the U.S. company should want to be. For why this is the case, check out China Enforces United States Judgment: This Changes Pretty Much Nothing and China Contracts: Make Them Enforceable Or Don’t Bother.

But Chinese courts typically hold that this sort of split jurisdiction clause means there is in fact no jurisdiction in China. So if you really want jurisdiction to be in China, your agreement should be 1) be governed by Chinese law, 2) be written in Chinese and 3) provide for exclusive jurisdiction in China. This is not black letter law. This is just what actually happens on the ground in China’s courts and this is why our firm’s China attorneys provide for all three of these in all contracts where it is critical our client be able to sue in China.

But once again there is no clear answer as to what might be best for any given company’s specific situation. To properly evaluate whether you go with Chinese law in a Chinese Court (which is what we usually end up choosing to do), you need to consider your most important concerns. Is it more important you have an effective remedy against the Chinese company with which you are contracting or is it more important you make it as difficult as possible for the Chinese side to sue you? If your primary goal is to be able to enforce the contract against a Chinese company, you usually will want to provide for exclusive jurisdiction in China with Chinese law applying and the contract being in Chinese. But if your primary goal is to prevent the Chinese side from suing you, you should consider providing for exclusive jurisdiction in the United States. But if you do this, you must realize that because China does not enforce U.S. judgments, you may never be able to enforce it against your Chinese counter-party. It is these preferences that should help you decide the best jurisdiction provision for your contract. In any event, the split jurisdiction approach generally does not work.

4. Geneva Chamber of Commerce Arbitration. A very good client of ours came to one of our international litigators with a contract calling for arbitration before the “Arbitration Institute of the Geneva Chamber of Commerce.” Problem was the Geneva Chamber of Commerce did not have an Arbitration Institute nor did it handle international arbitration. Our client had taken a contract my law firm had written for them and made a few changes and simply re-used it on another deal. The contract my firm had written had called for disputes to be resolved before the Arbitration Institute of the Stockholm Chamber of Commerce, which is a very common forum for resolving disputes between Russian and American companies. So when my client went off and did an agreement with a Spanish company and the Spanish company refused to have the contract disputes resolved in Stockholm, my client just switched “Geneva” for “Stockholm” and called it a day. But then when it came time for my client to pursue arbitration we had to conduct massive research to determine how even to commence arbitration before an arbitral body that did not exist. We ended up deciding to file with the Swiss Arbitration Association in Geneva, and the opposing side vigorously contested our choice of forum. We actually were able to keep the case there, but only after incurring a large amount in fees fighting to do so.

5. South Carolina Arbitration in Chinese Under British Law. Yes you read it right and if you are not stunned by this, you should read it again. This is my all time favorite. U.S. company comes to us with an arbitration clause mandating arbitration in South Carolina in Chinese under British law. When I talked about how much it would cost to get three Mandarin-speaking arbitrators to South Carolina (assuming the other side doesn’t argue for some other Chinese language) and and the added costs of researching and arguing British law, the U.S. company — wisely — chose not to pursue the case. When I asked the company how it had chosen this particular dispute resolution provision they explained that they had taken it from one of their previous agreements. I didn’t say a word, but what I will say now is that a provision like this is a great way to discourage arbitration and sometimes that can make sense, but such a provision is a disaster if you are the one that ends up needing to sue. Again, context is everything.

Every once in a while when I say that I cannot opine about their having chosen Hong Kong arbitration for their specific contract, the attorney will write me back asking for “my general opinion regarding Hong Kong arbitration”. My response is that there are plenty of excellent arbitrators in Hong Kong but arbitration there is generally very expensive and, most importantly, it is seldom the most effective forum for enforcing a contract with a Chinese party.

Frankly, the biggest issue I have with Hong Kong arbitration is that far too often attorneys choose it not because it is the best forum for their client’s disputes, but simply because they are comfortable with it because it has a common law system very similar to the United States, Great Britain, Canada and Australia and the contracts and the arbitration can easily and logically be in English. Like everything else, whether these reasons make sense will depend on the entire context.

International IP litigatorOur China IP lawyers get a steady stream of emails asking what can be done to stop Chinese companies from selling “knock-offs” of their products. This is really two questions. What can be done to prevent Chinese companies from knocking off your products and what can be done to stop a Chinese company that has already knocked off your product. This post will address both questions.

I.  The Basics For Preventing Counterfeiting. 

Back in the retail stone ages (five or so years ago), when companies would come to my law firm for China trademarks to protect their brand names from Chinese copycats, we would tell them that applying for such a trademark would take about a week, but actually getting the trademark officially registered in China would take more than a year. We would then tell them that until their trademark is registered in China, we would be almost powerless to stop companies in China from using their brand name. Few voiced any concerns with this.

Fast forward a few years and now when one of our China trademark lawyers tells a client that securing a China trademark will take a year, those who sell online (which these days is almost everybody) rightfully get all nervous and want to know what to do in the meantime to protect against copycats. See China and the First to Market Fallacy for how incredibly quickly China companies can and do copy products and get them to market.

Our typical response is to talk about “building IP walls outside China.” If you are selling your product in the United States and in Spain you should focus on protecting those two countries, by among other things, securing trademarks in those two countries as quickly as possible. Though a U.S. or a Spain trademark technically will not give you any trademark protection in China, it can still help in getting offending ads removed from Chinese websites like Alibaba. If “your” product shows up on Alibaba and you have no registered IP, your chances of getting Alibaba or some other Chinese website to take it down are slim. But if you have a registered Chinese trademark that is being infringed by something online your odds of getting that offending ad taken down are good. If you have a Spain trademark and an Alibaba ad clearly targeted at Spanish consumers infringes on your Spain trademark, your odds of getting that ad taken down are not bad, which is a whole lot better odds than if you did not have the Spain trademark at all. The same holds true for the United States.

Of equal importance though is that if you have a Spain trademark on your product you can use that trademark to try to keep the offending product from China from reaching Spain. You can do this by working with Spain’s Customs and Border Protection Bureau, which is authorized to block, detain and seize incoming products that violate Spain and EU intellectual property rights. The United States and virtually all other EU countries have similar procedures. In many countries it makes sense to register your trademark from that country with its Customs office.

Registering your trademarks with China’s Trademark Office is the essential first step for just about any company that is having its product made in China or that faces a counterfeiting threat from China.. See File Your Trademark In China. Now., China: Do Just One Thing. Trademarks, and China’s Changing Trademark Environment. Why You Need To Register Your Trademark Now. Because China is a first-to-file country, until you register a trademark you have no rights in that trademark. But a trademark registration alone will not limit the spread of counterfeit goods. A trademark registration merely gives you the legal capacity to enforce your rights to that mark, and should properly be seen as one of the pieces in an overall strategy.

For any company concerned about counterfeit goods coming from China, the next step should be registering your trademark with Chinese Customs. This is not a legal requirement but a practical one: though China Customs officials have discretion to check every outgoing shipment for trademark infringement against the Trademark Office database, in reality they only check against the Customs database. No separate registration with China Customs means no enforcement by China Customs. See How To Register Your China Trademark With China Customs and China Trademarks: Customs Helps Those Who Help Themselves.

If you register your mark with Customs, they will contact you any time they discover a shipment of possibly infringing goods. At that point you have three working days to request seizure of the goods. Assuming you request seizure (and post a bond), Customs will inspect the goods. If Customs subsequently concludes the goods are infringing, they will invariably either donate the goods to charity (if the infringing mark can be removed) or destroy them entirely. The cost of destruction, and of storing the goods during the inspection process, will be deducted from your bond. Registration with China Customs generally takes three to five months and can only be done after China’s Trademark Office has issued a trademark certificate.

We cannot stress enough the importance of China trademarks and China NNN Agreements for any counterfeit prevention strategy. China patents and China copyrights should be an important part of your counterfeit prevention strategy as well, but in our experience, getting offending goods taken off websites is fastest, easiest and most likely if you have a China trademark. See China and Worldwide: Trademarks Good, Patents Bad. Or as one of our China IP lawyers is always saying: “You can probably survive a Chinese company selling a duplicate of your product and selling it for half of what you charge, but if that duplicate product also can legally use your company and/or brand name on it, you may never recover. A China-centric NNN Agreement works to ensure that your own supplier will not sell your products out its back door. Note that a Western-style NDA Agreement for China will probably decrease your IP protection, not increase it.

II.  The Basics for Stopping China Counterfeiting

I apologize in advance for this portion being U.S. focused. This is somewhat necessary for this portion of this post because so much of it deals with litigation and my law firm has litigators in only the United States and in Spain. And since I am not a licensed Spain lawyer, I will confine my discussion regarding IP litigation against Chinese companies to just the United States. Nonetheless, almost all of what I say below is applicable to varying degrees to most countries outside China, not just the United States.
You just discovered a Chinese company is knocking off your product. What do you do? If you are like most companies, you go to your regular lawyer and ask her what to do and if she is like most U.S. lawyers she probably does not know. So then what? At that point, you or your regular legal counsel should reach out to a lawyer experienced in fighting Chinese counterfeiters and experienced in cross-border litigation. There are a lot of options for going after Chinese counterfeiters and the key is usually choosing the right option or the right combination of options.
The right option is usually going to depend largely on your own individual situation. When one of our international IP litigators gets an email asking us to take on a China counterfeiting matter, we usually fire back with a slew of questions to try to learn more. Below are some of the more common questions we ask.
  • What IP registrations do you have and where?
  • Do you have any trademarks registered in China? Do you have any trademarks registered in any other country? Are these knock off products using your brand name or your company name or your logo? Do you have trademarks on any of these in China? Elsewhere?
  • Please describe your registered trademarks. Is the counterfeiter using any of these?
  • Do you believe you have any common law trademarks anywhere? Is the counterfeiter using any of these?
  • Do you have any copyrights? Are any of these copyrights registered in China? Are any of these copyrights registered anywhere else?
  • Please describe your registered copyrights. Is the counterfeiter using any of these?
  • Do you believe you hold any copyrights that are not registered anywhere? Is the counterfeiter using any of these?
  • Do you have any patents registered in China? Do you have any patents registered in any other country?
  • Please describe your patents. Is the counterfeiter infringing on any of these? If so, how?
  • Have you registered your IP with any customs offices in any country? If yes, please describe.
  • Do you know anything about the Chinese company you believe to be knocking off your products? Please describe any prior dealings you have had with this company. Do you have any contracts with this company?
Answers to the above questions (and many more) help our international IP litigators figure out how best to proceed.
The below are some of the options you might have for pursuing your China-based counterfeiters.
1. Pursuing administrative or litigation relief in China. This might be done administratively, via civil litigation in a Chinese court, or even criminally. If you have a contract with the Chinese company that is counterfeiting your products and that contract calls for arbitration of all disputes, arbitration will be another option for you.
2. Figure out who is importing the counterfeit products. Oftentimes the US importer is closely connected to the company in China that is knocking off your products — like a son or a daughter or a spouse so pressuring or suing the importer often can be effective with the Chinese company as well.
3. Suing Chinese companies in US court usually takes a long time because Hague service of process on Chinese companies is taking a long time, and with the trade war heating up, it’s likely to start taking even longer. It is already at the point where if you do not have a Chinese attorney constantly calling all the right people in China all the time to check on the progress of your Hague service, it probably will never happen. There are though sometimes creative ways to get around Hague Service of Process.
On top of this, getting a Chinese court to enforce a US judgment is going to be difficult, if not impossible and the US-China trade war likely will hurt you on this front as well. See China Enforces United States Judgment: This Changes Pretty Much Nothing. This means your suing for damages in a US court will oftentimes not be the right tactic for you to take against a Chinese counterfeiter. But a Chinese counterfeiter in a US court might allow you to seize funds or other assets belonging to the counterfeiter or get an injunction blocking its sales.
4. Official Chinese company records can be goldmines of information that you may be able to use to impress upon the Chinese company the need for it to stop copying your products. This is especially true if those records help you show US connections
of the company or its owners or officers or directors.
5. Section 337 cases filed with the International Trade Commission in Washington D.C. can be a great way to stop counterfeit products from entering the United States. See Stopping Infringing Products From China: Section 337 Cases. These cases can be pursued without having to serve the Chinese defendant under the Hague Convention service of process rules.
6. Serving takedown notices on the online sites that are selling the counterfeits of your products can oftentimes be fast and easy and effective, mostly depending on the existence and quality of your IP registrations. See e.g.,
How To Remove Counterfeits From Alibaba Register Your China IP.
Bottom Line: It’s never too early to take action to prevent Chinese companies from counterfeiting your products. And if you are hit with a counterfeiter, it is critical that you explore and weigh your options carefully.
For more on counterfeit products from China, check out China Counterfeiting: 8 Common Myths

China employment lawyersAs both a big-time sports fan and the son of an English Professor I’ve always reeled whenever anyone talked about “giving 110%.” So yeah, I realize something cannot be 200% dangerous — heck, I’m not even sure something can be 100% illegal — but I feel compelled to over-exaggerate (which word is also of dubious usage) to make sure this post gets read.

The reason I want to be sure this post gets read is because our China employment lawyers are seeing increasing instances where expat employees working in China are having their salaries “split” by their Chinese or foreign company employers. We strongly counsel our employer clients against doing this sort of salary splitting and we even more strongly counsel against expat employees accepting such splitting. For one very simple reason: it is illegal and it puts you at great risk.

Let me explain.

China employer taxes and benefits are steep. Very roughly speaking, for every 100 Yuan an employee in China gets paid, the employer pays out an additional 40 or so Yuan in employer taxes and benefits. In other words, about 40 percent. And for every 100 Yuan a China-based employee gets paid, the employer is supposed to withhold around 25 Yuan for employee taxes. In other words, about 25 percent. So imagine the savings if instead of paying an employee $100,000 on the China tax and benefit grid, you instead pay just $30,000. How though can a China employer achieve this savings while still paying its employees at market rate? I mean you cannot just pay a top tier foreign software engineer $30,000, or can you?

You can if you are willing to violate Chinese law by engaging in tax fraud. This is most commonly done by splitting the salary by paying the employee $30,000 in China and $70,000 via Hong Kong or the United States or wherever. Ten years ago — before China became considerably more sophisticated with its tax system and its ability to root out tax cheats, foreign SMES with employees in China (especially expat employees) would engage in this sort of salary splitting. You might have a company in Houston that would send an employee to China and have its WFOE in China pay that employee $30,000 in China while sending $70,000 each year from the US company to the employee’s US bank account.

China now employs various techniques to crack down on this sort of thing and in response to that it has become way less common to see a foreign company engage in such fee splitting. One of its best and easiest techniques is to simply call bullshit on the idea of a company being able to pay a top-tier expat software engineer $30,000 a year. The other is to offer a tax amnesty to your just- terminated employee to get him or her to report your tax fraud. Then armed with that, China will not so politely demand you immediately pay it all past taxes and benefits, plus interest, plus massive penalties.

But while foreign companies are for the most part ending illegal salary splitting, Chinese companies have been taking it up with somewhat of a vengeance. Ten years ago, it was rare for an expat to work for a Chinese company in China, but today that is commonplace. But it is also commonplace for Chinese companies to be unhappy/reluctant about high expat salaries and having to pay full taxes and benefits on that. This has led our China employment lawyers to now see a slew of expat employees being offered $100,000 with $70,000 paid to them through Hong Kong.

This has also led Chinese companies to come up with some very creative justifications for their illegal actions, in an attempt to quell any expat disquiet about participating in tax fraud. Their first “line of defense” is usually to say “everyone does this and your American lawyers simply don’t know China.” When this doesn’t work, they often propose the expat employee become a director or an officer of the Chinese company’s Hong Kong entity and get paid the $70,000 for doing that. Yeah right. Anyone who knows China law enforcement, especially China tax law enforcement, knows this is never going to fly. See this Forbes article, China’s Tax Authorities Want You.

What we are also seeing, most unfortunately, are a slew of expat employees accepting such split payment contracts to their massive detriment. We see this when the expat employee writes one of our China employment attorneys  for help against their China employer who just fired them or who is not actually sending any of the promised money via Hong Kong. These expat employees want to sue their China employer as though they have an employment contract for $100,000, when of course they don’t have such a contract because the Chinese employer is smart enough not to have put anything in writing about the $70,000 that was to have been sent from Hong Kong. Seriously, who is dumb enough to put their own tax fraud in writing?

This sort of non-payment has become so common I am now of the view that many (most?) China company employers that split salary payments do so not so much to engage in fraud as against the Chinese tax authorities, but rather to engage in fraud as against their expat employee. More than half the time when we get an email from an employee seeking our help in getting their $70,000 split fee payment, the employee has been working for her or his China employer for more than a year and that means their China employer saved about $100,000 over the last year (the $70,000 salary plus the approximately $28,000 in employer taxes and benefits it never had to pay) without violating a single law.

It’s like the perfect crime but it is not a crime at all. The employer simply managed to convince the expat to work at super low wages and there is no contractual record indicating otherwise. Sometimes there may be an email record, but the smart employer has made clear in its employment contract that the employment contract supersedes any prior written or oral promises or agreements. But even without that, Chinese law so favors the written and signed and chopped contract that not having such a provision likely won’t make any difference anyway. Many employers tell their employees they will make the $70,000 payment in one lump sum 6 or 12 months after the expat employee begins work, but then they never actually make the payment. Even without this promise, the expat employee does not want to quit because he or she believes doing so will mean they will never get the $70,000 — not realizing that continuing to work only puts them even deeper in the hole.

Then there are the instances where the employer does pay the employee out of country but stops for a while and then stops paying the out of China portion or fires the employee. The employee contacts our China employment lawyers believing he or she can sue his or her employer for damages based on a $100,000 salary. But how can they do this when their employment contract says their salary is $30,000? Are they going to stand up in a Chinese court and say, “excuse me, your honor, I know the contract says only $30,000 and I know my taxes show I have been paying income taxes on only $30,000” but this employer and I were together engaging in tax fraud against the Chinese government and so I just really feel like I am entitled to have this court enforce the oral agreement my employer and I used to defraud the Chinese government. Yeah, right.

All this very much reminds me of how in the old days when foreigners were not allowed to own real property in China they would buy real property in the name of their Chinese citizen girlfriends (it was pretty much always guys) to get around this prohibition. Then, once the girlfriend had the property, she would break up with her foreign boyfriend and keep the property, insisting that it was a gift. The foreigners would then contact my law firm wanting to sue their exes and we would have to tell them how we viewed that as folly because they would need to argue to the Chinese court that they had bought the real estate not as a gift to their girlfriends, but to have their girlfriends illegally hold the property in a sort of trust for them. Yeah, right.

Our Chinese employment lawyers frequently help expats with their China employment contracts. See China Expat Employment Contracts Because They Matter. A Lot. Even when we are not retained, we like to stay in touch with those who wrote us for employment contract help just so we can know what happens to expats who negotiate their own employment contracts. The below is an email we have used for those who admit to having entered into a split payment employment arrangement:

What your employer has done here is 100% illegal and it puts you at risk. Both you and them are engaging in tax fraud but all that should matter for you is that you are engaging in tax fraud — assuming your employer actually pays you outside China, which they often do not. Your employer may claim otherwise but there is no doubt about this. You are supposed to be paying China income taxes on all of your earnings attributable to your work as a China expat employee. Plain and simple. But under this arrangement (again, assuming you do actually get paid outside China what you have been promised) you will not be doing that. If I were you I would go to my employer and insist it change this payment plan and if it does not, I would consider getting a new job, and fast. Just this week I wrote here how China is — in response to the US-China trade war- – stepping up its hunt for Americans violating China’s law just as you are doing. Do you really believe China would not love to call out and penalize Americans right now for tax evasion?

I am sorry I have to be such a downer, but if you were to end up in jail or deported I would not want it weighing on me that I did not at least warn you about your risks.
Expat readers, please consider this post your warning.

China company chop

It is always a good idea to have your Chinese counter-party “chop” or “seal” your China contracts with their official China company chop. It has been more than five years since we blogged about what constitutes an official China company chop and it seems like our China lawyers are getting an uptick in requests for us to explain how to discern what is and is not an official China company chop. This post is a response to those emails and a necessary update to our previous posts on China company chops.

Every contract with a Chinese company must be executed by a person at the Chinese company with authority and it must be chopped with the official company chop (sometimes also referred to as a company seal). However, there are many types of company chops. Which one should be used? How do you know if the company chop is real? What does a real China company chop look like? What does Chinese law require of a China company chop? What are some examples of fake company chops?

An official Chinese company chop on a contract says the Chinese company itself has authorized the contract. This means that the company cannot later claim that whomever signed it was not authorized to do so and so the contract should be deemed invalid.

The rules/requirements for Chinese company chops are different in every city, so there is oftentimes no way to know whether a company’s chop is a proper, legally registered and authorized company chop just by looking at it. For this reason, the Chinese courts have decided that they generally do not care and if the document is chopped with something that purports to be the company chop and if the signer of the document is either the legal representative of the Chinese company or a person with apparent authority to act on behalf of the Chinese company based on his or her business card the Chinese courts will usually not invalidate the contract based on a technical argument related to the validity of the company chop or the authority of the signer.

What this means in real life is that if you ever sue a Chinese company for breach of contract and the Chinese company tries to claim that the chop on your contract is not really theirs and its President (per his or her business card) did not have authority to sign on behalf of the company, it will almost certainly lose. Nonetheless, what this also means is that you will have one more litigation hurdle you must jump and on which you could conceivably fall. What if it is a mid-level manager who signs your contract and not the President? Your prevailing on your breach of contract litigation now looks less certain.

Since there are so many kinds of company chops, it is best to insist on the standard round company chop using red ink. Some of these company chops are numbered and some are not. This varies by district and is not an indicator of validity. The newish oval company chops in black and purple are not common and should be avoided for companies that want to take the cautious approach. Unfortunately, some districts have moved to using these oval company chops and so it can be a good idea to determine whether you are in one of these districts. Nonetheless, none of our China attorneys have personally dealt with a Chinese company that did not have access to a standard round company chop with a star in the middle.

The only way you can be virtually certain about the authenticity of a Chinese company chop is to do expensive and time consuming and difficult in-person due diligence. You can visit the head office of your Chinese counter-party and inspect the company chop there and then compare that company chop to the company chop used on previous contracts executed by the company and provided to you during your visit. For this sort of visit to be helpful, you need to be fluent in Chinese and know enough about Chinese law and business to be able to discern whether the older contracts you are being shown are real or not. As you can imagine, this sort of in person due diligence is not ordinarily done, other than on really big money transactions.

Better yet, you send a China attorney to confirm with the government that the company chop that will be used on your contract is actually the company’s real company chop. But this method too is usually reserved for only big money transactions because because getting an attorney to run to the local MOFCOM office is not going to be cheap or easy.

Our firm’s China lawyers are occasionally engaged to do one or even both of the two company chop verifiers described above, but for verifying company chops for more typical China contracts we usually suggest foreign companies do the following:

Ask the Chinese party to provide you with the following four pieces of information:

  1. The signatory’s title, in Chinese and in English
  2. The signatory’s name in Chinese characters.
  3. A scanned copy of the signatory’s business card, in Chinese and English [unless you already have a copy
  4. A copy of the Chinese company’s business license

Armed with this, our China lawyers cannot guarantee anyone that the company chop is indeed authentic, but we can at that point let our clients know whether we are comfortable or not with the chop. By this point we have almost certainly already done basic due diligence on the Chinese company and so we already know it is a legitimate company and so once we get the above information relevant to the company chop, it is the incredibly rare instance when we express discomfort.

The bottom line on China company chops is that so long as the company chop looks authentic and so long as the person signing the contract or document has apparent authority to act on behalf of the Chinese company, that is all that is normally required. Due to the variations from district to district regarding Chinese company chops, on all but really large transactions, it will usually not make economic sense for you to do much more than to get your experienced China lawyer (who must be fluent in Mandarin) the four pieces of information listed above and have them give the company chop a relatively quick perusal.

To a certain extent, China company chops are somewhat overrated. The big issue is whether you are dealing with a person in the Chinese company with authority to bind the company. Are you even dealing with the company and not some rogue employee or third party? Does the company even exist, using the name they have given you? Those are the real issues, and they require real work to resolve. The notion that “the company chop is everything” is no longer a wholly accurate representation of the current state of law in China. Finally, any company chop can be faked. So even if you know what the genuine chop looks like, you do not know whether the one you are looking at IS that chop or is rather a fake.

However, insisting that that any legal document be chopped is still required in China so the basic best practices described above should be used for all your China contracts.

Got it?

 

 

China SaaS lawyers
China SaaS. It’s complicated.

With the launch of the US-China trade war, it should go without saying that China is tough on foreign internet companies doing business in China. Foreign SaaS (Software as a Service) companies are on the front lines of China’s internet and the legalities of their operating in China are complicated and generally unfavorable.

Our China lawyers who focus on China’s internet typically send out some variant of the following email to foreign SaaS companies  to give them an initial lay of the China SaaS land:

 

The basic position of the PRC government regarding foreign SaaS is as follows :

1. Provision of SaaS services to Chinese nationals through a server maintained outside of China is not legal.

2. Storage of personal information gained during the processing of SaaS services on servers located outside of China is generally not legal.

3. The PRC enforces these above two rules in the following two ways:

a. Conversion of RMB for payment for offshore server SaaS services is not permitted.

b. The URL allowing contact to the offshore server is subject to being blocked. Use of a VPN to access a blocked server is illegal.

Unlike France and some other European countries, China does not typically seek to enforce its laws through extraterritorial action. 3 a. and b. are generally the only methods of enforcement used. However, these methods are very effective.

Many companies operate in this illegal realm, knowing they will likely not be pursued by the Chinese government in their home country. As long as they (the company and anyone who China might associate with the company) stay out of China, this attitude is probably rational. However, it is not usually possible to build a real business this way. But this “offshore server” approach is usually considered to acceptable by companies without real long-term interest in China.

To operate legally in China, a PRC based server is required and the arrangement requires licensing to a Chinese owned entity. This is the approach Microsoft and Apple use for their China Cloud/SaaS products. Setting up Cloud/SaaS operations in China with this sort of licensing approach is complex, but it is necessary and for that reason it has become very common.

Chinese companies overseasEight years ago, I wrote a post Top Ten Reasons Chinese Companies Fail In The U.S. A few weeks ago I got a fascinating email from someone in response to that post.

The below is that email. But before you read this email, let me make very clear that many Chinese companies do a very good job operating in the United States and my publishing this email is NOT intended to stand for the proposition that Chinese companies even tend to act as per the below.

Rather, I am publishing this email to show very starkly how operating in a foreign country without being mindful of the legal and cultural differences between your home country and the foreign country can lead to disastrous results. This is the theme or at least the sub-theme of many (most?) of the blog posts we write and in response to those we often get comments and emails expressing surprise at the disconnects. This post just goes to show that “what goes around comes around” and just as American and European companies so often stumble when doing business in China, so too do Chinese companies stumble when doing business overseas.

With all these provisos, here then is the email [substantially modified to protect both the person who sent it to me and those who still work at this company].

 

I am writing to you in response to the blog post from eight years ago, Top Ten Reasons Chinese Companies Fail In The United States. I wanted to relate my experience working for a Chinese company. I had a senior level position at this US company and after working there for 10+ years was purchased by a Chinese company. About a year later, the China home office brought in a a new plant manager from China to run things in the United States. This person’s English was very poor and this caused problems as the employees spoke only English or Spanish.

Almost immediately, he began to complain about the work ethic of the Hispanic workers, which I have to tell you had never ever been a problem.

Then the company began to enact draconian measures, such as firing workers for minor mistakes — like being a few minutes late or taking too long in the bathroom. They then moved to begin to replace the office staff with people who spoke Mandarin. This was done by hiring recent Chinese university graduates. This did not work out very well either because when one of the recent Chinese hires would ask too often about their vis sponsorships (which they usually did) they would be told that they would not be sponsored and either fired or left.

Production line employees were spied on and people from the HR department would walk the floor with cameras while telling the employees that any infraction would lead to termination. When any of us “management leftovers” would try to explain that they could not operate a company in the US like they did in China, we were glared out and ignored. Many times we were told that the workers “were lazy and ten times worse than those in China who knew their place.” They even took away the water coolers to save money by forcing the workers to get their water from the bathroom sinks. When one of us “management leftovers” said something bout this we were told not to “worry about it because ‘these people’ are used to drinking water like this from where they come from.”

Not surprisingly, production levels plummeted as skilled and unskilled workers alike either quit or were fired in an effort to intimidate the others into working faster. The blame for this began to fall on us “management leftovers.” Turnover by this point had reached triple digits among the production workers. People would show up and quit the next day complaining that they felt like they were working in a prison. By this point I was working 12 hours at the office and then coming home, eating dinner, and working another 4-6 hours on the computer doing reports and constantly having to explain to the home office why production goals were not being met. .

Management too by this point were dropping like flies and because word had already spread widely about our company, finding replacements was difficult/impossible. When I left the company after not being able to take it any more, I gave a full report to the HR people but that of course led nowhere.

The company is still spiraling down with turnover at an all time high. I have heard that the home office finally sent people from China to find out “the truth,” only to be told that all of the trouble had been caused by the “management leftovers” who did not know how to run the place. I even heard one manager was physically threatened not to reveal things to the home office. The lawsuits are coming next.

So yes, when I read your post I knew exactly what you were talking about.

China WFOE lawyerIf you are an American company doing business in China, you don’t need me to tell you how so many things have changed for you over the last year or so, and so I won’t.

But I do need to tell you — somewhat urgently — that if you are operating in China without a legal Chinese entity, you need to stop. Like right now.

Back in March, we did a post, Doing Business in China with Deportation or Worse Hanging Over Your Head in which we discussed how “China has like never before been tracking down foreign companies (especially U.S. companies) that are operating in China without having a business entity (a WFOE or a Joint Venture) that allows them to legally do so. See also Donald Trump and Your China Business: Double Down, Ditch It or Die and Donald Trump and Your China Business: Double Down, Ditch It or Die, Part 2. Our thesis — based on what we were seeing on the WFOE front and on other crackdowns involving even things like bar fightsvisasexpat taxescannabis, and employment law — was that China was toughening up enforcement against foreigners and foreign companies in China on all fronts, but especially against Americans and American companies as a sort of a slow and not terribly public retaliation against President Trump.

With all the talk now about US tariffs against China, legal enforcement in China against American companies operating in China without a WFOE has gone into hyperdrive. One of our readers, herself a China lawyer, recently wrote me to let me know how ridiculous she thought I was for believing Beijing would “quietly” go after American companies. My response to her was that we had no idea whether China’s stepped up legal enforcement is being directed from Beijing or is more in the nature of a slow and quiet and yet widespread uprising against the United States being mounted by government officials throughout China.

We can debate who is leading this enforcement charge and even the reasons for it, but to me the most important thing is that if you are an American company and you are not in full compliance with Chinese law you are at greater risk now than you have ever been. If you are doing business in China, especially if you are doing business there “through” a Chinese citizen you are paying, you need to think long and hard about your China company formation options.

Whenever we write about how China is getting tougher with such and such a law, we invariably get emails and/or comments saying how idiotic and/or unfair we are for criticizing China for enforcing its laws. Just so the record is clear, we have not said that and we are not saying that; we are as neutrally as possible merely writing on what we are seeing and we would be more than happy to leave it to the legal philosophers to put these sort of real-life China business and legal issues into some larger context.

In addition to the stepped up enforcement of China’s WFOE requirements, we are also seeing a massive uptick in American companies forming Hong Kong Companies or consulting WFOEs in ill-advised efforts to get legal. So let me use this blog post to once again make clear, forming a company in Hong Kong does not do a thing to make your business operations legal in Mainland China:

Nor will forming a company in Macau or Taiwan or Singapore. If you are doing business in the PRC/Mainland China, you need a PRC legal entity, such as a WFOE or a Joint Venture. See Having A Hong Kong Business Does NOT Make You Legal in Mainland China. See also A Hong Kong Company Is NOT a Mainland China Company and a Hong Kong Trademark is NOT a Mainland China Trademark. If it were otherwise, virtually nobody would go through the agony and the costs of forming a WFOE; they would instead pay some accountant in Hong Kong about USD$1,000 and have an HK company in less than a week. Please, please, please do not fool yourself into believing otherwise!

In fact, the more you get on the grid in China without actually doing everything the right way in China, the more you make your illegality more obvious and easier to spot. See Quasi-Legal In China. Not the Place You Want to Be andQuasi-Legal in China. Not the Place You Want to Be, Part II.

We are also hearing from many American (and some European companies as well, but we’ll save that for a subsequent post) companies that formed their WFOE in China the “fast and easy way.” Some less than reputable WFOE formation companies will tout how they can form China WFOEs quickly and cheaply and for only around USD $15,000 in minimum capital. What these WFOE formation companies typically then do is form your company as a consulting WFOE in an “easy” China city. Please don’t fall for this. If your WFOE is not going to be in the consulting business, it cannot legally operate as a WFOE in China and it will get shut down. See How To Form a China WFOE. Scope Really Really Matters, Part II. And if your WFOE is going to be operating in Xi’an you do not want it to be formed in Shenzhen, for just a whole host of reasons.

If you are not complying with Chinese laws it is important you move quickly to get into compliance. But it is also important that in moving quickly you not expose yourself to even more and potentially greater problems. To borrow from a famous legal quote, you should move to get legal in China with all deliberate speed.

China company formation done wrong is not going to be your answer.

What are you seeing out there?

attorney to help with Sinosure Not sure if it’s politics or tariffs or something else, but our China lawyers have of late been getting a rash (and that is the best word for it) of inquiries lately regarding Sinosure cases. For the full import of what I mean by a Sinosure case, I urge you check out Owe Money to China? Meet Sinosure, Leviton Law Firm, and Brown & Joseph and China Sinosure: What You NEED to Know

In response to our getting so many inquiries from companies looking for an attorney to help with Sinosure that we developed the following short list questions we can use to help us determine the Sinosure cases we will, we might, or we will not take on.

 

  • How much is being claimed against you? There is no point in hiring a lawyer if the amount at stake is too low to warrant it.
  • Why have you not paid? This greatly influences our initial strategies.
  • To whom do you owe the money? We usually follow up by asking how important the creditor is to the debtor’s business.
  • Do you have other suppliers in China in addition to the one (or more) that claim you owe them money? We are trying to figure out how important it is that the Sinosure problem be solved quickly?
  • Is it important that you be able to continue doing business in China? This is an important question for determining strategy
  • Do you have any brand names or logos or other IP that you use on any products or packaging made in China? If so, have it registered those brand names or logos in China? It is very common for Chinese companies to register their debtor’s brand names and logos as China trademarks so as to gain leverage. Often, the first thing we do is shore up the IP registrations of a company involved in any sort of business dispute in China. You do not want to go into battle without first patching up a gaping wound.

We then instruct them not to send anyone from their company to China and if anyone from their company is in China right now, we recommend they leave China immediately. See China Hostage Situations With a New Twist.

China NNN attorneyBy a wide margin, the most popular China contract my law firm writes is the China NNN Agreement. These are basic and important agreements no matter what your industry. We write these to protect against disclosure, competition, and circumvention. For more on what goes into our China NNN Agreements, check out our most read post, imaginatively entitled China NNN Agreements.

Unfortunately, not everyone uses my law firm’s China lawyers for their NNN Agreements and I say this for reasons beyond our not capturing the fees for those. I say this because our China attorneys receive a steady stream of emails from Western companies that want to retain us to sue on their existing NDA or NNN Agreement and after we review those agreements, we decline to take their case because their agreements are just not good enough. In fact, our firm has never taken on a breach of an NDA or breach of an NNN because we have yet to see such an agreement written by someone else that was strong enough to warrant litigation and because nobody has ever sought to sue on any of those we wrote.

Note. I am not saying that no other law firm can write a proper NNN Agreement for China. I am not saying that at all. I am merely saying — not surprisingly — that in situations where a Chinese company has signed an NDA or an NNN Agreement and then someone wants to sue on it, we have not liked the agreement on which they want to sue. Get it?

What then is so wrong with the NDAs and the NNNs my law firm sees and does not like? All sorts of things. The most common problem is that the agreement was not written for China at all. It is just a Western-style NDA used either as-is or cobbled together to try to look like it is for China. For why this does not work, check out Why Your NDA is WORSE Than Nothing for China. Probably the second most common problem we see is the situation where the Western company has an NNN that is 98 percent good, but then has a bad provision through which its Chinese counter-party can drive a truck. In these situations, I ask the Western company how the horrible provision came about and invariably their response is that the Chinese company would not sign the NNN Agreement without it and nobody told them how bad it would be for them to put that provision into the NNN Agreement.

WARNING. There are all sorts of ways a Chinese company can quickly and efficiently eviscerate a perfectly fine NNN Agreement with what can appear to be a minor change. For this reason alone, it is always a bad idea to get an NNN Agreement from your lawyer and then not go back to him or her with any proposed changes. When any of my firm’s lawyers draft NNN Agreements we make very clear that we see our role as handling the NNN transaction from beginning to end. See e.g., China NNN Agreements: How to Get Them Properly Signed and Executed.

I thought of all of the above recently when communicating with one of the best and most experienced attorneys I know. We were discussing “the old days” in China legal and how different they were and then we started talking about how in so many ways little as changed. On that front, this lawyer wrote me the following regarding NNN Agreements and IP theft [stripped of any identifiers and cleaned up substantially]:

Back in the 90’s I worked on a deal with a Chinese company that was entering the cellular phone business. The other side was ___________[Company X] from the United States. Company X insisted on a well-crafted, highly effective NNN Agreement. The Chinese side refused to sign this though, so Company X went home and said it would not come back until the agreement was executed. I asked the Chinese side why it would not sign the agreement. They said: “We won’t sign because we are doing this project to acquire the technology for ourselves. We are not going to disclose to someone else.” That is when I learned that non-use is more important than non-disclosure in these agreements. I told the Chinese side that if they didn’t sign Company X will not be back. The Chinese company eventually signed, but I also was sure to tell Company X that from the moment the paper document was signed, it would need to monitor what its Chinese counter-party was doing with its IP. Nothing really much has changed since those days except Chinese companies have become far more clever and they no longer  make it clear from the start what they are planning to do. But as you and I both know, that does not mean anything else about these deals and what is needed in these agreements has changed.

Yup. What are you seeing out there?

china attorneys
Love is a many splintered thing.

Our China attorneys often hear something like the following from our clients:

“I am not worried about this deal/contract/transaction with this Chinese company because” [choose one or more]:

  • The owner and I are great friends.
  • I trust the owner implicitly.
  • There is no way they [the Chinese company] would do this because it would destroy their business.

I start one of my “how to protect your IP from China” speeches with the following:

“Big companies in China want to steal your IP. Small companies in China want to steal your IP. Private companies in China want to steal your IP. Public companies (and SOEs) s in China want to steal your IP. Oh, and that company whose owner you like so much and whose son’s or daughter’s wedding you attended, that company also wants to steal your IP.”

So how then do our China lawyers respond to the client who insists “it’s all good” with their China counter-party and there’s no need for protection [choose one]?

  1. You are wrong about your friendship with the owner. He is a liar and a thief.
  2. You are wrong to trust the owner. He is a liar and a thief.
  3. You are wrong about the economics. They will . . . because they only think short term?
  4. None of the above.

None of the above is the correct answer because our China lawyers do not have any special knowledge about the Chinese counter-party or its owner(s) and so we have no way to refute what our clients are telling us about them. On top of this, we have seen plenty of instances where an American or a European company has had a fantastic relationship with its Chinese counter-party for decades.

No, what we say is that even if all they are saying about their Chinese counter-party is true, there are still substantial risks. And then we tell them about the countless instances where we have seen things go badly wrong even when the American or European company was entirely right in trusting their Chinese counter-party or the economics of the situation.

But how can that be?

Because the foreign company that believes trust or economics solves all when doing business with a Chinese company is ignoring the following:

Just because you are friends with the owner or just because the owner can be trusted or just because it would not make economic sense for the company to cross you, this does not apply to 1) the company’s employees, 2) the company’s vendors/suppliers; 3) the company’s subsequent owners, or to a 4) changed economic situation.

The risk is often not the owner of the company, but everyone else who gets access to your IP or your trade secrets. These are the sort of things our China lawyers see all the time:

  1. Everything is going great with the Chinese company and then the son or someone else takes over for and everything completely changes. Our China lawyers must have dealt with this at least a dozen times.
  2. Everything is going great with the Chinese company and then the General Manager of the Chinese company or someone else goes off and starts a competitor of the Chinese company and this new competitor steals our client’s IP or trade secrets and starts competing with our client. Our China lawyers must have seen this at least two dozen times. See Inside a Heist of American Chip Designs, as China Bids for Tech Power.
  3. Everything is going great with the Chinese company and then a vendor or a supplier of the Chinese company starts competing with the Chinese company by using our client’s IP or trade secret.
  4. Everything is going great with the Chinese company but then the economics of the industry change and the Chinese company can now make a lot more money by stealing our client’s IP or trade secrets and so it does.

For these four reasons (and more), my firm’s China lawyers (and pretty much every other China attorney we know) virtually always insist on our clients having enforceable contracts with the Chinese companies with which they are doing business. We draft these contracts to cover ownership changes and to cover employees and vendors and suppliers and changing economic situations. For more on what is needed to have an enforceable China contract, check out China Contracts: Make Them Enforceable Or Don’t Bother and China Contracts That Work.

Because this only makes sense.

And of course there is more. Beyond the contract, you need the registrations required to protect your product/technology/IP. This often means registering your trademark in China in English and in Chinese, registering the copyright in your software and anything else that applies in the PRC and maybe Taiwan elsewhere and registering a design patent in China. These will give you protection against those beyond just the Chinese company with which you are doing business. I will write more on these things in my next post.

Your thoughts?