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

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

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

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

I am licensed in Washington, Illinois, and Alaska.

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

International manufacturing contracts lawyers

In Part 1 of this series, we talked about how the product development stage is the highest risk stage for foreign companies manufacturing overseas and yet also the most neglected stage. In Part 2, we talked about how foreign companies often will use NNN agreements in the factory search stage and Manufacturing Agreements (ODM, CM and OEM) for the production stage, but rarely use Product Development Agreements during the product development phase because they often fail to recognize they are in that stage or because they believe their NNN Agreement will protect them. We then explained why this can be a big mistake, the results we often see from this “big mistake” and, most importantly, how to avoid it.

In this Part 3, I am going to make a slight diversion based on an email exchange I have been having with a European company that started with it wanting our international manufacturing lawyers to review an NNN Agreement and a Mold Ownership Agreement it had paid a Chinese law firm to draft. This company was having a “bad feeling” about the documents and wanted our manufacturing lawyers to make sure they “would work for China” before submitting them to its longstanding Chinese manufacturer, with which it had maintained a “superb” relationship for the last seven years. I very quickly looked at the contracts — they were probably passable — but immediately wrote back to the company to ask whether it had a Manufacturing Agreement with this Chinese manufacturer. The response from the Spanish company was essentially, “no, but why.”

The why is that a Manufacturing Agreement is exactly what this company needed and it could have saved time and money and even credibility with its Chinese manufacturer by getting it. I explained that due to the stage it was in with its Chinese manufacturer, it would have been faster, cheaper and way way better for it to have had its Chinese law firm draft a Manufacturing Agreement with its Chinese manufacturer that included a paragraph with NNN provisions and another paragraph simply making clear that the Spanish company owned the listed molds.

That very recently concluded email exchange got me to thinking of how incredibly common it is for companies to come to us after having spent good money for legal things they either did not need at all or barely needed, especially in comparison to what they truly did need. We see this sort of overbuying/overselling all the time. Just last week, I consulted with a company that came to us after having paid for four trademarks in China when due to its situation it clearly only needed one and another company that had paid for a China employment contract even though it had no Chinese entity, which is one of the most dangerous things any foreign company can do. See American Companies in China without a WFOE and the Impact of Donald Trump and US Tariffs and Why Hong Kong is not the Answer.

Pretty much every day, a client or a potential client will come to one of the attorneys at my firm — and this holds true for every area of law in which we practice, not just international law — saying that it wants to retain us for X when the client actually needs Y. Needless to say, our attorney never would say, “sure, I will charge you for Y and do Y” while all the while thinking “this client really needs X.” No. She would say, “wait a second,” what you need here is not Y, but X, and let me explain why this is the case. Unfortunately, Chinese lawyers — certainly NOT ALL Chinese lawyers have been trained differently and I talked about this in an interview I gave back in 2016 (See On Being a China Lawyer and on Doing Business In China: An Interview):

Dan: I’ll backtrack a little and tell you the problems American companies often have with Chinese lawyers.

An American company will hire a Chinese lawyer and tell the Chinese lawyer, “I want to do ‘A,’” and the Chinese lawyer will do “A.”

Three months later the American company will learn that no one’s doing “A” anymore. They’re all doing “B.” So it will go back to the Chinese lawyer and say, “Look, we did ‘A.’ Now everyone’s telling me that wasn’t a good idea.” The Chinese lawyer will then say, “Right, it was not a good idea.”

“Then why did we do ‘A’?”

“Because you told me to do ‘A.’”

It drives American companies nuts. If you had called up an American lawyer, he or she would have said, “Why do you want to do ‘A’? We do ‘B’ 99% of the time. Let’s talk about it.” When somebody tells me they want to do something, I don’t just say, “Yes.” I ask them 10 questions because I want to make sure that’s the right way to go.

The typical dynamic between Chinese companies and Chinese lawyers is, “I’m the boss. You’re my scrivener.”

One time we were brought in to help a Chinese company. Twenty years ago it had formed an American company, and then that American company had formed a Chinese company. It’s called a “roundtripper.” China once gave all sorts of preferences to foreign companies; Chinese nationals would form American companies, then go back to China to get the preferences. Not legal, but it was very common.

This Chinese company had gotten huge. They had a company in the United States that was formed by somebody’s cousin, had never paid taxes, and maybe had aspirations of going public. They needed to clean up their act. It was hugely complicated, and we brought in an international accounting firm to help on the tax side.

My colleague Steve Dickinson is based in China, and one of the lawyers we work with there invites him out to lunch. Steve is thinking, “That’s weird. This lawyer never invites me to lunch.” Steve goes to the lunch and the client is there, and the client has this idea on how to solve the problem in about 1/10 the time and at about 1/100 the cost of what we have said needs to be done.

Steve tells the client (nicely, I presume), “Are you kidding me? You know nothing about U.S. laws, you know nothing about U.S. taxes, you’re not a lawyer or an accountant in China, and you think you’ve just solved the problem? Give me a break.” Why was Steve brought to this lunch? Because the Chinese lawyer knew it was absurd, but he just was not comfortable telling this to his client because that is not his role.

When Chinese companies come over here to the United States, they often want to tell us exactly what to do. Once we took on a case where as soon as we were paid, the Chinese company told us how we were going to handle it. We told them that what they were asking us to do would be the dumbest thing we could possibly do. (I talked with about 10 other lawyers and they were like, “Seriously?”)

“No, we need you to do that,” the Chinese company said.

We responded, “Nope. Here’s your money back.”

As American lawyers, we can’t have that. Our reputations are on the line. We’re not going to do something that makes us look silly and just wastes the client’s time and money. We’ll do things for clients even if we disagree, but not when it’s absurd or unethical.

What does all of the above have to do with saving your shirt when manufacturing overseas? A ton. Because one of the ways you save your shirt is by getting all of the manufacturing contracts and protections you need and no more.

The below is a typical email I send in response to a company that writes saying that they need legal help with their overseas manufacturing and asking how we would propose to provide them with that help.

Working with our international manufacturing lawyers will in the end always depend on what makes sense for your company and your product, but to give you at least some idea of what we do, I can tell you that we usually do some combination of the following for our clients that are looking to have their products manufactured overseas:

NNN/NDA Agreements. We almost always do these in the language of the country of your manufacturer (the official version) and in English (for you) and they typically take us 4-5 business days to complete. You can learn more about our NNN Agreements here. We draft our NNN Agreements to protect confidentiality and to prevent your overseas manufacturer from competing with you or circumventing you. They make sense before you reveal any confidences. If you choose to have us draft an NNN Agreement, we first send you (via DocuSign) a one page Flat Fee Agreement setting out the fee structure. We next send you a questionnaire and when we have your answers to that we draft the NNN in English for your approval. Once you approve of the English language version, one of our lawyers will translate that into the official language and we then send that to you. You then send the full NNN Agreement to your overseas counter-party and if it proposes any changes we will revise it.

Manufacturing Agreements. Once you have chosen your overseas manufacturer, you need a Manufacturing Agreement (a/k/a OEM Agreement or Product Supply Agreement) in the language of the country of your overseas manufacturer (official) and in English (for you). These typically take us 10-14 days to complete. You can find out more about our Manufacturing Agreements here. Our drafting process for these agreements is similar to our drafting process for our NNN Agreements. If you are already certain who you will be using as your overseas manufacturer you can probably skip the NNN Agreement and go straight to the Manufacturing Agreement as our Manufacturing Agreements contain all the substantive provisions of our NNN Agreements.

Trademarks. If you plan to put your company name or your brand name or your product name or your logo on your product or on its packaging, you need to register those as trademarks in the country in which you will be having your product made (there are some exceptions to this which we can discuss when you are clearer on where you will be doing your manufacturing). This is usually true even if you will not be selling your product in the country where your products will be made. Our trademark fees vary by the country. It also generally makes sense for you to have a trademark in those countries in which you have or expect to have substantial sales and we can help you with that also. It also sometimes makes sense to secure patents or trademarks as well.

In addition to the above (each of which depends on your situation and/or your product) and depending on how your production progresses, there may be other agreements necessary. If you want help finding the right factory, we can help with that also, either with our own people (for Vietnam or Thailand) or by referring you to outside sourcing experts.

Our goal is to provide our clients with customized solutions to fit their manufacturing needs. Towards that end, if you have any additional questions, please do not hesitate. In the meantime, if you can tell us more about your product, your situation, and your goals, we can help narrow down your actual needs. At some point I would be happy to get on the phone with you because in 10-15 minutes of my peppering you with questions I am confident I can figure out exactly what you need and if I can’t, I can refer you to one of our more specialized lawyers who can.

Bottom Line: When manufacturing overseas, what makes sense for you is what makes sense for YOU and that is not usually going to be what you read on the internet nor what some other company tells you it did nor what you tell some law firm you need nor what some law firm wants to sell you.

Your thoughts?

International lawyers for manufacturing contracts

In Part 1 of this series, we talked about how the product development stage is the highest risk stage for foreign companies manufacturing overseas and yet also the most neglected stage. Foreign companies will use NNN agreements in the factory search stage and Manufacturing Agreements (ODM, CM and OEM) for the production stage, but they rarely use Product Development Agreements during the product development phase, oftentimes because they do not recognize they are in that stage or because they believe their NNN Agreement will protect them. This is a big mistake that often leads to one of two disasters for the foreign company.

The failure to use a product development agreement often leads to one of two disasters for the foreign company.

The first disaster usually occurs when the overseas manufacturer does the product development work at no charge. In these situations, the overseas manufacturer often will claim the intellectual property rights in the developed product are its own and will “generously” offer to manufacture the product for the foreign company at the price, payment, quantity, quality and delivery terms chosen by the overseas manufacturer. No matter how outrageous the pricing or other demands from your overseas manufacturer, there is little you can do because you waited until development was finished before even considering who would end up with “your” IP and now your overseas manufacturer owns it all. Our international manufacturing lawyers see this all the time, especially with start-up companies involved in making products for the Internet of Things ecosystem. See The Internet of Things: Do You Really Own “Your” IoT Product?

The second disaster stems from foreign companies not considering the procedural/operational issues inherent in successfully developing a product. Foreign companies far often mistakenly assume their overseas manufacturers can develop any product within the tight timeframes and close tolerances required by modern business. This often leads to the following problems:

  • The product is never completed or never works properly.
  • The product is not completed until after the market opportunity has passed.
  • The product ends up costing far more than anticipated.

And again, Internet of Things companies seem particularly prone to this.

The best way to address the above product development risks is with a product specific product development agreement tailored to the country in which your manufacturer is located. A good product development agreement covers the period between the NNN agreement stage when you are figuring out which manufacturer to use and the Manufacturing Agreement stage when you have already selected your manufacturer and know exactly what you will have manufactured.

A good product development agreement generally includes provisions addressing the following:

1. The product to be developed.

2. The specific technology the foreign company and the overseas manufacturer will contribute.

3. Who will provide product specifications and in what form.

4. Who will own the IP rights to the resulting product. Our international manufacturing attorneys often review overseas product development projects where the overseas manufacturer has asserted it owns all of IP rights in the developed product. These overseas manufacturers typically had agreed to make “their” product available to our clients  while at the same time manufacturing the product for their own sales under their own trademark and for sales to competitors of our client. Our clients are usually stunned when we tell them that because they had no written agreement making clear they would own the resulting product and the resulting IP in that product, their overseas manufacturers are legally justified in claiming IP ownership because they contributed their technology to developing the product and because they incurred the product development costs.

5. Who will pay for product development costs?

6. Who will pay for the molds and tooling? This becomes a major issue when the foreign company seeks to use a different manufacturer after product development is complete. In this situation, the overseas manufacturer that helped you to develop the product will likely do one of the following:

a. Refuse to release the molds, tooling, CAD drawings and other items required to manufacture the product.

b. Require you pay a substantial fee to give you the molds, tooling, CAD drawings and other items related to the product.

c. Claim ownership in the IP related to the product and threaten to sue you in its own country if anyone else manufactures the product.

You will be particularly badly positioned if your overseas manufacturer did the development work and produced the molds and tooling at its own cost, though it is also very common for overseas manufacturers to engage in the above tactics even when you paid for the molds and tooling. You are not going to be protected from this unless you have a written agreement (enforceable in your manufacturer’s country) making clear you own the molds and tooling and penalizing the overseas manufacturer for not immediately returning those to you. See Product Molds And Tooling Three Things You Must Do to Hang on to Yours.

7. Setting milestones. Overseas manufacturers will often agree to do your development work but then fail to do so in a timely manner. Your product development agreement should provide incentives for your overseas manufacturer to meet the listed milestones and a penalty if it does not. The following is a typical arrangement:

a. The overseas manufacturer does product development at its own cost and you pay all hard costs for molds and similar items.

b. Milestones and clear specifications for product development are set.

d. You and your overseas manufacturer agree on a target price and quantity for when the product is developed.

e. If your overseas manufacturer meets the milestones and specs and agrees to sell at the target price and quantity, you will then enter into a Manufacturing Agreement with it.

Overseas manufacturers (especially in China and especially in Chinese-owned factories in Vietnam and Thailand) usually prefer to cover all product development costs because they want to own the resulting product and foreign companies far too often go along with this, without realizing this likely means your overseas manufacturer will end up with “your” product and its related IP.

In part 3 of this series we will discuss how to protect your molds and tooling when manufacturing overseas.

Asia product development contracts

When a company comes to us looking to have its product outsourced for manufacturing in a foreign country, they often do not have a fully final product. By this I mean that their “product” can be anything ranging from a mere idea to a prototype needing further development before large scale manufacturing to a product needing minor refinements to a fully-fledged ready-to-go product. Our international manufacturing lawyers deal with less than fully-fledged products more than half the time.

Often, a client will believe its product is “ready to go” when it actually can (and should be) further modified to reduce production costs or simply to make it just a little bit better. It is quite common for good overseas manufacturers to suggest at least a few helpful changes to so-called final products.

Whenever an overseas manufacturer modifies (even slightly) one of our client’s products (and even when they don’t), we as lawyers immediately have the following three questions:

  1. Will our client own the IP rights to the modifications?
  2. Will our client own the IP rights to the final product?
  3. How can we as the lawyers best protect our client’s IP rights in the modifications and the products?

These are not merely academic questions either as our international IP lawyers get a fairly steady stream of American (United States, Canada, Brazil and Mexico, mostly), Australian,  and European companies seeking help to “recover” their IP rights taken by their (mostly) Asian manufacturers. Much of the time there is little our IP lawyers can do in these situations either because it is not clear who owns the IP rights or it is clear that our client unintentionally relinquished the IP rights to its manufacturer. Even worse, there are plenty of times where we have to tell our client that it is not clear who would prevail were we to bring a lawsuit but it is very clear that such a lawsuit will be incredibly time-consuming and expensive and require all sorts of highly paid experts.

Who owns the IP rights in your product? Do you really know? It is not uncommon for manufacturers to wait years before asserting their rights to “your” product. This assertion usually comes when your manufacturer decides the time has become right for it to begin selling its own products or when you decide you want to use another manufacturer. See Your China Factory as your Toughest Competitor and How to Stop Your China Manufacturer from Selling Your Product to Others: Don’t Let This Happen to You for how common the first of these scenarios has become and see Why Changing Suppliers Can Be So Risky for how incredibly common the second of these scenarios has always been.

The product development stage is the highest risk stage for foreign companies manufacturing overseas and yet also the most neglected stage. Foreign companies will use NNN agreements in the factory search stage and Manufacturing Agreements (ODM, CM and OEM) for the production stage, but they rarely use Product Development Agreements during the product development phase, oftentimes because they do not recognize they are in that stage or because they believe their NNN Agreement will protect them. This is a big mistake that often leads to one of two disasters for the foreign company.

In part 2 of this series we will set out why not having a timely and country-specific Product Development Agreement can a mistake, the two disasters our international lawyers often see that arise from this mistake and, most importantly, what you can do to prevent all this.

Stay tuned….

China Manufacturing Contract lawyers

Just read a great post on China ODM manufacturing at the always super-helpful Quality Inspection Blog. The post is entitled The Danger of Developing your Custom Product with an ODM Factory and it is on how going to an ODM factory for a custom product is both a sourcing and a legal mistake.

The post notes how foreign companies looking to have a custom product made in China are “tempted to go for a shortcut: working with a manufacturer that has been making very similar products (an Original Design Manufacturer, or ODM)” and on why that is so often a really bad idea. Per the post, the pros for using an ODM manufacturer to make your custom product are speed and starting costs, both because the ODM manufacturer is already making something close to what you want for your custom product. The cons are the following:

  • Changing your supplier will be difficult because it owns the design.
  • You are taking a risk because your supplier may have stolen its design from another company and your product may get sued for IP infringement and banned from key online marketplaces.
  • If your sales are high your supplier will tempted to compete with you.
  • You will have a tough time getting favorable terms.
  • Your design improvements/innovations will “feed” your supplier to be better able to compete with you.

The post then comments on how common it is for the Chinese ODM factory to get valuable design input from the foreign buyer and then go off and make the product for themselves. To help avoid this the post recommends getting the Chinese ODM factory to sign an enforceable non-disclosure, non-use, and non-circumvention agreement.

The above is all true and it leads the author to conclude that if you are going to have large quantities of your product made, you are better off using a contract manufacturer, not an ODM manufacturer.

From a legal perspective I cannot resist making one more suggestion. If you are working with any sort of manufacturer in China (or Vietnam or Thailand or Taiwan or Turkey or Spain or anywhere else) on together developing a product, you should have a Product Development Agreement with that manufacturer that is clear on who does what, who pays for what and, most importantly, who will own what in the end. And that contract must be written with your specific goals and product and country of manufacture in mind. In other words, a Product Development Agreement written for Spain is not going to work in China and a Product Development Agreement written for China is not going to work in Vietnam.

For more on how to protect yourself when manufacturing overseas, check out Overseas Manufacturing Contracts (OEM, CM and ODM).

Oh, and one more thing I feel I must drill home. As a result of the US-China trade war and the rapidly declining economic state of so many Chinese factories our China manufacturing lawyers are seeing more IP theft and more quality problems early from Chinese factories than we have in at least a decade. Along these same lines, check out China Trademark Theft. It’s Baaaaaack in a Big Way.

Be careful out there. More than ever!

China lawyers
Because 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 or phone calls 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 quick general answer and, when it is easy to do so, a link or two to a blog post that provides some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.

One of our China employment lawyers sent me an email from the head of HR (based in the United States) of a potential client regarding an employer audit. In these audits our China employment lawyers start by reviewing all of the client’s employment documents, mostly consisting of their various contracts with their employees. After our employment lawyer explained the basics of what we do in our employer audits, the potential client mumbled — to the extent you can mumble in an email — how, “in the end, does any of this really make sense when everyone knows employees in China always win.”

That’s actually a good question because in employee-employer lawsuits the employee does pretty much always win. See China Employment Arbitration: Good Luck With That Battle. So why even bother?

China lawyers

A China lawyer I know was asked by a reporter whether business relationships between the United States and China will return to normal if a trade deal is reached. His response was as follows (per an email):

No deal between China and the US will cause everyone on both sides to say, “we were just kidding.” The tariffs and the arrests and the threats and the heightened risk have impacted companies and those things are not going to be forgotten. Many companies that could quickly reduce their dependence on China have done so or are continuing to put things in place to do so, no matter what happens on the trade deal. Many are being open about wanting to get out of China as fast as possible no matter what.

Many Americans living and working in China say they feel “hated” there and that makes them very uncomfortable. Many Canadian companies (and American companies as well, but to a lesser extent) have curtailed their travels to China out of sheer (and justified) fear. This will undoubtedly lead to many of them curtailing their China business as well. People are seeing China for what it really is and they don’t like it and they want out. Add in the fact that wages and costs in China just keep rising and you are essentially have the perfect storm for foreign companies to leave China or at least reduce their presence there.

The China lawyers at my firm are hearing the same sort of things. More importantly, we are being tasked with helping our clients reduce or eliminate their presence in China and then working with them on the legal side of doing business with other countries. What countries? So far we are seeing/hearing the following:

1. Thailand is very much open for business.

2. Vietnam is very much open for business, but it has become so “busy” on so many fronts that lead times can be quite slow.

3. Mexico is very much open for business. Some companies refuse even to consider Mexico because of security fears. We see this as a huge mistake because there are plenty of great areas in Mexico that are shockingly safe.

4. The Philippines is very much open for business and we have been shocked at the breadth and depth of the manufacturing there.

5. Malaysia is very much open for business.

6. Taiwan. We have seen many companies that used to be in Taiwan return to Taiwan. Taiwan is a very easy country in which to do business, but it does tend to be more expensive than China.

7. Turkey. I am hearing of a few companies looking at Turkey. I find this very interesting because I did a year of foreign study there and learned Turkish and I have friends from that time who are lawyers there.

8. India, Bangladesh, Pakistan, Cambodia, and Sri Lanka.  Mostly clothing, at least so far.

9. Poland, Portugal and Spain. We see a lot of Spain interest because we have lawyers there, but very little of that is related to China. We are seeing nascent interest in Poland and Portugal, especially for tech (software).

But China is not going to “just go away.” No way. It’s not going to become “an even larger, more powerful North Korea,” as I have heard some threaten will happen if the United States and the EU were to hang tough against China. No way. What I see is American (and European and Australian companies better recognizing what it is like to do business with China or in China. The days of so many companies having stars in their eyes about China are over and this newfound realism can only be a good thing. Will American and European and Australian companies continue to do business with China? Absolutely yes, but in lower numbers than previously. How much lower? Hard to say, but I would anticipate seeing a steady decline (maybe totally around 30%) over the next five years. China will remain a big and important country and that should not be discounted. But the big change we are seeing and expect to see accelerate is foreign companies that would in the past just check the China box are now exploring other countries as well. And this too can only be a good thing.

What are you seeing out there? No really, please tell us in the comments below. 

China WFOE formation lawyers

One of the first tasks in forming a WFOE in China is to determine what entity will be the shareholder of the WFOE. It is possible for an individual or individuals to own a China WFOE, but for various reasons, our China WFOE formation lawyers nearly always discourage that.

The basic analysis runs as follows:

1. Direct ownership of a WFOE by the foreign operating company parent company is most common for single owner WFOEs.

2. For clients that either do not want their company to be easily identified with the WFOE or for various other reasons do not want their company to own the WFOE, forming or using a Special Purpose Vehicle (SPV) — a separate holding company not directly linked to the main company — is possible.

When considering an SPV for owning a China WFOE, the following considerations can be important:

a. Over the past decade, the Chinese government has become suspicious of SPVs. At one point, it even moved to prohibit SPVs for WFOE formations. However, with the adoption of the new WFOE formation rules in 2017, the Chinese government now permits using SPVs. So current Chinese government rules are neutral on this issue.

b. In the past, one reason investors used an SPV was to hide the true identity of the owners of the WFOE. Under China’s new WFOE formation rules, the investor must provide a complete organizational chart that details ownership of the shareholder(s) and that identifies the actual controlling person. It it therefore impossible to conceal ownership. Accordingly, SPVs are no longer useful to conceal actual ownership from the Chinese government.

c. SPVs continue to be used where there are several investors in the WFOE. Often these investors are resident in different jurisdictions. In that case, it is common to take all these investors into a single SPV. The SPV is then the single shareholder of the WFOE. Issues such as management, distribution of profits and purchase and sale of ownership interests are handled at the SPV level. In many cases, the SPV is formed in a tax haven such as Hong Kong to allow distribution of profits free of tax. These considerations do not apply in a single shareholder setting.

d. In terms of limiting upstream shareholder liability, there is little to no benefit in using an SPV. The WFOE will be a limited liability legal entity. The limitation of liability rules apply in China in somewhat the same way as in the United States, Australia, Canada and the EU (including the UK). The financial liability of the WFOE is limited to the amount of investment. Liability beyond the investment amount generally occurs only in the case of illegal acts. In China this liability would generally be as follows:

  • The shareholder will be held liable if it does not contribute required capital to the China WFOE and that failure results in the WFOE not paying its taxes, employee salaries, or in a fraud against creditors.
  • A WFOE’s director will be liable for instructing the WFOE to commit an illegal act. Examples of illegal acts are tax fraud or commission of a significant safety violation.
  • Directors and the shareholder will be liable if the WFOE terminates business and does not liquidate pursuant to Chinese company law. An improper WFOE shutdown leads to both the investors and the directors being placed on a black list and prohibited from engaging in other investments or business in China. Individual directors should not travel to China since they may be detained. See Shutting Down a China WFOE: Don’t Go There.

The above three basis for liability are all very real, but creating an SPV does not noticeably reduce any of these risks. This is because most of the liability risk falls on the individual directors, not on the shareholder. Second, the Chinese government will use the org chart/actual controlling person information to “pierce the corporate veil” to assign liability to what the Chinese government determines in its own discretion is/are the actual party/parties in interest.

Other basis for liability arising from WFOE operations are so rare that they can in most instances be discounted. On the other hand, the three basis for liability set forth above are common and care must be taken to avoid these sorts of liability situations.

3. There are sometimes tax or other operational or accounting reasons for create an SPV for China WFOE ownership. In considering whether to do an SPV, a cost-benefit analysis makes sense. Most of our clients find using an SPV to own their China WFOE more trouble than it is worth. However, each situation is different and there are definitely times where SPV ownership of a China WFOE makes good sense.

China Joint Venture lawyer

This is part 5 of our series on China Joint Ventures. We are writing this series now because our China lawyers are seeing a record number of potential joint ventures, due largely to China’s declining economy, the belief that truly foreign companies will not be well-treated in China, and a desire to try to “share the risk” of all this uncertainty. In part 1 of this series, China Joint Ventures: The Long Version, we talked about fake and exploitive joint ventures. In part 2, we assumed your Chinese counterpart is legitimate and wants to do a legitimate JV with your company and we discussed how to make sure you are truly on the same page with your China joint venture counterpart(s)  regarding what will go into the joint venture and how it will operate once formed. In part 3 we discussed some of the things you need in your joint venture agreement if you are to reap benefits from your China joint venture. In part 4, we discussed why the China corporate attorneys at our firm both love and hate China joint ventures.

In this part 5, we discuss what is probably the biggest and the most common mistake we see foreign companies make when going into a China Joint Venture: believing they have control over the joint venture when in fact they do not. We also explain how to avoid this mistake.

Way back in 2008, co-blogger Steve Dickinson was the legal columnist for one of China’s most prominent English language business publications. As part of his regular monthly gig, Steve submitted an article on how to avoid joint venture mistakes. The censors rejected it and we have always assumed they did so because it would have been detrimental to Chinese companies seeking joint ventures that would greatly favor them.

AmCham Beijing did not have such constraints and it published the article Avoiding Mistakes in Chinese Joint Ventures. It provides a roadmap for avoiding what is probably the biggest and most common mistake that gives Chinese joint ventures such a bad name.

The article starts out by noting that with “the exception of some market sectors, China is remarkably open to foreign investment, and in the past several years WFOEs [Wholly Foreign Owned Entities] have become the most common vehicle for foreign investment, partly due to investor skittishness as stories about past problems with Chinese EJV [Equity Joint Venture] partners made the rounds.”

The article then goes on to note how “thoroughly vetting your joint venture partner” will “dramatically increase your likelihood of success,” but states that most China joint ventures fail because the foreign partner made the “fundamental mistake” of believing its 51% ownership gave it effective control over the joint venture:

Foreign investors too often assume Chinese joint venture companies are managed according to a common Western model, under which a board of directors has controlling power over the company. Since the board is elected by a majority vote of company owners, most foreign investors will strive to obtain a 51% ownership interest in the EJV. As majority owner, the investor then assumes he has the right to elect the entire board, and thus effectively control the company.

After winning the struggle for percentage ownership, as a concession, the foreign investor will frequently allow the local side to appoint the representative director and the company general manager.

Unintentionally, this concession cedes effective power. As a result, the investor’s struggle for board control is rendered meaningless. Frequently the Chinese side intentionally angles to ensure this outcome. We know of cases where an EJV partner concedes on the percentage ownership issue in return for control over the two key management positions in the company.

In order to exercise effective control over a joint venture in China, investors must avoid this mistake. It is necessary to have control over the day-to-day management of the joint venture company.

The article then sets out the following basics for maintaining control over your Chinese Joint Venture:

The power to appoint and remove the JV’s representative. The side that appoints the representative director will have significant control over operations. The usual practice of conceding the power to appoint a key officer or director to another investor is a mistake.

The power to appoint and remove the general manager of the joint venture company. It must be made clear that the general manager is an employee of the joint venture company who is employed entirely at the discretion of the representative director. The common practice of appointing the same person as both representative director and general manager is a mistake.

Control over the company seal, or “chop.” The person who controls the registered company seal has the power to make binding contracts on behalf of the joint venture company and to deal with the company’s banks and other key service providers. The power over that seal should be carefully guarded. Ceding control over it as a matter of convenience is a mistake. There is a long, documented history of this seemingly minor consideration dooming EJVs.

The Chinese side to a joint venture usually will refuse to agree to any of the above three control measures by claiming it is more efficient to have them control day-to-day management of the company. The Chinese side will also often claim they cannot use their political connections unless their own people are the representative director and general manager. You should see these justifications for exactly what they are: red herrings used to disguise the Chinese company’s efforts to gain operational control over the joint venture company.

Relinquishing these three control mechanisms to your Chinese joint venture partner will almost invariably cause you long-term problems because once your Chinese JV partner has these controls you will essentially have relinquished all power to influence your own joint venture. When this happens, your best bet will usually be to either reduce your investment to a minority share or abandon it altogether. Once power over operations is out of your hands, it becomes very difficult to run a successful partnership in China.

 

China joint venture lawyers

This is part 4 of our series on China Joint Ventures. We are writing this series now because our China lawyers are seeing a record number of potential joint ventures, due largely to China’s declining economy, the belief that truly foreign companies will not be well-treated in China, and a desire to try to “share the risk” of all this uncertainty. In part one of this series, China Joint Ventures: The Long Version, we talked about fake and exploitive joint ventures. In part 2, we assumed your Chinese counterpart is legitimate and wants to do a legitimate JV with your company and we discussed how to make sure you are truly on the same page with your China joint venture counterpart(s)  regarding what will go into the joint venture and how it will operate once formed. In part 3 we discussed some of the things you need in your joint venture agreement if you are to reap benefits from your China joint venture. In this part 4, we discuss why the China corporate attorneys at our firm both love and hate China joint ventures.

For better or worse, our law firm has developed quite a reputation for not liking joint ventures and so it is not uncommon for us to get calls from potential clients that start with them saying they know we don’t like joint ventures and then explaining why their doing a joint venture is either necessary or will be different from the ones we write about. Are we losing joint venture legal work because of this reputation or do we get more such work because people believe that if we give their joint venture the go-ahead it really is as good as they think it is. Though we will never know, we can at least try to clear the air. So just to be clear: we like appropriate or necessary China joint ventures but we think it a mistake to consider a joint venture as the default method for entering China.

Of all the China legal work my law firm does, setting up and dismantling joint ventures is probably my favorite. I like it because each joint venture is so different and yet all are intellectually challenging. I also like them because they tend to be one of our most lucrative corporate matters we do. We charge a flat fee for about half our China work, but we always charge hourly for joint ventures because setting up a China joint venture can range from fast and easy to difficult and contentious.

Few joint ventures are fast and easy. A joint venture consists of two independent businesses — one foreign and one Chinese — going into business together. That alone ought to tell you how difficult they can be. The most difficult questions usually center around control. Which of the two companies will control what? What really needs to be done to ensure control? What can be done to ensure neither company goes out of control?

Just to be clear, we love forming joint ventures, but only when they truly do make sense and well over half the time we end up counseling our clients against doing the joint venture. Just today I had the following conversation with a potential client (modified ever so slightly for dramatic effect):

Me: I am not clear from your email about what exactly you want to do with your Chinese manufacturer but it sounds like you want to enter into a joint venture with them and that will almost certainly be a bad idea.

Potential Client: Well, we do want to further solidify our relationship with them and we have been thinking a joint venture might be one way to do that. So why do you think it is such a bad idea.

Me: Jokingly, did I say I thought it a bad idea? I think it’s a great idea and here’s why. You will pay us anywhere from $15,000 to $85,000 now to set it up — the more you pay us the less likely it is to actually happen. And then the odds are good that in 3-4 years you will pay us another $50,000 or so to shut it down.

I hope I am doing a good job pitching this to you. Do you want to move forward?

Potential Client: I’ll take two.

Me: Perfect.

Our China lawyers also love taking apart China joint ventures that have gone wrong, and again, not for because it is in any way a good thing for our clients, who usually are in dire straits when they come to us with their joint venture problems, but because resolving joint venture disputes is like a championship chess game, but at our hourly rate.

The problem with China joint ventures is not China-specific; it is joint venture specific. Joint ventures simply tend too to be a bad way to conduct business. Our international lawyers have seen this up close and personal with Russian joint ventures, Vietnamese joint ventures, Mexican joint ventures, Korean joint ventures, Japanese joint ventures, even a Gambian joint venture. Marketing genius Seth Godin beautifully explains why this is the case in his post, “Why joint ventures fail so often“:

There are two reasons joint ventures fail. The joint part and the venture part.

All ventures are risky, because they involve change and the unknown. We set off on a venture in search of something, or to make something happen –- inherent in the idea of a venture is failure. It’s natural, then, for fearful people on both sides of a joint venture to back off when it gets scary. When given a choice between a risk and sure thing, many people pick the sure thing. So any venture begins with some question marks.

The joint part, though, is where the real problem arises. Pushing through the dip is the only way for a venture of any kind to succeed. The dip separates projects that begin from projects that finish. It’s easy and hopeful and exciting to start something, but challenging and often painful to finish it. When the project is a joint one, the pressure to push through the dip often dissipates. “Well, we only have a bit at stake here, so work on something else, something where we have to take all the blame.”

Because there isn’t one boss, one deliverable, one person pushing the project relentlessly, it stalls.

Every joint venture involves meetings, and meetings are the pressure relief valve. Meetings give us the ability to stall and to point fingers, to obfuscate and confuse. If a problem arises, if a difficulty needs to be overcome, it’s much easier to bury it at a meeting than it is to deal with it.

In my experience, you’re far better off with a licensing deal than a joint venture. One side buys the right to use an asset that belongs to the other. The initial transaction is more difficult (and apparently risky) at the start, but then the door is open to success. It’s a venture that belongs to one party, someone with a lot at stake and an incentive to make it work.

Only one person in charge at a time.

Godin is 100% right.

 

Alibaba Counterfeit Lawyer

I got an email yesterday from a company called Vintage Industrial, out of Phoenix, Arizona. Vintage Industrial makes gorgeous retro furniture pretty much entirely by hand, using old-school techniques. I am not sure why I got this email at my law firm email address. I say this because the email (as I read it) had two purposes. One, to get me to buy furniture from Vintage Industrial.  And two, to tell me about how knock-offs of its furniture are being sold on Alibaba. It accomplished the second of the two purposes by prominently including a New York Times article on its China counterfeiting problems, entitled, A Small Table Maker Takes On Alibaba’s Flood of Fakes.

Not being in the market for furniture (we just last month ordered new conference room tables for two of our U.S. offices!), I went straight to reading the article. The article essentially says the following:

  1. Many companies have knock offs of their products sold on Alibaba.
  2. These knock offs can negatively impact sales of the real thing.
  3. It is really difficult to get Alibaba to remove the knock offs and pretty much as soon as they do, a fresh round of knock offs start up again and keeping knock offs off Alibaba is like whack-a-mole

All true.

Our China IP lawyers are constantly contacted by American and European companies regarding counterfeits of their products being sold on Chinese e-commerce sites, mostly Alibaba (Taobao, Tmall, Alibaba, AliExpress, 1688.com, etc.). These sites have formal internal procedures for removing product listings that infringe a third party’s IP rights. The procedures are actually relatively easy to follow if you are fluent in either Chinese or Chinglish. But because you must follow these procedures to the letter, for most companies, removing counterfeits is usually no easy or fast task. The New York Times article talks about the owner of Vintage Industrial sometimes spending 12 hours a day on counterfeit removal. Among other things, you usually must provide documentation proving (1) you and your company exist and you are the IP owner and you as the IP owner still have the rights to the IP in question. Only after you have submitted these documents and had them verified by the e-commerce site can you even submit a takedown request.

If you do all this and the removal happens, great, but oftentimes things do not go so well with the Chinese e-commerce site and then it is nearly essential to have someone who speaks Chinese, understands Chinese intellectual property law, and is experienced in dealing with the particular Chinese website with which you are having the problem. This person’s job then becomes getting to the high-level employees at the Chinese e-commerce site to explain to them why the listing does in fact violate your IP. The NYT Times spoke with an “Alibaba spokesman [who] said that suggestions that small businesses do not get its attention are “false” and that they can qualify for the streamlined process if their submissions prove reliable. If your company has not built up its own reliability with Alibaba, using a law firm whose Alibaba submissions have been proven reliable will usually be the fastest and best way to get counterfeits of your products taken down.

Our China IP lawyers have succeeded with nearly every takedown request seeking removal of products that infringe our client’s trademarks or copyrights. But about half the time, we tell the potential client they should not bother retaining our law firm for their product removal because there is such a small likelihood of success or because the gain from removal will not be worth the cost — more on that later.  The below summary of an email from one of our China IP lawyers who regularly works on takedown matters across multiple websites (both in China and elsewhere) explains:

Each Chinese website has its own takedown protocols and following those protocols is key to getting counterfeit products removed. We do not advise suing anyone or writing anyone other than the website unless and until we do not succeed in getting your products taken down. Lawsuits are expensive and based on our track record in securing takedowns, the odds are overwhelming that we will never need to file one on your behalf. Writing directly to the seller has a much lower success rate than going to the website and doing that can cause major blowback.

Only the copyright or trademark owner or its authorized representative can make takedown requests. However, sites vary as to the sort of authentication they require for Powers of Attorney. The major Chinese e-commerce sites know our lawyers well enough that they rarely even require we provide them with a formal Power of Attorney to achieve a takedown.

It is usually necessary that we be able prove you have registered your IP (your trademark or your copyright) somewhere. Some Chinese sites sometimes will take down products with foreign IP (i.e., non-China) registrations, but China registrations are always better. Technically, China is obligated to recognize copyrights registered in any Berne Convention signatory nation, but explaining China’s WTO obligations to a 21-year-old customer service representative seldom works. And as you can probably imagine, securing the removal of copyrighted IP for which a copyright has never been registered anywhere is even more difficult.

The more sophisticated/well-heeled the website, the more likely they have a formal takedown procedure. For the smaller websites, we generally have to contact someone directly by telephone. But unless the website is a pirate site (which is rare), it will not want to be sued for hosting counterfeit or pirated items and so long as we do all the work for them, they are usually quite willing to take down rogue products and content.

Once the whole takedown process begins, it pretty much continues forever because the pirates and counterfeiters do jot just go away after their first upload is taken down. Even after we stop one or two of the counterfeiters, you should expect more to pop up. This is why companies hire us to monitor and report and after we remove the existing counterfeits, we should discuss what sort of future programs make sense for your company. We recommend you have us try to figure out who is doing the counterfeiting and what we can do to try to stop it or at least slow it down. Oftentimes it is your own factory or distributor.

Our law firm has an Alibaba account that makes us eligible to seek removal of links that infringe our clients’ IP. We do this by providing the following to Alibaba: (i) our client’s “business license,” (ii) any formal IP registration documents and (iii) (sometimes) a power of attorney signed by the client, authorizing us to file the complaint on its behalf. We also submit the following information: the IP registration number(s), the title of the IP, the name of the IP owner, the type of IP, the country of registration, the time period during which the IP registration is effective, and the period during which the IP owner wishes to protect its IP rights. We translate these documents into Chinese to make things easier on the Chinese website company and to greatly speed things up.

Once Alibaba verifies the above information, we provide the infringing links and removal nearly always occurs very soon after that. For complaints concerning patent rights, we usually need to provide proof of the connection between the infringing material and the IP being infringed. Alibaba normally then sends our complaint to the infringing party. If the infringing party does not respond to our complaint within three working days of receipt — by deleting the infringing link or by filing a cross-complaint — Alibaba will delete the infringing link. Absent prior written permission from Alibaba, the infringing party would then be prohibited from posting the same information on Alibaba again. If the infringing party files a cross-complaint, we will need to deny the cross-complaint, and then Alibaba handles the “dispute.” Alibaba normally resolves such disputes within a few days. Counterfeiters rarely file cross-complaints; they typically just slink away. But they seem to be filing them more often now so as to buy time and to force the foreign company to retain a Chinese-speaking lawyer.

If your IP (especially your trademark or your copyright) is registered in China, securing removal of counterfeit products from Chinese websites is usually relatively fast and easy. If your IP is registered in a country other than China, securing the removal of counterfeit products from Chinese websites will be more difficult. If your IP is not registered in any country, your best strategy for securing removal of infringing products is usually (but not always) to register it first (typically wherever it can be done fastest and cheapest) and then seek removal, rather than to seek removal first.  If you want to protect your products from counterfeits popping up on the web (and then staying there), plan now with your IP filings for takedowns later. See China Trademarks: Register Yours BEFORE You Do ANYTHING Else.

Early in this post, I said there are times where “we tell the potential client they should not bother retaining our law firm for their product removal because the gain from removal will not be worth the cost” and promised more on this later, which is now. So I read the New York Times article from beginning to end and I looked at a ton of the Vintage Industrial products on its website and, like I said above, they make great stuff by hand. Great furniture plus hand-made in the United States using old-school methods is not cheap.

Please allow me to digress a bit. Actually, please allow me to digress a lot.

Many years ago I went to an art gallery in Hanoi and saw a painting I loved, going for around USD$4500. I loved it because its colors pop, its brush strokes are emphatic and incredible, and the eyes of the woman in the painting are mesmerizing.  It was a work of art. Later that day I saw copies/counterfeits of that painting all around Hanoi going for around $50. I ended up waiting a couple of days and then buying the original. It now hangs on a wall in my office — it’s the painting above! Here’s the thing: I never once considered buying the copy because the copy lacked everything the original had. The brush strokes were nothing special. The colors looked tired. And the eyes of the woman were off-kilter. I wanted a beautiful and well-done piece of art, not the equivalent of what hangs in the rooms at a Holiday Inn Express. They are not at all the same product and they don’t appeal to the same customer.

Those who buy a $15 knock-off Gucci purse would not pay $4650 for the real thing if there were no knock-offs; they would buy a $14 no-name purse somewhere else.

Way back in 2012, in How To Protect Your IP From China. Part 1, I wrote talked how it is important to keep your eye on the prize when dealing with your IP in China:

But there are of course circumstances where not going into China DOES greatly increase your chances of avoiding China IP theft. In those situations, should you avoid China? Not necessarily. In those situations you should do a cost-benefit analysis, or as I am always telling my clients, you should “keep your eyes on the prize.” Your company is in business to make money, and as important as IP is to your company – and no doubt for many companies, especially biotech companies, IP can be everything — your end goal is to maximize profits. There will be plenty of times where you can make more than enough money in China to justify putting your IP at risk.

Where I am going with all this is that companies that see knock-offs of their products immediately get all up in arms — and rightly so –and too often want to do “anything and everything’ to stop it. But that is not always going to be the best use of their time or their money. It generally (but not always) will not be worth it for a company to spend money trying to stop knock-offs in a country in which they are making no sales and have no future plans to sell to. It also is often not worth it for a company to spend a lot of time or money trying to stop knock-offs with which it is not competing.

So read the New York Times article and then ask yourself what it’s really about. Is it about Chinese counterfeiting? Is it about how American companies are impacted by Chinese counterfeiting? Is it about how American companies are economically harmed by Chinese counterfeiting. Is it about how American companies need to find a balance between advancing their company’s profits and fighting off Chinese counterfeiting? I think it is about all these things.

What do you think?