Basics of China Business Law

China trademark registration
       Same same but different

One of the annoying quirks (or endearing features) of the Chinese trademark system is that the Chinese Trademark Office (CTMO) and the Chinese court system have different standards for what makes one trademark “confusingly similar” to another, which is the statutory basis for determining whether one trademark conflicts with another. To make things even more confusing, neither the CTMO nor the Chinese court system has a uniform, clearly articulated standard.

That being said, experienced practitioners know CTMO examiners are generally more strict than Chinese judges. As discussed in these pages before, the CTMO continues to hire vast numbers of inexperienced trademark examiners who are under tremendous time pressure to crank through a mind-blowing number of trademark applications. They’re following a playbook, just like an offshore customer service representative, and they aren’t rewarded for making appropriate judgment calls. I haven’t been to one of their training sessions, but I have to believe the mantra drilled into new recruits is “When in doubt, reject.”

None of the CTMO examiners are native English speakers and many don’t speak English particularly well. They are trained to look for similarities in phonetics, pronunciation, appearance, and meaning, which can lead to absurd results for English-language marks that superficially appear similar. For instance, “Big Work” and “Big Dork” might well be considered confusingly similar brand names by the CTMO even though there isn’t a single native English speaker who would ever confuse the two. In fact, the CTMO would probably consider “Work Big” and “Big Dork” to be confusingly similar. At a very high level, you can see why: the order of the words is flipped and one letter is different, but otherwise they are identical.

It’s possible to rationalize the CTMO’s unsophisticated approach to English-language trademarks by noting that many Chinese consumers have limited English-language skills and might indeed think that “Work Big” and “Big Dork” brands were produced by the same company. But this argument doesn’t hold up under further scrutiny, because the CTMO examiners take the same approach with logos (that are not in any particular language).

The Trademark Review and Adjudication Board (TRAB) hears appeals of trademark rejections, and they have a more objective and sensible approach to the “confusingly similar” standard. But they, too, are overworked and understaffed, and far more often than you might expect, they will uphold a ridiculous CTMO decision. So it is entirely possible that in real life, an existing registration for “Work Big” would block an application for “Big Dork.”

Meanwhile, the Chinese court system would almost certainly not find that the “Big Dork” brand infringed upon the “Work Big” registration. The owner of “Work Big” could not get an injunction or damages, and would be hard pressed to take any action at customs. Frankly, it probably wouldn’t even occur to them because the marks are so different.

So where does that leave the owner of the “Big Dork” brand? They are unable to secure a trademark registration in China, but they can’t be sued for infringement either. Effectively, they’re in the same position as anyone using a descriptive trademark: nobody can stop them from using it, but they can’t stop anyone else from using it either.

Whether this is acceptable to the “Big Dork” brand owner largely depends on what they want to do in China. If all they want to do in China is manufacture goods and be assured that their goods will not be seized at Customs for alleged trademark infringement, they should feel reasonably confident. It’s not ideal, though, since CTMO’s decisions are not binding and if a trademark squatter files an application a couple years down the line and gets a CTMO examiner with a more relaxed standard, that squatter might be able to secure a registration after all. The best decision would be to use a trademark that they could definitely register in China, whether by appealing the CTMO’s rejection or by picking a new trademark. Better safe than sorry.

And if they plan to sell goods in China, they absolutely need to find another trademark, because it’s guaranteed that someone else would copy the “Big Dork” brand name and they wouldn’t be able to do a thing about it. See Make China Trademarks a Priority.

China employment lawyersChina employees can terminate their employment contracts and secure severance against their employer if their employer has not provided the labor protections or abided by the work conditions set forth in the employment contract. Many employers do not realize this applies to sexual harassment as well.

China employers are obligated to prevent and stop sexual harassment against their female employees in the work place and a female employee has a legal claim against an employer that fails to take necessary actions after the employee complains of sexual harassment. What this all means in real life is that if you do not already have a China-specific sexual harassment policy in place for China, you need one. NOW.

Whatever you do, do not use your U.S. or your European sexual harassment policy in China. China’s laws on this are very different from the West’s and just translating what you have will in no way cut it. See China Employment Contracts: Why Ours Are In Chinese  and Using English-Language Contracts in China. Not only must your sexual harassment policy by tailored specifically for China, it should also be tailored specifically for the locale or locales in which your China employees are based. See China Employment Law: Local and Not So Simple. A sexual harassment policy not tailored to the relevant locale within China can be deemed unenforceable. Even more common, our China employment lawyers often see foreign companies get sued for following an employment policy that does not jibe with local laws or customs.

As a China employer, you should be protective and encouraging toward a harassed employee. Consider the not uncommon situation where company policy mandates harassed employees must come forward to report any harassment and stops there. What happens if a harassed employee fails to report the harassment? Will the employee be disciplined in some way? If you do not intend to punish the employee, this sort of provision makes no sense and could very well prove harmful to you since it is not usually appropriate to penalize a harassed employee for failing to report harassment. Instead of saying “must” or “shall” you probably should say “is encouraged to.”

One-sentence in your rules and regulations stating that your company does not allow sexual harassment is not nearly enough. You need to be specific about the discipline you will impose. If all your employment documents state is that you may take appropriate disciplinary actions against an employee who engages in sexual harassment you might as well not even bother with having a policy. Your policy should set out specific measures you will impose and those specific measures need to fit the general approach of your rules and regulations and fit what is appropriate to the nature of the harassment and even the locale in which the harassment occurs. Your sexual harassment rules should not only be specific; they should be concise as well. A lengthy policy with too-complicated mechanisms or multiple-layers will not serve as good guidance to your management or to your employees and therefore is virtually never a good idea for China. You should also set out various reporting mechanisms and the measures you will take to assist sexual harassment victims.

Now can you see why a U.S. or Europe sexual harassment policy simply does not work for China?

By clearly setting out the specific discipline you will impose for sexual harassment you will establish a written basis for disciplinary actions or terminations you impose against an employee who commits sexual harassment. Since China is not an employment-at-will country you as employer generally need a specific contractual/legal basis to discipline or terminate an employee. See Six Common Myths About China Employment Laws. The legal basis for a China employer being able to discipline or terminate an employee who engages in sexual harassment would be serious breach of employer rules and regulations. This means that if you do not clearly enumerate your sexual harassment rules and policies in your written employment documents, you will lack a written basis for disciplining or terminating an employee who harasses and you will have a hard time justifying any punishment you impose on such an offender.

There have been a few cases in China where employers terminated an employee for sexual harassment and then succeeded in defending themselves in unlawful termination lawsuits despite any specific sexual harassment provisions in their employer rules and regulations. These employers succeeded by arguing that the employee has violated his general duty to follow mandatory laws prohibiting sexual harassment and/or by highlighting a catch-all provision in their employer rules and regulations that provided for termination for any serious offense. But these employers could have saved a lot of time and money had they merely implemented a specific sexual harassment policy. Also, in many pro-employee jurisdictions, if you do not have a set of enforceable employer rules and regulations, you have no recourse against an employee no matter how terrible the employee’s conduct. Seven Myths About China Employer Rules and Regulations (aka Employee Handbook).

Bottom line: Check your China sexual harassment rules and policies for legal compliance under Chinese law and for your locality. Now. See Why NOW is the Time to Comply with China’s Employment Laws, Part 2.

2. My recent webinar, Employment Laws for Female Workers in China, now available on demand.

 

China IP lawyersChina (Shenzhen mostly) is the primary destination for manufacturing of small electronic consumer products. And since Internet of Things (IoT) products are red hot, this means our China lawyers get a steady stream of China IoT legal matters.

The big issue we most often see is this: the IoT product has now reached the mass production stage and is being produced in large quantities. Now that it has a commercial product, the U.S. or European (usually) buyer now seeks financing for its start-up company. The financier (be it angel, VC, private equity, or even someone’s father-in-law) then asks who owns the intellectual property in the product? With the rise of the Internet of Things (IoT), this question is often difficult to answer definitively.

How did we get to this point where the IP rights of a product are so often vague? The process has worked its way through three general stages:

Stage One. In the good old days (roughly 1981 to 1995), the situation was simple. There were two possibilities. In the first, the Chinese manufacturer made a standard consumer product. The foreign buyer purchased that existing product and perhaps required the Chinese manufacturer take the extra step of placing the buyer’s own trademark/logo on the product. In that setting, ownership of the intellectual property was clear: the Chinese manufacturer owned the product design and the foreign buyer owned its trademark/logo. In the second, the product was a long standing, well developed product of the foreign buyer. The foreign buyer brought the completed product to the Chinese manufacturer and contracted with the Chinese manufacturer to make a copy. In that setting, ownership of the intellectual property was clear: the foreign buyer owned all the intellectual property and the Chinese manufacturer owned nothing.

The simplicity of this sort of relationship encouraged the somewhat lazy practice of documenting the entire manufacturing relationship with purchase orders. NNN agreements, product development agreements and OEM agreements were seldom used, since IP ownership was clear and the price and delivery terms were resolved via the purchase orders. This approach would often lead to product defects, but that is for another post.

Stage Two. In stage two (roughly 1995 to 2015), a new form of manufacturer-buyer relationship developed. Foreign buyers began coming to China with no completed project in mind; they instead would come with a product idea or proposal. The foreign buyer would then work with the manufacturer to co-develop a product. In some cases the Chinese manufacturer would simply take a completed prototype and commercialize that prototype for mass production. In these cases, the foreign buyer arrived with little more than a basic idea and the two sides worked to co-develop the product. See China Product Development Agreements, for pretty much everything you need to know about China product development agreements.

The Chinese manufacturer usually would perform the product development work at its own expense, with the implied agreement being that it would be the exclusive manufacturer of the product. This co-development process typically used the same lazy “purchase order only” approach from stage one. This approach then led to the many issues we see today that make answering the “who owns what IP” question so difficult. To do the co-development process properly, the parties must define their relationship with three agreements: 1) an NNN Agreement, 2) a Product Development Agreement and 3) an OEM Agreement.

When these agreements do not exist, a standard set of issues arises: Who owns the product design? Who owns the molds and other tooling? Who owns the manufacturing know-how and similar trade secrets? If the buyer decides has the product made by a different Chinese factory, what compensation is owed to the Chinese manufacturer that co-developed the product? What are the  Chinese manufacturer’s obligations to comply with the foreign buyer’s price and quantity requirements? If the Chinese manufacturer terminates its relationship with the foreign buyer and manufacturers the product under its own trademark/logo, is this a violation of any agreement between the parties? Absent clear written agreements, none of these questions have clear answers. In these unclear situations, the Chinese factory will nearly always be in a much stronger position than the foreign buyer and the Chinese factory will typically prevail in any IP dispute.

Stage Three. In stage three (2015 to today), we arrive at the IoT era. In designing, developing and manufacturing consumer products for the IoT market, the already unclear and problem-filled relationships of the stage two era are now magnified. In the IoT era a whole new set of issues has arisen. In the stage two era, there was at least the simplicity of two entities designing and/or manufacturing a single product. In the IoT era, the situation is considerably more complex. In most of the IoT projects we have done, the development process has expanded to include the following:

1. Product “concept” from the foreign (usually United States or European) buyer.

2. Product external design, from an international design firm.

3. Internal design and function, owned by:

a. The foreign buyer;

b. The Chinese manufacturer;

c. The provider of sensors and other components required to connect the IoT product to an outside network.

4. Design of the IoT product “app” (usually for smart phones). This involves two completely separate sets of software: the communication sending software residing on the IoT product and the communication receiving software residing in the application. In the same manner as the internal design, these software components may be written/designed by multiple parties: the foreign buyer, the Chinese manufacturer and (quite often) third party software design firms.

What happens then when the product is complete, and manufacturing is ready to start and the foreign buyer starts to seek funding: The funding source almost invariably will ask who owns the IoT product? Who owns its underlying IP? What our China lawyers have far too often found when we ask the foreign buyers these questions is that they usually don’t really know.

This “we don’t know” response does not sit well with potential sources of serious financing. Even worse, when the foreign buyer is pushed to answer the question, it becomes clear that it is not clear who owns the new product. Far too often the only ownership issue that is clear is that the one entity that the foreign buyer is the one entity that does NOT own the rights to the product. Even worse, it is usually not possible to fix the situation by this point.

Bottom Line: As manufacturing in China and the IP issues attendant with that become more complex, it becomes even more important that you have clear written agreements that answer the obvious IP questions in advance. It does not make sense for you to devote your time and your energy and your money developing an IoT product for someone else to own.

For more on the issues involving China and the Internet of Things, check out the following:

China employment lawyersAs I have previously written, during its new hire on-boarding process, China employers should confirm there are no encumbrances or restrictions on any new hires coming to work for your company. In particular, employers should make sure there are no in-force non-compete agreements. Let me explain why this is so important.

Though non-compete agreements are generally disliked by China’s administrative and judicial authorities, many employers like to have a non-compete agreement in place with every employee they hire, even part-time workers. Moreover, many employers prefer to have an elective agreement where the employer has the right to decide whether or not to enforce the non-compete agreement upon termination of the employment contract. In other words, the employer gets to decide whether it will pay the employee for not competing for a certain period of time after the employee’s departure, or whether the employee can “go free” without any restraints. The legality of such an elective arrangement depends on where you are located in China, but for purposes of this discussion let’s assume such terms are in fact legal and enforceable.

It makes complete sense for the employer to want to wait until the end of the employment term to see if the employee possesses any proprietary information worth protecting, since things may change during the course of employment. This especially makes sense because in China the employer must pay its departing employee not to compete.

What though happens if the employer does nothing when the employment relationship ends. Usually,“no action” on the part of the employer means the non-compete agreement does not come into force. If this is the employer’s intention it’s probably okay. But if the employee is both expecting and wanting a non-compete payment from you as his or her employer and you have not clarified the non-compete issue at time of termination, the employee may send you a demand for payment or even bring a lawsuit against you to enforce the non-compete. To avoid this battle and headache, if you decide you are not going to enforce the non-compete provision or contract, your best course of action is to make this clear to your departing employee before the employee’s departure. Doing this virtually always stops a terminated employee from suing for non-payment on a non-compete.

But what if you as the employer want to enforce your non-compete provision or agreement? In this case, you will need to inform the employee that you are electing to enforce the non-compete and you should also be sure to comply with all of the terms of the non-compete, including paying all non-compete compensation due to your departing employee. You should put your employee(s) on notice of your intent to enforce the non-compete via a clear writing to the employee. And by this I mean a hard copy document with clear language (in Chinese if your employee is Chinese) setting out your intention to enforce the non-compete. In most China jurisdictions, an employer who does not affirmatively confirm its desire to enforce a non-compete will be deemed to have waived its right to enforce the non-compete after three or so months. The exact number of months an employer can go without being deemed to have relinquished its rights to enforce a non-compete depends on the locale — as is true for just about everything else relating to China’s employment laws. See China Employment Law: Local and Not So Simple.

In the old days, when China non-competes were less complicated, our China employment lawyers pretty much always suggested to our clients that they put non-compete provisions in their China employment contracts. Nowadays though, we suggest they balance their need for a non-compete against the risks that such a provision or contract could eventually cause them problems. For example, what happens if you use a non-compete that automatically takes effect upon the employee’s termination and you have no intention of enforcing it when the employee leaves but you forget to terminate the non-compete when processing the employee’s departure? Though this too depends on your locale, in many of China’s cities, this will mean you will either need to reach agreement to pay your employee for a mutual termination of the non-compete or you do not pay any non-compete compensation and you run the risk of a Chinese arbitrator or judge determining that you are “stuck” with the non-compete because you knowingly signed a binding agreement that included one..

The bottom line is that you should be careful with your non-competes and that means not just inserting one without thinking through the repercussions of doing so and being very careful to act on any non-competes before any impending employee termination.

China gaming lawyersChina presents a wealth of opportunities for foreign gaming companies, but (and this is true of pretty much every IP-laden industry), it also presents substantial risks. See Gaming the System? Foreign Access to China’s Online Gaming Industry.

This post sets out the basics on how online gaming companies can protect their IP in China via China IP registrations. Though our law firm represents a host (sort-of-pun intended) of online gaming companies, we have been hesitant to write specifically about largely because it is not all that legally different from other industries. But because we have lately been getting emails requesting we do so, we will. Starting now.

The big thing to know about China IP laws as they relate to online gaming is that there really are no IP laws specific to online gaming. China’s IP laws relevant to online gaming are the same trademark and copyright and patent and IP licensing and trade secret and unfair competition laws we constantly write about on here. But though the laws are the same, how best to apply them to the particular product/industry — online gaming — differs. Our China IP lawyers generally view the IP work we do for our gaming company clients as similar to what we do for our movie and music and software and publishing (especially comic books) and toy company (especially dolls and character figures) clients.

China Online Gaming Copyright Protections. Copyright laws usually come into play when you are talking about “content” and when you are talking about online gaming, you are essentially talking about content. Online games are typically rife with copyrightable content, including the characters in the game, the music, the speaking, the story-line, and the animation. Oh, and of course the code

Registering copyrights for online games in China is very much like doing so in the United States and in Europe. Because of this, when we do such registrations, we usually just track what has already been done in the U.S. or in Europe. Registering video game source code in China typically consists of registering the source code using China’s special software registration rules. When it comes to registering the artwork in games, our normal strategy is to treat each character as a work of art. If there are special locations, these are also treated as a work of art. All the artwork is usually then collected into a bundle and is registered in one filing. The exact physical item that is sent to the registration authority depends on the nature of the work. Registration is not expensive and it is better to register too much rather than too little.

China Online Gaming Trademark Protections. As regular readers of this blog well know, we are huge fans of registering China trademarks. It is bad enough if someone copies your game but if they can legally give it and its characters the same names you gave them, it becomes nearly impossible for you to distinguish your game from the copy. Enforcing trademark rights in China is generally easier than enforcing a copyright rights and that’s why trademarks should always be considered for the name of the game and the names of the characters. The key thing you should know about China trademarks is that they usually take around a year to secure. This means you should file for your China trademarks as soon as you have an idea of what you will be calling your game and/or its characters.

China Online Gaming Patent Protections. Patents are still pretty uncommon in China for online games, but there will be instances where securing one will make sense. It really just depends.

Protecting your gaming IP requires you think ahead and act ahead. And as is true for pretty much all industries in China, the biggest benefit in your securing China trademarks and copyrights and patents will likely not so much to give you the ability to prevail in a lawsuit against an infringer, but to make potential infringers think twice before copying you. If given the choice (and to a certain extent infringers are given this choice) between copying your game that is loaded with registered China IP protections or copying a game with few or no China IP protections, the infringer more likely to pass your game by, which is exactly what you want.

 

China IP lawyers and artificial intelligenceI have received a number of emails in response to my recent post on China’s artificial intelligence plan. Many who wrote me seek to reduce China’s plan to the following simple, three step process:

  • Catch up in AI by 2020.
  • Learn to make some basic products by 2025.
  • Lead the world by 2030.

This does not accurately summarize the plan, though it is how much of the English language media describe it. The full PRC AI plan is set out in 35 pages of dense, jargon heavy, Chinese bureaucratic prose. I will be doing a series of blog posts seeking to explain the full plan. My first post, China’s Artificial Intelligence Plan — Stage 1, dealt only with stage one, and as you can see from that post, stage one is not written as “catch up.” Stage one is a full-on plan to continue developing technologies with which Chinese companies are already working. I note also that manufacturing automation robotics is not featured. On the robotics side, the emphasis is on service robots.

Note also that the Chinese companies are already way ahead of this plan. They are not waiting around for guidance from the government on their AI projects; they are moving ahead full speed. In general, Chinese companies are succeeding most with the software/network based applications of AI. This is the focus of the Baidu research center in Silicon Valley. They are not doing as well with mechanical devices such as robotics and smart vehicles and sensor based IoT devices. However, they know that and they are making strong efforts to advances in these areas. We touch on this a bit in China IP Challenges for Automotive Suppliers. One of the areas on which many Chinese companies are focusing is on human/AI interaction and they are having good success with that in the field of medical imaging and diagnosis.

There is little doubt that part of China’s AI strategy involves acquiring technology and then selling in back into the developed market from which it came. This has been and still is the strategy of businesses in pretty much every developing country. The U.S. followed this approach during the entire 19th and early 20th centuries. Japan and Korea and Taiwan did it with great success in the post WWII era. China and India are now moving into that phase. That is how technical progress is made and we write about to guard against this sort of IP appropriation nearly every week. See How To Give Away Your IP In China, How to Give Away Your IP in China Without Realizing It and China and the Internet of Things and How to Destroy Your Own Company.

The real question is whether this strategy will work in the AI era  In general, Chinese companies are not good at working on their own to appropriate foreign technology. They prefer to enter into a manufacturing or joint venture arrangement where they convince the foreign entity to teach them how to use the technology. See China Joint Ventures: Keeping Your Friends Close and Your IP Closer. Then, later, they appropriate the technology and sell the cheaper product back into the same market. This is what Chinese companies did with high speed rail and with the Russian designed fighter jet and this is what they are trying to do it now with commercial aircraft. They will undoubtedly seek to do the same thing with AI and robotics. See China-US Trade Wars and the IP Elephant in the Room.

Will China succeed it purloining AI IP? It depends on a couple of factors. First, if the technology is protected by patent and copyright and trade secrecy, then they cannot sell into the markets where those IP protections exist. This would mean that North America and the EU would be closed to them, at least during the period where the IP protections are in place. Second, can Chinese companies master the technology to point where they can really compete? Normally, the Chinese companies simply clone the product and then seek to compete solely on the basis of price. For some products, this works. For more sophisticated IoT, AI, “smart” products, the success rate of the Chinese companies has been low. How many U.S. consumers get excited about the purchase of a Lenovo computer or a Xiaomi cell phone? How many U.S. customers are interested in buying PRC knock offs of virtual reality headsets? Not many. Price is not the significant issue for these more technically sophisticated products. When Chinese companies cannot compete on price, they traditionally don’t know what to do. There are many programs in place in China focused on changing this “price is the only issue” mindset. So far, progress has been sporadic at best.

However, without regard to whether China can succeed with its AI program, it is clear that appropriating foreign AI technology is the goal of most Chinese companies operating in this sector. For that reason, foreign entities that work with Chinese companies need to be aware of the significant risk and take the necessary steps to protect themselves. There are many ways to do this, using a mix of IP registrations and carefully drafted agreements. See China Contracts: Make Them Enforceable or Don’t Bother. This is what the China lawyers at my firm focus on and this is the issue we discuss most often on this blog. Stay tuned.

China attorneys lawyers
Don’t trust the translation

Can’t believe this still happens, but it is, and in numbers that would likely surprise many people. The “this” to which I am referring is foreign companies signing dual language contracts without knowing exactly what the Chinese language portion of their contract says. This is really risky dangerous and below I explain why.

Many dual language Chinese-English contracts are silent on which language controls. For some unknown reason, foreign companies far too often just assume that the English language portion controls or they just assume that it does not matter because the meaning of both the English and the Chinese portions is exactly the same. Wrong, wrong, wrong.

What language controls when you have a dual-language contract?  If both languages say the same one language controls, that one language will control. If both the English language and the Chinese language portions say the Chinese language portion controls, the Chinese language portion will control. Similarly, if both the Chinese language and the English language portions say the English language portion controls, the English language portion will control. These are the easy and safe examples.

It is everything else that so often cause problems for American and European and Australian companies in  trouble.

If both your English language and your Chinese language portions are silent as to which portion controls, the Chinese language portion will control in Chinese courts and in China arbitrations. In real life this means that if the English language portion of your joint venture contract says that you get 10 percent of the joint venture’s revenue  but the Chinese portion says you get 10 percent of the profits (which will of course be way less than revenues) you will have no legal basis for claiming anything more than 10 percent of the profits. Not surprisingly it is joint venture contracts and licensing agreements where our China lawyers most often see this sort of meaningful dichotomy between the English and the Chinese portions of the contract.

Of the hundreds of dual language contracts proposed by Chinese companies and reviewed by one of my firm’s China attorneys, we’ve never seen a single one where the Chinese portion was less favorable to the Chinese company than the English portion. But we’ve seen plenty where the Chinese portion is better or much better for the Chinese company than the English portion. Chinese companies love using a contract with an English portion that is more favorable to the foreign company than the Chinese portion and then relying on the English speaking company to assume that the English language portion will control.

But what if the English language portion explicitly states that it will control? This works right? Not necessarily. If the Chinese language portion also explicitly states that it will control, the Chinese language portion will control under Chinese law. If the Chinese language portion is silent or says that the English language portion controls, the English language portion will control.

As we noted in China Contracts: Make Them Enforceable Or Don’t Bother, it usually makes sense to draft contracts with Chinese companies in Chinese with an English language translation. But this also requires that if that contract is going to be enforced in China (as should usually be the case), you absolutely positively need to be certain that you know exactly what the Chinese language portion of that contract actually says. No matter what the English language portion of your contract says, it behooves you to know exactly what the Chinese language portion says as well.

Doing business with China
State dinners are nice, but….

The following is a guest post by Adrián Cisneros Aguilar.* A Spanish language translation is directly below the English version.

Over the past decade, I have come to the reluctant conclusion that most Mexican companies are unwilling to spend the time or the money to get timely, experienced, and appropriate help when doing business with China. I cannot tell you how many times in just the last year a Mexican company has come to me for my “quick” advice on “a few key terms” of a deal they are just about to close without having ever conducted even the most basic legal due diligence. Is the Chinese side a real company? Are they dealing with an authorized representative? Is the deal legal under Chinese law? Will they have any recourse if something goes wrong?

Mexican companies doing business with China (and many of the business consultancy firms advising them) do not seem to care about these questions, and it stems from a false distinction between “business” and “legal” affairs. A company is both empowered and constrained by business norms, but those norms have no meaning without a legal framework. It’s not one or the other – it’s both. And comprehending the importance of both business and legal affairs is all the more important in countries like China where the law is often interpreted with an eye to both politics and the economy. But few Mexican entrepreneurs see law that way – they only care about the deal, and they tend to think of the law as an obstacle.

Many Mexico experts boldly claim that Mexico can rely on its treaty network to expand its imports and exports, but this is a triumph of theory over practice. Few Mexican companies truly understand how to conduct business internationally, as witnessed by the underutilization of the free trade agreement network already available to them. According to a report by the Congressional Research Service, approximately 80% of Mexican exports go to the United States (don’t get me started on the amount of FDI we get from America), but most Mexican companies are not familiar with the applicable terms of NAFTA. This lack of sophistication leads to bad business decisions. I regularly receive emails from Mexican companies that have fallen for the Chinese bank switch scam and hope that I can help get their money back.

Having worked with many Mexican companies in improving how they do business in China and with China, I worry that too many Mexican companies continue to ignore the law (largely because they don’t care about it) and never truly become “international.” Plenty of Mexican companies buy low cost off-the-shelf Chinese products to import into Mexico and there are also a number of Mexican companies that intermittently supply products to China with little or no added value. But how many Mexican companies have strong investments in China or regularly sell large amounts of product there? Not many.

To put it bluntly, if our government and our companies do not start spending more money for high-level assistance to get more sophisticated about China, our government’s current international diversification strategy will fail, at least for China. Before we spend more money encouraging Mexican companies to go abroad (or at least to somewhere other than to the United States), or promoting Mexico as a target for foreign investment, we need to spend more money educating Mexican companies on how to conduct business internationally. We need to get them to think more about the importance of the relationship between China law and business.

Otherwise, we’re just going to be spinning our wheels.

For more on business between Mexico and China, check out the following:

 

*Adrián Cisneros Aguilar is the founder/CEO of Chevaya (驰亚), an Asia-Pacific internationalization services company. Adrián has a Doctor of Laws from Shanghai Jiao Tong University and an LL.M. in International and Chinese Law from Wuhan University.

 

En los últimos diez años he llegado a concluir, si bien renuentemente,  que la mayor parte de las empresas mexicanas simplemente no están dispuestas a invertir el tiempo y el dinero necesarios para obtener ayuda oportuna, experimentada y adecuada para hacer negocios con China. No saben cuántas veces fui contactado el año pasado por alguna empresa nacional buscando mi “rápida” asesoría sobre “algunos puntos específicos” de una transacción que estaban a punto de cerrar, sin haber realizado la más básica debida diligencia siquiera.  ¿La contraparte china estaba debidamente constituida? ¿Estaban los mexicanos lidiando con un representante legalmente facultado de la empresa china? La transacción, ¿era legal bajo el Derecho chino? ¿Tenían claros los recursos o medios para hacer valer sus derechos si algo salía mal?

Ni las empresas mexicanas haciendo negocios con China (ni las consultorías de negocios asesorándolas) parecen preocuparse acerca de las cuestiones anteriores, lo que es consecuencia de la falsa distinción que hacen entre lo “comercial” y lo “legal.” Una empresa es, a un tiempo, empoderada y constreñida por reglas de negocio, pero esas reglas carecen de sentido sin un marco jurídico. No se trata de privilegiar una sobre la otra-ambas son relevantes. Y comprender la importancia, tanto de las cuestiones de negocio, como jurídicas es aún más trascendente en países como China, donde la norma frecuentemente se interpreta teniendo en cuenta consideraciones políticas y económicas. Sin embargo, pocos empresarios mexicanos ven al Derecho de esa manera: sólo les importa cerrar el trato, y tienden, por tanto, a concebir al Derecho como un obstáculo para lograrlo.

Muchos expertos mexicanos aventuradamente afirman que México se puede valer de su red de tratados internacionales en vigor para aumentar las importaciones y exportaciones, pero aquí es donde la realidad supera a la ficción, la verdad. Pocas empresas mexicanas verdaderamente entienden cómo realizar negocios internacionales, algo de lo que puede dar cuenta la subutilización de la red de tratados mencionada y que está a su disposición. De acuerdo con un reporte del Servicio de Investigación Académica del Congreso de EE.UU., aproximadamente 80% de las exportaciones mexicanas van a EE.UU. (y no me hagan hablar acerca de la cantidad de IED que viene de ese país), y aun así, la mayoría de las empresas mexicanas no están familiarizadas con los términos aplicables del TLCAN. Esta falta de sofisticación lleva a malas decisiones de negocio. Cotidianamente soy contactado por empresas mexicanas que han sido presa de la llamada “Estafa de Suplantación de Cuenta Bancaria China” esperando que les ayude a recuperar su dinero.

Habiendo trabajado con muchas empresas mexicanas en mejorar la manera en que hacen negocios en y con China, me preocupa que demasiadas empresas siguen ignorando la ley (en muy buena parte debido a que no les importa el Derecho) y, por tanto, nunca se internacionalizan realmente. Con sus excepciones, muchas empresas importan de China productos producto terminado de bajo costo, y también existen algunas empresas que, intermitentemente, proveen productos a China de poco o ningún valor agregado (agroproductos, recursos naturales, etc.). Pero, ¿cuántas empresas mexicanas tienen fuertes inversiones en China o venden regularmente grandes cantidades de producto? No muchas.

Seamos claros, si nuestros sectores público y privado no empiezan a destinar más recursos a obtener apoyo especializado de alto nivel para sofisticarse acerca de China, la actual estrategia de diversificación comercial del Gobierno Federal va a fallar, al menos, para China. Antes de que sigamos gastando dinero en animar a las empresas mexicanas a ir al extranjero (o al menos, a un lugar que no sean los EE.UU.), o promover a México como un destino para flujos de IED, debemos gastar en educar a las empresas mexicanas acera de cómo hacer negocios internacionalmente. Necesitamos que éstas comiencen a pensar más acerca de la importancia de la relación entre Derecho y negocios en China.

De otro modo, nos la pasaremos perdiendo el tiempo, haciendo cosas que no logran nada.

Para más información acerca del clima de negocios entre México y China, chequen los enlaces siguientes:

* Adrián Cisneros Aguilar es el fundador y Director General de Chevaya (驰亚), una empresa de servicios de internacionalización para Asia-Pacífico. Adrián es Doctor en Derecho por la Universidad Jiao Tong de Shanghái y Maestro en Derecho Internacional y Chino por la Universidad de Wuhan.

 

Protect your IP from China with an NNN Agreement
Protect your IP from China with an NNN Agreement

United States companies all too often make the mistake of trying to protect their intellectual property from China by using a U.S. style non-disclosure agreement (NDA). These agreements do not work for China. Chinese companies know this and so they willingly sign them.

U.S. style NDAs focus on preventing disclosure of trade secrets to the public and they are written in English, subject to U.S. law, and exclusively enforceable in a U.S. city. These things all make complete sense if you are looking to stop an American company from revealing your trade secret, but this kind of NDA is of no value when dealing with your typical Chinese company based in China.

None.  

First off, the fundamental issue when dealing with a Chinese company is not protecting your trade secret from being disclosed to the general public. The Chinese company that wants to steal your idea does not want to do so to reveal it to the general public; it steals your idea to use for its own benefit. This means your non disclosure contract with your Chinese counter-party must make clear that whether the information you provide is a trade secret or not, the Chinese company cannot use that information in competition with you.

The other fundamental problem with U.S.-style NDA agreements is that it they are not enforceable in China. Chinese law allows for protecting trade secrets and for contracts that provide NNN protections. But for such a contract to be effective and enforceable in China it should be written in Chinese, governed by Chinese law, and exclusively enforceable in a Chinese court. See China Contracts That Work.
Do not use a U.S. style non-disclosure agreement. Instead, use an NNN (non-disclosure, non-use, non-circumvention) agreement written to be enforceable in China. For all that entails, check out China NNN Agreements.

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 super fast 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.

I got an email this week from someone I’ve known since forever, telling me that his company was looking to start selling its products to China and “what’s the one thing we should look out for.”

My response was that there are two key issues when selling to China. The first is one we have covered here again and again and that is to register your IP in China before you start doing business with China See China Trademarks: Register Yours BEFORE You Do ANYTHING Else. The second should be a lot more obvious, but too often it isn’t, and that is make sure you get paid. Getting paid is most definitely a key issue when doping business with China. If a foreign seller allows its China buyer to get behind on payment, the result is never good. To quote a Chinese attorney friend of mine, “Chinese buyers don’t do letters of credit. They instead seek to impose the payment risk on the eager foreign seller who is living the ‘one toothbrush to every PRC citizen’ dream. The problem is that if the foreign seller insists on protective payment terms, the Chinese company often just moves on. There are so many suckers available, they don’t need to worry.”

What then can you as a company do if you are going to be selling your products or your services to a Chinese company? One, conduct due diligence on your potential buyers. See China Business Due Diligence. Two, don’t do the deal unless you get a substantial amount paid upfront. See Getting Money out of China: Part 6 (and read the previous five parts of this series as well) Three, have a contract that works. See China Contracts that Work.

Just be smart….