Sinosure, Leviton Law Firm, Brown & Joseph
Sinosure wants you

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

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

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

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

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

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

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

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

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

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

Domestic Wire Transfer:

Routing Bank: First Bank & Trust, Evanston IL

ABA: 071925538

Account #: 4084168

Beneficiary: Brown and Joseph, LTD

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

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

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

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

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

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

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

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

U.S.-Based Collection Law Firm.

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

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

The #1 International Debt Recovery Agency in China

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

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

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

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

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

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

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

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

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

China Trademark Squatting

We are on record (and then some) about the importance of registering your trademark in China. In spite of our efforts — or perhaps because of them — nearly every week someone contacts us after discovering someone else has registered “their” trademarks in China.

Most people lump all such third party registrants together under the common rubric of “trademark squatters,” but in fact, the registrants can be separated into five distinct categories, and the appropriate response (and the likelihood of success) depends on the category in which category they fall.

 

Category One – The Extortionist

China’s laissez-faire attitude towards bad-faith trademark registrations has created a cottage industry for numerous “entrepreneurs”: individuals who register brand names belonging to foreign companies and then hold those brand names for ransom. Anyone who deals with China trademarks has run into this sort of trademark squatter. They have filed hundreds of applications, for a wide variety of brand names and in a wide range of Nice classes. The registrations may be for different sorts of goods or services than what the brand is known for. The trademark squatter has no connection to any of the brands, and no intention of ever using them in commerce. They are a classic non-practicing entity, and their sole intent is to monetize the trademark registration by selling it to the highest bidder. They will sometimes approach the trademark owner, or they may sell the trademark to another third party on one of China’s trademark clearinghouse websites. The prices can vary but US$10,000/registration is a common starting bid.

Such registrations are the very definition of bad-faith, and you would think they would be easy to invalidate. Not so. China is slowly getting better at dealing with these situations, but even in egregious cases, it’s far from a slam dunk. The typical route involves an invalidation proceeding and an appeal and then maybe another appeal. All of this can take years and cost thousands of dollars, and there’s no guarantee of success. It’s easy to see why many foreign brand owners just pay the money and move on, as with a nuisance lawsuit. Alternately, some brand owners will wait three years and file a non-use cancellation. See China Trademarks: When (and How) to Prove Use of a Mark in Commerce.

Category Two – The Counterfeiter

Companies find the first category of trademark squatter exasperating, but they find the second category infuriating. These squatters have registered foreign companies’ trademarks not to hold them for ransom, but to use them in commerce. Indeed, these squatters’ business model is to produce counterfeit goods they can sell in China (and in any other country where the foreign company has not registered its trademark) without fear of reprisal from the true brand owner – because the squatter legally owns the trademark in China! Sometimes they will sell the same kinds of goods as the true brand owner, sometimes not – it all depends on how well-known the brand is, and what the squatter thinks will generate more money for them. Oftentimes you’ll see these squatters register several foreign brand names in China, all in the same classes of goods. If one foreign brand is good, four are better.

It is usually more expensive for the true brand owners to purchase these registrations because the registrations are worth more to the trademark squatter. Moreover, a non-use cancellation will not succeed, because the marks are actually being used in commerce. It is sometimes possible to succeed with a bad-faith invalidation, but this will largely turn on whether the mark was well-known in China, which is a difficult thing to prove. For many years the de facto Chinese position has been that if foreign brand owners cared about their marks in China, they should have registered them there. Here, the alleged trademark squatter is using the mark in commerce and probably also employing people and paying taxes on its income. That looks a lot better to Chinese authorities than a sole-proprietor non-practicing entity who lives with his parents in Kunming or Kansas.

 

Category Three – The Stiff-Arm Competitor

The third category of squatter looks a lot like the second category – they file trademarks covering a certain, fairly narrow set of goods. But this type of squatter isn’t a counterfeiter and has no plans to use the marks in commerce. Rather, this squatter is your competitor, and their goal is to prevent you from entering the Chinese market (at least under your preferred brand name). The more specialized the market, the more likely this is to occur because everyone knows all of the other players. More than once I’ve seen a Chinese manufacturer in a specialized industry register the trademarks of all its European and American competitors. They then offer the competitors a Hobson’s choice: buy the trademark at a grossly inflated price (upwards of $250,000K) AND designate the competitor their exclusive distributor in China, or say goodbye to their brands in China.

The stiff-arm competitor often also oftentimes will threaten to block products manufactured with its trademark by anyone else from leaving China. In other words, they may threaten to effectively shut down your entire business worldwide by choking off your sole production point.

Brands that are actually well-known in China may have some success in wresting trademark registrations from such registrants, but as noted above that rarely happens. Most foreign brand owners in this position are out of luck. The argument that these trademark squatters gamed the system is not going to get much traction.

 

Category Four – The “Helpful” Supplier

Sometimes companies will find that their brand names have been registered by a familiar entity – their own supplier or distributor in China. If the supplier or distributor is still producing or distributing goods for the company, the proffered explanation is usually benign: the supplier or distributor registered the mark to prevent any rapscallion squatters from doing so first. This may be true, but the brand owner should wonder why the supplier/distributor didn’t inform them first and/or ask if the brand owner wanted to register the mark itself. Nonetheless, if the relationship is still positive, it is a relatively straightforward process for the supplier/distributor to assign the mark to the brand owner. Some suppliers/distributors will attempt to retain ownership of the trademark but this should be resisted.

If the relationship has turned ugly, which is usually the case when the trademark owner is a former supplier/distributor, a simple assignment may be difficult to procure. But this situation is the easiest one in which to prove a bad-faith registration. So long as you can prove the existence of a business relationship with the supplier or distributor (e.g., through purchase orders, contracts, and other documentation), it is quite likely the squatter will be forced to give up the registrations. Needless to say, the process is a lot easier if you have a signed, chopped manufacturing agreement or distributor in which the supplier specifically agrees not to register your IP. See China Trademarks and Your Chinese Distributor.

 

Category Five – The Coincidental Copycat

The last category isn’t really a traditional trademark squatter and arguably shouldn’t even be part of this list. Occasionally, someone in China registers “your” trademark because they came up with it on their own independently. This only happens with word marks – it is highly improbable two applicants would come up with the same logo by blind chance. In these cases, the trademark owner may be willing to sell the trademark, but if they’re not, there’s little you can do about it. The registrant simply followed the dictates of China’s Trademark Law: they were the first to file (not you), and so they get to keep the mark.

In sum: if you find that your brand has been taken by a trademark squatter in China, first determine the category they fit in, and then plot your strategy accordingly. Better yet, register your trademark right away and prevent having to strategize at all.

 

 

China employer auditNow is the time of year when we usually go full one with our employer-employee audits. The below is what we usually recommend to our employer clients for our audits. Due to China’s recent rash of employment law changes, the importance of these audits have increased in importance. Though not an exhaustive list, the below can serve as a good starting point. Going through the below will help you see where you are in terms of employment law compliance and, most importantly, what you should do to avoid future problems. Now is the time to do this because certain requirements must be satisfied by the end of the year.

  1. Employment contracts. Do have a written contract with every single one of your employees, including part-time employees? Are all of your employment contracts current? Are all your open-term employees on open-term contracts? Do all your contracts contain non-compete provisions while it is not necessary to include them?
  2. Employer rules and regulations. Do you actually have a set of employer rules and regulations? More importantly, does this document work for China? Have you given it to all of your employees? Have your employees signed an acknowledgment of receipt proving they actually received it? Is that form in Chinese?
  3. Female employees, especially those who are pregnant or nursing or are maternity leave. Are you providing the labor protections and conditions required by the relevant laws? Are you providing the required maternity leave? Are your employees on maternity leave being paid what they should be paid during the entire period of their leave? Are you extending the contracts of female employees who are in the specially protected class as required by law?
  4. Working time, rest and vacation days. Are your employees using up their vacation days each year? If not, can you still make arrangements so they can take their unused vacation days without incurring payment obligations on your part? Are you making sure your employees who are designated to work under the standard working hours system do not exceed their standard working time? Are you staying on top of your employees’ overtime? Are you current on the alternate working hours system renewal? Are you giving your employees on these systems enough rest and due consideration to their health?
  5. Employee remuneration. Are you meeting the minimum wage requirements? Do you timely pay your employees in full? When you withhold payment from an employee, do you explain the reasons to the employee and document the situation so you will be able to show your action was reasonable and lawful?
  6. Social insurance contributions. Are you making all mandatory social insurance contributions? How do you treat your part-time employees? Are you treating your expats according to the local law?
  7. Expats. Are you current on all paperwork for your expats? Are you providing the employee benefits as mandated by law?
  8. Last but not least, employee terminations. Are you handling all of your employee terminations according to the law? Do you document your employee terminations including so-called voluntary resignations in writing? Do you timely transfer your terminated employees’ files and social insurance accounts? Do you perform all your obligations upon employee departure, such as providing a Proof of Termination of Employment Relationship document?

Get started on this, NOW. Do not wait.

China trademark registration lawyersLabbrand, a leading Chinese brand consultancy, recently published an article discussing the naming work they’d done on behalf of Haribo, the German confectionery. (For those who don’t know, Haribo is the first and best manufacturer of gummi candies: all gummi candies in the world are derived from Haribo Gold-Bears, the ur-gummi.) I have been a huge fan of Haribo since I was a kid, and was interested to read how Labbrand had adapted Haribo’s brand names for China. I’m excerpting their descriptions below, interspersed with my own commentary.

Since 2012, Labbrand has been working closely with HARIBO to validate and create over 20 Chinese names for its brand and products, as well as for the tagline and Jingle of the Haribo brand. Chinese names 萌桃仔 [méng táo zǎi] for Peaches, 趣缤纷 [qù bīn fēn] for Supa Mix and 甜莓狂想 [tián méi kuáng xiǎng] for Berry Dream were amongst the first new releases from the brand.

The verbs in the first sentence are essential: Haribo’s Chinese brand names were not just created but also validated. Brand creation without brand protection is meaningless. As I wrote back in 2015, “If you care about your brand in China, it’s not enough just to register your English-language brand. You also need to select a Chinese name and register that as a trademark in China. Otherwise, you will forfeit not only the right to use your Chinese brand name, but the ability to choose it in the first place.” See Don’t Be Like Mike: Register Trademarks In CHINESE.

I did a quick check of the Chinese Trademark Office (CTMO) database and am happy to report that the three brand names cited above are all registered already or will be soon. (Had the results been otherwise, this would have been a short blog post!)

The three new products launched are:

Peaches, a peach flavor two-toned, sugar-dusted gummi. The Chinese name 萌桃仔 [méng táo zǎi] (cute/ peach/ young) personalizes the sweets as a cute little person by putting 仔 [zǎi] at the end. Originated from cyber language, 萌 [méng] conveys a cute and lovely feeling.

Supa Mix, a mixed collection of fruity gummies. The name 趣缤纷 [qù bīn fēn] (interesting/ colorful) brings fun and joy at the same time translating the ‘mix’ concept.

Berry Dream, a collection of berry-flavored sweets. The unique, eye-catching Chinese name 甜莓狂想 [tián méi kuáng xiǎng] (sweet/ berry/ fantasy) triggers curiosity and imagination with a good fit with product and brand attributes.

I won’t comment on the above names, except to note that they are thoughtful combinations of literal translations and characters with positive and appropriate connotations. This is the value of hiring branding professionals. Sometimes clients will come to us with a Chinese name derived from Google Translate and ask us to opine, which always brings out my inner DeForest Kelley: I’m a lawyer, not a branding specialist. Still, you don’t need to be a brand specialist to know when a machine translation goes wrong, which is often enough.

Besides the product names, Labbrand also created the Chinese tagline of HARIBO’s signature jingles – “Kids and grown-ups love it so, the happy world of HARIBO” – to help the brand better communicate with its Chinese audience. The Chinese brand tagline 大人小孩都说好, 快乐品尝哈瑞宝 [dà rén xiǎo hái dōu shuō hǎo, kuài lè pǐn cháng hā ruì bǎo]” can be translated as “grownups and kids all say it’s good, and happily enjoy HARIBO”, which is straight-forward, rhythmic, as well as easy to read and remember. The two-part structure, each ending with the same rhyming syllable [ǎo], makes the tagline melodic, attractive and unforgettable. The simple and memorable Chinese tagline stays true to the original English jingles.

I find it funny that Labbrand worked so hard to capture the rhythms and meaning of the original English tagline: “Kids and grown-ups love it so, the happy world of HARIBO.” I had always found the latter a bit stilted, and assumed it was the result of a decades-old translation from German that had over time become memorable, even cute. That’s what a phenomenally popular product can do – make the uncool cool.

Sometimes the best brands are the ones that happen by chance. Haribo was founded by Hans Riegel in Bonn, Germany in 1920, and the name Haribo is simply a portmanteau of the first two letters of HAns, RIegel, and BOnn. Now Haribo is an internationally known trademark, with registrations in multiple classes all over the world.

One final note: the official Chinese name for “Haribo” is the sound-alike “哈瑞宝” (hā ruì bǎo). Haribo has duly registered this name as a trademark in China, but they have also applied for a number of similar-sounding Chinese-language trademarks, including 嗨乐宝, 哈莱宝, and 好乐纷. Not because Haribo intends to use these marks, but because they want to prevent third party trademark squatters from doing so. Sometimes the best offense is a good defense. See “Chinese Brand Names, Copycats, and Soundalikes.”

Doing Business in China
Doing business in China: Middle of the road

The World Bank just came out with its 312 page “Doing Business” report, ranking 190 economies on just about every measure possible. It is important to note that the rankings are based on the ease of doing business for domestic companies and not for companies seeking to do business in a foreign country.

I skimmed the methodologies the World Bank used to rank these 190 economies and I am impressed. But in the end, I have to admit that I tend to judge these sorts of rankings by looking at the countries I know to determine whether the rankings match what I see as the realities, and this World Bank ranking absolutely does.

China came in at 78th, which seems about right to me.

  • Singapore — 2nd
  • South Korea — 3rd
  • Hong Kong — 5th
  • Japan — 34th
  • Mongolia — 62nd
  • Vietnam — 68th

Singapore and Hong Kong make complete sense to me as those are indisputably two of the most pro-business countries in the world. South Korea is pretty good for foreign companies but I am surprised to see it ranked so high. Japan’s ranking makes sense to me, but Mongolia and Vietnam seem a bit high to me and I would actually rank them behind China. But my knowledge stems from representing foreign companies and perhaps those countries are different for domestic companies.

The United States ranked sixth and that seems about right. Spain, where my firm has an office, ranked 28th, and that seems about right also. Germany, where we do a lot of work, ranked 20th and that too seems right.

Here’s something in the rankings I know many of you will find amazing: China ranks 5th in the world in terms of enforcing contracts. Fifth out of 190 economies. I think that ranking is too high, but it does strongly reinforce a point we are always trying to make on this blog: contracts work in China, so long as they are drafted for a China court. See China Contracts: Make Them Enforceable or Don’t Bother.

What do you think of these rankings?

China Manufacturing AgreementWith rare exceptions, American and European companies have goods made in China for one reason: because it’s cheaper. Why is it cheaper? Because labor is so much cheaper in China than in the US and Europe, and labor is a significant portion of the production cost. But over the past several years, wages have been steadily rising in China, making Chinese factories progressively less competitive on labor costs. Meanwhile, numerous pundits have made predictions about manufacturing work fleeing China for countries with lower labor costs, and especially Southeast Asian countries like Vietnam or Myanmar. A corollary prediction calls for more reshoring – bringing back manufacturing to the United States.

But the mass exodus from China hasn’t occurred. Thus far most of the manufacturing moving to Southeast Asia has been either redundant manufacturing (i.e., to have an alternate source of production in case something goes awry in China) or manufacturing for goods lower on the value chain. And the reshoring movement is still finding its feet.

China has maintained its competitive advantage in a number of ways. For one thing, it has made enormous investments in infrastructure: raw materials, components, and finished goods travel rapidly and consistently to, from, and within China via a vast web of ports, railways, and highways. None of its competitors come close. Additionally, China’s status as the factory of the world means its factories (and many of its cities) have developed tremendous expertise and specialization. They may have been the cheapest before, but now they’re the most experienced – and sometimes even the most efficient.

A couple weeks ago, Sheelah Kolhatkar wrote an article in The New Yorker about advances in robotics which logically will put a number of factory workers out of a job – no matter where the factories are located. The Chinese factory owners interviewed in the story were almost stereotypically dismissive of concerns about workers rights, and perhaps necessarily so. To them, and arguably as a matter of national economic policy, vast automation is the only way China will remain competitive as a manufacturing base for the rest of the world.

My colleague Grace Yang writes frequently about the challenges companies face when navigating China’s labor laws. Regardless of Chinese factory owners’ attitudes, you’d think they would have a tough time replacing workers with robots. But one of the factory executives quoted in Kolhatkar’s article made a keen insight: up to 80% of factory workers simply don’t come back to work after going home for Chinese New Year. You couldn’t draw it up any better for making a massive and sudden reduction in force.

Of course, US companies that reshore manufacturing with largely automated factories won’t have to contend with disgruntled factory workers, because those workers were laid off years ago. And the better robots get at doing assembly line work, the more it will make sense for goods consumed in the United States to be manufactured in the United States. As Kolhatkar notes, “China was never a particularly convenient place for Western companies to have their sneakers and T-shirts and widgets made.”

But for now, China remains the factory of the world. And the increased shift to automation means there will be an ever-widening divide in China between manufacturers with an eye to the future and manufacturers stuck in the past who can only compete on price but not quality – and won’t be able to compete on price for long. This means that selecting the right manufacturer is more important than ever, and it’s going to be hard to do that without visiting the factory. It also means that a well-written OEM agreement with your Chinese factory is more important than ever. At least, until Skynet becomes self-aware.

China and Hollywood and Big DataThis past Saturday I attended the USC Entertainment Institute on Entertainment Law and Business. In past years the Institute has had entire panels on China, but this year things were pretty low-key, with just one panelist having a China connection (Chia-Chi Li, Director of Tencent’s Content and Technology Transactions Groups).

Why the shift? Undoubtedly one reason is the high-profile collapse of several deals involving Chinese money and Hollywood. Who wants to see a discussion about all the money that’s not being invested? Another possible reason is that the giddiness of the past few years – during which many people in Hollywood viewed Chinese investors as the new “dumb money” – is over and the Chinese entertainment industry is maturing, with most of the remaining players being relatively well-run, competent outfits. Or perhaps it’s that the annual US-China Film Summit is taking place in two weeks, and there are only so many times you can have a “What’s The Deal With China?” panel.

But China nonetheless kept creeping into the discussions. The morning panel on music (“Where the Money is in Music These Days”) broke down the ways in which artists and record labels actually generate revenue today, with particular attention to YouTube and streaming services. The panelists all complained about the revenue stream from YouTube (currently the biggest single medium by which consumers listen to music), but almost as an aside noted that the revenue model for music in China was even worse. Meanwhile, multiple panels referenced the social media/DIY music video phenomenon that is Musical.ly, albeit without a word about the app being Chinese. As I wrote a few months ago, this is exactly the kind of soft power the Chinese government has been hoping for.

Professor Jeffrey Cole, Director of USC’s Center for the Digital Future, started off the institute, as he has done for the past few years, with a fascinating speech about the future of the entertainment industry (“The Industry: Trends, Fads and Transformation”). Although most of his talk centered on domestic concerns, he closed with an intimation that there was a failure of comprehension (and imagination) about the size, wealth, and power of the BAT companies (Baidu, Alibaba, and Tencent), and what it meant for Hollywood.

In determining the future of the US entertainment industry, Prof. Cole noted that two of the most basic concerns are how people spend their time and how they spend their money. In the US, numerous companies are competing for either or both. In China, the competition exists in name only; Alibaba controls the majority of consumer purchases, and Tencent’s WeChat is so dominant and so comprehensive in terms of user base and “stickiness” that – and this is a direct quote from Prof. Cole – it is in many ways like the commercials from the 80s for the Roach Motel: “Roaches check in, but they don’t check out.” Despite the negative connotations, Cole meant it as a compliment of the highest order: a recognition that a substantial majority of the Chinese population uses WeChat all day, every day and for almost everything. We have written about this before – if you are doing business of any kind in China, you need a WeChat strategy. Indeed, we have been approached multiple times by companies interested in forming a WFOE for the sole purpose of opening up an official WeChat account.

Meanwhile, Tencent’s representative, Mr. Li, was one of the best panelists of the institute and with by far the highest degree of difficulty, because whether he wanted to or not, he had to represent the views of himself, his employer, the Chinese entertainment industry, and China as a whole. That’s a lot of water to carry.

Mr. Li made several points worth repeating, but I’d like to focus on two. First, he acknowledged that though some Chinese companies had payment problems because the RMB is not freely convertible, Tencent (and other successful Chinese companies) had access to funds outside China and if they want to make an overseas investment they can. This is true enough, but it somewhat sidesteps the issue: the Chinese government may not be able to control what Tencent does with money in its US bank accounts, but it can certainly control what Tencent does in China, and thereby exert indirect control. Still, the point remains that for large Chinese companies already in the media and entertainment business, not having to secure government approval for every wire transfer is a big advantage.

Second, according to Mr. Li, any foreign film that hopes to do well at the Chinese box office needs a Chinese partner. His specific examples: Warcraft ($47M domestic box office, $386M foreign box office with $213M of that in China) and A Dog’s Purpose ($64M domestic, $136M foreign with $88M of that in China) had major Chinese partners (Tencent and Alibaba, respectively). The LEGO Batman Movie ($175M domestic, $136M foreign with $6M of that in China) did not.

On a certain level, this argument sounds familiar.China is too big to understand without local help, so don’t even try. But Mr. Li was actually making a more subtle point. In his telling, the reason Warcraft was successful in China (and nowhere else) is because Tencent had so much data about its users that it could identify nearly every single Warcraft player in China and could push targeted ads and marketing material to them. Similarly, the reason A Dog’s Purpose did so well in China is because Alibaba had so much data about its users that they already knew the identity of every dog-owning household in China.

It’s a compelling argument if you can get past the Big Brother-ness. I’m not sure it entirely holds up under scrutiny; why wouldn’t this strategy work for every movie released in China? Still, it’s hard to explain the success of Warcraft in China in any other way, because the movie was a critical and popular bomb everywhere else in the world. Maybe it only works for movies with a clearly defined affinity group.

Either way, China will only become more sophisticated in its collection and use of big data and companies going into China will need to keep pace — which probably means partnering with one of the BAT companies — or else they’ll just be rolling the dice. At least in the film business, the stakes are too high to accept those odds.

China IP lawyers

I am not a big fan of filing Madrid Protocol applications for China. In certain situations, they can work well, but when they don’t work (which is fairly often, especially when applications are filed without forethought) the trademark registration process takes longer and costs more than just filing a national application. See China Trademarks. Register Them In China Not Madrid.

Filing a priority application in China is another matter. As part of the IP modernization begun under Deng Xiaoping’s leadership, China acceded to the Paris Convention in 1984. Under the Convention, if you file a trademark application in one Paris Convention country, and then file an application on a priority basis in another Paris Convention country within 6 months of the date of the original application, you can claim the first filing date as the date for your subsequent applications as well. For example, if you filed a trademark application in the United States on May 1, 2017, you would have until November 1, 2017 to file a trademark application for the same goods/services in China and still be able to claim the May 1, 2017 filing date for your China trademark application.

The vast majority of countries in the world are signatories to the Paris Convention, so the convention has wide-ranging effect. Priority filing is particularly important in first-to-file countries – most notably China – where there often truly is a race to the trademark office between legitimate IP owners and unsavory trademark squatters. See Register Your China Trademark or Go Home.

Priority filing can be an extremely useful tool for China trademark protection, but there are a couple common misconceptions about it. First, priority filing will not improve your odds of registration. The only thing priority filing does in China is establish an earlier filing date. An application filed on a priority basis is considered a national application, and once it is submitted it goes through the same examination process as any other national application. In other words, if you have priority filing for a brand name or a logo that has already been registered as a trademark in China, you will not succeed in getting your brand name or your logo registered in China.

Second, priority filing is not the only option for filing in China. Sometimes clients will contact our China IP lawyers in a frantic rush because they have received notice that they have only a few days before the priority filing window closes on their trademark, and they believe that once that window closes they will not be able to file a trademark application in China at all. Not so! The only effect of the priority window closing is that you cannot claim an earlier filing date. Going back to the earlier example, if you filed a trademark application in the United States on May 1, 2017, and then filed an application in China for the same goods/services after November 1, 2017, the deemed filing date in China would be the actual filing date for China. Priority filing changes the deemed filing date, nothing else.

Another important point regarding priority filing is that priority filings are limited to the same goods/services as in the original application. In this way, priority filing is similar to Madrid Protocol filing, and often not well suited to filing in China. But if the application only covers a narrow range of clearly stated goods/services, and those are the only goods/services that you care about protecting in China, it will work just fine. Priority filing cannot be used for the “Starbucks strategy” of covering all goods/services. But if you use it to establish a beachhead and cover the most important goods/services, it will usually dissuade the first wave of squatters.

Because the description of goods and services for trademarks in the United States (and for many other countries as well) is often quite different than the description of goods and services for China trademarks, for clients interested in filing in both countries I generally recommend filing concurrent applications without regard to priority. But for clients who first file in the United States (or some other Western country) and then realize belatedly that they ought to protect their IP in China as well, a priority filing can be ideal. More than once, a priority application has meant the difference between securing a China trademark registration and having to deal with a trademark squatter with superior rights.

China box office numbersAs reported by numerous media outlets, the MPAA-requested audit of the Chinese box office numbers is complete and the numbers ain’t pretty. Chinese theaters underreported 2016 box office results by 9%, which given the 25% revenue share for quota movies, means that US studios have been underpaid by about $40 million.

I don’t know anyone who follows the Chinese movie business who was surprised by these results. No, I take that back. Many people (myself included) were surprised the number wasn’t considerably higher. One possible explanation is that PricewaterhouseCoopers conducted the audit, and after the Oscars debacle they were probably triple-checking their results and eliminating anything they couldn’t justify six ways from Sunday. And even with that, they still found a 9% discrepancy.

The full audit results haven’t been publicly released; all we know is that the auditors looked at data for 29 films in a handful of theaters and then extrapolated the results across China’s more than 40,000 screens. Such extrapolation, based on statistical sampling, is commonplace and perfectly normal, but I have to wonder what a full audit would have found. Without putting too fine a point on it, a lot of strange things happen in China’s third and fourth-tier cities. Even as it is, the audit found a whole host of irregularities, including unreported screenings, unreported ticket sales, and counting box office revenue as concession sales. No word on whether the audit turned up more instances of ascribing ticket sales from US films to Chinese films – which is what happened in 2015 when an alleged $11 million in ticket sales for Terminator: Genisys were instead attributed to the Chinese propaganda film The Hundred Regiments Offensive.

So what now? One argument is that the audit helps the United States in its ongoing negotiation to increase the quota and the revenue share, but it’s also likely that it hurts. China already knew it had massive problems with movie accounting and had taken steps earlier this year with a very public punishment of 326 cinemas for box office fraud. Being called out in the press like this by foreigners is a tremendous loss of face. Then again, $40 million is a lot to leave on the table.

It’s easy to understand the studios’ frustration that led to the audit. Box-office fraud in China has been rampant for years, and even the box-office revenue that is reported takes eons to get paid. And as China’s box office continues to grow, the revenue share becomes an increasingly important part of studios’ bottom line. Long gone are the days when revenue from China is just a nice bonus for US studios; indeed without China, some movies wouldn’t be made at all.

I’m reminded of the opening lines of Annie Hall: “There’s an old joke. Two women are at a Catskill mountain resort, and one of ’em says, ‘Boy, the food at this place is really terrible.’ The other one says, ‘Yeah, I know; and such small portions.’” That’s essentially how the studios feel about their relationship with Chinese movie theaters – full of underreported revenue and unhappiness, and they hope it never ends.

Of course, if the studios actually see the $40 million in additional revenue, the audit will be worth it. Either way, we can expect to see more of them.

And it’s not like the US studios are the only ones who should be conducting audits. We work with accounting firms that audit Chinese film and television productions on behalf of Western investors, and the extent (and creativity) of the financial shenanigans is astounding. For most of these audits, there’s no political or reputational element; it’s just common sense.

If you’re dependent on your Chinese partner to account for and remit revenues (be it in the movie industry or otherwise), an audit should be part of your repertoire too.

Check your China employment contracts
Check your China employment contracts

Do you check your employment contracts? A company in Shenzhen wasn’t careful in checking theirs and it had to pay an employee nearly 150,000 RMB as contract damages for unpaid wages and an additional nearly 3,000 RMB for overtime compensation. In the end, this company had to pay this one employee nearly 50 times more than what was actually owed. Before I discuss this case and what you should do to prevent the same thing from happening to you, let’s quickly review relevant China employment laws.

An employee can demand its employer pay contract damages pursuant to the parties’ employment agreement. The law only imposes restrictions on employers imposing contract damages (similar to and called liquidated damages in some countries) on their employees, but an employee can collect contract damages from an employer under certain circumstances. At the time of termination, unless there is a law to the contrary, the employee can demand contract damages in addition to the applicable statutory severance. But again, be careful, this is just the general law in Guangdong tvince and there may be exceptions and, as is pretty much always true when dealing with China employment laws, there are local variances.

Now back to the case I mentioned above. In that case, the Shenzhen employer and the employee entered into an employment contract under which the employer agreed to pay its employee 50 times any missed/miscalculated base salary and overtime pay. In other words, for every Yuan the employer is short in wage payments, the employee must be paid 50 RMB as a penalty. When the employment relationship went awry, the employee sued and sought nearly 150,000 RMB in contract damages for having been shorted a bit under 3,000 RMB owed to him. The trial court — The People’s Court in Baoan District — sided with the employer on this claim, concluding that this damages provision did not comply with the employment law and the amount far exceeded the actual amount owed to the employee. It then applied a “fair” standard for damages and ordered the employer to pay the owed wages plus an additional 25% of those wages as damages.

The employee appealed, arguing that the Baoan court had no legal basis for its ruling. The employee argued that the employer intentionally included this damages clause in the employment contract to make the job look more enticing and it would not be fair to allow the employer to be released from a contractual obligation it had created. The employee also argued that China’s freedom of contract laws called for enforcing the contract.

The Shenzhen Intermediate People’s Court determined the damages clause did not violate any mandatory laws or social interests and it reflected the parties’ true intent. The employer was the more powerful party and the employee an ordinary worker with only minimal bargaining power. The contract damages provision was therefore enforceable against the employer and the employee was entitled to the full amount of contract damages.

If the Shenzhen employer had been careful about what it allowed into this employment contract it could have avoided this penalty altogether. Our China employment lawyers regularly audit the employment records of foreign employers in China and this means we frequently see employment contract provisions that heavily favor the employee. One of the most common things we see is for the English to say one thing (that’s good for the employer) and the Chinese to say another (that’s good for the employee). This is a problem because the Chinese language controls.

Do your employment contracts contain a “surprise” clause that would potentially expose you to unwanted liabilities? Now is the time to check to make sure.