China internet litigationFollowing on the heels of China’s first Internet court in Hangzhou, two other Internet courts have recently been established respectively in Beijing and Guangzhou. In the meantime, China’s Supreme People’s Court published the Provisions on Several Issues Concerning the Trial of Cases by the Internet Courts, 最高人民法院关于互联网法院审理案件若干问题的规定 (link in Chinese) (“Provisions”), clarifying the types of cases within the jurisdiction of these courts and regulating certain procedural issues relevant to Internet courts.

According to the Provisions, the Internet courts are designated to handle disputes involving the online sale of goods and services, lending, copyright and neighboring rights ownership and infringement, domains, infringement on personal rights or property rights via the Internet, product liability claims, and Internet public interest litigation brought by prosecutors.

Currently, all three internet courts are trial courts within the jurisdiction of their own cities. Most appeals will be heard by the intermediate courts in their respective jurisdictions. However, online copyright-ownership and infringement disputes and domain-name disputes tried by Guangzhou and Beijing Internet courts will be appealed to the Intellectual Property Courts in their respective cities.

As a general rule, the entire litigation process in the Internet courts will be conducted online, including the service of legal documents, the presentation of evidence, and the actual trial itself. Notably, in these Provisions, the Supreme People’s Court confirms that the Internet courts may consider electronic evidence provided by the parties that can be authenticated by electronic signatures, time stamps, hash value verification, blockchain and other tamper-proof verification methods. In fact, before these Provisions were announced, the Internet Court in Hangzhou for the first time in China admitted evidence that was authenticated by blockchain technology in an online copyright infringement case (link in Chinese, not official source). In this case, the plaintiff sued the defendant for copyright infringement because the defendant published the Hangzhou company’s copyrighted material without a proper license to do so. The plaintiff captured defendant’s webpages, their source code and call logs, and uploaded the data to a blockchain platform. The Court held that the data confirmed each other and accurately reflected their source, generation and path of delivery, and were therefore reliable and could be admitted as evidence.

As far as I know, China is leading the world in internet litigation, which in some respects should be no surprise as so much in China is done online and its regular courts so much favor documentary evidence over live testimony. The fact that China has expanded its Internet courts from one city to three (and Beijing is not exactly an unimportant city) means it views its initial foray into internet dispute resolution as having been a success. It will be interesting to see how fast these internet courts spread within China and to the rest of the world.

China Law Social MediaWhen we first started writing this blog we were more free-wheeling than we are today for one very simple reason. The odds of our our having problems with the Chinese government were a lot less back then, though there were definitely times where we would “go blank” in China for weeks at a time for having crossed some arbitrary and capricious line. For a whole host of reasons we want to stay live in China and so — like many others — we have toned down and learned not to walk too close to various lines. We don’t like this one bit but this is the China world in which we and everyone else lives.

We don’t have that same line on Facebook or Linkedin or Twitter.

And so we have ramped up what we do on social media. We have a thriving China Law Blog Group on Linkedin that serves as a 99.99% spam-free forum for China networking, information, and discussion. This group is always growing and we are now less than 100 members short of 12,000.

More importantly, we have had some great discussions there, as evidenced both by their numbers (we’ve had discussions with 50-100 comments) and their substance. Our discussions range from people asking and trying to answer questions like, “why is it so difficult to do business in China” or ”what do I need to do to get my Chinese counter-party not to breach my contract” to the ethereal, like “when will we know China is taking innovation seriously?”

The group is nicely split between those who live and work and do business in China and those who do business with China from the United States, Australia, Canada, Europe, Africa, the Middle East and other countries in Asia. Some of our members are international lawyers but more than 90 percent are not. We have senior level personnel (both attorneys and executives) from large and small companies and a whole host of junior personnel as well. We have professors and we have students. These mixes help elevate, enliven, and enlighten the discussions.

What truly separates us from most (all?) of the other Linkedin China groups is how we block anything and everything that even smacks of spam. We have become so proficient at not allowing spam to show up on the discussion page that it is the rare person who even tries to tempt fate by trying to sneak anything past us anymore. This means postings are relatively rare there (1-2 a week) but this also means it will not waste your time.

If you want to learn more about doing business in China or with China, if you want to discuss China law or business, or if you want to network with others doing China law or business, I urge you to check out and join our China Law Blog Group on Linkedin. The more people in our group, the better the discussions, so please go here and join us!

My personal Linkedin page has more than 8,500 followers and in response to that I have started posting more often there on China, though still a bit irregularly. I welcome any new followers, especially as I plan to start posting more often there (even if it is only to share some of the truly great stuff that others are posting on Linkedin about China.

Our China Law Blog Facebook page, which until only fairly recently was little more than an afterthought, has more than doubled its followers in less than a year. It has more than 23,000 followers (I base this on its number of “likes”) and it is the rare post that does not engender discussion, often heated. With no government there to restrain us, we can be a lot more free-wheeling there than anywhere else and we do take advantage of that. With all the tension that has been going on between China and the US these days (much of which cannot be discussed here without repercussions) our Facebook page has truly become a key source for helping to figure out what is happening. It also has its lighter side as we often will just post cool pictures of China there or really whatever strikes our fancy about China. I urge you to go there and “like” us so you can consistently benefit from what we are doing there.

I am also on Twitter (here, as @danharris) though I am there more to learn than to post.

See you online….

China cryptocurrency

The Shenzhen Court of International Arbitration (SCIA) of China recently published a case analysis (link in Chinese) on contract disputes between parties to a share transfer agreement involving cryptocurrencies.

In this case, an unnamed applicant engaged the respondent to manage and invest in a pool of cryptocurrencies (Bitcoin, Bitcoin Cash and Bitcoin Diamond) on behalf of the applicant. In another transaction where the respondent was purchasing company stock from a third party, the applicant agreed to pay part of the purchase price on behalf of the respondent, so long as the respondent returned the cryptocurrencies to the applicant. The terms of this deal were recorded in a written contract between the applicant, the respondent and the third-party seller of the company stock. The respondent failed to return the cryptocurrencies and the applicant and third-party seller demanded arbitration.

One of the key issues in this case was the validity of the company stock transfer agreement. Citing the Announcement on Preventing the Financing Risks of Initial Coin Offerings made by China’s central bank and several other government agencies in 2017 (often referred to as China’s “ICO Ban”), the respondent argued the company stock transfer agreement was invalid and unenforceable because exchanging and delivery of cryptocurrency is illegal.

The arbitral tribunal disagreed holding that though the ICO Ban prohibits using cryptocurrency as a financing tool and prohibits financial institutions and non-bank payment processors from providing services related to cryptocurrency financing, no Chinese law prohibits private parties possessing Bitcoin or even engaging in transactions involving Bitcoin. Since the respondent’s obligation under the company stock transfer agreement was simply to return the cryptocurrencies to the applicant, the ICO Ban does not apply. Because the agreement was properly executed and did not violate any statutes on the validity of a contract, the agreement is valid and enforceable.

The arbitration tribunal further explained that though cryptocurrency is not fiat money (inconvertible paper money made legal tender by a government decree) and should not be exchanged and treated as fiat, this does not prevent bitcoin from being protected as property that can be owned and controlled and that has economic value.

The SCIA is not first Chinese tribunal to rule that cryptocurrencies should be protected as property. Earlier this year, a Shanghai court reached the same conclusion regarding Ethereum. In the Shanghai case (link in Chinese), the defendant received Ethereum from the plaintiff by mistake and refused to return it. The Court held that Ethereum should be treated as property and the defendant’s keeping other people’s property constitutes unjust enrichment.

Although China’s General Provisions of Civil Law (民法总则) provide that “any laws on the protection of data or network virtual properties shall be followed,” there is so far no law in China that defines or sets forth the rules for protecting network virtual property. However, as long as cryptocurrency continues to exist, it will in China no doubt continue to be heavily regulated.

Bottom Line: China is generally very suspicious of cryptocurrency, largely because it can make for such an easy tax dodge. However, recent cases do show that cryptocurrencies are not completely illegal and the property rights inherent in them will, at least sometimes, be protected.

China e-commerce lawyer

 

In the midst of our international lawyers handling a massive influx of foreign companies that manufacture in China looking to get out of China (See How to Leave China and Survive), we are also handling a much smaller (but increasing) influx of companies looking to sell their products online to China. Somewhat paradoxically, we even have some clients simultaneously looking to move their manufacturing out of China while looking to move sales into China.

Many of these companies have attended seminars where someone has told them how easy it is to sell your products online to China. Many have attended Alibaba conferences where Alibaba puts 3-4 foreign companies on stage to have them explain how quickly and easily it was for them to make millions from selling their product on TMall or Taobao or wherever. These companies are almost certainly telling the truth and I know this because I have represented many American and European companies that make millions of dollars a month by selling their products into China. And it is in fact relatively easy to sell your product on one of the leading Chinese e-commerce platforms, particularly if you use one of the many companies that handles all of the logistics for you

The tough part though is actually making the sales and I have personally represented a number of American and European companies whose products barely sell or sell not at all to China. As lawyers, our best advice for determining whether your product will sell well into China and for making sure that it does is to get help from companies and people with actual track records in marketing and selling products to China.

Our job as lawyers when we represent foreign companies that want to sell their consumer products into China is relatively uncomplicated and usually consists of our doing the following:

1. Making sure the product is legal in China and can be legally sold to China by a foreign company without need for any special license or testing or certification. See this Forbes Magazine Article, Do This One Thing Before Doing Business in China.

2. Making sure the contract our client signs with the China e-commerce platform company actually works for and makes sense for our client.

3. Making sure our client’s intellectual property is protected such that a Chinese company cannot immediately start selling the exact same thing with the exact same brand name. In doing this, our China IP lawyers typically start out by explaining how our clients trademarks and patents in other countries will not protect them in China because China is a “first to file” country. By way of an example, this means that (with very few exceptions) whoever files for a particular trademark in a particular category gets it. So if your company’s name is Bill’s Clothing and you sell shirts and you have been doing so for the last five years and some other company (Chinese or foreign) registers the “Bill’s Clothing” trademark in China for shirts, that other company gets the trademark. If you allow some other company to register “your” trademark in China, that other company can stop you from selling your products in China using “your” trademark. This happens all the time and your starting to sell your products online in China is like a bell whistle for trademark trolls. If you want to protect your IP in Mainland China you must register the IP in Mainland China.

But before you just go off and registering a trademark in China you should think long and hard about what you should be registering.  Do you register your English-language name? The answer to this is nearly always yes. Do you create a Chinese name and register that as well? The answer to this is that you usually should. Should your Chinese name be a translation of your English name, a transliteration, or something unrelated? This really just depends, and if oftentimes figuring this out requires both a China trademark lawyer and a China marketer. In Hermès’ China Trademark Case. Do You Know What Trademarks You Really Need? I talked about how my firm’s clients often handle these trademark issues:

In situations where our clients are making product in China for export only and their product has the trademark on it only in English, securing just an English language trademark is usually enough. In situations where a company intends to manufacture its product in China and eventually sell in China, the company must weigh the costs and benefits of securing a Mandarin (or other language) trademark now, or just wait. In situations where the company knows it will be selling its product in China right away, it needs to analyze the options set forth above. In almost all instances where our client’s trademark has actual meaning, they have chosen to trademark both the English and the Mandarin of the word. Rarely do our clients seek a China trademark in a language other than either English or Mandarin. Only around 25% of the time do our clients seek to secure the trademark for a transliterated or phonetic version of their English language trademark. Most of the time, they choose to wait and see how their product does in China and then, if it proves successful, they usually come back and register more on it. Waiting also allows them to see exactly what the Chinese will call their product. The downside to waiting is that someone else may register the name in the meantime.

Companies that are looking to sell their products into China should take a long term approach to their China trademark filings. Sure you are only making shirts now, but what about your plans to eventually expand to pants and jackets and shoes. Should you register your trademark in the trademark classes/categories that encompass all of these ? Do you care if someone makes socks with your name on it? These are just some of the trademark type issues you should consider before you sign your contract with Alibaba to sell your consumer products to China.

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China entertainment lawyer

The pace of change is so rapid that it’s always hard to keep up with developments in China. What made sense last month often makes no sense this month. Here’s my attempt to make sense of what’s going on in video streaming right now.

1. More subscribers

As recently as four or five years ago it seemed that Mainlanders simply weren’t prepared to pay for online content. Advertising-supported delivery seemed the only commercially viable form of distribution. These days, millions of Chinese are prepared to subscribe, either to access the increased volumes of premium content now on offer or simply to avoid advertising. The rapid growth of mobile wallets like those provided by WeChat and Alipay is supporting this process. Whatever the reason, in 2017 online video revenues increased by 49% to $14 billion.

2. More streaming, less social media

Over the last five years we’ve seen a huge increase in traffic on VOD sites as Chinese people move over from social media to VOD. The 2018 WeChat Social Commerce Report says that increased engagement on video apps is causing the decreasing use of social apps.

3. VOD, and not TV, is now driving production

VOD platforms are pushing TV broadcasters aside with their production spends. Anke Redl, MD of CMM-I, says “VOD platforms have become production powerhouses. They are investing in other platforms and spending more on production costs. Their content creation spends now far exceed those of the TV stations”.

4. Big platforms are spending big on original content

According to Redl, “The VOD ecosystem has changed dramatically in the last few years. In the past, the platforms were more inclined to buy existing content, much of it foreign. As foreign content restrictions bite, they are now more careful about acquiring foreign content and more inclined to invest in local content”. Youku, Tencent Video and iQiyi, China’s three big OTT players, are all investing more in the production of premium content. In an interesting twist,  increased local production spend may be a way of allowing platforms to access more foreign content because their foreign imports must be a proportion of their local offerings.

5. Content prices are up

The transformation of China’s video market is driving up content acquisition prices. Platforms are now spending two or three times more per episode than they did two years ago. Per episode production spends are reportedly now in the range $1.6 to $2.4 million.

6. Content is local language, China focused

While there will always be demand for foreign content, Chinese people mostly like watching Chinese content. They are very happy with Chinese programs. This basic fact often comes as a surprise to foreigners. This is an underlying cultural preference that can’t be blamed on foreign content restrictions and import quotas. The good news for China’s producers and distributors is that the domestic market is large enough to show substantial returns on investment. The bad news, though, is that there is no foreign market for Chinese programs. A show that fails here has nowhere else to go.

7. Regulation of foreign content is increasing

No surprises there. The US-China trade war obviously isn’t helping. See this recent post for a summary of new proposed regulations. By the way, the Chinese aren’t the only ones restricting foreign content. Look at the new EU law requiring streaming platforms to carry 30% European content.

8. There is a growing market for non-exclusive foreign content deals

Quota places follow the imported programs, not the importing platform. Non-exclusive foreign content deals therefore allow more than one platform to benefit from a quota place. More and more of the smaller platforms are operating in this space. They will clear particular programs for a quota place, shop them around and then license them non-exclusively to bigger platforms. In this way the benefit of quota places is spread more widely across the market.

9. Capital markets are paying attention

Thomas Hui, CMC Holdings COO, says “Specialty and short form content platforms are gaining traction with viewers and in capital markets“. There sure has been a lot of activity at the big end of town. iQiyi raised more than $2 billion when it went public in New York earlier this year, while Tencent invested $1.1 billion in a single day — $461.6 million in Huya and $632 million in Douyu TV.

10. Despite it all, big China platforms are making losses

Subscriptions may be up but subscribers still remain in the minority. They accounted for only a quarter of total online video revenues in 2017, with advertising accounting for half. Tencent recently reported its first profit decline in more than 10 years, wiping more than $100 billion off its market capitalization. According to analysts referred to by The Information, Youku, Tencent Video and iQiyi are all operating at a loss.

On September 20th, 2018 China’s film and TV regulator, NATR, published a discussion draft of the Provisions on Administration of Import and Broadcasting of Overseas Audio-Visual Programs. The provisions apply to “overseas” films, TV programs, animation and documentaries. “NATR” is the National Administration of TV and Radio, the result of a recent restructuring of SAPPRFT, the State Administration of Print Publication Radio Film and TV.

If implemented in their present form, the provisions will seriously impact the streaming and broadcasting of foreign motion picture and TV content. These provisions are part of a process of increasing regulation of foreign content that began in 2014. One of the stated objects of this process is to support the domestic Chinese entertainment industry and to improve domestic program standards. One of the effects of the process will be to reduce foreign access to the Chinese market.

For streaming:

  • NATR will be required to publish and maintain a catalogue of overseas programs approved for streaming in China. Streaming of overseas programs not listed in the catalogue will be prohibited. This would be an entirely new development.
  • Each platform will be required to limit overseas programs to 30% of its programming in any one “category.” This would be in addition to the general 30% limit on overseas programs introduced in 2014.

For broadcasting:

  • Each TV broadcaster will be required to limit overseas content to 30% of the broadcaster’s total daily broadcast time in the applicable “categories.” This too would be an entirely new development.
  • Primetime broadcast of overseas programs of any kind will be prohibited without NATR approval. This would replace the 2016 regulations that already restrict primetime broadcast of foreign formats to two per broadcaster.

The big issues right now are how to draw the line between foreign and domestic content and how best to structure IPR in Sino-foreign film & TV deals.

We will keep you posted as developments occur.

China LawyersOur China lawyers have been seeing a massive uptick in frauds allegedly coming from China. I say “allegedly” from China because there is no way to know whether the con artists on the other end of the internet are really in China and many times I am fairly certain they are not.

Recently, an American travel services company wrote one of our China transactional lawyers to ask about our reviewing and revising a contract so as to protect her company’s interests. Changing the facts a bit to hide identities, the American company was in the business of providing high end guided tours of Italy and France and the “Chinese company” wanted to do a deal that would involve the Chinese company running massive numbers of Chinese tourists through this American travel services company.

Nothing smelled right about any of this (more on that later) and our lawyer essentially said this by stating if we were to be retained, “we would first do some basic due diligence on the Chinese company to confirm this is not a scam.” The American company then sent the draft contract and asked what our lawyer thought of it. Our lawyer responded by saying that “there’s a  98% chance this is a scam and rather than pay us to run this to ground, you should consider just walking away.” The American company then asked what in the contract led our China lawyer to reach that determination, and the lawyer responded with the following:

1. Chinese companies almost never send out the first draft of a contract. This supposed Chinese company did.

2. This contract is way too long and way too specific for any normal first draft from a Chinese company.

3. There is a provision at the end about how the CEOs [of both companies] must meet in person in ________ city in China where no foreigner ever goes. This is to get you to go to China where they can charge you an exorbitant amount for the hotel and for dinners, splitting these costs with the hospitality providers.

4. The business you are in, a small service business that could conceivably operate internationally.

5. The state you are in — a Southern state that does not do much business with China.

6. Your gender. Not sure why, but a huge number of these scams we are seeing lately are directed at female-owned small service businesses.

7. Why are they going to someone in Louisiana for tours of Italy and France when they can go directly to Italy or to France and save money by not using use as an additional payment layer?

8. The contract has a provision about notarizations and says the two companies are to share in the notarization fees. This makes no sense and is a classic scam. China doesn’t do notarizations and this is to get you to pay for fake notarizations. A lot.

9. The contract does not even mention the name of the Chinese company.

10. The contract mentions in the body of the contract the need for the Chinese company to put its company chop on the document. No Chinese contract would ever mention this in the body of the contract  because it would be a given and would be done in the signature portion.

11. The contract says the English language portion will control. Our law firm has done thousands of contracts with Chinese companies and though it is actually very unusual for the Chinese side to provide the first draft, we have never seen a first draft from a Chinese company that called for English to control the contract. And of the other thousands of contracts we have done, I cannot remember one instance where the Chinese side ever suggested that English control.

12. The contract includes all sort of things that seem to be there just to make it look real but are rarely if ever in this sort of contract. Chinese contracts tend to be a lot shorter than this and it just does not read like a Chinese contract.

13. As long as it is (I mean, two pages describing the sort of hotel in which you are to put the Chinese tourists!) all sorts of crucial provisions are missing, like contract damages, choice of law, and jurisdiction.

14. Everything. I’ve seen enough of these to know. It just doesn’t feel like a Chinese contract at all. The Chinese is weird and the English is bad in a different way than the bad English we see on real Chinese contracts.

The above is based on a five minute scan. I’m sure I could find more reasons to doubt this company and this transaction if I were to spend another ten minutes on it and I’m sure I could give you concrete proof if we were to research this “company.”

China self driving cars As I outlined in my previous post, Self Driving Cars in China: The Roadmap and the Risks, the Chinese government is pushing hard for development of a Chinese based self driving car. In reviewing China’s proposed legislative framework and recent books from China, we can see how Chinese’s system offers unique advantages for developing fully autonomous vehicles.

China does not seem to have the atavistic fear of robots and AI common in the Western world. Recent surveys show that over 75% of Chinese car buyers have a favorable opinion of self driving vehicles, as opposed to only 50% in the U.S. More significant is that 60% of Chinese auto buyers believe developing self driving cars is a significant issue, as opposed to less than 20% in the U.S. and in Germany.

Fear of autonomous driving is not a factor in China. The issues in China are more direct. Is a self driving car available? Will it be available in a reasonable time frame? Will a self driving car work well? How much will it cost? Will the vehicle be owned by an individual or by a ride sharing entity or (in China) by some service owned or managed by the government? These are rational economic considerations, not gut level fear of robots and artificial intelligence.

A Chinese consumer may decide self driving cars are not an important issue because they rationally believe they will never happen. But they do not oppose self driving cars due to a fear of robot control. The Chinese are generally not in love with driving. Driving in China basically sucks, and if they can leave the driving to someone else, the Chinese are generally happy to do that. And if the someone else is a robot, they don’t care. The issue to the Chinese consumer is: how much will that robot cost? [Editor’s Note: Peter Hessler’s book, Country Driving: A Chinese Road Trip, makes for a great read on driving in China.]

The Chinese also do not generally make unreasonable requirements on the safety of a self driving car. In the U.S. and in Europe there is an unstated but very real demand that self driving cars must be perfect. Every accident involving a self driving car is head line news and endlessly reported online. At the same time the 40,000 U.S. deaths and the ~25,000 EU deaths per year from human controlled driving are taken as business as usual.

The Chinese regulators and public make no such unreasonable demands. One goal of the Chinese government is for self driving cars to reduce the current very high Chinese passenger vehicle accident rate (~260,000 people die on China’s roads a year). However, the goal is to reduce the accident rate by a reasonable percentage. No one in China demands self driving cars be accident free. It is assumed they will NOT be accident free. The issue in China is whether the rate of accidents will be at an acceptable level or not. In China, it is assumed that the accident rate will decrease due to autonomous vehicles, but no one expects that rate to be dramatically lower than the current rate. For that reason (and probably some others), accidents involving self driving cars simply are not news in China.

Finally, the Chinese are free of the Western (especially U.S.) need to assign blame for accidents involving self driving cars. U.S. legislation and discussion of self driving cars almost obsessively focuses on this issue. Who will pay if there is an accident? Will it be the software developer? The auto manufacturer? The vehicle owner? What if the accident is determined to have been caused by a flaw in the software? Or a flaw in the installation? Or a flaw in the smart transportation network? Or the result of hacking by a third party? Or by operator error? Or by circumstances beyond the control of any party? Or even something as relatively routine as failed brakes?

If you examine U.S. based discussions of self driving vehicles, you will see these issues are primary and this is certainly even more true among the lawyers. Self driving projects then focus on issues like the ethics of driving decisions, insurance coverage, liability and damage allocation. Though these are primary issues in the U.S., they hardly exist in China. I have 200 pages of Chinese government proposed rules and regulations for autonomous vehicles on my desk. I have five full length Chinese language textbooks on self-driving cars, all published in the last two years. The issue of liability and insurance is simply not discussed at all in these thousands of pages. It is a complete blank.

There are two reasons for this. First, the Chinese are generally far less concerned with assigning guilt than Westerners. In Chinese traditional morality, guilt is not the main focus of an enquiry of what to do when a person is harmed or injured. In China, the focus is on how the social equilibrium can be restored as quickly as possible. The damage is repaired and the parties move on. Guilt and the associated liability for guilt is usually not a fundamental issue. Second, the Chinese insurance system is a no fault system so there is no reason to assign guilt. Auto accidents do not give rise tot moral issues. The issues arising from auto accidents in China are usually clear: what was the damage and what sort of payment is required to restore the parties to their original situation. Lawyers are virtually never involved, the award is limited to economic compensation and there is no high value award for non-economic matters like pain and suffering.

From the U.S./Western side, the fear of robots, along with unreasonable safety demands and allocation of liability in a guilt based system create substantial barriers to developing self driving cars. In the U.S., these barriers are at least as significant as the considerable technical barriers. In China, these non-technical barriers do not exist. It’s not that they are reduced; they don’t exist at all.

China can therefore focus on the technical issues. It is the technical issues that will drive the development of the vehicle of the future. So thought Chinese companies are currently behind the West on the technical side, they can move forward free from so many of the non-technical barriers that will both slow down and increase the costs of autonomous vehicle development in the West. This means China will reign as the primary testing ground for new technical solutions in the self driving car field. So even if China is not the place where the technology is developed, China will be the place where the technology is applied in real world applications. This is already happening in the electric vehicle market and this same trend will continue in the self driving car market.

China SaaS lawyers
China SaaS. It’s complicated.

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

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

 

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

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

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

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

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

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

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

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

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

China cyber lawyers cyberlawMany international companies that operate in China have Chinese websites and some kind of network system, whether for selling their own products or solely for internal use. In many cases, these websites and internal systems are hosted on servers outside China. I and the other lawyers on our China cyberlaw team are frequently asked whether a company that collects personal information within China must store that information within China.

The short answer is yes.

China’s Cybersecurity law took effect last year and it requires critical information infrastructure operators (CIIOs) to store personal information and important data collected and generated within the territory of the PRC. Whether a network operator is a CIIO typically depends on its industry and on how much a data breach would harm the public interest. Network operators in industries like public communication and information service providers, energy, finance, and public services are more likely to be considered CIIOs.

China is also in the process of establishing rules for cross-border transmitting of personal information and important data via draft Measures for Security Assessment of Cross-border Transfer of Personal Information and Important Data (个人信息和重要数据出境安全评估办法, the Measures) and draft Guidelines for Data Cross-Border Transfer Security Assessment (数据出境安全评估指南, the Guidelines). Under the existing drafts, the Measures and the Guidelines will apply to any company that is a network operator engaged in “domestic operation.”

The term “network operator” is defined to include any person or entity that owns and manages any network and also network service providers. If a company uses its internal network for its internal company operations and uses its company website to provide information to its customers and this system and website are owned and managed by its foreign parent, the foreign parent company is a network operator.

Under the Guidelines, domestic operation means providing products or services within China. A foreign network operator that is not registered in China but provides products or services to customers in China is engaged in domestic operation and will be subject to China’s cross-border data transfer requirements.

The Guidelines also set forth how to determine whether a foreign company is engaged in domestic operation. The factors that will lead to such a finding include using the Chinese language, settling payments with RMB, and delivering or distributing products or services to China citizens or companies. If one or more of these exist, a foreign company will be deemed to be engaging in “domestic operation” and therefore will be required to conduct a security assessment before engaging in any cross-border transfer of personal information and important data. But a network operator located in China that provides only products or services to foreign entities and whose operation does not involve any personal information of Chinese citizens or important data will not be considered to be a domestic operation and therefore will not be subject to China’s cross-border data transfer rules.

China Cross-Border Data Transfer Requirements.

Non-CIIO network operators may transmit personal information to a server located outside China so long as the subject of the relevant data has consented to such transmission and so long as the entity (usually a company) that initiates the transfer has undergone a security assessment regarding its data transfers. These requirements are laid out in the Measures and the Guidelines.  The company should conduct the security assessment, either by itself or engaging a third-party professional service provider.  Report of such assessment shall be kept for at least two years. In certain circumstances, the relevant industry regulator will review the assessment.  

Under Article 7 of the second draft of the Draft Measures, the relevant regulatory authority will conduct when the data transfer involves any of the following:

  1. Data containing or accumulatively containing personal information of more than 500,000 individuals
  2. Data related to nuclear facilities, chemical biology, national defense, or military, population and healthcare
  3. Data related to large-scale engineering activities, the marine environment, or sensitive geographical information
  4. Data related to the cybersecurity information of key information infrastructure, such as system vulnerabilities and security protection measures
  5. Other factors that may potentially affect China’s national security and public interests
  • The Required Consent

To transfer personal information outside China, a network operator must first obtain consent from the subject of the personal information. This consent must either be in writing or by some other sort of affirmative action by the subject of the data. Consent can be achieved by, for example, an online pop-up notification asking the data subject to click yes or no, or by sending a text message to the data subject requiring a “yes” or “no” reply to the cross-border transfer.

Consent can be implied in certain circumstances, such as making international calls, sending an email internationally, international instant messaging, and conducting cross-border transactions via the Internet.

  • The Required Data Security Assessment

The Measures require the company transmitting personal information and important data outside China to conduct (or use a third party to conduct) a security assessment of the cross-border data transfer system it will use to send the personal information and important data. Industry regulators or regulatory authorities will be responsible for monitoring these assessments and they shall do their own cross-border data inspections “regularly.” According to the Guidelines, when there are multiple entities involved in an outbound data transmission, the entity that initiates the transmission shall conduct the security assessment.

Only one security assessment is needed for “continuous” cross-border transmissions. If two separate data transfers occur within a year and the purpose and recipient of both transfers are the same, and the scope, type, and quantity of information are similar, these transmissions will be considered “continuous.” Take for example, a Chinese subsidiary of a foreign retailer that collects its customers’ personal information on any initial order and then transmits that information to its foreign parent company. This sort of transmission may happen instantly many times every day with the receiver, scope and type of information remaining the same. These transmissions would likely be considered continuous and therefore not require a separate security assessment for each single transfer.

In my next post I will provide more on the nuts and bolts of what foreign companies that are doing business in China need to do to comply with China’s cybersecurity and internet privacy laws.