China joint venture lawyers
Smile. The fake China joint venture scam is easily avoided.

Our China lawyers have over the last few months have been getting way more emails and phone calls from foreign companies (U.S. and European) either telling us they’ve been scammed or seeking our assistance in determining whether they are about to get scammed.

Anyway, in recognition of this recent in scamming, I am writing (again) about the sorts of scams we usually see, along with providing tips on how to avoid them. In Part 1, I wrote about the scam of tricking someone to come to China to sign a deal. Part 2 was on the scam of getting money for supplying products and then supplying nothing or, more commonly, something that isn’t even close to what the foreign company bought and paid for. Part 3 was on the switched bank account, which is — by far — the most difficult to avoid scam. Part 4 was on a scam where a Chinese company gets you to provide it work or services (or perhaps even product) in return for stock or stock options that you can never really own because you are a foreigner. Part 5 involved a fairly recent, increasingly common, and highly sophisticated scam whereby a Chinese company claims to be interested in investing in a foreign company but in reality it has that interest only so far as it can use it to steal your IP.

This part 6 post is on what we call the fake China Joint Venture, and it is an oldy but a goody and — dare I say it — one of my favorites. The reason I say it is one of my favorites is because anyone who falls prey to it brings it on themselves, at least in part. Our China lawyers have seen this one quite often and as far as I know, it has always involved an American company, which I fear says something about American naïveté.

This scam is really very simple and it pretty much always goes down the same way. It starts with a Chinese company convincing a foreign company to do a joint venture. The foreign company then contributes something to the joint venture to secure its ownership stake in it. This contribution virtually always consists of money, but it also often involves other assets as well, such as intellectual property, equipment, personnel (usually unpaid) or know-how. The Chinese company says it will handle the setting up of the joint venture and the foreign company readily agrees to this.

But instead of actually setting up a real joint venture with the foreign company having an actual ownership stake in the new company, the Chinese side simply takes the assets from the foreign company and does nothing official towards forming a joint venture. Most of the time the Chinese company never even sends the foreign company any remotely official documents regarding the alleged joint venture, but sometimes it sends fakes. Either way, the end result is that the foreign company believes it to be the part-owner of a China joint venture and it starts acting accordingly.

Usually for years everything is fine, but then the foreign company begins to wonder why it has never received any money whatsoever from the joint venture when it now seems to be doing so well. So they contact their supposed joint venture partner (the Chinese company) and then when they fail to get any answers, they contact a China lawyer to look into bringing a lawsuit. The China lawyer does some quick research (and by quick, I mean really quick) and then realizes there is no joint venture.

In some circumstances it may be possible to sue individuals and companies outside China for fraud but for that to work you need for the foreign country to have subject matter and personal jurisdiction and even if both of these jurisdictions are present, one must still effect service of process under the Hague Convention and, perhaps most importantly, have some means of collecting on any judgment awarded. Foreign courts are not going to be quick to claim jurisdiction over the ownership of a company in China and Chinese courts are certainly not going to be very quick to say that a foreign court has the power to determine ownership of Chinese companies. All this combines to mean that in most instances the duped party has no good recourse.

How do you avoid this scam happening to you? Very very simple. You retain a qualified lawyer early on to make sure a real joint venture gets formed with your company as one of its owners.

US China Trade War
It will all be just so easy.

President Trump has his trade war, but it is not just against China. This trade war is the United States against the World. President Trump has announced tariffs of 25% on steel imports and 10% on aluminum imports under Section 232 of the United States’ National Security law. It is important to note that because Section 232 is not a trade exception (such as Section 201 or antidumping and countervailing duty cases) approved by the World Trade Organization, other countries have the right to retaliate and retaliate they will. Of this I am certain.

Many countries around the World, including the EU, Canada, Mexico, and China, immediately threatened trade retaliation against U.S. exports.  Europe is talking about tariffs on U.S. exports of Harley Davidson Motorcycles, Jack Daniels Bourbon and blue jeans. China is talking about tariffs on U.S. agricultural exports, such a sorghum grain and soybeans.

To see the advice the President is getting one has to look no further than the statements made last month by United States Trade Representative, Robert Lighthizer on Fox News about how it is ridiculous to think that the United States will get into a trade war with China and other countries over Section 232 cases. But the reaction of numerous countries to Trump’s announcement of tariffs on Steel and Aluminum imports shows Lighthizer’s statement was itself ridiculous. Lighthizer is Trump’s principle advisor on trade laws and trade agreements and this statement shows how badly he and the Trump Administration have misjudged the situation.

The major problem is that Lighthizer and Trump are focusing too much on the trade deficits and not enough on the enormous amount of U.S. exports. The United States exports roughly $2.4 trillion in goods and services per year so there are plenty of targets for retaliation.

On March 2, 2018, President Trump tweeted, “trade wars are good, and easy to win.”  But like pretty much all wars — both trade wars and real wars — the most common result is that no one really wins and everybody loses.

Both the Wall Street Journal and Investors Business Daily disagree with the Trump trade war. In an editorial entitled, Trump’s Tariff Folly, the Wall Street Journal Editorial Board wrote how these new tariffs on aluminum and steel will harm the United States both economically and diplomatically:

Donald Trump made the biggest policy blunder of his Presidency Thursday by announcing that next week he’ll impose tariffs of 25% on imported steel and 10% on aluminum. This tax increase will punish American workers, invite retaliation that will harm U.S. exports, divide his political coalition at home, anger allies abroad, and undermine his tax and regulatory reforms. The Dow Jones Industrial Average fell 1.7% on the news, as investors absorbed the self-inflicted folly.

Mr. Trump has spent a year trying to lift the economy from its Obama doldrums, with considerable success. Annual GDP growth has averaged 3% in the past nine months if you adjust for temporary factors, and on Tuesday the ISM manufacturing index for February came in at a gaudy 60.8. American factories are humming, and consumer and business confidence are soaring.

Apparently, Mr. Trump can’t stand all this winning. His tariffs will benefit a handful of companies, at least for a while, but they will harm many more. “We have with us the biggest steel companies in the United States. They used to be a lot bigger, but they’re going to be a lot bigger again,” Mr. Trump declared in a meeting Thursday at the White House with steel and aluminum executives.

No, they won’t. The immediate impact will be to make the U.S. an island of high-priced steel and aluminum. The U.S. companies will raise their prices to nearly match the tariffs while snatching some market share. The additional profits will flow to executives in higher bonuses and shareholders, at least until the higher prices hurt their steel- and aluminum-using customers. Then U.S. steel and aluminum makers will be hurt as well.

Mr. Trump seems not to understand that steel-using industries in the U.S. employ some 6.5 million Americans, while steel makers employ about 140,000. Transportation industries, including aircraft and autos, account for about 40% of domestic steel consumption, followed by packaging with 20% and building construction with 15%. All will have to pay higher prices, making them less competitive globally and in the U.S.

Instead of importing steel to make goods in America, many companies will simply import the finished product made from cheaper steel or aluminum abroad. Mr. Trump fancies himself the savior of the U.S. auto industry, but he might note that Ford Motor shares fell 3% Thursday and GM’s fell 4%. U.S. Steel gained 5.8%. Mr. Trump has handed a giant gift to foreign car makers, which will now have a cost advantage over Detroit. How do you think that will play in Michigan in 2020?

The National Retail Federation called the tariffs a “tax on American families,” who will pay higher prices for canned goods and even beer in aluminum cans. Another name for this is the Trump voter tax.

The economic damage will quickly compound because other countries can and will retaliate against U.S. exports. Not steel, but against farm goods, Harley-Davidson motorcycles, Cummins engines, John Deere tractors, and much more.

*    *    *    *

Then there’s the diplomatic damage, made worse by Mr. Trump’s use of Section 232 to claim a threat to national security. In the process Mr. Trump is declaring a unilateral exception to U.S. trade agreements that other countries won’t forget and will surely emulate.

The national security threat from foreign steel is preposterous because China supplies only 2.2% of U.S. imports and Russia 8.7%. But the tariffs will whack that menace to world peace known as Canada, which supplies 16%. South Korea, which Mr. Trump needs for his strategy against North Korea, supplies 10%, Brazil 13% and Mexico 9%.

Oh, and Canada buys more American steel than any other country, accounting for 50% of U.S. steel exports. Mr. Trump is punishing our most important trading partner in the middle of a Nafta renegotiation that he claims will result in a much better deal. Instead he is taking a machete to America’s trade credibility. Why should Canada believe a word he says?

The Investors Business Daily followed suit stating in its editorial, entitled Sorry, Mr. President: Your Trade Protectionism Will Cost The U.S. Dearly:

Protectionism is a political feel-good policy that does nothing for the economy. It’s a big cost with very few tangible benefits. That’s why President Trump has made a big mistake in imposing big tariffs on steel and aluminum.

We understand, of course, that President Trump feels beholden to his constituencies in the U.S. who have been hurt by foreign competition, particularly in basic industries like steel and aluminum. But the 25% tariff on steel and 10% tariff on aluminum that Trump seeks to impose will lead to higher prices for all, the loss of thousands of jobs and a political-crony windfall for a handful of big companies.

“We’re going to be instituting tariffs next week,” Trump told a meeting of executives at the White House on Thursday. “People have no idea how badly our country has been treated by other countries.”

We have no doubt that what Trump says is true. But if so, it should be remedied through trade talks, not a trade war.

And make no mistake: The broad nature of Trump’s tariffs, hitting all exporters to the U.S., will invite some kind of retaliation from those who’ve been hit.

Already, EU Commission President Jean-Claude Juncker is threatening to respond in kind: “We will not sit idly while our industry is hit with unfair measures that put thousands of European jobs at risk,” he said. “The European Union will react firmly and commensurately to defend our interests.”

*    *    *    *

Beijing is already looking at imposing trade penalties on U.S. sales of sorghum there, and may soon also target our sales of soy, too. Meanwhile, India, emboldened by the U.S. turn toward protectionism, might use Trump’s moves as a reason to protect its own wheat and rice sectors from U.S. imports.

So the steel and aluminum industry’s gains will be the loss of others.

Trump’s justification for tariffs is “national security.” But, as some have pointed out, the U.S. military uses only about 3% of domestic steel output, and much of our imported steel comes from allies like Canada. So the “threat” really isn’t much of one.

Of greater concern is what the higher prices for steel and aluminum — remember, a tariff is actually a tax — will do to our domestic economy.

As the R Street Institute think tank reminds us, “According to 2015 U.S. Census data, steel mills employ about 140,000 Americans, while steel-consuming industries, including automakers and other manufacturers who rely on imported steel, employ more than 5 million. It is estimated that nearly 200,000 jobs and $4 billion in wages were lost during the 18 months during 2002 and 2003 that President George W. Bush imposed tariffs on imported steel …” . . .

Protectionism is a bad road to travel. Let’s hope this move by President Trump is merely a negotiating ploy, and not a long-term policy. If it’s the latter, buckle up because we are going to be in for a long and bumpy ride.

President Trump has many times been called ignorant on trade, but the truth is that his trade views reflect the views of many Americans who believe that all (or at least most) imports are unfairly traded and who fail to understand the importance or profitability of U.S. exports.

For years, the U.S. Commerce Department has used a policy called zeroing, which allows it to create dumping rates when there simply were none. With China, Commerce creates dumping rates because it refuses to use actual prices or costs in China, instead using surrogate values from import statistics in 5 to 10 different countries to construct a cost. These faulty costing premises have now been used to justify a trade war with the World.

Foreign countries have many targets among U.S. exports against which they can strike back. This trade war will not be pretty and many Americans and American companies will be hurt. The rest of the world is likely to suffer as well.

There is still a small chance President Trump will back away from his tariff pronouncement. I sure do hope that happens.

China data protection lawyers
China data protection requirements

Earlier this year, China released the final version of the national standard on personal information protection, GB/T 35273-2017 Information Technology – Personal Information Security Specification (信息安全技术 个人信息安全规范) (the “Specification”).  The Specification will take effect on May 1, 2018.

The Specification is not a law or regulation that requires mandatory compliance. However, it likely will be relied on by Chinese government agencies as a standard to determine whether companies are following China’s data protection rules. Businesses that collect or process personal information in China should check their current practices against this Specification to identify and minimize their potential risks. The below provides the basics on this new Specification.

Personal Information and Sensitive Personal Information. Under the Cybersecurity Law of China, personal information means information that can be used to identify a person if used separately or in combination with other information. This new Specification expands this definition to include information that reflects a person’s activities, such as browsing history.

Sensitive personal information includes information that, if leaked, illegally provided or used inappropriately, will likely threaten personal and property safety and can easily harm personal reputation, physical or mental health or lead to discriminatory treatment. Examples of sensitive personal information include a person’s ID card number, bank account number, and personal information of minors of age 14 or younger.

Data Controller. The new Specification introduces the concept of a personal data controller, which means a natural person or an organization that determines the purposes and means for processing personal data. A data controller is responsible for compliance with applicable laws and regulations in the collection, retention, use, sharing and transfer of personal information, as well as in handling data breaches.

Data Collection. The new Specification states that collecting personal data should be done legally and minimally. It requires a data controller obtain consent from the personal data subject (the natural person whose data is being collected) and further requires explicit consent when sensitive data is being collected. There are a few exceptions when consent is not required. For example, when the collection and use of personal data is necessary for executing and performing contracts, for criminal investigation, or for news reports when the data controller is a news agency.

A data controller shall also establish and publish a privacy policy according to the Specification. A model privacy policy is also attached to the Specification.

Data Retention. Personal information must be retained for the shortest period of time and only to the extent necessary. After personal information has been collected, the data controller must de-identify such information and retain the de-identified information separate from any personal identifiable information. When a data controller ceases operations, it must stop collecting personal information, inform relevant data subjects of the same, and delete or anonymize all of the personal information it has retained.

Use of Data. A data controller must limit access to collected personal information to the minimum extent necessary. Data subjects have the right to access data and to rectify incorrect or incomplete data, the right to erasure and to data portability, as well as the right of account cancellation

Third-Party Processors; Sharing and Transfer of Data. When a data controller outsources data processing to a third party, the data controller must conduct a security assessment to ensure the third-party processor is capable of offering sufficient security. The data controller must also supervise the processor by audits and by imposing contractual obligations regarding data processing security.

If a data controller needs to share or transfer personal information, it must first conduct a security assessment, use effective measures to safeguard data subjects, inform data subjects of the purpose and the recipient of the data transfer and obtain prior consent (a separate consent in addition to the initial consent to collecting and processing data). If a data controller is acquired by or merged with other entities, it must notify the data subjects of this fact and its successor shall continue to perform the original data controller’s responsibilities and obligations.

Data Breach Incidents. Data controllers must have security incident response plans in place, provide periodic training and perform emergency drills at least annually. When a data breach occurs, the data controller must record the incident, assess potential impact and take remedial measures. It shall also notify affected data subjects of the incident by email, mail, phone, push notification, or other reasonable and effective method when individual notice is not practically possible.

China expat employment contracts
China expat employment contracts: make ’em real

If you are an expat working or seeking a job in China, your China employment contract really matters. Let me be clear. Your final executed China employment contract really really matters and if you plan to travel all the way to China to take a new job there, or even just take a new job there, you should do all of the following

  • Have your proposed employment contract checked by a China employment lawyer to make sure it fully protects you and includes EVERYTHING you need or want to be included. Oh, and please do this before you sign it, not after.
  • Make sure the final version of your contract is the same version as your approved version and make sure gets fully executed by both parties: On the employer side, this means it should have the signature of your employer’s legal representative and your employer’s company chop or seal;
  • Hold on to one original of the fully executed employment contract for your records. Please.

In China, it is fairly common for employers to deliver an offer letter to a potential employee stating the employer’s intent to enter into an employment relationship with that employee. When delivered to an expat, this offer letter is virtually always in English. Most expats check this document carefully but far too many stop there, believing their acceptance of this offer letter fully “covers” them. It doesn’t and if this is all you have, you pretty much have nothing at all. Others, realizing this, ask for a full-on contract but then get that in just Chinese and then just assume it includes everything set out in their offer letter. If you are someone who believes that, you obviously have not been reading this blog long enough. This assumption goes astray pretty much every time for one of two reasons: (1) the final employment contract does not include everything from the signed offer letter, or (2) the Chinese in the contract does not match the English in the offer letter (or even in the contract itself). And let me tell you, when there is this disconnect it favors the employer 99.9% of the time.

You would be surprised (or maybe not) how often we see the following when it comes to China expat employment contracts:

  • The expat’s employment agreement never was executed. This may work in your favor in that you may (but not always!) be able to collect damages as a result of the employer’s failure to enter into a written employment contract. On the other hand, it can also work against you in that none of the benefits you negotiated with the employer are in writing.
  • The expat’s final executed contract contained NOTHING to which the parties agreed in their negotiations. This may happen for a couple of reasons. First, the employer has to submit a completely different form to the local labor authorities to secure a work visa for the expat and the employer does not bother to explain this to the expat when he or she signs such submitted form. The employer never got the expat to execute the “real” contract, perhaps because they were sloppy or disorganized or the people in charge of it did not care. Second, the employer intentionally cheated the expat by having the expat sign a completely one-sided contract (favoring the employer, of course) even though the parties had agreed on a different set of terms. There may be other reasons, but in our experience, these two are by far the most common.
  • The expat agreed to sign a fake contract knowing the real deal was not on paper. In this situation, the paper was for “official purposes only,” but not necessarily for securing a work visa. For example, it may have been intended to show the tax authorities that the expat is making a much lower amount than orally agreed. This is done to lower everyone’s tax burden and the plan is for the employer to make up the difference in cash or by some other illegal means.

Now imagine you get into a dispute with your employer regarding your salary or your bonus and there is no enforceable written agreement of any kind that supports your claim. You should assume (though even this to a certain extent can depend on your locale) that you will be held to a higher standard because you are a high-level expat, not an “ordinary” Chinese employee and the odds are overwhelming that you will lose.

And though you’ve probably heard this dozens of times, but when your Chinese counterpart assures you “mei wen ti” (no problem), there usually will be plenty of problems and it will be you who will be the recipient of them. Rest assured, if your China employer tells you it is no problem that you have a fake agreement, there you WILL have a problem.

Last but not least, if you do have a well-crafted employment contract that has been executed by both you and your employer, you should make sure any amendments to that contract are done by signed and chopped writings as well; not verbally or by WeChat or email.

Bottom line: Check your offer letter. Check your proposed employment contract. And check your final, to-be-executed employment contract, and make sure it gets fully executed.

US-China Trade War -- Sorghum
US-China Trade War. Sorghum is the latest move.

For the first time in over a decade, the United States Commerce Department late last year self-initiated an antidumping and countervailing duty case. This case was against aluminum sheet imports from China.  Almost all other antidumping and countervailing duty cases are initiated by domestic producers filing a petition asking the U.S. government to investigate whether the subject imports are dumped or subsidized, and injure the domestic industry. It was highly unusual for DOC to self-initiate AD/CVD cases and act as both prosecutor and judge in these cases.

On February 4, 2018, China’s Ministry of Commerce (“MOFCOM”) self-initiated its own antidumping and countervailing duty case against the United States for imports of US sorghum grain. Total China imports of US Sorghum Grain in 2016 were 5,869,000 tons worth more than $1.26 billion USD. China is a significant export market for U.S. sorghum, accounting for about 70 percent of total US sorghum exports in 2016. Sorghum is used primarily as a livestock feed, but can also is used to make alcoholic beverages like Chinese Mao-tai and other baijiu. This self-initiated action by MOFCOM is widely viewed as China’s counter to U.S. trade actions over the past year.

China’s case involves dumping claims and it also targets large US agricultural subsidies for sorghum grain, such as the following United States agricultural assistance programs: Crop Insurance; Price Loss Protections; Agricultural Risk Protections; Marketing Loans; Export Credit Guarantees; Market Access Programs and Foreign Market Development Partner Program.

The following North American sorghum/ grain exporters may be targets of this MOFCOM Action:

  • Agniel Commodities, LLC
  • Attebury Grain, LLC=
  • Big River Resources
  • Bluegrass Farms of Ohio, Inc.
  • Bunge North America, Inc.
  • Cardinal Ethanol, LLC,
  • Cargill, Inc.
  • Consolidated Grain and Barge Co.
  • DeLong Company  Inc.
  • Enerfo USA, Inc.
  • Fornazor International Inc.
  • Freepoint Commodities LLC
  • Gavilon, Illinois Corn Processing, LLC
  • International Feed
  • Louis Dreyfus Commodities
  • Marquis Grain Inc.,
  • Mirasco Inc.,
  • Pacific Ethanol, Inc.,
  • Perdue AgriBusiness, LLC,
  • The Scoular Company,
  • Southwest Iowa Renewable Energy, LLC,
  • Tharaldson Ethanol Plant I, LLC,
  • United Wisconsin Grain Producers
  • Zeeland Farm Services.

This case is important because it signals a possible escalation of the on-going trade war with China. In January 2017 China issued AD duties of 42.2 to 53.7% and CVD duties of 11.2 to 12% on another U.S. grain product used primarily for livestock feed, dried distiller’s grains with solubles (DDGS). Some of the companies who exported DDGS to China may also export sorghum to China.

At a minimum, it shows that what goes around can come around and that China has no intention of remaining idle in the face of US trade actions. If the US is going to self-initiate antidumping and countervailing duty cases against China, China is going to self-initiate antidumping and countervailing duty cases against the US. This sorghum grain trade case indicates there is a price to pay for US tariffs and trade actions. Most of the companies listed above are based in or have very close connections to America’s heartland and that is surely no coincidence; China is aiming this sorghum grain case right at President Trump’s constituency—the agriculture and rural states.

Both the Wall Street Journal and Investors Business Daily have in numerous editorials warned the Trump Administration that the economic issue that could stop the rise in the US economy is a trade war. Trump and the Republicans have tied their political star to the rising US economy. But if President Trump levies more tariffs against Chinese imports, expect the Chinese government to retaliate and aim its trade guns at products and constituencies that will hurt President Trump and the Republicans the most—agriculture.

In the meantime, any company involved in providing sorghum grain to China should be looking to retain counsel experienced with both China and with international trade.

Things are starting to get serious.


Five China employment law red flags
Five China Employment Document Red Flags

If you have employees in China, you need written Rules and Regulations to govern the terms of your employment relationships. Since China is not an employment at will jurisdiction, well-crafted Rules and Regulations are critical to giving you a basis for disciplining or terminating an employee. And unenforceable or unworkable Rules and Regulations expose you to regulatory, liability and lawsuit risks.

Though we audit our client’s employment documents year-round, the beginning of each year always brings on an onslaught of such work, as doing so seems to be (and should be) part of every company’s New Year’s resolutions. The following are red flags, that tell you (loud and clear) that you need to revise your Rules and Regulations to avoid future trouble.

1. Your Rules and Regulations are in English only. This is by far the one our China employment lawyers see most often and this is a dead tell that whoever drafted your Rules and Regulations was not familiar with Chinese employment laws. Nine out of ten times, this also means that your Rules and Regulations came from overseas and have no real relationship with China’s employment laws. If you don’t have your Rules and Regulations in Chinese, you essentially don’t have Rules and Regulations. Oh, and just translating your English language documents is not going to cut it. You need bilingual China-centric policies written not just for China, but for your industry and your locality.

2. Your Rules and Regulations are in Chinese only. From time to time, our China employment lawyers are called (usually urgently) to assist a foreign employer whose Rules and Regulations are in Chinese only. The problem here is that none of the key HR personnel understand a word of what the Rules and Regulations say and yet they are expected to make important personnel decisions based on them. The other problem is that these China-only Rules and Regulations are nearly always inadequate. In an ideal world, your Rules and Regulations are clearly written in both Chinese and in English.

3. Your documents haven’t been updated for years. China laws change at light speed and China’s employment laws change even faster than that. The fact that employment laws are incredibly local only increases the odds that your Rules and Regulations are no longer good. You could be exposed to huge risks if you make an employment change (discipline, wage reduction or termination especially) based on Rules and Regulations that have become contrary to law. Also, what made sense for your business years ago may no longer make sense now. For example, if you started your business five full-time employees in one city but now half your 50 person workforce is part-time employees in three different cities, you need new Rules and Regulations. Like right now.

4. Your key employment documents are all over the place, both in what they say and where they are located. You cannot believe how common this one is; we see this maybe 75 percent of the time. I recently did an employment audit for a client where three different people from three different cities gave me three different sets of employment documents and nobody knew which were current nor which employees had been given which. The only solution: start all over with yet another set of documents and make sure every single employee signs on for this new one.

5. You lack signed acknowledgments from your employees confirming receipt of your employment documents. This is much worse than most realize. You need to make sure your employees actually receive a copy of your Rules and Regulations and you have proof that they did so. If you end up having an employee dispute, the employee will virtually always claim never to have received a copy of your employer Rules and Regulations. Without a Chinese language acknowledgment of receipt signed by your employees proving they received your Rules and Regulations, you will have a difficult time justifying your employment decision in front of the arbitrator/judge.

If you see yourself in the above, get cracking.




China lawyersAs many of you probably know, UCLA basketball players LiAngelo Ball, Cody Riley and Jalen Hill, were arrested in China last week on suspicion of stealing sunglasses from a Louis Vuitton store in Hangzhou. President Trump claims their fast release from custody stems from his having personally asked Chinese President Xi Jinping to intervene in the case.

Whether President Trump was or was not responsible for the quick release of these three players (I am convinced he was), what should those without such presidential connections do when similarly arrested in China. We recommend the following:

1. Contact your Nearest Embassy or Consulate. Your first step should usually be to contact your nearest embassy or consulate, but recognize that it will be limited in the assistance it can provide. Foreigners arrested in China are subject to Chinese laws, not the laws of their own country. This should be obvious, but not everyone knows this.

Your embassy or consulate should be able to help you with the following:

  1. Providing you with a list of local attorneys who speak your native language
  2. Contact your family, friends or employer
  3. Visit you in jail and provide you with reading materials and maybe food.
  4. Monitor your situation in jail and help ensure that you are being treated appropriately.
  5. Provide you with an overview of the local criminal justice process

2. Hire a Local Criminal Attorney. You will need a local attorney. This means if you are arrested in Qingdao you need a Qingdao criminal lawyer and not a Shanghai one. China has many terrific criminal lawyers and they usually require relatively low upfront flat fees to take on a new matter for a new client. This means it is usually relatively easy to find a good and cheap Chinese criminal lawyer, but few speak English.

It is absolutely critical that you get a good local criminal lawyer as quickly as possible. Far too often when our China lawyers get contacted regarding a criminal law situation in China, the detainee or the detainee’s friends or family believe that because the arrest was a “mistake” no lawyer is needed. Some claim they do not need a lawyer because they or someone they know has sufficient guanxi to handle the arrest lawyer-free. Even if these people are right (and they pretty much never are), it still behooves them to get a good local criminal lawyer immediately.

No ifs ands or buts: if you are arrested in China, you need a local criminal lawyer and fast. 

How do you find such a lawyer? That depends. By way of an example, one of our China lawyers was recently retained to find a criminal lawyer in a small Chinese city. This lawyer immediately emailed all of the China lawyers in our firm and we all emailed our China lawyer contacts in various cities to ask for the names of recommended Chinese criminal lawyers in this small Chinese city. The client ended up hiring a lawyer who was mentioned multiple times by the Chinese lawyers we know.

3. Contact Family and Friends but Keep Them Quiet

Sometimes you want your family and friends on the outside to scream up and down about your arrest. Sometimes that is the worst strategy possible. It is generally a good idea not to publicize your case unless your local criminal lawyer instructs you to do so. China is not going to release you because your hometown newspaper is saying you are being held unfairly. Instead, your publicizing the unfairness of your arrest might just cause the local prosecutor or court to double down. But see here for a case where the strategy was to generate bad publicity for the arresting country.

4. Hire an Attorney in Your Home Country (Sometimes) 

Our China attorneys get contacted by arrested Westerners maybe ten times a year. If the matter is something like a shoplifting arrest, we usually do little more than provide our client with a few tips and find them a good local criminal lawyer and sometimes good local translator. This is the case for nine out of ten. But in some cases — when the Westerner arrested is from the United States or Spain or Germany where we have our own attorneys — we do considerably more.

By way of one example, our firm a few years ago represented an American charged by China with massive financial fraud. We stayed involved in this case from its beginning through sentencing (note that more than 99 percent of those charged with a crime in China end up being convicted). For this client we did the following:

  • Found him a top-tier criminal lawyer. This lawyer did not speak Chinese and so we often served as the intermediary.
  • We often served as an intermediary with the US Consulate.
  • We would communicate with the detainee’s family in the United States
  • We gathered up key mitigating documents from the United States and other countries outside China.
  • Perhaps most importantly, we explained China’s legal system to the detainee and his family and, in particular, the huge benefits of admitting to the crime and setting up a procedure to reimburse those who harmed by the crime and a rehabilitation plan. We also explained China’s sentencing and early release laws and the importance/benefit of reimbursing the victims so as to get a sentence term that allowed for early release.

Bottom Line: If you or someone you know are arrested in China, take it very seriously and act quickly.

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 Court judgment and Hague Service
Move Along. Nothing to see here.

The China legal world was abuzz this last weekend about a Chinese court in Wuhan enforcing a California judgment against a couple of Chinese citizens. On one level this is indeed a huge deal, but on a practical level, this really does not change anything with respect to what you as an American company should put in your China contracts in terms of where your disputes should be resolved.

At least not yet, and likely not for a very long time.  

Since this blog’s inception, we have preached how terrible it is to draft a contract with a Chinese entity that calls for disputes between the parties to be resolved in the United States. That has not changed.

About a year ago, in Enforcing US Judgments in China. Not Yet, I wrote of how China had never enforced a United States court judgment.

At least once a month, one of my firm’s China lawyers will get a call or an email from a U.S. lawyer seeking our help in taking a U.S. judgment (usually a default judgment) to China to enforce. The thinking of the U.S. lawyer is that all we need do is go to a China court and ask it to convert the U.S. judgment into a Chinese judgment and then send out the Chinese equivalent of a sheriff to the Chinese company and start seizing its assets until it pays.

As we have consistently written, nope, nope, nope.

I then went on to discuss how my firm’s China lawyers are often called on to conduct research on this very issue (usually for lawyers or companies wanting to prove to their insurance company or to a court that it would be futile for them to pursue enforcement of their United States judgment in China) and I pulled a large section from a recent memorandum on that topic:

Article 282 of the PRC Civil Procedure Law, requires all of the following conditions be met for enforcement of a foreign judgment to be recognized in China:

The foreign judgment has taken legal effect in the jurisdiction in which it was rendered.

The country where the deciding court is located has a treaty with China or is a signatory to an international treaty to which China is also a signatory or there is reciprocity between the countries.

The foreign judgment does not violate any basic principles of Chinese law, national sovereignty, security, or social public interest.

Though China is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, it is not a signatory to any international treaty on recognition and enforcement of foreign court judgments. There is no bilateral treaty between China and the U.S. on recognition and enforcement of foreign court judgments. There also is no bilateral treaty between the two countries on civil or commercial judicial assistance.

Even judgments from countries that have an enforcement treaty with China are oftentimes not enforced in China. For example, China and Australia entered into an agreement on reciprocal encouragement and protection of investments in 1988 that mandates both countries promulgate laws recognizing and enforcing each other’s judgments. But in response to a 2007 request by the Guangdong Province High People’s Court for instructions regarding an application by an Australian plaintiff for recognition and enforcement of an Australian court judgment, the Supreme People’s Court of China rejected enforcement. Since there was no international treaty to which China was a signatory nor any treaty between China and Australia on mutual recognition and enforcement of court judgments, nor any reciprocity between the two countries, the application should be rejected.

Since China is not a signatory to any international treaty on recognition and enforcement of foreign court judgments nor is there any treaty between China and the U.S. regarding judgment enforcement, the only possible way to get a U.S. judgment enforced in China would be if there were reciprocity between the two countries, but there isn’t.

In considering the question of reciprocity, a Chinese court will consider whether there is any precedent indicating reciprocity. In other words, the court will seek to determine whether there are any prior cases where a U.S. court recognized or enforced a Chinese court’s decision. If there are no examples of a U.S. court having enforced a Chinese judgment, the Chinese court will almost certainly rule against enforcing the U.S. judgment because the reciprocity requirement will not have been met.

In 1994, the Dalian Intermediate People’s Court considered a Japanese party’s application to recognize and enforce a Japanese judgment and two rulings. The application was eventually referred to China’s Supreme People’s Court for guidance and the SPC held that because there was no multilateral or bilateral treaty governing such matters between China and Japan and because the two countries had not established reciprocity, the Japanese judgment would not be recognized or enforced by a Chinese court. This case confirms China requires factual reciprocity, not presumed reciprocity.

But are there any examples of a U.S. court enforcing a Chinese Judgment? On August 12, 2009, the United States District Court for the Central District of California issued a judgment enforcing a $6.5 million dollar Chinese judgment against an American corporate defendant under California’s version of the Uniform Foreign Money Judgments Recognition Act and in 2011, the Ninth Circuit Court of Appeals affirmed the district court’s decision. The plaintiffs in that case were Hubei Gezhouba Sanlian Industrial Co. Ltd. and Hubei Pinghu Cruise Co. Ltd., two PRC companies located in Hubei Province. The plaintiffs won a judgment against Robinson Helicopter Company Inc., a California corporation, at the Higher People’s Court of Hubei Province. The United States District Court for the Central District of California held that the PRC judgment was final, conclusive and enforceable under PRC laws and the plaintiffs were therefore entitled to an issuance of a domestic judgment in the amount of the PRC judgment.

This was the first time a U.S. Court recognized and enforced a PRC judgment, but it does not necessarily mean a Chinese court will invoke the principle of reciprocity to recognize and enforce a U.S. court judgment. First, the enforcing court in that case is in California (though it was federal court), and the laws usually differ from state to state in the U.S., so it’s uncertain whether a Chinese court will deem the U.S., as a country, to have established a reciprocal relationship with China. Second, since the enforcing court was a federal court, it’s also not clear whether a Chinese court will deem a state court’s judgment enforceable in China. Third, the enforcing court is not the U.S. Supreme Court, thus, a Chinese court may not deem it to amount to reciprocity at the highest judicial level between the two countries. Finally, that case involved a U.S. defendant who had previously argued that only China had jurisdiction over the case, so it hardly could be deemed unfair for a U.S. court to rule on enforcing the Chinese judgment.

Chinese courts tend to be more willing to recognize and enforce foreign divorce judgments involving Chinese citizens so they don’t have to initiate a separate divorce proceeding. However, since this is not a divorce case, it almost certainly is not relevant.

We have not been able to find a single instance where a Chinese court enforced a U.S. non-divorce judgment.

This memorandum does not address the possibility of your suing the Chinese company directly in China and there are times where doing so makes sense.

In conclusion, a U.S. court judgment against ______________ will almost certainly not be recognized or enforced in China. Unless ___________ has assets in the U.S. or in some country other than China that enforces US judgments, a US judgment will probably not be collectable against this company in any way.

Earlier this year, in Is Now the Time to Take Your U.S. Judgment to China? I pondered whether China might be ready to start enforcing U.S. judgments and I talked of how I would love to see someone take such a judgment to a Chinese court to test this out:

I find it hard to believe that this decision regarding [enforcing] the Singapore judgment did not receive a thorough vetting from on high and maybe it does signal a change in enforcement of foreign judgments in China. I for one would love to test it out, but I would want to do it with the perfect case, or something close to it. The perfect case would be a Chinese defendant company that is a real bad hombre (sorry to use a Trump line, but I just cannot help it) who cheated someone in a commercial dispute and then got sued in a U.S. federal court and fought and lost on the merits. Ideally the judgment is for millions of dollars and the Chinese company has the wherewithal to pay it. I know it is asking too much but if the Chinese defendant appealed the lower court’s ruling and lost on appeal also, well that would be the icing on the cake.

I will now discuss the Wuhan (Liu Li v. Tao Li and Tong Wu) case and explain why it has not changed the risk equation for enforceability to impact how you should be writing your contracts with Chinese companies.

This Wuhan case was before the Intermediate People’s Court of Wuhan City. The case sprung from a commercial dispute involving a plaintiff (a Chinese citizen) who paid USD$125,000 to two Chinese citizen defendants for shares in a California company and then got nothing, not even a return phone call. Plaintiff then sued defendants for fraud in Los Angeles Superior Court. Defendants were served with the complaint and summons in this case but they ignored it and the Los Angeles court granted plaintiff a default judgment. Note this was a dispute between Chinese Nationals on both sides and the dispute involved a United States sale of stock. In other words, the fact that it was a United States sale of stock means that it was wholly appropriate for a US court to reach a decision in the case and the fact that the dispute was entirely between Chinese Nationals gives a Chinese court every incentive in the world to enforce the judgment. The additional fact that the defendants certainly appear to be “bad hombres” (I apologize again for using that line but since I started with it I have to continue with it) is all the more reason to expect enforcement.

Plaintiff then took that default judgment to the Wuhan court to have it enforced there. The Wuhan court ruled it had jurisdiction because the defendants live and have assets there. The court ruled defendants had notice of the Los Angeles action and it also held that the Los Angeles judgment did not violate any basic principles of Chinese law, national sovereignty, security, or social public interest.

Most importantly, the court found reciprocity between China and the United States (California?) and it also held that it should not consider the merits of the Los Angeles court’s ruling, beyond determining that it did not violate any China basic principle. The court found reciprocity based on the Robinson Helicopter case I discuss above. For more on the Robinson Helicopter case see Your Company Can Be Sued In China And That Matters.

This all sounds good right? But for the following reasons I am of the view that this changes little.

  1. This is just one case and it comes from an intermediate court in Wuhan. Are you willing to risk a $30 million contract by making it subject to U.S. court jurisdiction based on this one case out of Wuhan?
  2. Did this decision depend on reciprocity with California as opposed to the United States as a whole? If you are a Texas company are you going to be willing to risk a $30 million contract by making it subject to Texas court jurisdiction?
  3. The underlying case involved a dispute between two groups of Chinese nationals. The case only makes sense if the defendants have property in Wuhan. So the Wuhan court just takes this a dispute between two Chinese that should properly be settled in China. There is always a chance a Chinese court will enforce an arbitration award or a foreign judgment when the parties on both sides are Chinese. It is not at all clear this case can or will be extended to enforce a judgment in a dispute between a foreign party and a Chinese national and the Chinese side appears in China and strongly opposes enforcement.
  4. The the bad act in the underlying lawsuit occurred in the U.S. It is normal for there to be jurisdiction in the place where the bad act will occur. So this case is perfectly normal. Why would you sue someone in China for a stock transaction violation that takes place in the U.S.? It is just a strange accident of fate that the seller/defendant also had presence and assets in China. In fact, it is probable that the entire transaction was illegal under Chinese law because Chinese citizens are supposed to have government approval before investing overseas and it is doubtful these defendants had that approval. This likely illegality also probably colored the Wuhan court’s decision.
  5. The Wuhan court found reciprocity based on the Robinson Helicopter case in which a California federal court enforced a Hubei province court judgment. Wuhan is in Hubei province and the judgment it enforced here was from California. Would the Wuhan court have ruled the same way if Robinson Helicopter had enforced a Beijing judgment? Would the Wuhan court have ruled the same way had Robinson Helicopter been a decision out of Kansas? No way to know.
  6. Even if you get past the various hurdles above, there is a final hurdle which essentially neuters one’s ability to sue a Chinese company in the United States and then use that judgment to collect in China: service of process. China’s Central Authority and its courts have over the last few years begun dragging their feet so much when it comes to Hague Service of Process that those lawyers who do it (and one of the China lawyers in my firm does these all the time) have been discussing among themselves whether it is even possible. It seems China is taking years to effect Hague service of process on Chinese defendants in U.S. cases and it is quite possible that it is no longer effecting such service at all. Without proper service (or at best, with service that takes two to three years), how valuable is suing a Chinese company in the United States?

This Wuhan case arose from a highly unusual and unique situation. When our China attorneys insist on China-centric contracts, we are focusing exclusively on business activity taking place entirely or primarily in China. For example, take this same lawsuit. What if the stock were stock in a Chinese entity and the transfer was supposed to take place in China? Would it make sense to take that law suit to Los Angeles? And if it were to be brought in Los Angeles, would a Chinese court really be likely to enforce the judgment that results from it? Same for failure to deliver product manufactured in China. Same for violations of IP agreements or for violations of reseller agreements and for violations of JV agreements and so on and so on. If you are going to enter into a contract with a Chinese company and some or all of the goods and services covered by the contract are going to be made or provided in China, your situation is going to be 180 degrees different from the situation that gave rise to this Wuhan case.

What is the best way to resolve a dispute in China? Even if we were living in a fantasy world where service of process in an American dispute can be made quickly and easily (or even at all) against a Chinese defendants and the Chinese courts promptly enforce those monetary awards from U.S. courts, you must consider the cost and expense of a U.S. litigation. Consider the problem of evidence and proof if your contract is mostly or all about China. Consider all of these things and then ask yourself whether setting up your contract to require litigation in a U.S. court and then enforcement of any eventual judgment in that court would make sense for you on any particular contract, or even ever? In what circumstances would having to go to two courts be a good contracting strategy?

In the case where a tort has occurred in the U.S., the situation is more complex. The product was made in China but the damage occurred in the U.S. In that setting, a law suit in the U.S. makes legal sense. However, the question then whether the U.S. is the best place to sue? Is it likely that a U.S. style products liability award will be enforced in China against an unwilling defendant? These are important issues and far more likely to be situation specific than the issue of what to put in your contract. So in this respect, this Wuhan case does make it more difficult to figure out the proper way to proceed in China for certain kinds of legal disputes.

But not typically for commercial contracts regarding matters that will mostly or exclusively take place in China. China is not a colony of the United States or of any other country. We are no longer in the early 20th century where China was carved up into foreign spheres of interest and where foreign law was applied against the Chinese people. China is a modern country with an increasingly developed legal system. China is not what it was in the 1980s, where there was virtually no legal system that could be used to resolve disputes. The Chinese know this and its courts fervently believe this and they are offended by foreign parties who insist on applying foreign law and foreign dispute resolution to matters 100% conducted in China. For this reason, it will almost certainly never be the case that China’s courts will enforce foreign judgments for what is truly a China-centered business dispute. For example, if you enter into a Joint Venture arrangement with a Chinese company and you think you can resolve your intra-company joint venture disputes in the United States and have a Chinese court enforce that resolution, you will almost certainly be sadly mistaken. If foreign companies are going to do business in China, they need to be prepared to accept having their disputes resolved in China.

At this point, it would be a mistake for anyone to draft a contract with a Chinese company with a jurisdiction provision calling for disputes to be resolved in U.S. courts. Unless and until there is that certainty, or unless your Chinese counter-party truly has assets in the United States (See Suing Chinese Companies and Citizens in the United States and in Canada: When it Makes Good Sense), it would behoove you to draft your contracts with Chinese companies to have disputes resolved in a Chinese court or, in some cases, before a China-qualified arbitral body. See Is Your China Contract Worthless?

But, if you already have a contract that calls for U.S. court jurisdiction, it would absolutely make sense for you to consider moving forward with litigating it in a U.S. court and trying to effect Hague service of process on the Chinese defendant(s). And then if you succeed in effecting Hague service and in securing a U.S. court judgment, you take that judgment to a Chinese court to have it enforced, perhaps you even do the same if you get the U.S. court judgment even without having effected Hague service.

But to count on this one decision on which to base future US-China contracts? No, that would not be smart.

What are your thoughts?

Shenzhen employment law DongguanGuangdong Province (home to Shenzhen, Guangzhou, and Dongguan, among others) recently came out with new employment laws. The provincial High People’s Court recently released a document entitled the Answers to Difficult Questions regarding Adjudication of Labor Disputes Cases, with the primary goal of making the province’s labor adjudication more consistent. This post discusses a few of its key provisions and I will be writing more about this new law in future posts.

If during the course of the employment relationship, an employer suffers damages as a result of an employee’s gross negligence or intentional wrongdoing, the employer may pursue the employee for a single sum payment at the time of termination. However, the damages will be limited to direct economic losses suffered by the employer, and the court will consider the nature and degree of the employee’s conduct in determining the damages to the employer and it will not allow the employer to impose its own operational risks on the employee.

An employee leaving employment because of employer wrongdoing or abuse (such as failure to provide necessary labor protections or labor conditions), must clearly provide to the employer the reason why he or she was allegedly forced to terminate the employment contract. If the employee fails to notify the employer that he or she is terminating the employment relationship on grounds of employer wrongdoing or abuse, the employee cannot (in most cases) later demand statutory severance for employer abuse/wrongdoing. Though this new rule is employer-friendly, we still advise our employer clients to try to figure out why an employee is leaving. Even if the employee may be barred from suing for statutory severance, he or she may still sue for other issues, such as unresolved overtime pay or vacation penalties. Your goal as an employer is usually going to be to try to resolve all problems with a departing employee without getting sued.

When an employer moves its location, it constitutes major changes of the objective circumstances on which the employment contract was concluded, and for that reason, the employer must consult with the employee and reach an amendment to the parties’ contract. If the parties are unable to reach agreement, the employee can terminate the contract and demand the employer pay him or her statutory severance. However, if the employer’s move does not have any obvious (whatever that means) impact on the employee and the employer has taken reasonable measures to accommodate the employee (such as providing a company shuttle or paying the employee transportation subsidies), the employee’s demand for statutory severance may be denied as there is insufficient ground for the employee to unilaterally terminate the contract. This is not exactly new either, but it is worth repeating that it is virtually always safer to reach a written agreement (in Chinese!) with your employee before you change any clause of their employment contract.

An employee can demand its employer pay contract damages pursuant to the parties’ employment agreement. The applicable employment laws impose restrictions on employers imposing contract damages (similar to and called liquidated damages in some countries) on their employees, but they do not prevent an employee from collecting contract damages from the employer under certain circumstances. Unless there is a law to the contrary, the employee can demand contract damages in addition to statutory severance (or double statutory severance in the case of unlawful termination). If a contract is being proposed by the employee (which is rare but does happen from time to time), the employer should be careful in checking whether there is such a provision that specifies contract damages payable by the employer (note that we generally recommend our clients not use any contract presented to them by an employee). On the flip side, when an employee — especially an expat — gets to negotiate his or her own employment package, they should consider whether it makes sense to include a contract damages clause in their contract.

Stay tuned for more on the new employment law developments in Guangdong.