China non-compete lawyers

It has become increasingly common for both foreign and Chinese companies to require their expat employees sign a non-compete agreement as part of their employment contract package. The below are some of the more common issues that arise with most expat non-compete agreements.

Non-compete timing. When it comes to China employment contracts, our China employment lawyers represent both foreign companies and expats. One of the things we have been noticing lately when retained to review expat employment documents is what we have taken to calling a “future” non-compete agreement. We mostly see this where a high level expat is negotiating employment with a Chinese company and the Chinese company’s employment contract will explicitly mention a non-compete agreement and explicitly state that the expat will sign a non-compete agreement, but the Chinese company will not provide the expat with a non-compete agreement for signing. To make matters worse, this mention of a non-compete is a lot clearer in the Chinese language portion of the employment contract than in the English portion and always to the expat’s detriment. This really matters because unless specifically specified otherwise in the Chinese language portion of the agreement, the Chinese portion of any China employment contract is all that legally matters in a Chinese court or arbitration. See Dual Language China Contracts: Don’t Get Fooled! This means an expat who is negotiating with its putative Chinese employer without the assistance of an experienced China employment lawyer will be signing on to sign on to a (very likely onerous) non-compete agreement without ever having seen it.

Non-compete compensation. Will the expat receive fair compensation for performing her or his non-compete obligations? According to China’s Supreme People’s Court, if the employee and the employer agree on the employee’s non-compete obligations but the employment agreement is silent on the post-employment compensation for the non-compete, the employer must pay the employee 30% of the employee’s average monthly salary in the twelve months before termination or the local minimum wage where the employment contract was performed, whichever is greater. This generally means the post-employment non-compete compensation agreed to in the employment contract or in the non-compete agreement will prevail because the parties are free to agree on this amount by a mutual agreement. There are though some China courts and judges and arbitrators who will disregard the parties’ own agreement and apply the 30% standard if the parties’ agreement calls for a lower than 30% payout. No matter what, it is generally a good idea for both the employer and the employee to agree in writing to a clear and specific compensation amount for the employee’s agreement not to compete with the employer.

Geographic scope. Far too often the agreement that sets forth the non-compete obligation fails to clearly address exactly what this obligation will be. We most commonly see this in its failure even to address the geographic scope of the non-compete. In other words, will the expat be forbidden to compete with her employer in Shenzhen? In China? In China and Hong Kong? In China, Vietnam and Thailand? In all of Asia (and how is that defined?)? In the entire world? Uncertainty on geographic scope usually works against the expat down the road because it can limit the expat’s ability to get hired. Sure, you can as an expat argue that your non-compete does not extend beyond China, but will potential employers in Hong Kong or Vietnam be willing to hire you and take on the risk that it extends beyond that?  On the employer side, one of the more common mistakes we see is a non-compete that extends so far that few courts anywhere would ever enforce it. It behooves both the employer and the employee to have a non-compete that reasonably coincides with the employee’s position/company role and the employer’s business, size, and industry. A multinational with offices in 85 countries will be given more geographic leeway than a company that sells tortillas in just Qingdao.

Non-compete period. China’s legal maximum is two years after the employment contract is terminated or ends so the first thing our employment attorneys do is make sure the non-compete agreement complies with this. We then focus on making sure the non-compete period makes sense for our client. What this usually means is that when we represent the expat we seek a non-compete duration of less than two years. Because so much of our expat representation is for high level management and physicians, both of whom are in high demand by China employers, we have a very good track record of being able to narrow the scope of the employer’s proposed non-compete, both in duration and in geographic scope.

Termination rights. What are the termination rights (if any) for either party? Is the employer allowed to terminate the non-compete agreement at any time without making any additional payment? Can the employee terminate the non-compete agreement and, if so, how? Keep in mind once a non-compete agreement is signed it is usually difficult for either party to get out of it.

Contract damages. Is there anything in writing specifying the damages the employee will need to pay for breaching the non-compete agreement? If yes, what does it say? When dealing with Chinese employers we often see the damages provision be a lot clearer in the Chinese portion of the contract than in the English portion and always to the expat’s detriment. Since the Chinese portion of any China employment contract is all that legally matters in a Chinese court or arbitration (unless clearly specified otherwise in the Chinese language portion), this really matters. At minimum, the damages you as the expat must pay should be proportional to the non-compete compensation you will receive. Note also that it typically makes sense to impose specific breach of contract damages against the employer as well.

The non-compete agreements my firm’s China employment lawyers review for expats always favor the employer; this makes sense because the employer prepares this agreement. Non-compete agreements are not “just a formality” and it is critical you as the expat fully understand what you are being asked to sign and that you make a concerted effort to negotiate for better terms and protection. The fact that the Chinese language portion of the agreement is nearly always the only portion that legally matters further tilts the playing field against you. Having an experienced Chinese employment lawyer who is completely fluent in Mandarin review your non-compete agreement is usually your only real protection.

 

 

 

International business lawyers
Photo by George Baird

I had a sorta friend in college who smoked like a chimney and drank like a Supreme Court Justice. When people would point out the danger of his ways he would respond by emphatically noting that his grandfather also smoked and drank just as much and he was still alive and kicking at 88. Does anyone not see a problem with this analysis?

And yet, my firm’s international lawyers often hear something similar as an excuse for why some company or some person is doing XY or Z that is not legal. Sometimes they will add that so and so who is a native of the country in which they are doing business has told them that this or that is okay, which to me is the equivalent of relying on someone with no medical training saying it’s okay to smoke.

What has happened to Fan Bing Bing spurs me to mention the above. Fan Bing Bing is a terrific movie actress who recently got into BIG trouble with the Chinese tax authorities for having underreported her income via a dual-contract system in which only one contract is disclosed to the tax authorities. For more on this, check out China Movie Stars and The Two-Contract Problem. But it isn’t just movie stars that employ the two-contract tax dodge; many foreign companies and expats do as well:

Even if Fan Bingbing hasn’t done a single thing wrong (which is very possible), it wouldn’t be surprising to learn that tax evasion is rampant in the film business. Tax evasion is like a national sport in China. Mainland factories regularly misreport income by having payments go to a Hong Kong or Taiwanese holding company. So-called “independent contractors” in China rarely report their income because they and their foreign employer are both operating illegally. And the billion-dollar daigou business is profitable largely through tax and customs fraud.

Around once a month (and 4-5 times in December and January — not kidding), our international lawyers get a call from a foreigner in big trouble somewhere like China or Indonesia for having done something illegal. I myself have taken many of these calls and they usually start out with the person in trouble saying something like the following:

I always follow the law and I wanted to follow the law in __________ [country] but my ___________ assured me that this is how things are done in ___________[country] and so I reluctantly went along. And now I am in legal trouble for having done…..

The person who usually gets the blame is the accountant or general manager or even the person’s wife who is a native of whatever country in which the person is having his legal problems — I say “his” here because I cannot remember getting such a call from anyone not male. My tactic is to quickly push through this sort of discussion by bluntly saying, well yes, not paying your taxes or not doing X is illegal pretty much everywhere in the world and I am not aware of any country in the world where it is a defense to say that everyone else is operating illegally as well. So at this point, what I suggest is that we bring in a top-flight criminal lawyer and work on doing whatever we can to prevent you from going to jail and to reduce what you will need to pay.

Around ten years ago, A reader sent me an article regarding the Sri Lankan parents being denied the return of their 17 year old daughter by a United States judge because the family was unable to prove they were in the United States legally. The judge was denying the daughter’s return both for immigration reasons and because her parents’ credibility had been so damaged by their history of immigration untruths. The reader asked if we were aware of anything like this having happened in China or the United States with Chinese businesspeople and whether “something like this” can impact one’s business in China. I responded by listing out all sorts of examples we had seen where one’s immigration status has harmed a business.

Many years ago, I was involved in an international litigation matter involving two Russian fishing companies. One of the key witnesses for the Russian company on the other side was a woman who had secured a US visa based on her supposed extensive education and experience in the fishing industry in Russia. She had secured this visa by claiming a college degree from one of Russia’s best fishing institutes and by claiming to have spent many years working for one of its largest fishing companies. One of my firm’s crackerjack paralegals somehow acquired a copy of this person’s visa application and noticed that her college degree from a college in Town A in Russia had been stamped by someone in Town B in Russia. This was the equivalent of a Harvard degree with an official Yale stamp on it. In other words, it could never happen if the degree were not a fake.

Our next move was to depose this person and depose her we did. At her deposition, we asked her a series of questions intended to make clear we knew she had lied to get into the United States, including the following:

1. Who was your favorite professor? She said she had no favorite.
2. Name one of your professors. She said she could not remember a single one.
3. Name one professor at the entire college. She said she could not remember a single one.
4. Who was your best friend at college? She said she was too busy studying to have had any friends.
5. Name one fellow student at your college. She said she could not remember a single one.
6. List the classes you took. She gave a really vague answer.
7. Name some of the buildings on your campus. She could not remember a single one.
8. Describe the campus. She gave an incredibly vague description.

We asked the same sort of questions regarding the fishing company at which she had allegedly worked in Russia and we got the same sort of answers.

And guess what, this key witness for the other side never showed up to testify at trial, which greatly strengthened our case and probably helped us prevail. I have no doubt her failure to appear stemmed from her fear of her illegal immigration status being publicly exposed.

I was once contacted by a Russian-American company that wanted my firm to sue an American company over a debt. I pushed my client about skeletons in his and his company’s closet and he admitted he was in the United States on a student visa and so should not have been working at all. We talked about how his bringing this case would probably expose him to visa issues and how he should think long and hard before he brought it. He chose not to bring the case and instead to just walk away from a not insubstantial debt.

We have had to tell a number of foreigners in China the same thing when they have sought our help in collecting on a debt in China or in suing their Chinese partner for having run off with what the foreigner thought was its own business. If you or your business are not 100% legal in China, you have pretty much foreclosed your ability to sue anyone in China, no matter what they do to you. To put it bluntly, you are ripe for the plucking.

A handful of times (usually during periods of stepped-up visa enforcement), my firm has been contacted by foreigners with illegal businesses in China who have either been denied re-entry into China or have been told to leave. These people are desperately seeking our help to get them back into China. They are desperate because their profitable China based businesses cannot function without them. The odds of our being able to help them are slim.

One of the most underrated benefits of having a Wholly Foreign Owned Entity (WFOE) in China is that entity’s ability to hire foreigners and those foreigners’ ability to secure Chinese work visas (Z visas). These companies are legal and they have standing to sue and since their employees are working in China legally on Z visas, they have nothing to fear by testifying on the company’s behalf.

And we too have seen our share of double contracts. Many years ago, a European company hired us to sue an American company for having failed to pay around 2.5 million dollars for the sale of a used airplane (I have forgotten the exact amount). This company told us they had a written contract for this transaction and we told them we like their case. They then sent us the contract and instead of it listing the airplane price at $2.5 million, it listed it at $600,000. We raised the monetary discrepancy with the client who explained that “yes, this is what the contract says but the deal was for $2.5 million and the only reason it wasn’t written in the contract that way was because the other side insisted on it saying $600,000 to minimize its duties when it took the plane to its own country. We told them we were no longer interested in pursuing the case and as far as I know they ended up having to walk away from $2.5 million.

One of my favorite stories is when I went to Papua New Guinea to help a Sakhalin Island client secure the return of two helicopters. When I landed in Port Moresby, I was asked if I was in the country as a tourist or for business. The tourist visa was something around $35 and the business visa was something around $350, but I said “business” and I paid the much higher fee. I then flew to Goroka where I met the next day with the governor of the Eastern Highlands Province, Malcolm “Kela” Smith. I was told “Kela” means bald man. The first thing Mr. Smith did when I met with him was to check my passport. When it revealed I was there on a business visa, I could sense a change in his view of me. Though he never confirmed this to me, I am convinced that had my passport revealed I was in PNG on a tourist visa, Mr. Smith would either have had me thrown out of the country or he would have refused to meet with me because I was in the country illegally. Kela Smith ended up meeting with me and with my client and within a day or two we had a deal whereby my client would get his helicopters back.

With so many companies these days looking to set up in Asian countries with even weaker law enforcement than China, our international business lawyers are often finding ourselves stressing the advantages of scrupulously following a country’s laws even when doing so is difficult and expensive. Our experience is that this virtually always pays off in the end — economically, with stability, and with peace of mind.

The simple and obvious bottom line here is that if you are going to be doing business in a foreign country it pays to do so legally.

 

California lawyers Proposition 65

Near as we can tell, nearly all IoT products are being made in China these days. And near as we can tell, most of those IoT products being made in China by foreign companies are being sold in the United States, and that includes California. It therefore bears mentioning that California Governor Jerry Brown last week approved SB-327, the first information security law in the U.S. specifically targeting the IoT.

SB-327 will take effect on January 1, 2020 and it will require manufacturers of connected devices — essentially, IoT devices — to be equipped with “reasonable” security measures. These security measures must be appropriate for the nature of the devices and for the information they collect and contain and they must be designed to protect the devices from unauthorized access, destruction, use, modification, or disclosure. SB-327 also requires devices that can be accessed outside of a local area network be equipped with either a unique password or allow its users to generate their own password.

It is important to emphasize that SB-327 does not impose any requirements on users of IoT devices, but rather on manufacturers. This will essentially mean that companies that manufacture qualifying devices may need to re-do or re-develop or maybe even re-invent their IoT products.

It is also important to note that this new California law will apply to more than just California manufacturers. It will apply to any business that manufactures — either itself or through a contracting third party — qualifying devices that will be sold or offered for sale in California. Crucially, there is no threshold number for product sales in California. Consequently, pretty much any manufacturer, anywhere, could be subject to SB-327.

Complying with SB-327 may be as simple as assigning randomly generated passwords to each of your IoT devices or re-tooling your IoT device’s software or firmware to provide more robust security protection. But for some manufacturers — especially those that make devices that gather up or contain sensitive information — compliance may be more involved and may require a ground-up reinvention. And because this is California, you should expect to be sued (and sued again) if you do not comply with these new laws.

Any company that has had to deal with California’s Proposition 65 knows whereof we are speaking here. Speaking of California’s Proposition 65, this is another California law of which companies that manufacture in China and sell into California must be aware. California’s Proposition 65 regulates any substance listed by the State of California as having a 1 in 100,000 chance of causing cancer over a 70-year period or birth defects or other reproductive harm. Businesses are prohibited from knowingly exposing individuals to listed substances without providing a clear and reasonable warning.

Here though is the big issue with Proposition 65: a company whose product may cause cancer (as defined per the above) may be sued by a private party for having such a product in California. What this means is that if you are having a product made in China (or anywhere else) and that product ends up in California, you are at risk of having to pay a lot of money to lawyers to defend against such a lawsuit and of having to pay the plaintiff in such a lawsuit a lot of money to make it go away.

And let me tell you, this is not just a hypothetical risk; I know this because my law firm’s Los Angeles and San Fransisco offices deal with these sorts of cases on behalf of our clients (American, European and Asian) all the time.

If you sell your products into the United States, you should figure that will include California and you should figure that you will need to contend with SB-327 and/or Proposition 65 and don’t say we didn’t warn you.

What are you seeing out there?

Editor’s Note: This post was co-written by Griffen Thorne, a cybersecurity lawyer based in our Los Angeles office.

China employer audit

As we have been saying pretty much since we started this blog, tough times in China bring on tough enforcement measures against foreign companies doing business in China. What with the tariffs and all, these are tough times in China and we are seeing increased enforcement of China’s laws against foreigners in countless areas, including employment law. Foreign companies — especially American companies — are realizing this and in response they are seeking to clean up their employment practices with employer audits.

Our employer audits typically begin with our reviewing all HR-related documents but they often graduate to our going to the employer’s facility to interview key personnel and other employees on site. No matter what we do though, the goal is always the same: figure out what the employer needs to do to minimize employee legal issues and to thereby reduce the likelihood of lawsuits and government fines. We do this by crafting a course of action to remedy any issues/problems/concerns we find during our review. Such a course of action nearly always involves our revising existing employment documents and drafting new ones.

I attended a really good employment law seminar last week where a speaker mentioned that one of the best things about being an employment lawyer is being able to answer her client’s employment law questions. She then went over a number of frequently asked questions and provided quick answers. I too most enjoy being able to answer employment law questions and so in that spirit I below put forth some of the most commonly asked China employment law questions we get related to our China employer audits and provide short answers to each of them.

Question 1: Why do we need to do this now when none of our employees has ever filed a claim against us?

You need to know your potential regulatory/lawsuit risks/exposure and the only way to know those is to have someone assess the adequacy of your HR program. If problems are revealed during this process that need to be fixed immediately (which happens a lot), you can get on it quickly. But if you don’t have an employer audit, the chances are high that you will not become aware of a problem until it is too late (which also happens a lot). I should also note that many of our clients who have employees make claims against them in the last six months were getting claims for the first time.

Question 2: Can we limit the document review to just employment contracts?

You can if you want to, but you should not want to. If you just want us to review and revise your employment contracts, we will do so but that is not a China employer audit and just doing that is not going to be enough to truly minimize your employer risks.  If your goal is to reduce risk we strongly recommend we comprehensively review all your employment-related documents, not just your employment contracts. If your employment documents consist of just employment contracts, I can tell you right now that you need more. See e.g., China Employer Rules and Regulations: A Must Have No Matter Your Size.

Question 3: We currently have an employee dispute. Can we have an audit conducted in parallel with that?

Absolutely, and all the more reason to have one. Your having employee problems now does not necessarily mean you are not complying with China employment laws, but it probably does mean there are important things in your HR program that need fixing. For example, it is very common for employees to bring claims seeking something they were promised in the employer rules and regulations (often referred to as the employee handbook) but not provided. In this sort of situation we start out asking if the employer knew it had promised the benefit on which it is being sued and if it ever wanted to promise the benefit on which it is being sued and if it wants to keep promising the benefit on which it is being sued. Much of the time, the employer did not even know because its rules and regulations are in Chinese only and were drafted by their first Chinese employee many years ago. Virtually always, the employer wants to remove or at least modify the promise. So yes, the short answer is that looking at all of your employee documents and considering how to revise them in light of an existing employee claim is always a good idea.

Question 4: What exactly do you do in an employer audit and what is the turnaround time?

The first thing we do in an employer audit is to request all of the employer’s written employment document used for their China office(s). At the same time, we ask the employer to advise us of any pending or imminent employee problems of which they are aware. Our lawyers then review all of the documents we receive from the employer and then we usually ask for more documents. If you have been following, you should at this point be asking why we need to ask for more documents when we previously asked for every document. The answer is that most of the time the employment documents we receive will mention other documents we did not receive. Much of the time the other documents do not even exist either because the employer did not know that they were referred to in their existing employment documents or because they forgot to get around to having them drafted. Needless to say, this is something that calls for remedying.

We then draft a memorandum providing the client with a general assessment of their HR situation, along with document-by-document comments and proposals on next steps. The more quickly we are provided with the documents we request, the more quickly we can complete our review, but generally speaking, it usually takes 2-4 weeks.

Question 5: We are just a small company. Do we really need an employer audit?

First off, the size of your WFOE does not matter in terms of whether you are complying with China’s employment laws or not. Second, though the odds of your facing an employee claim when you have ten employees will obviously be less than if you have 10,000 employees, the negative impact on your business will be greater the smaller you are. The need to avoid time consuming and costly labor arbitration and/or litigation is in many respects greater the smaller you are.

Think of an employer audit as a sort of wellness check for your HR program. Any company with employees can benefit from that.

 

 

 

China licensing lawyers
Don’t be a big sucker for a terrible China licensing agreement

In the past few months, our China lawyers have been seeing something new and troubling with China licensing agreements. Before I explain let me step back and give a bit of history. This post is important so please stay with me.

In a typical China licensing deal the foreign licensor grants the Chinese licensee the right to produce and sell goods, use the licensor’s brand name or trademark, or use the licensor’s patented technology. We have for years been writing about how Chinese companies are increasingly seeking to license technology from foreign companies and to get the rights to sell foreign products and services in China. We frequently tout licensing agreements as a great way for a foreign company to profit from China without having to “go into” China or spend a lot of money. See China Difficulties, Netflix, and Why We Love Licensing. All this is still true.

But….

Our China licensing lawyers have drafted a ton of licensing agreements in the last five years or so (they were quite uncommon before then) and in nearly all instances those licensing deals have gone down as follows:

1. Chinese company reaches out to foreign company about licensing XYZ from the foreign company. The foreign company comes to one of the China lawyers at my law firm for legal assistance and we explain some of the basic terms to which a licensor and licensee should agree before anyone bothers to spend time and money drafting a licensing agreement.

2. Maybe a third of the time the parties do not reach an agreement on basic terms and no agreement is ever needed or drafted. The other two-thirds of the time, there is enough of an agreement on key terms between the foreign company and the Chinese company and the foreign company is then tasked with drafting the licensing agreement. It usually makes sense for the licensor to draft a licensing agreement because the licensor typically needs more protection than the licensee. Among other things, the licensor needs to make sure it gets paid and its IP and its reputation are protected.  See the following for more about what goes into a China licensing agreement and what is usually important to foreign companies licensing anything to China.

3. One of our Chin lawyers then drafts the licensing agreement and after a bit of back and forth negotiation it gets signed.

But like I said, our China lawyers are starting to see something new and troubling. We are seeing what appear to be sophisticated Chinese companies (at least when it comes to licensing agreements) reaching out to relatively small unsophisticated Western companies (so far we have seen this with two American companies and two European companies) with what can only be described as absurd licensing offers. Here is how these “new” deals are to go down:

  1. The Chinese company reaches out to the foreign company and expresses an interest in licensing the foreign company’s IP and product to sell in China. The pitch is essentially as follows: we, a relatively big Chinese company will make and sell your consumer product in China at no cost or risk to you. We will pay you from our sales. You should license us to do all this so you can sell your products into China at no cost or risk to you.
  2. This sort of offer is tempting for the foreign company because they see it as a no-cost/no-risk way to get their product into China and to profit from doing so.
  3. The Chinese company sends a long and well-written English language licensing agreement to the foreign company. Note how different this is from the old scenario where the foreign company (the licensor) would be the one to draft the licensing agreement.
  4. This licensing agreement ridiculously favors the Chinese company. One would have given the Chinese company exclusive and perpetual worldwide rights to the licensor’s IP and product for just 10 percent of sales proceeds no matter how the Chinese licensee company did with sales. In other words, once the agreement is signed, the foreign licensor no longer has any real rights left in its IP or its product and even if the Chinese company does not make a single sale (or even try to make a single sale), the foreign company cannot terminate the contract This agreement did allow for termination if the Chinese company goes bankrupt or ceases to exit, but even these did not really apply because the Chinese company would have been 100% free to assign its licensing rights to anyone else. This means, for example, you may think you are licensing your clothing designs to a clothing company as your Chinese licensee but the Chinese clothing company that signed your licensing agreement can assign that license to an arms dealer or a pornographer, neither of which would exactly be good for your clothing company’s long term reputation.
  5. The other three licensing agreements granted exclusivity “merely” for all of China (very broadly defined) but those proposed China licensing agreements contained much of the same over the top language as the one described above. Three of the contracts mentioned how building up sales in China usually takes 5-8 years.

In two cases, the companies were coming to my firm on the recommendation of their regular lawyers who had made clear that these agreements should not be signed. A third company knew the deal was terrible but the forth company did not know this until we pointed it out to them. In all four instances, the foreign company very much wanted to do a deal with the potential Chinese licensee and tasked our lawyers with figuring out how to accomplish that. They all talked about wanting us to draft a “better agreement” as though that was all that separated them from a workable licensing agreement.

We stressed our skepticism about the possibility of doing a real deal and how there would be no point in our even trying to draft a new licensing agreement without their first getting some clear indication that their Chinese counterparts would sign such an agreement. We recommended the foreign companies go back to the Chinese companies and test them with a reasonable request. We suggested they ask the Chinese companies to agree to meeting some minimum amount of sales in the second or third year of the licensing deal. Not surprisingly, this was a no-go in all four instances. The Chinese companies said this could not work because they had no idea what their sales were going to be. All four foreign companies had the good sense to walk away and the four Chinese companies presumably then moved on to looking for another potential sucker.

It may be fine to sell someone an exclusive lifetime license for real money up front in return, but unless your product or technology is and will always be a commercial flop, it should almost never make sense to sell an exclusive and permanent license with no guarantee of ever getting anything back in return. A couple of these foreign companies mentioned that the Chinese companies would “at least try” to sell their products in China because why else would they have bothered with the contracts? Even this “at least try” assertion is not necessarily true because the goal of the Chinese company may have been to remove potential competitors from China forever. And unless we researched the Chinese company we would not even know if they were legally licensed to sell the licensed products in Mainland China or anywhere else.

If you are presented with a wildly unfavorable licensing agreement you essentially have two choices. One, just walk away. Or two, go back to the Chinese company and ask if it is willing to make reasonable changes to its proposed agreement and then when it does not, just walk away. There is always the off chance the Chinese company will accept the reasonable changes you propose, in which case you should probably still walk away rather than try to do business with someone who essentially just tried to scam you.
Is this really a scam though? A scam is usually defined as a dishonest scheme or fraud and, technically, there is no fraud at play here. The deals look legal and legitimate and they very well may be. They are though ridiculously terrible for the foreign party. Scam or no scam, these horrifically lopsided China licensing agreements that have been springing up of late highlight the complexity of cross-border licensing and the need for professional help before signing any China contract.
You have been warned.
What are you seeing out there?

China lawyers
Because of this blog, our China lawyers get a fairly steady stream of China law questions from readers, mostly via emails but occasionally via blog comments or phone calls as well. If we were to conduct research on all the questions we get asked and then comprehensively answer them, we would become overwhelmed. So what we usually do is provide a quick general answer and, when it is easy to do so, a link or two to a blog post that provides some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.

At least twice a month, one of our China lawyers will get an email from someone (usually an American or an Australian or a Brit) who has lived in China for one to three years and who now wants to attend a law school to eventually become a China lawyer. This person will ask us which law school they should attend to best prepare for a career as a China lawyer. Oftentimes they will tell us about how such and such law school looks good to them because it offers three courses on Chinese law and are we aware of any other law school with more such courses.

My response is always pretty much the same and it goes something like this:

Don’t worry about choosing a law school with Chinese law courses. Very few of your potential employers will ever look at or care much about the courses you took in law school. Generally speaking, if you want to become a China attorney, the three best things you can do are the following:

1. Get into and attend the best law school you can.

2. Get the best grades you possibly can in law school.

3. Work on your Chinese language skills as much as possible. Being able to read and write Mandarin is far more valuable than being able to just speak it.

Got it?

China employment law firm
Change your mindset for China employment contracts.

If you have or are going to have employees in China, you need a China-centric written employment contract with each of your employees. Around once a month, one of our China employment lawyers will get a company asking us to “translate our existing employment agreements into Chinese for our China office.” Our response to this request is always the same: “Sorry, we cannot do that because the end result will not work at all for China. You need a China specific employment agreement and our translating what you are using (in the United States or the UK or Canada or Australia or Spain or France or wherever) is not going to work.” At all.

I want to be very clear: translating a foreign country employment agreement into Chinese for use in China is a flat out dangerous thing to do. Even if your translation is perfect and it captures everything you want it to say (which seldom happens), an employment agreement not written specifically for China will contain provisions that do not comply with China’s employment laws or are unworkable in your specific locale in China. For these same reasons, our unwillingness to “just translate a contract into Chinese” extends to every contract we do. See Translate Your Contract For China? The Answer is No.

The most common example our China employment lawyers see in foreign employment agreements of something that will not work under China’s employment system and that can be harmful is a provision stating that the employment is at-will. Under an employment at-will system, an employer is said to be able to terminate an employee for good reason, bad reason or no reason at all, but in China, terminating a China employee almost always requires specific cause both allowed under China’s national and local employments laws and under your employer rules and regulations. Putting an at-will employment provision in your employment agreements will not help you but it can hurt you by making your China management team believe they can fire their China employees for any or no reason at all. We have seen many wrongful termination actions brought by employees terminated by managers who believed they could do so at-will.

If you now think that merely eliminating any references to at-will employment will solve the translation problem, you’re dreaming. China’s entire employment law system is very different from those in Western countries and this necessitates very different employment contracts across the board.

Take overtime pay as another example. If your China-based manager is working under the standard working hours system (this usually means 8 hours on a work day and 40 hours in a week), you must pay or otherwise compensate him or her for any overtime incurred. See China Employee Working Hours and The Things You Cannot Skip. If your manager has been approved by the government to work flexible hours, you may be able to avoid paying overtime, but not always. The foreign country managerial contracts we see usually contain a provision making clear there will be no overtime. If one of your China managers sues you for unpaid overtime in China, you should expect this provision will be Exhibit 1.

Many foreign companies have their own policies on how much notice their employees must give when resigning and these sort of notice requirements are often put into their employment agreements. China though has its own very strict notice requirements and an employer that seeks to require resignation notice longer than China’s own minimum requirements is just asking for legal trouble.

We have also found that using a non-China centric employment agreement causes companies to lose sight of what most matters for China. Seniority, for example, is a huge issue for China employees as it is tied to other important employee benefits, such as statutory vacation days, and statutory severance. It is therefore important as a China employer that you deal extensively and clearly with this issue in your China employee contracts. But because this issue is usually not covered or covered very differently in foreign employment agreements, your using your foreign employment contract as your template for your China employment contracts will mean you either fail to address this critical issue or you will do so very badly. Either way, this will end up hurting you if/when you are sued.

This is not to say that what you have in your existing employment contracts is wholly worthless in formulating your China employment contracts because it isn’t. My firm’s China employment lawyers will often like to review our clients’ existing employment contracts before we start drafting their employment contracts for China. We though want to see those contracts not because we intend to translate them or even because we intend to use them as a template for the China contracts. Rather, we want to see them just because they often broadly outline what is important to our client in its employer-employee relationships.

In terms of your own thinking though, it is best for you to start from scratch. China employment laws are that different and that local and so what you know from Barcelona or Boston or Brisbane or Berlin may not matter or may just get you in trouble.

China tariff lawyer

This is part two in what will no doubt be a continuing and long running series on what American companies can and should be doing in light of the ongoing trade war between the United States and China. In part 1, I discussed how our  China lawyers are getting a slew of phone calls and emails from companies looking at massive tariffs being imposed on their products imported into the United States and wondering what they should do.

That first post focused on what companies facing tariff problems should NOT do:

They should not have their China products shipped to Taiwan or to Malaysia or to Thailand or Vietnam or anywhere else and then have those products shipped to the United States as though they are not from China. Doing this sort of transshipping can and does lead to massive fines and to JAIL TIME. I am not kidding. I am starting out with a post on what not to do because the risks from this one thing far exceed the benefits of the things we will be discussing in our subsequent posts.

And yet, many are telling us that their Chinese factories are suggesting these exact sort of transshipments and giving assurances that they are legal or that nobody ever gets caught, neither of which are remotely true. Step back for just a second and ask yourself why you are even considering taking legal advice about United States customs law from a Chinese factory owner or salesperson who has all the incentive in the world to sell you Chinese products and very little incentive to keep you out of jail. Please, please, please don’t fall for that. Please.

But what should you do? The below is the sort of plan our international trade lawyers (working in tandem with our China lawyers) are mapping out for companies needing our help:

The first and most obvious thing to do is to figure out how your products will be impacted. Has the United States imposed tariffs on your products? Is it planning to do so? Just this first step is more complicated than many realize both because it is not always clear whether a specific product comes within the classification of a product against which tariffs have been imposed and because the media has been less than clear in distinguishing between existing and upcoming tariffs.

If one of your products is on a U.S. tariff list, your next step is to figure out what you can do about that. Surprisingly enough, you do have options. The U.S. Trade Representative will accept comments until September 6 on whether entire categories of products listed on the third wave of proposed tariffs — the $200 billion in imports from China — should be exempted. And later waves of U.S. tariffs will have later dates by which comments must be made. Out of the first round of $50 billion in tariffs, comments led to the removal of $16 billion (32 percent), which shows there is real value to challenging these tariffs.

But even if your product is not exempted due to challenges, you can make what is called an exclusion request. These too have their deadline dates and these exclusion requests typically include the following:

  • Identify the product you want excluded. The U.S. list of targeted products is identified by the Harmonized Tariff Schedule (HTS) number that is used to declare the product when imported into the United States. A company needs to identify the commercial name of the product, the HTS number for the product, and any other industry designation of the product under a recognized standard or certification (for example: ASTM, DIN).
  • A description of the product based on physical characteristics (for example: chemical composition, metallurgical properties, dimensions) so your product can be distinguished from other products that would still be covered by the tariffs. A significant concern in considering exclusion requests is whether granting a specific exclusion request will create a loophole many other products can also use.
  • The basis for requesting an exclusion. Is the product unavailable from a domestic U.S. supplier and thus imports are needed to fill a demand no U.S. supplier can fill. Are there certain qualification requirements only the import supplier can satisfy? Have you been put on allocation by domestic suppliers? Are there alternative suppliers in any country other than China?
  • The names and locations of any producers of the product in the United States and in foreign countries.
  • Total U.S. consumption of the product by quantity and value for each year for the past three to five years (2013 – 2017) and projected annual consumption for the next few years (2018- 2020), with an explanation of the basis for the projection.
  • Total U.S. production of the product (or possible substitutes) for each of the past three to five years.
  • Discussion of why the U.S. products (or substitute products) cannot be used in place of the imported products.
  • A good story why your company deserves the exclusion it is requesting. This typically includes the history of your company (e.g., fifth generation family-owned), the products produced by your company, the strategic significance of your company’s products, the number of workers in your company, and your company’s annual sales.

The difference between the comment process and the exclusion process is that successful comments lead to the removal of tariff line items from the list whereas successful exclusion challenges remove specific products from the tariff item. In other words, the requirements for the exclusion process are much more product specific; if you have six different types of widgets, you will have to make six different product exclusion requests.

The first deadline for a product exclusion list is October 9th for the first $34 billion list.  USTR has not yet set up Product Exclusion requests for the $16 billion, not to mention the $200 billion list.  So we are still waiting on that.

There have already been many opposing comments and exclusion requests submitted for the first two waves of proposed China tariffs. Many of the opposing comments have noted how the proposed tariffs on the Chinese products have nothing to do with  Chinese practices of stealing or extorting intellectual property from U.S companies, which are the reasons claimed for invoking the China tariffs in the first place. Many have also objected to how these tariffs are not likely to change how China respects intellectual property  rights, but will have a catastrophic effect on certain American companies.

A U.S. exclusion process will likely proceed fairly slowly because there are so many exclusion requests already in the pipeline for the steel and aluminum tariffs, though a successful exclusion request likely will result in a refund of any tariffs paid. Waiting for a tariff refund is not the best thing in the world, but requesting such a refund will be the best path for many. Our trade lawyers are representing companies in more than a dozen industries that are seeking to have their products excluded from tariffs.

In part 3, we will discuss what actually makes a product “Made in China” for purposes of United States tariffs and what you can legally do to take your products outside that classification.

 

Transshipping from China International Trade Lawyers
Don’t transship. Just don’t.

Not surprisingly, our China lawyers are getting a slew of phone calls and emails from companies that are looking at massive tariffs being imposed on their products imported into the United States. These companies want to know what they can and should do now to ameliorate or avoid their tariff problems. This is the first part in what will no doubt be a constantly ongoing series of posts on what you should be doing in light of the US tariffs being enacted against imports from China.

But before I discuss what companies do about their tariff problems, it is far more important I start out discussing what they should NOT do. They should not have their China products shipped to Taiwan or to Malaysia or to Thailand or Vietnam or anywhere else and then have those products shipped to the United States as though they are not from China. Doing this sort of transshipping can and does lead to massive fines and to JAIL TIME. I am not kidding. I am starting out with a post on what not to do because the risks from this one thing far exceed the benefits of the things we will be discussing in our subsequent posts.

And yet, many are telling us that their Chinese factories are suggesting these exact sort of transshipments and giving assurances that they are legal or that nobody ever gets caught, neither of which are remotely true. Step back for just a second and ask yourself why you are even considering taking legal advice about United States customs law from a Chinese factory owner or salesperson who has all the incentive in the world to sell you Chinese products and very little incentive to keep you out of jail. Please, please, please don’t fall for that. Please.

Chinese companies and the U.S. importers of their products often believe they can get around United States tariffs  by transshipping the products to Malaysia, Vietnam, Philippines, Sri Lanka, Thailand, Bangladesh, India, [or some other country] before sending them on to the United States. Their plan is to relabel the products with a new country of origin and then export the products to the US free of China , without US Customs and Border Protection (“CBP”) ever being the wiser.

So wrong.

US Customs has become expert at discovering such evasions and the penalties when caught have become very harsh. Importers that knowingly falsely label the country of origin on their imports are subject to significant fines and penalties under 19 USC 1592 and to criminal prosecution under 18 USC 542 (import by using false statement) and 18 USC 545 (smuggling). Lying about a product’s country of origin can subject you to 20 years in Federal prison.

Immigration and Customs Enforcement (“ICE”) has conducted criminal investigations against a number of products, including honey, saccharin, citric acid, lined paper products, pasta, polyethylene bags, shrimp, catfish, crayfish, garlic, steel, magnesium, pencils, wooden bedroom furniture, wire clothing hangers, ball bearings and nails. Many of these investigations have led to criminal convictions and large fines and penalties. U.S. importers have also been prosecuted and sentenced to prison for bringing in Chinese products, such as honey, garlic, wooden bedroom furniture and wire clothing hangers, by means of false Country of Origin statements so as to evade US AD and CVD orders. My law firm’s international trade lawyers are always pointing out that whenever the US increases tariffs on a product, it knows there is an increased likelihood of illegal transshipping of that product and it prepares accordingly. There is zero doubt the U.S. government is preparing to catch those who transship China products to avoid the new China tariffs. There is also zero doubt that both the U.S. government (and even the U.S. populace as a whole) are going to be tougher than usual on anyone who engages in transshipping

United States CBP, ICE and the Justice Department can be very tough investigators and prosecutors.

One of the biggest hammers against transshipping is the False Claims Act (“FCA”).  The FCA ( 31 U.S.C. § 3729) allows people or companies to file what are called “qui tamlawsuits against individuals or companies that directly or indirectly defraud the Federal government seeking triple damages on the government’s behalf. Anyone who knows of the fraud, including a competitor company may file a qui tam lawsuit. And they do.

Qui tam actions are brought to attack competitors and to get 15 to 30 percent of the triple damages the U.S. Government can recover from the lawsuit. Your competitors and your importers and your own employees (and even employees of the Chinese company that has assured you that your transshipping is perfectly legal) are the most likely to initiate a qui tam lawsuit against you, but sometimes it is just someone who learned of what you are doing. Because the person or company that brings such an action can be awarded millions and even tens of millions of dollars, the incentive to file is huge. If you want to get a better idea of just how lucrative these lawsuits can be, do a Google search for lawyers looking to take on qui tam lawsuits and look how much they are paying for qui tam keywords.

Qui tam lawsuits are filed confidentially and are not served on the defendants, but on the US Government. The US Government then determines whether to intervene and pursue the action or settle with the defendant(s). If the U.S. Government intervenes, it takes on primary responsibility for the case. If the U.S. Government decides not to intervene, the initial claimant may dismiss the lawsuit or pursue the lawsuit on its own.

What is your duty as the US buyer/importer to make sure the products you are importing are truly from the country listed on the import documents?

The examples below are illustrative.

  • A US importer is told by its Chinese producer/exporter whose products will be covered by the China tariffs not to worry about the tariffs because the Chinese company will ship the product through Taiwan and list them as Taiwan products. The importer should decline this offer because if it imports this product knowing it is from China and not Taiwan, it will be criminally liable under U.S. customs law and subject to potentially massive damages under the U.S. False Claims Act. 
  • A US importer suspects its Vietnamese “producer” is not actually making anything, but rather simply transshipping product that comes from the Chinese company that owns it. The company visits the Vietnam facility and it does not appear anything is actually being produced there. The US importer raises this concern with the Chinese company which tells the US company that it can avoid any problems by being listed as the consignee of the products and not the importer of record since it is the importer who is at risk. This too is simply wrong information.

Transshipment is a crime and Chinese companies and their US importers can have very different interests when it comes to importing product into the United States. The Chinese company wants to ship product to the US above all else and the US importer should above all else want to avoid Customs trouble and avoid liability and stay out of jail. The Trump Administration has made known its desire to vigorously hunt down and prosecute transshipment claims.

If you are doing business with a person or company using transshipments to minimize US customs duties, you could be in very big trouble and you should contact a lawyer immediately. If you are aware of such transshipments by a company with which you are not doing business, you should consider contacting a lawyer to determine whether you might profit from your information.

Here’s the thing though. There is often a lot you can do to legally change the country of origin of your products, but the key here is legally. The other key here is that the rules for figuring out the appropriate country of origin are incredibly complicated and best left to an experienced and qualified lawyer, especially in light of all that is going on between China and the United States these days. Even our China lawyers do not claim to be qualified on this score and, for instance, about all I tell my clients who ask for country of origin help is something like the following:

About all I know is that putting together your electronics product in China and then shipping it to Vietnam for a plastic case to be put on it is not going to do the trick. Beyond this though, you are going to need to consult with our trade and customs lawyers because this is not something we can afford for you to get wrong.

So yes, it may be possible for you to make minor (or major) changes in how you are having your products made so they can legally avoid the China tariffs, but please, please, please tread carefully hear and whatever you do, don’t just go along with what your China factory is telling you to do. It’s your company and your money and your freedom that’s at stake here and this is not something on which you should be messing around and taking advice from anyone whose job it is to do anything but look out for your interests.

Got it?

China employment lawyersWhen our employer clients seek our counsel on new China employee hires, we usually (but not always) advise they use an initial fixed term of three years. We also recommend that before the initial employment term is up, they consider whether to extend the employee’s contract for a second employment term. Because China is not an employment at will jurisdiction and terminating a China employee is generally very difficult, you as the employer should be sure not to take an employee beyond an initial term unless you are certain you wish to continue employing that person. If you choose not to renew an employee for a second term you can terminate the employment but you will have to pay severance based on the employee’s years of service for not renewing the contract. This holds true unless you have a legal/contractual basis for terminating the employee without severance, such as an employee’s serious wrongdoing.

Consider this hypothetical. Employer and Employee enter into an employment contract for an initial fixed term. Both before and shortly after the expiration of the initial term, Employer provides Employee with notices that it wishes to renew the contract and each time Employee fails to sign a new contract. Employee then files a labor arbitration claim, demanding statutory severance for the termination. Will Employee prevail? The short answer is that it depends.

In the real case on which this hypothetical is based, the court (the case went from labor arbitration to the court level) noted that 1) Employer provided convincing evidence, including minutes of conversations between the parties and witness testimony, that showed Employer truly intended to renew Employee’s initial contract and 2) Employee failed to produce any evidence to show Employer’s proposed terms and conditions were worse than the terms and conditions in Employee’s initial contract. The court went on to rule that Employer was not obligated to pay statutory severance upon termination because the applicable law stipulates an employer must pay an employee statutory severance for not renewing a contract, unless the employer has offered the employee the same or better terms and conditions for the renewal and the employee does not agree to renew on such proposed terms.

What are the key takeaways from this? First, you as the employer should start thinking about whether to renew an employee’s contract before that employee’s employment term expires. I cannot tell you how many times our China employment lawyers get called by China employer’s asking us what to do with an employee’s contract that expires tomorrow or expired last week — NOT good. Next, regardless of whether you wish to renew or end the employment, you must provide the employee with a written notice of such intent before the end of the employee’s contract term. If you do not want to continue employing the employee, pay the employee statutory severance and process the employee separation in a timely manner. Avoid putting the employee on another probation to see if maybe things will work out this time. If you want the employee to continue working for you but the employee does not wish to renew (assuming the terms and conditions in the proposed new contract are the same or better than the first contract), document that in writing and process the employee separation. In this situation, you don’t have to pay statutory severance since essentially it is the employee terminating the employment.

If the employee is ambiguous as to what he or she wants, do not have the employee work beyond the last date of his or her contract. In other words, you should not have the employee work without a current written contract. This is because China’s employment laws require an employer use a (current) written employment contract with its employees. Even if you signed a first written contract with that employee but since that contract has expired, you likely will be treated as having no contract at all and subject to all the problems and penalties that go with this.

Under China’s written employment laws, an employee is entitled to an open-term contract after two consecutive fixed-terms. However, in practice, in most places in China, once an employee has been renewed at the end of the initial fixed term, that employee has become an open-term employee, which means he or she must be retained as an employee until his or her mandatory retirement age. Therefore, the first renewal should be treated seriously and no employee should be taken beyond the first term unless you want to see the employee on your team long-term. Like forever long term.

Have employees who are approaching the end of their contract terms? NOW is the time to get on it.