Litigation and Arbitration

International trade lawyersOn March 6, 2019, The American Kitchen Cabinet Alliance, consisting of 27 United States domestic producers, (Petitioner), filed antidumping (AD) and countervailing duty (CVD) petitions against Wooden Cabinets and Vanities (“Wood Cabinets”) from China. A copy of that petition can be found here.

Under U.S. trade laws, a domestic industry can petition the U.S. Department of Commerce (“DOC”) and U.S. International Trade Commission (“ITC”) to investigate whether the named subject imports are being sold to the United States at less than fair value (“dumping”) or benefit from unfair government subsidies. For AD/CVD duties to be imposed, the U.S. government must determine not only that dumping or subsidization is occurring, but also that the subject imports are causing “material injury” or “threat of material injury” to the domestic industry.

Last year, domestic kitchen cabinet producers unsuccessfully argued that certain wooden cabinets were covered under the AD/CVD orders on Hardwood Plywood from China that were issued in January 2018. Because DOC rejected their scope ruling request and ruled that certain wooden cabinets were not covered by the Hardwood Plywood AD/CVD orders, the domestic producers have filed these petitions to start new AD/CVD investigations to try to get new AD/CVD orders to cover Chinese wooden cabinets.

In 2018, the total U.S. imports of wooden cabinets from China was about $4 billion.

Scope

The proposed scope definition in the petition identifies the merchandise to be covered by this AD/CVD investigation as follows:

The merchandise subject to these investigations consists of wooden cabinets and vanities that are designed for permanent installation (including floor mounted,  wall mounted, ceiling hung or by attachment of plumbing), and wooden components thereof. Wooden cabinets and vanities and wooden components are made substantially of wood products, including solid wood and engineered wood products (including those made from wood particles, fibers, or other wooden materials such as plywood, strand board, block board, particle board, or fiberboard), or bamboo. Wooden cabinets and vanities consist of a cabinet box (which typically includes a top, bottom, sides, back, base blockers, ends/end panels, stretcher rails, toe kicks, and/or shelves) and may or may not include a frame, door, drawers and/or shelves. Subject merchandise includes wooden cabinets and vanities with or without wood veneers, wood, paper or  other overlays, or laminates, with or without non-wood components or trim such as metal, marble, glass, plastic, or other resins, whether or not surface finished or unfinished, and whether or not assembled or completed.

Wooden cabinets and vanities are covered by the investigation whether or not  they are imported attached to, or in conjunction with, faucets, metal plumbing, sinks and/or sink bowls, or countertops. If wooden cabinets or vanities are imported attached to, or in conjunction with, such merchandise, only the wooden cabinet or vanity is covered by the scope.

Subject merchandise includes the following wooden component parts of cabinets and vanities: (1) wooden cabinet and vanity frames (2) wooden cabinet and vanity boxes (which typically include a·top, bottom, sides, back, base blockers, ends/end panels, stretcher rails, toe kicks, and/or shelves), (3) wooden cabinet or vanity doors, (4) wooden cabinet or vanity drawers and drawer components (which typically include sides, backs, bottoms, and faces), (5) back panels and end  panels, (6) and desks, shelves, and tables that are attached to or incorporated in  the subject merchandise.

Subject merchandise includes all unassembled, assembled and/or “ready to assemble” (RTA) wooden cabinets and vanities, also commonly known as “flat packs,” except to the extent such merchandise is already covered by the scope of antidumping and countervailing duty orders on Hardwood Plywood from the People’s Republic of China. See Certain Hardwood Plywood Products from the People’s Republic of China, 83 Fed. Reg. 504 (Dep’t Commerce Jan. 4, 2018) (amended final deter. of sales at less than fair value, & antidumping duty order); Certain Hardwood Plywood Products from the People’s Republic of China, 83 Fed. Reg. 513 (Dep’t Commerce Jan. 4, 2018) (countervailing duty order). RTA wooden cabinets and vanities are defined as cabinets or vanities packaged so that at the time of importation they may include: (1) wooden components required to assemble a cabinet or vanity (including drawer faces and doors); and (2) parts (e.g., screws, washers, dowels, nails, handles, knobs, adhesive glues) required to assemble a cabinet or vanity. RTAs may enter the United States in one or in multiple packages.

Subject merchandise also includes wooden cabinets and vanities and in-scope components that have been further processed in a third country, including but not limited to one or more of the following: trimming, cutting, notching, punching, drilling, painting, staining, finishing, assembly, or any other processing that  would not otherwise remove the merchandise from the scope of the investigation if performed in the country of manufacture of the in-scope product.

Excluded from the scope of these investigations, if entered separate from a wooden cabinet or vanity are:

Aftermarket accessory items which may be added to or installed into an interior of a cabinet and which are not considered a structural or core component of a wooden cabinet or vanity. Aftermarket accessory items may be made of wood, metal, plastic, composite material, or a combination thereof that can be inserted into a cabinet and which are utilized in the function of organization/accessibility on the interior of a cabinet; and include:

Inserts or dividers which are placed into drawer boxes with the purpose of organizing or dividing the internal portion of the drawer into multiple areas for the purpose of containing smaller items such as cutlery, utensils, bathroom essentials, etc.

Round or oblong inserts that rotate internally in a cabinet for the purpose of accessibility to foodstuffs, dishware, general supplies, etc.

Carved wooden accessories including corbels and rosettes, which serve the primary purpose of decoration and personalization.

Non-wooden cabinet hardware components including metal hinges, brackets, catches, locks, drawer slides, fasteners (nails, screws, tacks, staples), handles, and knobs.

Also excluded from the scope of these investigations are:

All products covered by the scope of the antidumping duty order on Wooden Bedroom Furniture from the People’s Republic of China (Inv. No. A-570- 890). See Wooden Bedroom Furniture From the People’s Republic of China, 70 Fed. Reg. 329 (Dep’t Commerce Jan. 4, 2005) (notice of amended final deter. of sales at less than fair value & antidumping duty order).

All products covered by the scope of the antidumping and countervailing duty orders on Hardwood Plywood from the People’s Republic of China (Inv. No. A-570-051 and Inv. No. C-570-052). See Certain Hardwood Plywood Products from the People’s Republic of China, 83 Fed. Reg. 504 (Dep’t Commerce Jan. 4, 2018) (amended final deter. of sales at less than fair value, & antidumping duty order) (Certain Hardwood Plywood Products from the People’s Republic of China, 83 Fed. Reg. 513 (Dep’t Commerce Jan. 4, 2018) (countervailing duty order).

Imports of subject merchandise are classified under Harmonized Tariff Schedule of the United States (HTSUS) statistical numbers 9403.40.9060 and 9403.60.8081. The subject component parts of wooden cabinets and vanities may be entered into the United States under HTSUS statistical number 9403.90.7080. Although the HTSUS subheadings are provided for convenience and customs purposes, the written description of the scope of these investigations is dispositive.

Alleged AD Margins

Petitioner calculated estimated dumping margins for China that range from 175.50% to 259.99%, with an average margin of 216.04%.

Although Petitioner alleged numerous government subsidy programs that benefitted the Chinese wood cabinet industries, Petitioner did not allege a specific subsidy rates.

Named Exporters/ Producers

Petitioner included a list of companies it believes are producers and exporters of the subject merchandise.  See the producer and exporter list here.

Named U.S. Importers

Petitioner included a list of companies that it believes are U.S. importers of the subject merchandise.  See the named United States importers list here.

Estimated Investigation Schedule 

March 6, 2019 – Petitions filed

March 26, 2019 – DOC initiates investigation

Mar 27, 2019 – ITC Staff Conference

April 20, 2019 – ITC preliminary determination

August 3, 2019 – DOC CVD preliminary determination (assuming extended deadline)

October 2, 2019 – DOC AD preliminary determination (assuming extended deadline)

February 14, 2020 – DOC final determination (extended and AD/CVD aligned)

March 30, 2020 – ITC final determination (extended)

April 6, 2020 – DOC AD/CVD orders issued (extended)

For those of you who have not been keeping track, there has been an onset of trade actions brought by U.S. companies against incoming product from China. With all the trade issues involving China and bipartisan anti-China sentiment prevalent in the United States right now, the view is that now is a great time to bring such actions. This specific case was no surprise to U.S. trade lawyers and we fully expect (many?) more to drop in the next few months. If you are importing products from China, now is the time to know the trade risks of your imports.

Dumping China Thailand Taiwan India Carbon Steel

Vulcan Steel Products Inc. (Petitioner) on February 19, 2019, filed antidumping (AD) and countervailing duty (CVD) petitions against Carbon and Alloy Steel Threaded Rod (“Steel Threaded Rod”) from China, India, Taiwan and Thailand.

Under U.S. trade laws, a domestic industry can petition the U.S. Department of Commerce (“DOC”) and U.S. International Trade Commission (“ITC”) to investigate whether the named subject imports are being sold to the United States at less than fair value (“dumping”) or benefit from unfair government subsidies.  For AD/CVD duties to be imposed, the U.S. government must determine not only that dumping or subsidization is occurring, but also that the subject imports are causing “material injury” or “threat of material injury” to the domestic industry.

— Scope

The proposed scope definition in the petition identifies the merchandise to be covered by these AD investigations as:

The merchandise covered by the scope of these investigations is carbon and alloy steel threaded rod. Steel threaded rod is certain threaded rod, bar, or studs, of carbon or alloy steel, having a solid, circular cross section of any diameter, in any straight length. Steel threaded rod is normally drawn, cold-rolled, threaded, and straightened, or it may be hot-rolled. In addition, the steel threaded rod, bar, or studs subject to these investigations are non-headed and threaded along greater than 25 percent of their total actual length. A variety of finishes or coatings, such as plain oil finish as a temporary rust protectant, zinc coating (i.e., galvanized, whether by electroplating or hot-dipping), paint, and other similar finishes and coatings, may be applied to the merchandise.

Steel threaded rod is normally produced to American Society for Testing and Materials (“ASTM”) specifications ASTM A36, ASTM A193 B7/B7m, ASTM A193 B16, ASTM A307, ASTM A320 L7/L7M, ASTM A320 L43, ASTM A354 BC and BD, ASTM A449, ASTM F1554-36, ASTM F1554-55, ASTM F1554 Grade 105, American Society of Mechanical Engineers (“ASME”) specification ASME B18.31.3, and American Petroleum Institute (“API”) specification API 20E. All steel threaded rod meeting the physical description set forth above is covered by the scope of these investigations, whether or not produced according to a particular standard.

Subject merchandise includes material matching the above description that has been finished, assembled, or packaged in a third country, including by cutting, chamfering, coating, or painting the threaded rod, by attaching the threaded rod to, or packaging it with, another product, or any other finishing, assembly, or packaging operation that would not otherwise remove the merchandise from the scope of the investigation if performed in the country of manufacture of the threaded rod.

Carbon and alloy steel threaded rod are also included in the scope of this investigation whether or not imported attached to, or in conjunction with, other parts and accessories such as nuts and washers. If carbon and alloy steel threaded rod are imported attached to, or in conjunction with, such non-subject merchandise, only the threaded rod is included in the scope.

Excluded from the scope of these investigations are: (1) threaded rod, bar, or studs which are threaded only on one or both ends and the threading covers 25 percent or less of the total actual length; and (2) stainless steel threaded rod, defined as steel threaded rod containing, by weight,1.2 percent or less of carbon and 10.5 percent or more of chromium, with or without other elements.

Excluded from the scope of the antidumping investigation on steel threaded rod from the People’s Republic of China is any merchandise covered by the existing antidumping order on Certain Steel Threaded Rod from the People’s Republic of China. See Certain Steel Threaded Rod from the People’s Republic of China: Notice of Antidumping Duty Order, 74 Fed. Reg. 17,154 (Dep’t Commerce Apr. 14, 2009).

Steel threaded rod is currently classifiable under subheadings 7318.15.5051, 7318.15.5056, and 7318.15.5090 of the Harmonized Tariff Schedule of the United States (“HTSUS”). Subject merchandise may also enter under subheading 7318.15.2095 and 7318.19.0000 of the HTSUS. The HTSUS subheadings are provided for convenience and U.S. Customs purposes only. The written description of the scope is dispositive.

— Alleged AD Margins.

Petitioner calculated estimated dumping margins of:

China:  53.57% to 55.60%
India:  25.43% to 28.34%
Taiwan:  32.10%
Thailand:  20.3%

— Named Exporters/ Producers

Petitioner included a list of companies that it believes are producers and exporters of the subject merchandise.  See attached list here.

— Named U.S. Importers

Petitioner included a list of companies that it believes are U.S. importers of the subject merchandise.  See attached list here.

— Estimated Schedule of Investigations.

February 21, 2019 – Petitions filed

March 13, 2019 – DOC initiates investigation

March 14, 2019 – ITC Staff Conference

April 7, 2019 – ITC preliminary determination

July 21, 2019 – DOC CVD preliminary determination (assuming extended deadline)

September 19, 2019 – DOC AD preliminary determination (assuming extended deadline)

February 1, 2020 – DOC AD/CVD final determination (assuming extended deadlines)

March 17, 2020 – ITC final determination (extended)

March 24, 2020 – DOC AD/CVD orders issued (extended)

This product has previously been subject to other AD/CVD investigations.  In 2009, AD/CVD orders were imposed on carbon steel threaded rod from China.  In 2013, although Petitioner tried to get AD/CVD orders imposed on carbon steel threaded rod from India and Thailand, the ITC made a negative determination (i.e, no injury or threat of injury caused by the subject imports). This Petitioner appears to be a serial user of US trade laws repeatedly trying to get the US government to issue protective duties against subject imports. Given that the Petitioner’s most recent attempt to get AD/CVD duties imposed was unsuccessful, foreign exporters or US importers of this product may be able to use similar arguments to explain why these new AD/CVD actions should also be rejected.

China litigation lawyersMany years ago a US company came to us wanting to sue a Chinese company in China. Legally, its case was very strong and we told the company that. But we also told the company that we had serious doubts about its ability to prevail in a Chinese court because we didn’t like the case’s optics. More specifically, we believed that a Chinese court would be reluctant to rule in the US company’s favor for equitable reasons.

The general counsel of this company HATED our analysis and the US company hired a different US law firm for the case. An “insider friend” at this company later revealed that the US company ended up spending hundreds of thousands on the case and lost it 100%. To make matters worse, it had rejected an opportunity along the way to settle the case in a way that would have (over time) allowed it to recover around 35% of its damages.

What the US in-house lawyer failed to realize is how different Chinese courts are from American courts. In an American court the US company would almost certainly have won nearly every dollar it sought because the law and the facts clearly favored it. But Chinese courts are different.

But how?

I often struggle to explain this to foreign companies. In my speeches, I used to do this in part with a slide that asked “Remember Equity? I then followed that with another slide that noted how in China “Harmony is more than just a baby name from the 1960’s.” I would then go on to explain how Chinese courts truly consider equity and social harmony in reaching a decision on pretty much every case, even those that where we as Western lawyers see no role for such things.

I read today a really good piece written by two Chinese lawyers, explaining the basis on which Chinese judges make their decisions. The article is entitled, How Chinese Judges Think, and if you are contemplating bringing a law suit in China, you should absolutely read it.

The article starts out by noting how in determining their rulings, Chinese judges will consider the “legal effect, social effect and political effect.” It then talks about how these basis for legal decision-making are ingrained in various documents of the Chinese courts via common expressions such as “judges should pursue the unification of legal effects, social effects and political effects in case trials.” They then write how this is “not only the official requirement of the Chinese courts; in fact, according to my years of experience in litigation, the judges have habitually thought in this way when hearing cases.”

The article then goes on to explain each of these three effects as follows:

1. Legal Effect. Judges “should accurately apply the law when hearing cases and making judgments.” Very strictly.

For example, pursuant to the Contract Law of China, if the parties concerned have no agreement on the terms of the transaction or the agreement is unclear, the judge should first determine the terms of the transaction according to the business practices; if the terms of the transaction cannot be determined, the judge should use the relevant provisions of the Contract Law as the terms of the transaction. Therefore, the judge should first try to explore the terms of the transaction agreed by the parties, and the terms of the transaction stipulated by the law shall only be adopted if it is indeed impossible to find out the agreement. However, in most cases, the judge is not willing (or does not dare) to explore the authentic agreement (real intention) of the parties, which is reflected as follows: if the parties’ written contract does not specify the terms of the transaction, or divergent interpretations of the contract exist, the judge will tend to directly adopt the terms of the transaction stipulated by the law.

The reason for the judge doing so is because, on the one hand, if he speculates on the authentic agreement of the parties according to his own judgment, and this judgment will benefit one of the parties, then he is likely to worry that others will think that he colludes with the party benefiting from such judgment. However, if he strictly applies the law and others accuse him, he would have a solid reason to defend himself. On the other hand, the majority of Chinese judges are directly admitted to the court after graduating from law schools, so they mostly only work in the profession of judges without other professional experiences, which makes them lack enough experience and background knowledge to speculate on the authentic trading conditions of the parties.

2. Social Effect. “Judges should obtain positive comments and recognition from the public on their judgments when trying cases and making judgments.” This is the “harmony” thing I talked about above and the Chinese government takes this extremely seriously:

Consideration of social effects has led judges to sometimes care more about the public’s perception of justice, rather than the parties’ perception of justice in a particular case. For instance, the Chinese public generally does not recognize huge liquidated damages. . . . Therefore, even if the parties agree that the defaulting party should pay huge liquidated damages, the judge is likely to lower the liquidated damages according to the public’s perception of fairness. For another example, China’s traditional concept adheres to “harmony”, which makes most Chinese people think that cooperation should avoid being terminated as much as possible, and transactions should be completed as much as possible, so the contract should avoid being terminated as much as possible. The judge will also follow this view. Unless the parties expressly agree on the conditions for the termination of the contract and such conditions are clearly fulfilled, the judge will not easily make a judgment in favor of the termination of the contract.

3. Political Effect. “The Chinese courts usually do not mention political effects. Because there is a view that if the judge achieves social effects, the public’s trust in the political authorities will be enhanced, that is, the political effects are achieved. However, sometimes political effects can be exhibited in a more concrete manner.” This effect is usually (but not always) relevant or only barely relevant to business disputes.

Failing to recognize these “effects” can lead to bad litigation results.

 

On February 4, 2019, The American Institute of Steel Construction, LLC (Petitioner) filed antidumping (AD) and countervailing duty (CVD) petitions against Fabricated Structural Steel (“FSS”) from Canada, China and Mexico. You can see that petition here.

Under U.S. trade laws, a domestic industry can petition the U.S. Department of Commerce (“DOC”) and U.S. International Trade Commission (“ITC”) to investigate whether the named subject imports are being sold to the United States at less than fair value (“dumping”) or benefit from unfair government subsidies.  For AD/CVD duties to be imposed, the U.S. government must determine not only that dumping or subsidization is occurring, but also that the subject imports are causing “material injury” or “threat of material injury” to the domestic industry.

Scope

The proposed scope definition in the petition identifies the merchandise to be covered by this AD/CVD investigation as the following:

The merchandise covered by this investigation includes carbon and alloy (including stainless) steel products such as angles, columns, beams, girders, plates, flange shapes (including manufactured structural shapes utilizing welded plates as a substitute for rolled wide flange sections), channels, hollow structural section (HSS) shapes, base plates, plate-work components, and other steel products that have been fabricated for assembly or installation into a structure (fabricated structural steel). Fabrication includes, but is not limited to, cutting, drilling, welding, joining, bolting, bending, punching, pressure fitting, molding, adhesion, and other processes.

Fabricated structural steel products included in the scope of this investigation are products in which: (1) iron predominates, by weight, over each of the other contained elements; and (2) the carbon content is two percent or less by weight.

Fabricated structural steel is covered by the scope of the investigation regardless of whether it is painted, varnished, or coated with plastics or other metallic or non-metallic substances. Fabricated structural steel may be either assembled; disassembled, but containing characteristics or items, such as holes, fasteners, nuts, bolts, rivets, screws, tongue and grooves, hinges, or joints, so that the product(s) may be joined, attached, or assembled to one or more additional product(s); or partially assembled, such as into modules, modularized construction units, or sub-assemblies of fabricated structural steel.

Products under investigation include carbon and alloy steel products that have been fabricated for erection or assembly into structures, including but not limited to, buildings (commercial, office, institutional, and multi-family residential); industrial and utility projects; parking decks; arenas and convention centers; medical facilities; and ports, transportation and infrastructure facilities.

Subject merchandise includes fabricated structural steel that has been assembled or further processed in the subject country or a third country, including but not limited to painting, varnishing, trimming, cutting, drilling, welding, joining, bolting, punching, bending, beveling, riveting, galvanizing, coating, and/or slitting or any other processing that would not otherwise remove the merchandise from the scope of the investigation if performed in the country of manufacture of the fabricated structural steel.

Fabricated structural steel may be attached, joined, or assembled with non-steel components at the time of importation. The inclusion, attachment, joining, or assembly of non-steel components with fabricated structural steel does not remove the fabricated structural steel from the scope.

All products that meet the written physical description are within the scope of this investigation unless specifically excluded. Specifically excluded from the scope of this investigation is certain fabricated steel concrete reinforcing bar (“rebar”). Fabricated rebar is excluded from the scope only if (i) it is a unitary piece of fabricated rebar, not joined, welded, or otherwise connected with any other steel product or part; or (ii) it is joined, welded, or otherwise connected only to other rebar.

Also excluded from this scope is fabricated structural steel used for bridges and bridge sections. For the purpose of this scope, fabricated structural steel used for bridges and bridge sections is defined as fabricated structural steel that is used in bridges and bridge sections and that conforms to American Association of State and Highway and Transportation Officials (“AASHTO”) bridge construction requirements or any state or local derivatives of the AASHTO bridge construction requirements.

Also excluded from this scope are pre-engineered metal building systems. For the purposes of this scope, pre-engineered metal building systems are defined as complete metal buildings that integrate steel framing, roofing and walls to form one, pre-engineered building system and are designed and manufactured to Metal Building Manufacturers Association guide specifications. Pre-engineered metal building systems are typically limited in height to no more than 60 feet or two stories.

Also excluded from this scope are steel roof and floor decking systems designed and manufactured to Steel Deck Institute standards.

Also excluded from the scope are open web steel bar joists and joist girders that are designed and manufactured to Steel Joist Institute specifications.

The products subject to the investigation are currently classified in the Harmonized Tariff Schedule of the United States (HTSUS) under subheadings: 7308.90.9590, 7308.90.3000, and 7308.90.6000.

The products subject to the investigation may also enter under the following HTSUS subheadings:  7216.91.0010, 7216.91.0090, 7216.99.0010, 7216.99.0090, 7228.70.6000, 7301.10.0000, 7301.20.1000,            7301.20.5000, 7308.40.0000, 7308.90.9530, and 9406.90.0030.

The HTSUS subheadings above are provided for convenience and customs purposes only. The written description of the scope of the investigation is dispositive.

 

Alleged AD Margins

Petitioner estimated dumping margins of up to 31.46% for Canada, 218.85% for China, and 41.39% for Mexico.

Although Petitioner alleged numerous government subsidy programs that benefitted the Canadian, Chinese, and Mexican FSS industries, Petitioner did not allege specific subsidy rates.

 

Named Exporters/ Producers

Petitioner included a list of companies it believes are producers/exporters of the subject merchandise. You can see that list here.

 

Named U.S. Importers

Petitioner included a list of U.S. importers it believes to have imported the subject merchandise.

 

Estimated Schedule of Investigations

February 4, 2019 – Petitions filed

February 25, 2019 – DOC initiates investigation

February 26, 2019 – ITC Staff Conference

March 21, 2019 – ITC preliminary determination

July 5, 2019 – DOC CVD preliminary determination (assuming extended deadline)

September 3, 2019 – DOC AD preliminary determination (assuming extended deadline)

January 16, 2020 – DOC final determination (extended and AD/CVD aligned)

March 1, 2020 – ITC final determination (extended)

March 8, 2020 – DOC AD/CVD orders issued (extended)

 

If you are on one of these lists or you fear you should start preparing to respond.

Huawei indictments for IP theftThe re-opening of the U.S. government has brought with it a renewed assault on Chinese telecoms manufacturer Huawei and its U.S. subsidiary. On January 28, the U.S. Department of Justice unsealed two indictments against Huawei. The first indictment concerns ongoing claims against Huawei and its CFO, Meng Wanzhou, for allegedly violating U.S. sanctions against Iran. This indictment can be found here.

The second and more interesting indictment concerns alleged trade secret theft conducted by Huawei’s U.S. subsidiary under the direction of Huawei China. The trade secrets indictment can be found here. 

The factual portion of both indictments makes for interesting reading. In particular, the trade secrets indictment should be read by any company that engages in technology based business relations with China. This is because the practices described in the indictment do not apply solely to Huawei. If you want a primer on “how they do IP theft” this is where to start. Note that if Chinese companies do in the United States what is described in this indictment consider what Chinese companies do in China.

Let’s say you have set up a WFOE in China to manufacture a critical chemical. The composition of the chemical and its method of manufacture are trade secrets. You have resisted the demands of your Chinese customers to set up a joint venture in China. You have resisted the demands of your Chinese customers to license your technology to a Chinese entity. The only Chinese persons with access to your technology are your Chinese employees. Since those employees are insiders, not outsiders, your technology is safe. Right? Unfortunately, the answer is no.

What can happen to the Chinese employees of your WFOE in China is exactly what allegedly happened to the Chinese employees of Huawei’s U.S. subsidiary. The local Chinese government will give your employees a detailed list of exactly what your employees must take from the WFOE and the timeframe in which they must complete the task. Though your Chinese employees may formally work for your WFOE, the Chinese government is essentially their ultimate “boss,” in the same way Huawei China is alleged to have been the ultimate boss of the employees of their U.S. subsidiary.

What though if your WFOE employee is an honest person and resists following the local government’s instructions? Or perhaps the employee is not so honest but resists simply because he or she does not want to risk losing his or her job if caught. The local government responds: your spouse works as a nurse in the local hospital and it would be too bad if she lost her job. Your father lives on a pension from the local government and it would be too bad if he lost his pension. Your daughter is applying for admission to the local high school and it would be too bad if she is denied entry. On the other hand, if you provide what we [the local government] have requested, we will ensure none of this happens. Moreover, you and your family will receive benefits. If you lose your job, we will find you another job. Don’t worry about it. Just do what you are told and help YOUR country. The pressure to comply is overwhelming and your Chinese employee complies. Your employee really has no choice.

This is the practice in China. Most WFOE managers in IP sensitive industries with whom I have worked in China understand this and so they do not even try to control their employees on IP because they know who is their real boss. They instead set up a costly system in which none of their Chinese employees is given  access to the WFOE’s IP sensitive information. This makes operations difficult and oftentimes the system’s rules are violated and access to IP is granted. When that happens, the technology gets taken because the pressure from the government never stops, in the same way the pressure from Huawei China is alleged to have never stopped against Huawei’s . U.S. employees. This is what is often meant by “forced technology transfer.”

What then should companies that do business in China or with China take away from these two Huawei indictments? Note first of all that neither focus on security issues related to the Huawei equipment that has led the United States and other countries to ban Huawei 5G telecom equipment. That claim is specific to Huawei and the type of equipment it manufactures.

These indictments are focused on how Huawei conducts business. The U.S. Department of Justice (DOJ) is claiming is Huawei intentionally and as a matter of company policy violated U.S. law. For example, in the trade secrets indictment, the DOJ claims Huawei China directed its U.S. employees to steal trade secrets from T-Mobile and when the U.S. employees did not succeed at doing this, Huawei China dispatched a Chinese based engineer to complete the job. The indictment goes on to allege that when Huawei got caught taking T-Mobile’s IP, Huawei submitted an internal report lying about what happened. Huawei’s technology theft is alleged to have been part of a Huawei China program that paid its employees bonuses for stealing intellectual property.

The DOJ claims Huawei stole T-Mobile trade secrets and violated the Iran sanctions and by doing so it overturned the underpinnings of the U.S. legal system and the world legal order. The DOJ’s press release on the trade secrets case makes this clear:

“The charges unsealed today clearly allege that Huawei intentionally conspired to steal the intellectual property of an American company in an attempt to undermine the free and fair global marketplace,” said FBI Director Wray. “To the detriment of American ingenuity, Huawei continually disregarded the laws of the United States in the hopes of gaining an unfair economic advantage. As the volume of these charges prove, the FBI will not tolerate corrupt businesses that violate the laws that allow American companies and the United States to thrive.”

“This indictment shines a bright light on Huawei’s flagrant abuse of the law – especially its efforts to steal valuable intellectual property . . . to gain unfair advantage in the global marketplace . . .”

The U.S. charges are directed at the impact Huawei’s actions have had on both the United States and the rest of the world. The U.S. seeks to expand its claims against Huawei to go beyond the device security concern to a more general concern with how Huawei (and other Chinese businesses and, most importantly, China itself) violates the laws and regulations underpinning the modern free trade system. This is an ambitious goal that will extend beyond Huawei as a company and even beyond IP enforcement as a specific issue. The trade secret indictment complains of actions that go beyond U.S. jurisdiction. The indictments against Huawei read as a global campaign against how Huawei and China do business.

We should therefore expect additional DOJ enforcement actions against Chinese companies. Ms. Meng’s arrest in Canada should not be seen as an isolated case. Worldwide arrests and extradition proceedings and civil and criminal litigation against Chinese companies and their executives will become more common and not just in the United States. We also will see such actions brought by Canada and Germany and Japan and Australia and Spain and England and others as well. The DOJ and the FBI and governments and private companies from around the world will work together to implement this program. These enforcement and litigation programs will extend to various other Chinese companies. The charges against Huawei should be seen as the first, not the last.

Most U.S. companies previously were reluctant to take this sort of aggressive action against China IP theft because of concerns doing so would impact their business in China. They feared a “tit for tat” response by the Chinese government. With the deterioration of US-China relations, this concern seems to be melting away and decades of pent-up resentment against China’s IP practices could well spill out in a cascade of claims from the US and the EU and others.

Welcome to the New Normal.

UPDATE: It took less than 24 hours to prove out the above. See FBI charges second Apple employee with stealing autonomous car secrets.

Sinosure lawyer

Like clockwork, the downturn in China’s economy is leading to a big uptick in American companies contacting our international litigators for help in fending off Sinosure threats. For the full import of what I mean by Sinosure threats, I urge you to check out Owe Money to China? Meet Sinosure, Leviton Law Firm, and Brown & Joseph and China Sinosure: What You NEED to Know. To summarize, Sinosure is China’s Export and Credit Insurance Corporation and what that means in real life is that it insures most of China’s exports. It insures those exports by paying its policyholders when a foreign company fails to pay for product it has received from its Chinese supplier.

So how does an increase in Sinosure cases against American companies reflect the downturn in China’s economy? Well over half of the many Sinosure cases our lawyers have seen over the years arise from bad product delivered by the Chinese manufacturer. The typical Sinosure case involves a Chinese company sending over (let’s say) $500,000 in bad product. The American company cannot sell that product for its usual $950,000, but instead is forced to unload it for $350,000. The American company tells all this to the Chinese company and seeks to resolve its alleged $500,000 debt to its Chinese supplier with a one time $250,000 payment. The Chinese company goes silent and a few weeks later, the American company receives an aggressively threatening letter from one of Sinosure’s U.S. lawyers. So again, how does this link to China’s recent economic troubles?

With every China economic downturn, Chinese companies (logically enough) change their behaviors. I first wrote about this phenomenon for the Wall Street Journal way back in 2012, China’s Slowdown and You: The effects for foreign companies extend beyond merely slack sales. This latest economic slowdown greatly worries Chinese manufacturers and these worries have caused many of them to try to get what they can, NOW.  See China Trademark Theft. It’s Baaaaaack in a Big Way and On SMEs Trusting China Manufacturers. Don’t. Just Don’t. In 2011, in China. Smells Like 2008, Gloom And Doom Edition, I wrote the following on what our China lawyers were seeing from Chinese manufacturers during that downturn:

We are getting those 2008 and 2011 calls (and emails) again now. Pretty much every single day now we get an email from a foreign company (usually U.S. or European) asking for our help in recovering anywhere from $20,000 to $2 million paid to a Chinese manufacturer that shipped clearly bad product or no product at all. Unfortunately, in most cases, we have to tell the sender that without a really good China manufacturing contract the odds of their getting their money back are not so good. See China Manufacturing: Bad Contracts and Bad Times Lead to Bad Products. To make matters worse, some of these companies that want their initial payment back from a Chinese manufacturer that has provided bad product end up getting dunned by Sinosure for failing to pay the remainder allegedly due.

So what should you do when Sinosure comes knocking on your door threatening you and your company with all kinds of harm? One thing for certain: Do not go to China to try to resolve the matter with your Chinese manufacturer. Please, please, please do not do this. For why not, see Maybe Owe Money To China? Don’t Go There. Second, do not believe for even one second that Sinosure’s lawyers or collection agencies care about anything but getting money from you. In particular, do not believe that they care at all that the Chinese manufacturer sent you unusable product. And why should they? If you don’t have a China-centric contract with your Chinese manufacturer that clearly specifies the quality of product you are to receive, Chinese law is almost certainly on the side of your Chinese manufacturer in any event.

Truth is there is no one good way to deal with a rampaging Sinosure. The best way for you to deal with Sinosure will depend on your specific contracts, situation, and goals. When our lawyers are retained to represent a Sinosure victim, we typically begin by asking them the following questions:

  • How much is being claimed against you? There is no point in hiring a lawyer if the amount at stake is too low to warrant it.
  • Why have you not paid? This greatly influences our initial strategies.
  • To whom do you owe the money? We usually follow up by asking how important the creditor is to the debtor’s business.
  • Do you have other suppliers in China in addition to the one (or more) that claim you owe them money? We are trying to figure out how important it is that the Sinosure problem be solved quickly?
  • Is it important that you be able to continue doing business in China? Exactly what sort of business? These are important questions for determining strategy.
  • Is it important that you or anyone else in your company be able to go to China? This is an important question for determining strategy.
  • Do you have any brand names or logos or other IP that you use on any products or packaging made in China? If so, have you registered those brand names or logos in China? It is very common for Chinese companies to register their debtor’s brand names and logos as China trademarks so as to gain leverage. Often, the first thing we do is shore up the IP registrations of a company involved in any sort of business dispute in China. You do not want to go into battle without first patching up a gaping wound.

But what about Sinosure wanting your first born? Is that a real thing? Of course it’s not; that was just for effect. Well, sort of. I say “sort of” because we have been hearing of late that Sinosure is threatening to go after American business owners personally. Can Sinosure do that? Probably not, but maybe. That Sinosure has apparently now added this threat to its arsenal is troubling nonetheless. Sinosure is tough and relentless and a big problem and that problem is growing.

China cryptocurrency

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

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

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

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

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

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

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

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

International litigation lawyer

Hardly a day goes by without one of the international lawyers at my firm getting an email from someone who very briefly describes their situation and then asks whether they have a good case or not. 99+ percent of the time the only answer we can give them is that we do not have nearly enough facts to know one way or the other.

There are so many things that go into determining whether someone has a good lawsuit or not, and many of those things go well beyond the facts that make up the elements of the potential claims. In other words, just because you could sue someone and win does not mean you have a “good case.”

I thought of all this today after reading Think of the Long Game, Part 1 — Making Sure You’re In the Right Forum over at the Hague Law Blog. This post notes how often it is that plaintiff’s lawyers bring international lawsuits without first figuring out two very basic things:

But two critical questions often get missed, only to be asked after filing and after hiring somebody like me to deal with the initial due process concerns (or worse, wading into the fray alone).  One focused on the beginning, and the other focused on the end:

1. How do you establish jurisdiction?  (The one we’re discussing here.)

2. How do you get paid? (The one we’ll discuss later.)

I agree.

Just by way of example, the most common question I get relating to someone wanting to know the quality of their lawsuit is something like the following:

I just got 14,000 widgets from my factory and they are so bad as to be unusable. Do I have a good lawsuit?

Now like I said above, my usual response is a quick “I don’t know” because I don’t have nearly enough facts, but I usually do add one or two specific questions to that and for demonstrative purposes, I set forth below just a subsection of some of the things we would need to know to discern the quality of the lawsuit, and why.

  1. How much did you pay for the widgets? Legally, this does not matter in that the quality of the claims are going to be the same whether the answer is $363 or $3,630,000, but let’s get real here. No law firm is going to take on an international litigation matter where only $363 is at stake.
  2. What do you mean by unusable? We have handled international disputes where a client bought millions of dollars of fish that were quarantined upon arrival as a safety hazard and we have also handled international disputes where one letter was misspelled on the widget. Very different cases. Which gets me to my next point, which is super critical.
  3. Do you have a contract? What does it say? If they do not have a written contract that works for the relevant country (more on what the relevant country is in a second), the quality of the lawsuit just went down. Sometimes way down. If they do have a contract and the contract is silent on the key issues, the quality of the lawsuit just went down. If they do have a contract and the contract works against them the quality of the lawsuit just went way down.
  4. What does the contract say about where the lawsuit must be brought? If the contract is silent on this, where can the lawsuit be brought? Many years ago, my law firm was hired by a large group of creditors to try to collect on a large amount of clearly owed debt. The big problem with the lawsuit was that North Korea (yes, that Korea) was the only viable jurisdiction. The clients decided not to pursue the case. Where the lawsuit must be brought is critical not only to winning the case, but also to being able to collect on any judgment should you actually prevail. Will the country in which your defendant has its assets and on which you can collect on your judgment actually enforce whatever judgment you get from some other country? Oftentimes the answer is no. See China Enforces United States Judgment: This Changes Pretty Much Nothing.
  5. What will the lawsuit cost and what are the chances of prevailing and of collecting from the defendant if you do prevail? Some lawsuits are relatively cheap. For instance, if someone says they will give you 100,000 pounds of fruit and all the records show they send you only 7,000 pounds of fruit, you likely have a relatively cheap and easy case. But if you are suing to claim that a 7.8 kilogram widget is worth $1300 less per widget than a 7.9 kilogram widget, you are likely going to need to pay for experts to back this up and you may not prevail. And if you are going to claim that your business’s reputation was damaged by not being able to deliver the widgets to all of your downstream customers, you will need another expert for that. Does your defendant even have the money to pay you if you prevail?
  6. What will the lawsuit do to you outside the lawsuit? It is amazing how seldom people consider this. Every single week without exception one of our China employment lawyers will get an email from someone looking to sue their China employer over one thing or another. Even if you win, is that a good idea? Might you get fired as soon as you soon? Might others in your small industry learn about your lawsuit and never hire you? Many years ago I worked on a matter involving four professional athletes who had complained to their professional league about an unofficial pay cap on foreigners in that league. These were four of the best players in their league but they were soon cut by all four of their respective teams and, as far as I know, never picked up by any professional team anywhere in the world. They had essentially been blackballed. Had they come to me sooner you can be sure I would have discussed this possibility with them. I often have this sort of discussion with clients being chased by Sinosure.

So yeah, all of this (and a lot more) is why experienced international lawyers are so reluctant to comment on the quality of a lawsuit without first knowing a heckuva lot more.

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.

What with all the US-China tensions and trade tariffs,

our China lawyers are getting an increasing number of questions from U.S. companies regarding Sinosure. To grossly summarize, they go something like this: “We have received an email from Sinosure’s lawyers saying we owe XYZ China factory $371,456. We do owe them some money but not this much because this does not include the $123,675 that should have been subtracted for the poor quality product we received but could not use. Should I just send them the money we owe them?”

Short Answer:  No. If you send them the money you say you owe the odds are overwhelmingly that you will be pursued for the rest. Also, if you are going to pay anyone anything in China you need a full-fledged Chinese languageChina-specific settlement agreement making clear your payment will resolve all outstanding issues both with Sinosure and with the XYZ China factory. Most importantly, you will want that settlement agreement to be signed and chopped by both Sinosure and by XYZ China factory.

For more on how to deal with Sinosure, check out China Sinosure: What You NEED to Know.

China Employment Lawyers

Our China employment lawyers are asked by China employers about pursuing claims against an employee who fails to give sufficient notice of their resignation. Generally speaking, you cannot demand an employee pay damages for an early resignation unless you can show actual damages as a result. Just a quick summary of the relevant law on employee resignations: in accordance with China’s Employment Contract Law, a China employee during his or her employment contract term can generally leave by giving 30 days written notice while an employee on probation can leave with 3 days notice. We usually (but not always) recommend our employer clients not  make it more difficult for their employees to leave than the law mandates. Though it’s not an easy task, it is possible to pursue an employee for failing to abide by legal standard on resignation or a contractual standard, provided the contractual arrangement does not violate applicable law.

Let’s consider a hypothetical. Employer and Employee enter into an employment contract for a fixed term for Employee to work as a front-desk cashier at a hotel. Employee leaves before her employment term is up without providing a reason or a notice of resignation. Employee’s manager tries to get in touch with her, but to no avail. Employer leaves the employee a text message warning her that if she does not return to work or otherwise get in contact with her Employer right away, Employer will take legal action. When Employee is no show, Employer hires a temp to perform her job duties. Employer then brings a labor arbitration claim for damages as a result of Employee’s unauthorized departure. Will Employer prevail?

In the real case on which the above hypothetical is based, the arbitrator noted that pursuant to China’s Employment Contract Law, an employee who violates the law on employment termination notices and causes damages to the employer by having done so shall be liable to the employer for damages. The arbitrator went on to hold that this particular had failed to provide adequate resignation notice as required by law (that is, 30 days’ written notice), had left her work position without authorization, and that her behavior had caused economic losses to her employer. It therefore ordered this employee to pay her employer damages. The employer did not get the amount it was seeking because the arbitrator held that the daily salary the employer claimed it paid to the temp was much higher than workers in similar and even higher positions and it significantly held that damages should be roughly $20 a day, not the $50 a day the employer had sought. To make a long story short, the employer had sought a little over $1300 in damages and it ended up being awarded a little over $200 instead.

This case affirms that it is possible for an employer to pursue an employee for leaving without providing proper notice which causes damages to the employer. However, as is true of so many other claims against an employee, the amount of possible damages are likely to be so low that it will rarely make sense on economic grounds to pursue an employee for leaving early. Of the times a China employer has asked one of our China employment lawyers about pursuing an employee for leaving early, I can recall only one time where we thought it might make sense and that one time involved a very high level employee who the employer believed had left with trade secrets and a plan to compete against his former employer. Bringing the action in that instance would be done as much to send a message to the ex-employee and to other employees as for economic reasons.

Bottom Line: As is true of so much employment litigation and of litigation in general, the decision to pursue a claim needs to be based on more than just the likelihood of success on the merits. If you are going to bring any sort of arbitration claim or lawsuit in China you should first weigh the likelihood of success on the merits and the amount you will be awarded if you prevail and your likelihood of collecting on the one hand against the economic and emotional and opportunity costs on the other hand. In most cases, your best course of action will be to walk away.