The 101 on international business

Just got back from teaching an International Law course at Indiana University’s Maurer School of Law in Bloomington, IN. I team taught this course with an experienced and excellent law professor, Professor Hannah Buxbaum. Professor Buxbaum is a powerhouse and I ended up learning a ton from both her and the students in the class. Teaching this class also forced me to re-examine many international law basics.

We used the brand new edition of Transnational Business Problems as the textbook for this course and — no exaggeration — this is probably the clearest written, most helpful law school textbook I’ve ever read. Professor Buxbaum is one of the authors of this truly superb book, along with Detlev Vagts, a professor of international law at Harvard Law School, Harold Koh, a professor of international law at Yale Law School, and William Dodge, a professor of international law at UC Davis.

This is the first in a series of posts I will be writing in the next few weeks setting out the things I garnered from this course that are relevant and helpful for companies that do business internationally.

Today’s post starts (as it should) with the basics of what a business should consider and/or do in pretty much any international transaction. The below five things are what will most likely determine whether your company succeeds or fails internationally. The below “rules” apply to a company looking to set up a business in Mexico, buy widgets from a company in Thailand, or license its technology to a company in Poland. The below rules are the basics of what you should consider or do before making your company makes an international move. These are the things that will likely determine your company’s success in just about any international business transaction. I have sought to list them in chronological order, but that order can vary depending on your company’s goals, the nature of the transaction, and the country, among other things.

1. Legal Viability. Is the transaction you want to do legal?  I wrote about the importance of this for Forbes Magazine in an article entitled, Do This One Thing Before Doing Business In China:

Many years ago, an American credit reporting company called me seeking help with forming a subsidiary in China (a Wholly Foreign-Owed Entity). This company told me of their extensive and expensive market research demonstrating that China had a tremendous pent-up demand for their credit reporting services. As I listened, I kept thinking that unless the law had very recently changed, foreign companies were prohibited from engaging in such business without a Chinese joint venture partner.

So I asked politely if anyone had researched whether their planned business would be legal in China. They paused and said they had not. I then suggested that we do so straightaway. After about ten minutes of research, I reported back that credit reporting was barred to foreign entities seeking to go it alone in China. This company immediately abandoned its China plans, putting to waste its hundreds of thousands of dollars on market research.

Flash forward to the present. Organic, cruelty-free cosmetics have become big business, including in China, where many who can afford such things would not be caught dead putting made-in-China products on their skin. American cruelty-free cosmetic companies are being contacted in droves by Chinese companies wanting to import and distribute the American products.

*    *    *     *

The point here is simple. Before conducting market research or flying across an ocean or drafting memoranda of understanding or engaging lawyers to form a foreign subsidiary, you should first determine whether your business plan is even legal.

Before committing a large amount of company money or employee time to a foreign venture, first make sure you can legally do it.

2. Business Viability. This one is obvious. Will this foreign venture make money? Just because XYZ is profitable in Country A does not mean it will be profitable in Country B.

3. Protect Your IP. Know what it takes to protect your intellectual property in all relevant countries before you reveal your IP to anyone. Know that whatever IP you have registered in your home country probably does not give you any IP protections outside your home country. Know also that in most countries it is relatively easy for someone to register “your” trademark and get to keep it because they were the first to file for it in that other country. See China Trademark Theft. It’s Baaaaaack in a Big Way as an example of what can go wrong in China (and in most other countries) when you fail to move quickly to register your IP.

4. Choose the Right Partner. Make sure the foreign company with which your company will be doing business actually exists and is licensed to do what you are planning to have it do. If it is not, the odds of your company losing a lot of money just went way up.

5. Use Good Contracts. Protect your company with good contracts and know that using a U.S. or an EU or contract for a deal in Vietnam or Indonesia or Colombia will almost invariably lead to disaster. A good contract is a contract written for the relevant country.

Now go forth and prosper.

China Statury Retirement Age

Foreign companies doing business in China fairly often ask our China employment lawyers whether they can legally hire someone who has passed the legal retirement age. The short answer is that doing so is legal, but somewhat complicated.

Consider this hypothetical. Employer employs Employee (male) for several years. Employee turns 60, the statutory retirement age, but continues to work for Employer. Employee is not eligible for a pension. A few years later, Employer informs Employee that Employee’s services are no longer needed. Employee brings a labor arbitration claim demanding statutory severance for the termination.

In a recent case in Chongqing with facts similar to those set forth above, the employee lost. The Chongqing High People’s Court noted that the main issue in this case was whether the parties had an employment relationship after the employee reached the statutory retirement age of 60. The court cited Article 21 of the Regulation on the Implementation of the Employment Contract Law of the PRC which provides that an employment contract ends when an employee reaches the statutory retirement age. The court then went on to say that after the employee reached the statutory retirement age, the employment relationship no longer existed between the parties and the employee’s post age 60 relationship with the employer was pursuant to a labor relationship. Because an employer’s obligation to pay statutory severance to an employee is generally only applicable in an employment relationship and because at the time of termination the parties did not have an employment relationship, the employer did not owe statutory severance to the employee.

So if your China entity has an employee approaching mandatory retirement age and you do not want to retain that employee, what do you do? You send a written notice (in Chinese) to the employee letting him/her know that the employment contract will end on the [date] the employee reaches his or her statutory retirement age and you cite the applicable law. Generally speaking, when an employee retires, no statutory severance is owed to the employee.

What though do you do if you want to retain the employee beyond his/her statutory retirement age? You still send a written notice (in Chinese) to the employee but with different content. You first let the employee know that his/her employment contract with your China entity will end on the date of his/her statutory retirement, but you also state that you would like the employee to enter into a labor services relationship that involves your company engaging his/her services after his/her retirement. If the employee is open to this, you then present a well-written labor services agreement to the soon-to-be former employee to review and sign. This agreement should, among other things, provide clarity on how the employee termination works and eliminate surprises and disputes down the road. This agreement should also address all other issues pertaining to both the retirement and the new labor services arrangement, such as the term of the agreement, the person’s work responsibilities, the person’s compensation and the payment method, and the person’s working hours and how insurance will be handled.

As is true with any employment relationship (or any sort of contractual relationship), it will be crucial that your company has a proper written agreement in place. In other words, you do NOT want to be like the employer in the above case. Sure, that employer eventually won its legal battles, but it had to unnecessarily incur huge legal fees to fight through a long series of legal proceedings to do so when an enforceable agreement almost certainly would have avoided all that.

Last but not least (and as is nearly always the case) there are substantial local differences in the court decisions on the above issues so you should (as always) make sure that whatever you do complies with what your local authorities expect to see.

 

Customs lawyers

The US and China may be signing a Phase One trade agreement next week, but the antidumping and countervailing duty claims against Chinese products are not missing a beat.

This January 8, 2020, filing against wood mouldings and millwork products is just another in a long line of anti-dumping/countervailing duty cases brought against Chinese products in an effort to increase the duties on those products when they enter the United States. The media is so focused on the tariffs being imposed against China that it tends to ignore the side wars being waged against Chinese products via the AD/CVD mechanism and via out and out restrictions. These duties just keep coming and if and when the United States and China ever do reach a comprehensive trade deal these duties will likely be so prevalent and so high as to neutralize the economic effect of any such deal.

Truth is that with all the trade issues involving China and bipartisan anti-China sentiment prevalent in the United States, now is a great time to bring such actions. The international trade lawyers at my firm mostly defend against antidumping and countervailing duty claims instead of bringing them — we represent mostly the overseas producers and exporters and the US-based importers — so I say this not to encourage more such actions, but as a factual statement. If you are importing products from China, you need to assess and know the trade risks of your imports and you need to consider whether sourcing from another country makes sense or not. See Has Sourcing Product From China Become TOO Risky? and China Manufacturing: ”Elvis Has Left the Building”.

One of the chief US foreign policy goals is to drive business from China back to the United States and, failing that, to more friendly countries like Mexico (note how quickly President Trump’s mini-tariff war with Mexico was resolved),  VietnamThailand, the Philippines, Taiwan, and Indonesia, among others. The price of products coming from China to the United States will continue rising and other countries will look increasingly attractive.  For a dollop of practical information on moving your manufacturing from China elsewhere, check out How NOT to Lose Your Shirt When Having Your Product Made Overseas.

But I digress. Back to the Wood Mouldings and Millwork products case.

On January 8, 2020, the Coalition of American Millwork Producers (Petitioner), consisting of seven companies, filed antidumping (AD) and countervailing duty (CVD) petitions against Wood Mouldings and Millwork Products from Brazil and China.

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.

These AD/CVD petitions are not related to any action directly taken by President Trump or the U.S. Trade Representative (i.e., not related to any Section 301 China tariff action).  Rather, these petitions are the latest actions taken by U.S. industries involved with wood products (e.g., hardwood plywood, softwood lumber, multilayered wood flooring, wooden bedroom furniture, wooden cabinets) to use U.S. trade remedy laws to try to protect their industries from unfair import competition.  The domestic industries seek relief from the government in the form of AD/CVD duties imposed on imports from the targeted countries.

Brazil was the source of the largest U.S. import volumes.  The significant weakening of the Brazilian real relative to the U.S. dollar gave Brazilian exports a significant pricing advantage over U.S. producers.

China substantially expanded their wood moulding and millwork industries, primarily targeting their own increasing domestic demand.  Chinese housing demand, however, recently slowed and excess capacity appears to have been directed towards exports to the United States and other markets.

Scope

The petition identifies the merchandise to be covered by this AD/CVD investigation as “wood mouldings and millwork products.” Examples of the millwork building materials subject to this AD/CVD petition include interior and exterior door frames, casing, base mouldings, hand rails, crown moulding, and panel moulding.

Excluded from the scope of this investigation are exterior fencing, exterior decking and exterior siding products, finished and unfinished doors, flooring, and parts of stair steps.

Also excluded are all products already covered by the scope of the antidumping and countervailing duty orders on Hardwood Plywood from China and Multilayered Wood Flooring From China.

See the proposed scope for a complete description of the physical characteristics of the covered merchandise, and the HTS numbers that may be used to import the subject merchandise.

Alleged AD/ CVD Margins.

Petitioner calculated estimated dumping margins ranging between 289.70% and 361.83% for China and 268.74% for Brazil.

Although Petitioner alleged numerous government subsidy programs that benefitted the Chinese wood moulding and millwork products industries, Petitioner did not allege specific subsidy rates.

Named Exporters/ Producers

Petitioner included a list of companies 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.

January 8, 2020 – Petitions filed

January 28, 2020 – DOC initiates investigation

January 29, 2020 – ITC Staff Conference

February 24, 2020 – ITC preliminary determination

June 8, 2020 – DOC CVD preliminary determination (assuming extended deadline) (4/2/20 – unextended)

August 5, 2020 – DOC AD preliminary determination (assuming extended deadline) (6/16/20 – unextended)

December 18, 2020 – DOC final determination (extended and AD/CVD aligned)

February 1, 2021 – ITC final determination (extended)

February 8, 2021 – DOC AD/CVD orders issued (extended)

China manufacturing lawyers

Though “Phase One” of a US-China trade deal is set to be signed next week, few believe that will end the ongoing trade and restrictions war between China and the United States. In China’s manufacturing exodus set to continue in 2020, despite prospect of trade war deal, the South China Morning Post (owned by Alibaba), in an article by its Political Economy Editor, Finbarr Bermingham, wrote of how it also will not stem the tide of foreign companies moving their manufacturing from China.

The SCMP article notes that “China’s rising costs, tricky regulations and increasingly unstable geopolitical situation are forcing more manufacturers to move production elsewhere” and we should expect this exodus to gain speed in 2020, “despite the prospect of a minor US-China trade truce.”

The article starts with “veteran manufacturer” Larry Sloven, who after “three decades of building up manufacturing bases in China” helped his company, Capstone International Hong Kong, move its production base from China to Thailand. Sloven does not see the “stream of companies” that have left China ever returning. Per Sloven, “Elvis has left the building.”“

that began at the tail end of the last decade will continue well into this one.” This even though few believe that China’s “just right” mixture of costs, quality, human resources and infrastructure will ever “be matched in India, Indonesia, Malaysia, Mexico, Thailand, Vietnam or anywhere else.”
The article uses the below graph to illustrate how far and how quickly China’s exports to the United States have fallen since the trade war began in July 2018 and notes how China is now only the US’ third largest trading partner, down from number one before the trade war.

China’s trade in goods surplus with the US fell by 7.9 per cent in November alone, per just released US Census Bureau statistics. “US purchases of Chinese goods are now at their lowest point since March 2013.” Since the trade war began, US goods purchases have increased 51.6 percent from Vietnam, 30 percent from Taiwan, 19.7 percent from Thailand 19.7 per cent, 14.6 percent from Indonesia 14.6 per cent, 12.7 percent from Mexico, and 11.3 per cent from Malaysia.

Companies have finally begun to realize that US-China decoupling is real and “they need to rethink things.”  Few believe the Phase One Trade deal will slow down the decoupling and John Evans, “who advises firms on relocating from China, said that even with the announcement of a phase-one deal, he has been getting more calls”: 

“There were still a number of companies sitting on the sidelines, even into the last quarter of last year, thinking there’ll be a grand resolution. But in reality, it’s more of a new normal.”

This so-called new normal has helped drive a long list of big-name companies out of China, with others choosing to keep a presence but scale back operations to continue selling to the domestic market.

But for every Hasbro, Samsung, Sonos, Sharp, GoPro, Sony or Nintendo, there are a host of small suppliers being forced out due to costs, or because they are pressured to follow their major customers

Perhaps most interestingly, the article notes how “a director at a company supplying accessories to Apple– who spoke anonymously because of the sensitivity of the topic – said the US tech giant had told them that they should plan to leave China if they were to be kept on as a supplier, forcing them to scout for new production sites in Southeast Asia.”

It is not just American firms fleeing China, “but companies from all over the world.”  Allar Peetma, CEO of Estonian manufacturer Gerardo’s Toys, says its “plan is to produce in the EU” using automation that will allow it to keep its costs about the same but improve quality. He notes that “other countries have high [import] taxes for China too, like Brazil and Turkey.” Tsutomu Aoi – a manager in the Hong Kong division of Japanese magnetic toymaker Sumaku – says that the tariffs have led his company to set up in Indonesia. CEO Pascal Comte of French scooter manufacturer says that you can’t do anything about tariffs i the short term but “long term for sure, or medium term, the best option is Vietnam. It takes a while to transfer tooling, and to find operations and manpower.”

The article rightly notes that moving manufacturing from China to other countries is rarely fast or easy:

Rarely, however, is the divorce from China a clean one. Sloven at Capstone moved to a new base in Thailand with the help of a Chinese manufacturing partner that still provides many of the components used in their products. It can be a delicate balance, working with a Thai manufacturing partner to ensure that enough of the finished product is made of local content, to qualify for a low-tariff “Made in Thailand” label.

“We’ve worked out a formula that’s good for both of them so they both can stay in business,” he said. “It’s difficult to get out of China without the help of your Chinese partner.”

The company needs to ship a particular form of glue from China that cannot be sourced in Thailand and will also import packaging from there.

“You would be amazed at the things that you find out. It’s cheaper to produce your packaging in China, put it on a boat, ship it to Thailand than to have a factory in Thailand produce that packaging,” Sloven said “My point is you can’t do this overnight. This is a two year process.

For more on what it takes to move your manufacturing from China, check out the following:

See also Would the Last Company Manufacturing in China Please Turn Off the Lights, written way back in October, 2018.

Oh, and for anyone wondering what happened to Elvis, I urge you to read this New Yorker article that explains how he moved to Vicksburg, Michigan, less than 20 miles from the house in which I grew up and in which my mother still lives!

An American Bum in China

I know the author, Tom Carter, of the book, An American Bum in China and he was kind enough to send me a copy of it. I loved it, especially because I spent four years in Iowa and I’ve been to Muscatine (more on that below).  I also loved that it is 102 pages and I was able to read it in a day. Oh, and it also has great drawings. What’s not to like?

So I promised Tom I would write a review of it. But because I am no book reviewer, I found myself stumbling to do so. Tom stepped in and said he’d send me a review and I could publish it if I liked it and I do and so I am. Below. It’s by JFK Miller (more on him below).

Enjoy. And buy the book.

 

Muscatine, Iowa, is a backwater in a flyover state with no rightful claim to attention. This small city of barely 24,000 on the Mississippi bled Trump in 2016 because it is exactly that: forgettable and forgotten, an overlooked if not entirely abandoned part of the American Dream. Mark Twain spent two years in Muscatine in the 1850s running its local newspaper, but in Life on the Mississippi the greatest impression the city seems to have left on him were its sunsets.

If Muscatine has any meager claim to relevance today it is because, for a brief time in the spring of 1985, it served as a representation of homespun Americana to a delegation from the People’s Republic of China led by a serious young man who was, his hosts recalled many years later, unfailing courteous.

That young man was Xi Jinping, then 31, and a rising star in the party he would later lead. “You were the first group of Americans I came into contact with,” Xi told his Iowan hosts, Roger and Sarah Lande, when he returned to Muscatine in 2012 on a carefully staged nostalgia trip before he became China’s president. “To me, you are America.”

I doubt Xi would be so courteous in his remarks about Matthew Evans, the protagonist of Tom Carter’s new nonfiction book, An American Bum in China. Evans is also from Muscatine, the same American heartland as the Landes, but he represents a very different America and a very different type of American, one who is, perhaps, more suited to these fraught times. The Chinese name for the US is Meiguo — the beautiful country — but in the Xi-Trump era the beautiful country has turned ugly to China, and China ugly to it.

This makes Carter’s book, recently published by Camphor Press, a timely release, and Evans an unlikely anti-hero. We first meet him stealing across the Chinese border from Ruili, a border town on the Shweli River, to Muse, in Myanmar’s northern Shan state. The 27-year-old is there to sell the only thing he has left of any value, his American passport, for which he has been assured a quick US$15,000 by a black-market broker.

“Dreamfully driven to do things regardless of their consequences, Evans was singularly determined to get this money — and willing to compromise China’s territorial integrity, sell out his own country’s national security, and brave Burma’s ongoing civil war in order to obtain it.”

This prologue sets in train Evans’ downward trajectory. His is a cautionary tale, all of it true except for a little dramatic license taken by Carter for the narration. The message for Westerners today is that if they want to try their hand in 21st century China they should come well-prepared, if not with a solid plan then at least with solid credentials. If they don’t, they’ll be chewed up and spat out by a mercenary employment market that no longer suffers from a cultural cringe.

Foreigners like Evans may have prospered in China 20 years ago, perhaps even 10 years ago, but today they are crowded out by locals who are eminently better qualified, better educated, and generally better equipped. Westerners are no longer attributed superiority by virtue of the color of their skin; in today’s hubristic China, chances are it will actively work against them.

Rednecks like Evans don’t stand a chance. He is clueless, a slob, a chancer, a reprobate; the kind of person who ordinarily doesn’t make it out of America let alone Iowa. His saving grace is that he knows it. He is, by his own admission, the personification of “everything wrong with America”; he is a drifter, a dreamer, a Willy Loman but alive to his own inadequacies. He shares Loman’s disenchantment with the American Dream and seeks to supplant it with a Chinese Dream of his own.

Only a nightmare awaits. Evans crafted his own doom when he left Muscatine against the wishes of his overbearing mother who thinks all Chinese are “damn Commies.” She tells him, “They’ll shoot you. The moment you get off that airplane they’ll shoot you. Or they’ll arrest you. They’re Communists. And Communists hate Americans!”

As it turns out she is not far off the mark. Evans is in fact arrested, but you can’t say he didn’t bring it on himself. He does the one thing a foreigner should never do in China: break the law. His first infraction is not having the correct visa. For this, he is arrested and sentenced to eight days’ pretrial detention in a Shanghai jail before he is formally deported.

A sensible person would have quit at this point. Not Evans. This is why I have little sympathy for him. Evans’ exploits serve as a primer on what not to do, not just in China but in life generally. After a brief stint back in Muscatine — which coincides with Xi’s 2012 visit there — he returns to China.

He again breaks the law, this time by forging a diploma at a Shanghai print shop. His muddled thinking is that today’s China is something like America’s Wild West — to hell with the law; all that is needed is some swagger (and a bogus degree) to bluff one’s way into a job. As Carter writes,

“Evans had bought a fake diploma thinking it would get him a better life, yet I could barely make ends meet with my real degree. “You know this can’t end well,” I sighed. “All those friggin’ Chinese schools cheated me, so why can’t I cheat them back?” he responded with childlike plaintiveness, then asked in a whimper, “What else am I gonna do?”

It works, at first. Evans manages to wheedle his way into a teaching position at Nanjing Agricultural University. But his students catch on about halfway into his first semester. They lodge a complaint and he is summarily dismissed. Sometime later, he manages to blag his way into another teaching position, this time at East China Normal University in Shanghai. His fraud is once again exposed, he is dismissed a second time, and flees Shanghai in disgrace.

He drifts to Yunnan, then to Sichuan, living mostly like a tramp. He tries, for once, to observe the law by applying for a new passport. But the US embassy is wise to him, having gotten wind, courtesy of his mother, of his attempt to flog his passport on the Myanmar black market.

“Locked out of his country’s diplomatic post and with no papers to prove his nationality, he was, by definition, ‘administratively stateless.’ A spiritual person might consider it sweet, karmic retribution for all his transgressions.”

His nadir comes in Macau. Here he takes up residence on the street in front of Hotel Lisboa, the city’s iconic casino where fortunes are made and lost. Now utterly destitute, he asks a local to write “Rub the lucky foreigner’s tummy” in Mandarin on a piece of cardboard which he then proceeds to hold over his head. He hopes to appeal to superstitious Chinese tourists by charging them to rub his tummy for luck, similar to the way they do to statues of deities in Buddhist temples. He is eventually chased away by hotel security. Undeterred, he tries his luck in front of other casinos but suffers the same fate. Fortune may favor the brave but not the clueless.

Perhaps I am being unkind. Carter, the narrator, is far more sympathetic. There is a morality tale here but he tells it in good humor; it is an enjoyable romp and a quick read, clocking in at only 130 pages. Carter was a natural fit for Evans’ story, as it was his own book of lush photography, 2008’s CHINA: Portrait of a People, which drew Evans to China in the first place.

Carter also sees a little of Evans in himself: a mischievous interloper with something of Tom Sawyer / Huckleberry Finn about him. But if Twain was a non-participant in his protagonist’s story, Carter plays a more active role, coming in and out of Evans’ life at various points during his Chinese odyssey. He even offers Evans friendly counsel, urging him to quit China when there’s nothing left there for him. Evans, not surprisingly, is deaf to this sage advice.

If Carter’s book draws inspiration from another source it is Swift’s Gulliver’s Travels. He employs Swift’s technique of chapter summaries to give the reader a useful guide as to where the journey is heading, described in olde English: “What happened to Evans in Chinese prison, and how he was expelled thence,” “In what distress Evans flees, and the traveler’s adventures in Yunnan,” and so forth.

Carter’s previous book, 2013’s Unsavory Elements: Stories of Foreigners on the Loose in China, was an anthology of essays from noteworthy writers such as Simon Winchester and Peter Hessler, which he commissioned and edited. The title of that book was a tongue-in-cheek stab at the Xi administration’s first social policy, a nationwide crackdown on foreigners, who were referred to as buliang fenzi, which means “unsavory elements.” In Carter’s words:

“Beijing in the East and New York in the West — each place thought that it was the best. But with fluctuating employment rates, scarily high crime stats, and arguably one of the worst public education systems, the United States has lost its right to be called a land of opportunity. That title now goes to China, whose shores are now teeming with Western refuse such as Evans and myself. But unlike McDonald’s, which refuses to close their doors to anyone, the People’s Republic does not want our tired, our poor, our huddled.”

Evans, however, more than fits this description. We last see him in Hong Kong in 2014. Here he finds himself penniless, living like a bum in a makeshift cardboard home, and an unwitting observer of the Umbrella Movement. It is a fitting place to end his story. In hindsight, it was a good time to check out of Hong Kong as Evans seemed on the cusp of doing at the end of the book. The passive resistance of the 2014 Umbrella Revolution has now been surpassed by the fury and ferocity of 2019’s anti-extradition law movement. Many foreigners have since seen the writing on the wall and bailed from Hong Kong. For once, Evans was ahead of the curve.

 

JFK Miller was born in Brisbane, Australia, where he currently resides and is working on a book on the city’s migrants. He has also worked as a lawyer in London and was editor-in-chief of that’s Shanghai magazine, a six-year experience he recounted in his 2015 book, Trickle-down Censorship.

California IoT law A few days ago, California passed the first U.S. information security law specifically targeting the Internet of Things (or IoT). We wrote about the lawSB-327, about a year ago when it first passed. SB-327 has gotten relatively little press compared to California’s other pioneering data protection statute, the California Consumer Privacy Act. But when it comes to buying devices from China, SB-327 can have a much broader effect for U.S.-based companies.

For a refresher, SB-327 took effect on January 1, 2020. It requires manufacturers of connected devices — essentially, IoT devices — to be equipped with “reasonable” security measures. These security measures are poorly defined, but generally they 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.

SB-327 applies 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, can be subject to SB-327.

This all seems relatively simple, if a little costly. And for companies buying IoT-equipped chips or devices from manufacturers in most places in the world, it probably is not so challenging. But all that goes out the window with China.

If your company is buying IoT-equipped chips or devices from China for use in products made in California, chances are that you cannot trust that the IoT chips comply with California law. You should ask yourself (or your lawyer) these basic questions:

  1. Is the manufacturer promising that the products comply with California’s new requirement?
  2. Will the manufacturer tell me how the product complies with California law?
  3. Have we verified that all of the manufacturer’s specifications and representations about their compliance with U.S. laws are correct?
  4. Have we thoroughly tested the product to ensure that there are no vulnerabilities that would allow access to information on the device by persons outside the U.S.?

If the answer to any of these questions is “no”, or even just “we don’t know” or “maybe”, that’s a bad sign. The bottom line is, do you (or even can you) trust your China-based IoT chip manufacturer? Do you think that their word is good enough to bet on in a lawsuit by the California Attorney General? As experienced China lawyers, we can tell you that it is the rare overseas manufacturer who has any clue about foreign country product requirements so the odds that your Chinese or Vietnamese or Thai or Indonesian or Mexican or knows California’s brand new IoT requirements are close to zero. In other words, it’s going to be up to you.

These questions are critical because, again, your company could face liability if it incorporates non-compliant technology from overseas manufactured IoT chips into a product in California. And knowing how aggressive the California Attorney General is, our California lawyers are just waiting for this to happen.

China Employment Lawyers

Our China employment lawyers often get the following question from both potential and current clients:

We have an employee who did something clearly wrong. However the conduct in question is not directly addressed in either his employment contract nor in our employer rules and regulations. Given how wrong his conduct is though, can we terminate him anyway?

Our response is usually something like this:

As much as we would love to give you a simple yes or no answer, it is almost always more complicated than that and for us even to know whether yours is in the majority of complicated cases, we will need to gather up all sorts of additional facts from you.

Let me first say that unilateral terminating a China employee is generally tough and terminating an employee for misconduct is even tougher.

At the end of 2019, Jiangsu labor authorities issued a notice called the Seminar Minutes on Difficult Issues in the Trial of Employment Disputes in the “Three Provinces and One City” (that is, Jiangsu, Zhejiang and Anhui provinces and Shanghai) of the Yangtze River Delta Region. This notice shed some light on unilateral terminations when an employee commits wrongdoing but neither the employer rules and regulations nor the employment contract deals with the employee’s specific misconduct or the employer rules and regulations document is not valid due to the employer’s failure to properly implement it. It provides that if an employee violates the laws, administrative regulations or labor disciplines which must be followed and those violations seriously affect the employer’s production/operation or management order, the employer will be deemed to have been justified in terminating the employee.

To be clear, there is nothing particularly new in the sense that some places (Shanghai for example) already have rules allowing an employee to be disciplined or even terminated for serious misconduct when the relevant employment documents do not have anything on point. Even in Beijing (a very pro-employee city), employers are permitted to terminate an employee who seriously violates labor disciplines or professional ethics, even if the employer’s rules and regulations and employment contract are silent on the specific misconduct.

In other words, the Chinese labor authorities generally recognize that employers should not be without recourse against an employee who commits wrongdoing just because the relevant employment documents do not and cannot cover everything. The above just reaffirms this.

However this by no way means any sort of employee misbehavior will justify an employer’s dismissal decision. In a way, this reaffirms that it almost does not matter how wrong the employee’s action is, or how angry a reasonable employer would be in the same situation, it comes down to if the employer suffered harm because of the employee’s action. The employee misconduct must rise to a level that causes “serious” bad consequences to the employer for the employer to meet the above legal requirements. And if the employer does not have hard evidence to prove this, it might as well forget about a unilateral termination.

This should go without saying, but it is still the case that disciplining or even terminating an employee without reference to any employer document remains quite risky. Unilateral terminations without severance are often challenged by employees and employers that do not have anything in its own employment documents absolutely will give the terminated employee (and his or her plaintiff’s employment lawyer) greater incentive to sue for wrongful termination.

So what can you do in this sort of situation? If you believe it necessary to terminate someone, plan, plan and plan some more. In addition, be proactive by checking all your key employment documents and make all necessary changes and updates to make sure you are covered before you initiate the termination.

How to choose your China lawyer

Our China lawyers have probably a thousand combined times had a foreign company seek help with a China problem for which we cannot economically help them because the contracts on which they wish to sue do not give them any protections. For some reason, we tend to get an increase in these sorts of problems at the end and the beginning of every year and this year seems even worse than years past.

Of those approximately thousand times, the foreign company absolutely never used a good law firm for help with their contract. They instead did the following:

1. Drafted the contract themselves, without a lawyer.

2. Used the contract provided to them by their Chinese counter-part, usually without any changes to it.

3. Used a domestic American, European, or Australian lawyer not fluent in Chinese and not at knowledgable about Chinese law to help them with their China transaction.

4. Used a consultant or an accountant or a “China expert” to help them with their China transaction.

My usual advice to these companies is that they consider hiring the right lawyer to look into suing the lawyers for malpractice and the non-lawyers for practicing law without a license.

What is with these companies, anyway?  I realize that lawyers truly qualified to draft contracts with Chinese companies are expensive, but these costs pale in comparison to the costs eventually incurred by not using the right people for the legal job.

And lest anyone at this point think this is a calloused call for you to retain my law firm, you would be mostly wrong. We’ve never written a post like this, but if I can help just one foreign company not lose its shirt to China, this post will have been worth it. For that reason alone, I cannot resist.

This is a call for you to retain any qualified law firm to help you with your China legal matters and to do so before you encounter big problems. There are many qualified such law firms, in the United States, in China, in Europe, in Australia, in Canada, in Latin America, etc. How do you find such a firm?

  1. Ask your existing lawyer to find you the right lawyer for China.
  2. Ask around about the right lawyer for China. Ask other companies you know that have done business in China. Ask your consultants and your accountants to refer you to the right lawyer and if they claim that they are the right lawyer, you should probably start wondering whether they are the right consultant or accountant for your business.
  3. Search the Internet, but very carefully. See China Lawyers: The Fakes and the Quasi-Fakes and China Lawyers: The Fakes and the Quasi-Fakes, Part 2.

In searching for the right lawyer for your China transaction, you need to realize that there is no free lunch, or even anything close to it. If you get a $8,500 estimate or flat fee from one law firm and a $350 flat fee from a “virtual” lawyer on the Internet, there is almost always something very wrong with the $350 lawyer and, in most instances, you would actually be better off not having a contract than paying (or even not paying) someone to draft a bad contract for you.  See e.g. Why Your NDA is WORSE Than Nothing for China.

What are you seeing out there?

China Hostage lawyers

I’ve been somewhat surprised at how many emails our international lawyers have gotten regarding Carlos Ghosn’s Hollywood-like escape from Japan.

Some — including journalists — have asked our views on what happened in Japan. We are getting these questions because we spent many years representing Sea Shepard in and against Japan, including helping out in the criminal trial of Peter Bethune in Tokyo. See Anti-whaling activist has ‘no regrets’ as his trial begins in Tokyo. I have the following three things to say about Japan based on that trial:

  1. The Japanese government is uber-powerful. I have zero doubt that I was followed the entire time I was in Japan and that my phone was tapped and that my hotel room was bugged, among other things.
  2. The prosecutors win something like 99 percent of the time.
  3. Every Japanese lawyer I know told me exactly what the verdict in Bethune’s case would be as though they knew it before it was issued. The verdict was 100% what they predicted, convincing me that the whole thing was rigged from start to finish.

Based on the above, I do not blame Mr. Ghosn one bit for fleeing Japan.

We also have gotten a ton of questions about whether something like this could happen in China. Well, of course it could. It could happen in China because its government is uber-powerful, uber-corrupt and uber political and its important criminal trials involving foreigners are rigged and pre-ordained.

What about the escape part? If someone has actually been arrested and jailed in China, it is extremely unlikely they could mount an escape such as Ghosn’s. If Ghosn had been arrested in China on charges similar to those in Japan, he would almost certainly have been kept in a high security prison without possibility of parole.

But what if you are held in China, but not jailed? In China Product Defects, Lawsuits, Hostage Taking and Exit Ban: Please, Please, Please Read This! we wrote about how foreigners who allegedly owe money to Chinese companies are often held as debt hostages by the Chinese company to which the money is allegedly owed:

Hostage taking. The Chinese side will arrange a meeting to take place at the factory or in a hotel that cooperates with the factory. The factory staff will obtain the passport of the foreign buyer. After the passport is obtained (stolen or taken by force), the factory holds the buyer captive either in a factory dormitory or in the cooperating hotel. The Chinese call this a “soft kidnapping” because no physical threats are made. The factory simply states: we won’t let you leave until after you pay the bill. If the police are contacted, the police will usually say: “It’s none of our business. You should pay the bill.” If the local authorities are contacted, they will usually say “It’s none of our business. You should pay the bill.” Resolving the matter without making payment is nearly impossible.

We also wrote how when a foreign company allegedly owes money to a Chinese company — especially if there is a court decision ordering the foreign company to pay — the Chinese government will block key employees from the foreign company from leaving China:

Exit ban. Because of the potential for social unrest, the Chinese authorities usually will work to assist the Chinese factory in getting paid. One way they do this is through an exit ban. The foreign buyer is permitted to enter China, but when the buyer seeks to exit China, permission will be refused. The foreign buyer is told: “You will not be permitted to leave until after you have resolved your payment dispute with the factory.” Exit bans are only approved at the national level and a factory that makes a false claim will be penalized. This is why hostage taking is more common.

So what if you find yourself held hostage in China, with the tacit consent of the local authorities? Can you get out? The answer is yes. First off, in most instances, if you or your company pay all that your company allegedly owes, the odds are very good that the Chinese company holding you hostage will give you back your passport and release you and you should have no trouble getting out of the country.

We have been involved in or heard about many such cases. In those cases our own China lawyers have handled, we have sought clear written guarantees from the Chinese side that if our client does pay, the release will happen. Though such a written contract is not a true guarantee of the release, we believe it greatly increases the odds and so far this has always been the case. I do not recall a single instance (though it is possible there was one) where our client got a hostage release without paying every single dollar allegedly owed, even in those cases where our client was almost certainly being held up for more than actually owed.

What if you want to get yourself or one of your employees out of China without paying the full amount? Can that be done, Goshn-style? Yes, and our firm has been involved in a number of these as well. For obvious reasons we cannot go into full detail on what we did to get our client hostages out of China, but I can tell you the following:

1. Getting a hostage without a passport out of China is not easy and not cheap.

2. The first thing you must do is get the hostage out of the grasp of those holding him or her hostage.

3. Once released, there are essentially two ways to get the by now former hostage out of the country. One is to get them across a border (typically by land via Laos or Vietnam) without a passport or exit visa and then getting a new passport in Vietnam or Laos. Two is to get the former hostage to a Chinese city where you can get a new passport from your embassy or consulate and then flying out of China. Our China lawyers (with a lot of help from friends and others in China) did this once with a debt hostage and by pre-preparing the Embassy (I am not even going to mention the country, but I will say that they were amazingly helpful) we were able to get our client a new passport within 12 hours and have her on an airplane going from Beijing to her home country within another five hours. Let’s just say that most Western countries do not hold China’s legal system or police force in high regard and they will almost certainly be on your side in getting someone out of China who is being illegally held there.

China is a dangerous place for foreigners, and as we have been writing for at least a decade,  foreigners being taken hostage in China is way more common than generally believed. See How Not To Get Kidnapped In China. Resolve Your Debt Problems Before You Go. The real key is not to get out of China once you are held hostage, but preventing the seizure in the first place. The best way is not to go to China at all if there is anyone there who might claim your company owes it some money.

China Employment Lawyers
Navigating China Employee Terminations

One of the most common questions our China employment lawyers get, both from current and potential clients is the following:

We have an employee on a fixed-term employment contract expiring in a month. We can simply not renew the employee’s contract when it ends, right?

Well, it’s not that simple or easy. Let me tell you why.

Consider this hypothetical. Employee and Employer have entered into five consecutive fixed-term employment contracts. Upon the expiration of the fifth term, Employee sends a notice to Employer of her intent to renew and Employer confirms receipt of that notice. Employer then decides not to renew her contract. The relevant law provides that an employee is entitled to an open-term contract after two consecutive fixed-term contracts unless the employer has a legal basis for termination. Employee brings a labor arbitration claim demanding damages for the alleged wrongful termination due to Employer’s failure to execute an open-term employment contract with her upon the expiration of her fixed-term contract. Will Employee prevail on this claim?

In a recent case with very similar facts, the employer lost big time at all levels: labor arbitration, trial, appeal and reconsideration. At the final stage, Beijing High People’s Court ruled that Employer’s decision to terminate the employment relationship constituted wrongful termination and ordered Employer to pay Employee double statutory severance as damages. The court’s reasoning is quite simple: it cited the applicable Article 14 of the PRC Employment Contract Law (which deals with the circumstances under which an employee is legally entitled to an open-term contract). It noted that as Employee informed Employer that she wanted to renew the contract before the end of the-then current term, Employer should have renewed her contract and by failing to renew here contract, Employer violated the law. Employer tried arguing that there were other reasons that led to the non-renewal, including Employee’s poor performance, the difficulties in Employer’s business operation, and job redundancy, but the court rejected all of these arguments.

Here are the key takeaways from this case.

First, you as the employer need to know when you are legally required to use a non-fixed term (aka open-term) contract. Our general advice is that as long as an employee meets the applicable legal conditions for an open-term contract and the employer wants to retain the employee, the employer will usually be better off just proposing to renew on an open-term basis. It almost always makes sense to “err” on the side of using an open-term contract no matter how “appealing” the fixed-term approach may seem. Remember that you can still terminate an open-term employee for cause. Though you may proceed with signing a fixed-term contract if your employee explicitly requests this, you need to make sure you document the employee request in a clear writing. Note also that many localities do not permit this even if your employee has requested it.

Second, if you want to terminate an employee entitled to an open-term contract, you must be able to show cause for the termination. For example, if the employer in the above case had hard evidence, proving that its employee had committed a material breach of the employer’s rules and regulations, the employer could have not renewed the employee’s contract without having to pay severance. This though is usually very tough to prove.

This is very different from the renewal/non-renewal at the end of the first contract term. Generally speaking, before the end of an initial fixed term, the employer can simply provide a non-renewal notice to the employee without any explanation for its non-renewal decision so long as it pays the employee statutory severance. But this is pretty much the only time when an employer can terminate an employee for “no reason” at all. Renewals down the road are more complicated. When there is no strong basis for a unilateral termination (which is often the case), it usually makes sense to settle with the employee via a mutual termination agreement. Paying a generous severance usually beats undergoing multiple lengthy, costly, and risky proceedings like the employer did in the above case.

In practice, some employers “force” the employee to agree to a contract for a short fixed-term (usually one year or less), no matter how many consecutive fixed-term contracts the parties have signed, and no matter what the employee requests. This arguably abuses fixed-term contracts in an attempt to avoid using open-term contracts and if an employer gets caught doing this (and they usually do), there will be consequences.

I should also note that we are still seeing local differences in court decisions on this sort of issue, so you (as always) need to act according to your own local requirements. That being said, Beijing, like many other cities in China, remains very pro-employee. So you need to keep that in mind as well.