Human Global Resources

Listen HERE or stream on SpotifyApple PodcastsGoogle PlayStitcher, or Soundcloud!

The large-scale shift to telework brought on by the COVID-19 pandemic is prompting businesses around the world to explore new avenues to engage with clients and friends. Harris Bricken is no exception, and we are proud to announce our new podcast series: Global Law and Business, hosted by international attorneys Fred Rocafort and Jonathan Bench.

In Episode #23, we are joined by Nathan Sheranian, Senior Director of HR at Freshworks. We discuss:

If you have comments on this episode or if you’d like to suggest topics for future episodes, please email globallawbiz@harrisbricken.com.

And please follow Fred and Jonathan on social media to stay informed on upcoming guests and topics:

We’ll see you next week for another discussion on the global business environment as we sit down with Eric Jensen to discuss global conventional warfare and cyber warfare.

Negotiating with Chinese Companies

In the early 1980s the US Air Force commissioned Lucian Pye, an eminent sinologist, to write a report on how Chinese negotiate with foreigners. Published in 1982, it was called Chinese Commercial Negotiating Style.

Based on extensive interviews with foreigners engaged in China trade, Pye’s paper analyzes the negotiating style the Chinese use with foreign businesspeople. Pye’s overall conclusion was that the way most negotiations are initiated usually sets in motion a process that helps the Chinese side achieve its preferred strategies and tactics.

Though some of Pye’s political and economic observations are now somewhat dated, I was nonetheless struck by his report’s enduring relevance and I now recommend it to anyone interested in doing business with China. A recurring theme is Chinese mastery of contractual preliminaries.

One key point: Pye never moralizes or suggests there is anything wrong with the Chinese approach. He merely points out how different it is from the typical Western approach, leaving readers to conclude that foreigners ignore or disregard the Chinese negotiating tactics at their own peril. This is certainly consistent with our view that one should not rush to blame the Chinese when things go wrong.

The “Courtship” Phase

In Pye’s view, foreigners often follow the historical practice of coming as guests seeking permission to do business in China. This naturally casts them in the role of supplicants asking for Chinese beneficence. They are visitors from afar and their hosts call the tune on the procedures and the timing of meetings. Problems associated with visas, invitations and access to officials or business leaders contribute to foreign anxiety about “doing the wrong thing” when doing business in China. So when problems arise, the foreigners are prone to suspect they are somehow at fault. In this way, the Chinese hosts gain the advantages of surprise and uncertainty in agenda arrangements.

According to Pye, the Chinese tend to limit preliminary exchanges to generalities so as to size up the foreign party and to determine its vulnerabilities, especially any lack of patience. At the same time, foreign business leaders tend to jump straight in. The novelty and status associated with visiting China frequently compel foreign CEOs to be the first to engage in talks with the Chinese, without waiting for subordinates to prepare the ground. The graciousness and bountifulness of Chinese hospitality can make the foreign visitor feel awkward about being too businesslike. Consequently, foreign CEOs tend to be very obliging in following the Chinese practice of seeking initial agreement on very general principles, without clarification on the specific details. Much of what occurs at the preliminary stage has a tacit quality and foreigners frequently misjudge their progress. In taking this approach, Pye says, foreigners violate one of the first principles of negotiations and diplomacy — summit meetings should never take place without extensive preliminary spadework by subordinates.

When mid level executives are later sent to work out the details of a contract they usually discover the Chinese want to rely on the agreed “principles” put in place by the CEO. Such principles were often taken by the foreigners to be no more than ritual statements, but the Chinese tend to use them to practical advantage by suggesting the other party has not lived up to their “spirit.” See China LOI and MOU: Don’t Let Them Happen to You. Instant authorities on China, these CEOs returned from their initial visits to report success, saying they found the Chinese to be cooperative and gracious. The mid level executives and others tasked with working out details then come under great pressure. They are constrained to avoid acting in ways that might irritate the Chinese and spoil relationships established by the boss. So, when the big guns are sent in first the foreigners lose the advantage of dispatching their highest people for critical negations at the consummation of the deal. Their second appearances must now be limited to generalities where civilities prevail.

The Contract Formation Stage

Chinese culture traditionally shuns legal considerations and instead stresses ethical and moralistic principles. By contrast, Westerners are thought to be highly legalistic. The Chinese tend to reject the typical Western notion that agreement is best sought by focusing on specific details and concrete matters, while avoiding discussions of generalities or rhetoric. The Chinese prefer to agree on general principles before dealing with details. They can, Pye says, be tenacious in holding to their principles but surprisingly flexible about details. The Chinese focus is on the “spirit” of the deal. Agreement on principles usually takes the form of letters of intent or protocols, the purpose of which often mystifies the Westerner. The Chinese attach great importance to symbols and symbolic matters. Symbols such as the spirit of the agreement have a reality for the Chinese and there is a distinct Chinese bias in favor of the publicity or “face” these symbols can generate.

The Chinese, Pye says, conceive of their business relationships in longer and more continuous terms than Westerners. They expect an agreement to set the stage for a growing relationship in which it will be proper for the Chinese to make increasing demands. A proclivity for seemingly unending negotiations can even make the Chinese insensitive to the possibility that “canceling” contracts may cause trouble in the relationship with the foreign party. From the Chinese perspective, nothing about a contract is ever final. Westerners usually think a contract will provide for a given period of fixed and predictable behavior but the Chinese look for continuous bargaining and regard this bargaining itself as suggesting an enduring relationship. For Westerners there can be a great deal of give and take before agreement is reached, but afterwards the expectation is that neither party should lean on the other to seek further advantages. For the Chinese, the very achievement of a formalized agreement, like the initial agreement on principles, means that the parties now understand one other well enough that each can expect further favors. They will therefore not hesitate to suggest changes immediately on the heels of an agreement. They tend not to treat the signing of a contract as signaling a completed agreement.

Pye advances several explanations for the Chinese tendency to seek early agreement on general principles. First, he says, it is easier to extract concessions when details are to be worked out later on. Second, agreement on principles can easily be turned into agreement on goals. This can in turn support a later insistence that all discussion of concrete issues must support these goals. Finally, Pye says, agreement on general principles can be used later to substantiate tactical claims of bad faith.

Specific Negotiating Tactics

According to Pye, Chinese negotiators tend to use the following tactics:

Open with flattery — In response to flattering remarks the foreigner feels compelled to give an enthusiastic affirmation. The foreigner is then called on to give an emphatic denial of a feigned, self-deprecating remark. This puts the foreigner on the back foot from the outset.

Operate on two levels — There is the manifest level of bargaining about the concrete and there is also the latent level at which attempts are made to strike emotional bargains based on dependency. Chinese negotiators seek relations in which the foreigner will feel solicitous toward China, thus implicitly becoming a protector and more a superior than an equal.

Focus on mutual interests — Westerners like to think of themselves as conciliators. The Chinese tend to reject the principle of compromise and prefer instead to stress mutual interests. When mutual interests have been established it is easier to ask the foreign party to bear a heavier burden without protest.

Use meetings as seminars — Negotiations are seen partly as information-gathering operations. Foreign competitors are played off against against one another to extract maximum technical intelligence from presentations. Negotiating sessions are used frequently for training purposes. The foreigner is encouraged to perform so as to impress the passive Chinese host. The obliging guest entertains in repayment for hospitality and brings “gifts of knowledge”. Put simply, Chinese companies often claim to want to do a deal with you when all they really want is to get access to your technology or know-how. I cannot stress enough how often our China lawyers see this sort of situation.

Blur the lines of authority — You can’t tell who reports to whom or where the apparent leader fits in the hierarchy of the Chinese company. Negotiating teams tend to be large but the lines of authority are diffuse and vague. Chinese negotiators are often unsure of their mandates and of the probable decisions of their superiors. They therefore tend to give inaccurate signals about the state of negotiations. Foreigners persist in trying to find a particular person who has command authority at each level. In China it cannot be assumed that power is tied to responsibility. Proof of a person’s importance often lies precisely in their being shielded from accountability.

Never say “no” — Chinese negotiators will frequently seem to be agreeing when they say something is “possible” but often this is an ambiguous way of saying “no”. They will often respond with silence to a proposal and then at a much later date suddenly return with interest.

Never telegraph their next move — Chinese negotiators don’t telegraph their next moves through displays of emotion. The level of friendliness or impersonality remains the same whether negotiations are heading for success or failure. This brings surprises. Warm and progressively friendly meetings can lead to disappointing outcomes. Chinese negotiators are quite prepared to end meetings or negotiations on a negative note. As negotiators often have little authority they often find it prudent to maintain a negative attitude. At the same time, apparently disinterested negotiators can suddenly announce that a positive agreement is possible.

Exploit Chinese members of the foreign team — Ethnic Chinese associated with the foreign team will be sought out in the belief that they are naturally sympathetic to China. Our China attorneys have also seen many instances where an Ethnic Chinese person on the foreign side is accused of disloyalty for not siding with the Chinese side in the negotiations — always in Chinese, of course.

Use “shaming” — Chinese negotiators may be quick to point out “mistakes” in an effort to put the foreign party on the defensive. There is a deep belief that people will be shattered by the shame of their faults so there is a tendency to make an issue over trivial slip-ups and misstatements.

Make big asks — Chinese negotiators often have no hesitation in presenting what they must understand are unacceptable demands. These demands are often accompanied by a hint that they will be withdrawn in return for only modest or symbolic concessions. Extreme language is often used to obtain symbolic victories.

Stall — Chinese negotiators are masters of creative use of fatigue. They have, according to Pye, great staying power and almost no capacity for boredom. These traits keep foreigners’ hopes alive. This approach may also reflect lack of experience, bureaucratic problems or a subordinate’s fear of criticism from above. Conversely, when agreement reached it is often the Chinese who become impatient for deliveries by the foreigners.

 

Negotiation Tips for Foreigners Negotiating with Chinese Companies

Take general principles seriously. According to Pye, the Chinese usually prefer to begin with agreement about general principles before moving to concrete items, while foreigners like to begin with specifics and avoid generalities. Agreement on generalities allows the Chinese to make headway by drawing subsequent negotiations back to the “spirit” of the agreement. If you follow the Chinese route it is imperative you decide ahead of time the precise general principles you are prepared to accept.

Avoid the indebtedness trap. Chinese negotiators often seek to put foreigners in a position where they will feel obligated or indebted. Pye says that foreign negotiators need to be aware of the obligations they may be accruing. They should be skeptical in the face of the “effusion of personal friendship” often used to elicit an acknowledgement of the indebtedness. See How NOT To Choose Your China Business Partner.

Prevent exaggerated expectations. Exuberant Western sales techniques are often read to mean the foreigner is prepared to do more than they intend. Once the Chinese assume a relationship has been established they will genuinely count on generosity and flexibility from their partners. If the Chinese decline an offer of generosity in one instance, they may consider themselves entitled to ask for the same kind of generosity in future. Chinese “face-saving” can involve turning down initial offers but there is no loss of face in asking for help later.

Handle the shaming. When disappointed, Pye says, Chinese negotiators tend not to search for appropriate counter moves but attempt to shame the foreign party with moralistic appeals and denunciation. They believe that if the other party can be shamed into doing the “right” thing they will be grateful and not resentful. You can often satisfy the shaming tactic with symbolic responses.

Master the record. A Chinese negotiator will normally be completely knowledgeable about the deal history and will test the other side’s memory to advantage. What was previously discussed or settled may be contradicted in an attempt to take advantage of new negotiators or changed circumstances. There is a belief that foreigners are careless and deserve to be penalized if they make mistakes. Pye’s tip is that you keep an exact record of your negotiation history.

Control the damage. It will inevitably be necessary, at times, to adopt positions the Chinese may find offensive or that may violate their beliefs about how people with mutual interests should behave. Pye’s tip is to concentrate on limiting the damage and not engage in mutual recriminations, which will only convince the Chinese side that the foreign side is insecure. According to Pye, the Chinese have a strong need to publicize what they perceive as mistreatment. Avoid an aggressive defense at all cost. Better to pass something off as an unavoidable misunderstanding about which the Chinese side has the right to be upset.

International litigationAt any given time, my law firm’s international litigation team are involved in 3-5 matters involving companies owed money by Chinese companies.

Late last year — right before COVID I received I was cc’ed on an email from one of our litigators to an attorney who is regular counsel for a company we are assisting in China. Because this e-mail was “lawyer to lawyer,” it went into a bit more detail and had a bit more editorializing on the subject of China litigation. I loved it because it provides an excellent snapshot of the initial stages of litigation in Chinese courts and I very much wanted to put it on the blog.

But before I could do so, I had to strip out anything that might allow one to identify the pending case. I have done that by taking out any mention of parties, lawyers (both the China attorneys and the attorneys stateside) or even the court in this memo. I also changed at least one item in the post as a further diversion. I have, however, retained the heart and soul of this e-mail and none of my deletions/changes have any real impact on its substance.

I am writing to provide you with a general update on the ABC matter. We are currently waiting for the arrival of your document package. We plan to file the complaint shortly after receipt. Based on our current planning, that will be sometime in the middle or end of next week.

I would like to inform you about the basic procedures that will follow after the complaint is filed. Note in all respects that China is a civil law jurisdiction, so the procedure is much closer to that of continental Europe than to that of a common law jurisdiction such as the United States [or Canada or England].

After we file the complaint, the Court convenes an initial hearing. In China this happens quite quickly. Normally, in the XYZ court, the first hearing is convened within two months after the complaint is filed.

Generally, for complex international disputes, at least three hearings are required to resolve the case. The time for convening the second hearing can be the subject of some dispute. The defendant will be expected to plead difficulty and lack of information and complexity and the rest and will seek delay. In general, the Chinese courts do not like delay, and they tend to view such requests quite strictly.

The time for the first hearing can also be delayed if 123 Chinese company files a motion challenging jurisdiction or requests time to deal with complex evidentiary issues. Again though, these matters are viewed quite strictly in China. Chinese courts, especially the XYZ court, like to move the cases through their dockets extremely quickly.  That is why we have taken time to carefully prepare before filing the complaint. Once the process starts in China there is little time for extra preparation.

As a general rule, no personnel will be required to attend the hearing or even provide any form of statement or affidavit concerning the facts of the case. The Chinese courts like to work from documentary evidence. The evidence we have provided is quite complete and there should be no need for any supplementation in the form of either live testimony or affidavits. As a common law attorney, I find this quite odd, but that is the Chinese system. The Chinese courts view humans as more likely to lie than tell the truth, so they prefer to work with hard evidence whenever possible. This is a major advantage in this case, since the hard evidence is very good for us.  The court will not give them much room to talk out of it, which benefits our position.

I will attend and assist at all of the hearings in XYZ court and I will provide detailed reports on the proceedings. The XYZ court is a reputable court. However, all legal proceedings in China are much more rough and ready than we are used to in the United States and we must be prepared for the fact that the situation can be unpredictable.

Please let me know if you have any questions about this matter.

The eight IP questions you should be asking before you bring your business into China.
The eight IP questions you should be asking before you bring your business into a foreign country

As companies transition out of China and move elsewhere, my law firm’s international IP attorneys are helping them protect their IP during and after this transition.

The following are the eight questions we suggest companies starting a business in a foreign country should ask about their own intellectual property before they start doing business in that foreign country, be it Mexico, Spain, Japan, Thailand or wherever.

1. Can we adopt, use and register as trademarks the names we want to use for our products or services in the foreign country?

2. Is any aspect of our IP new, inventive and useful and therefore potentially patentable in the foreign country or anywhere else relevant to our business?

3. Have we instituted procedures to keep our potentially patentable inventions confidential until a patent application may be filed?

4. Are there any third party patents that could prevent us from selling our services or products in the foreign country or even from manufacturing our products there or anywhere else?

5. What aspects of our products or services are protected by copyright?

6. Is the design of our product protectable as a design patent in the foreign country or elsewhere?

7. Are there any third party design registrations that could prevent us from selling our product in the foreign country or elsewhere?

8. Do we have written agreements with our foreign country employees and manufacturers that clearly assign to us any IP we create with them and that provide for maintaining the confidentiality of our information and our trade secrets?

Your thoughts?

Moving manufacturing from China

With companies falling all over themselves to move their manufacturing out of China to reduce their risks (and their tariffs), my law firm’s international manufacturing lawyers are not only hearing from many companies wanting to leave China, but from many companies in big trouble for not having properly engineered their leaving China.

In The Single Best Way To Avoid Being Taken Hostage In China, we wrote of how Chinese companies and individuals often take hostages in an effort to collect on alleged debts or to protest employee layoffs or the closing of a China facility:

My law firm’s advice to our clients that are laying off workers in China or closing a facility in China or allegedly owe money to someone in China is to stay outside China. Regular readers of our blog know we took this position long ago and have never waffled:

    • If you are in a debt dispute with a Chinese company, the best thing to do is not go to China at all.
    • If you must go to China, think about using a bodyguard or two or three and think carefully about where you stay and where you go. Most importantly, be careful with whom you meet.
    • Consider preemptively suing your alleged creditor somewhere so you can plausibly claim to have been seized not because you owe a debt, but in retaliation for having sue. If you are going to sue, carry proof of your lawsuit with you while you are in China.

Though China may seem safe, one should absolutely not write off the possibility of violence in one’s business dealings in China. My law firm has helped about a dozen foreign companies navigate their way out of situations where violence was threatened or occurred. We tell our clients that if they owe money to a Chinese company or are involved in any sort of dispute with anyone in China (partner, employee, etc.), they should avoid meeting to discuss the dispute/problem anywhere other than in a neutral, very public place in the day time and they should — if at all possible — not go to China or remain in China so long as that dispute might be pending.

In a similar vein, we have also written extensively on why you must prepare well in advance for terminating your China supplier. And by plan in advance, we mean make sure you have secured your molds and all paid-for product before you do anything that might tip off your China supplier regarding your plan to start manufacturing elsewhere.

Not surprisingly, there has been little media coverage about people being held hostage for changing suppliers, but there was this story about a US toy company whose already paid for product was held hostage by a Chinese supplier after learning the US company would be re-shoring its manufacturing to the United States. The article is entitled, Jilted Chinese supplier tells would-be U.S. reshorer -“Not so fast,” and it talks about how the Chinese supplier delayed deliveries in an attempt to make it impossible for the American company to start making its toys in the United States.

It is incredibly common for Chinese manufacturers to retaliate against foreign product buyers that cease buying product from them. For this reason, we instruct our clients to line up new suppliers and have them ready to go before they even hint about ceasing production with their existing China suppliers.
We give this advice because our China lawyers have seen the following:
  • Foreign company tells its China manufacturer it will be ceasing to use it for its production. China manufacturer then keeps all of the foreign company’s tooling and molds, claiming to own them. This is incredibly common. The way to prevent this is to get an agreement from your Chinese manufacturer making clear you own the tooling and molds before your Chinese manufacturer has any inkling you will be moving on. For more on the importance of mold agreements, check out How Not To Lose Your Molds/Tooling In China. Get this contract signed well before you leave.
  • U.S. company tells its China manufacturer it will be moving its manufacturing from China to Mexico and Thailand then it learns someone in China registered its brand names and logos as trademarks in Mexico and Thailand! U.S. company is now facing not being able to have its product — at least with its own brand name and logo — manufactured in these countries. The easy way to prevent this is to register your brand names and logos in the country to which you will be moving your manufacturing before anyone knows this might be happening. You might even want to consider doing these registrations under a company name that will not tip anyone off to your plans to leave China.
  • Foreign company tells its China manufacturer it will be ceasing to use China manufacturer for its widget production. A few weeks later, foreign company has its widgets seized at the China border for violating someone’s trademark or design patent. The foreign company is (rightly) convinced its China manufacturer is the one behind the product seizure, believing the Chinese manufacturer registered the foreign company’s brand names as trademarks in China long ago and is just now using that trademark to seize product as revenge. China has laws forbidding its manufacturers from registering the trademarks of those for whom it manufactures, but because it is virtually impossible to prove your manufacturer in Shenzhen had a cousin in Xi’an do the registering, this sort of thing happens all the time. You can prevent  this by timely registering your China IP and by making sure your China IP is up to date before anyone knows you may be leaving.
  • Foreign company tells its China manufacturer it will be ceasing to use China manufacturer for its production. China manufacturer then says it will not be shipping any more product because foreign manufacturer is late on payment and owes it hundreds of thousands of dollars. China manufacturer then reports foreign manufacturer to Sinosure and Sinosure then ceases to insure product sales to this foreign company, which can cause the foreign company financial problems that makes it difficult for it to leave China. This too is incredibly common and our law firm has handled at least three times as many Sinosure related matters in 2020 as in any prior year.
  • Foreign company tells its China manufacturer it will be ceasing to use China manufacturer for its production. China manufacturer then either threatens to or actually does hold people from the foreign company hostage for alleged debt. This is China’s dirty little secret, but this too is incredibly common and in every single instance where this has happened to one of our clients, the local police have either stayed completely out of it or helped the hostage takers.

Bottom Line: Manufacturing in China has become much riskier, but leaving China has become much riskier as well. Protection comes by planning ahead.

China Licensing AgreementsWhen one of our international lawyers is contacted to “draft a contract” we usually must first determine whether it is time to draft the contract or not. For example, if a client wants us to draft an OEM Agreement to have its widgets manufactured by Company A, there is no point in our starting on such an agreement if the parties are not close to agreeing on the price for those widgets.

We often find ourselves giving clients and even potential clients a list of the items on which they should reach agreement before they pay us to draft their agreement. There have been plenty of times where we as lawyers have been able to bridge the gap between our client and their foreign counter-party to make a deal happen, but there are some gaps we simply cannot bridge. If a manufacturer insists on charging $5 per widget and our client will pay no more than $3 per widget, there will be no deal and there is no point in our drafting an agreement as though there will be one.

But on something more complicated like a Joint Venture deal, where neither side is usually familiar with common terms, we often start drafting the joint venture agreement before the parties have reached a clear agreement, in part to help the parties determine what remains for them to agree on for an agreement to get signed.

Licensing agreements are usually more complicated than manufacturing agreements, but less complicated than joint venture agreements. I was recently cc’ed on an email from one of our IP lawyers to a potential client contemplating licensing its technology and brand name to a Chinese company. This email was in response to the potential client having requested we help them with the “things we should be doing to prepare for our upcoming meeting with our potential licensee.”

The email list was as follows:

1. Make sure all of the IP (trademarks, patents, copyrights) your licensee may use is registered in China. You do not want a situation where your potential China licensee files for “your” trademarks so as to gain negotiating leverage against you. If such IP is not already registered, get it registered. Our China IP lawyers can help you with this.

2. Make sure your potential licensee is legitimate. Is it financially capable of paying your licensing fees? Does it have experience with your sort of product? Is it the sort of company that will preserve, enhance or destroy your reputation? We can help you by conducting this due diligence.

3. Are you going to allow this potential licensee to sub-license, and if so, to whom?

4. What sort of controls are you going to want over this licensee’s use of your technology and your name?

5. Who is going to pay what in terms of marketing your technology and your name in China? I’m guessing it is going to be the Chinese company, but you should get clear on this.

6. Who is going to be responsible for paying Chinese taxes on the royalties? For a whole host of reasons, you are going to want this burden to fall on your China licensee.

7. How long will the duration of your licensing agreement be and on what grounds may you unilaterally terminate it early? Make sure that you include grounds that involve your need to protect your brand and your reputation.

8. Make sure that your potential licensee agrees to comply with all Chinese laws regarding the need to register your licensing agreement. This should not be a problem, but occasionally it is.

9. Do not sign an MOU or an LOI unless you run it by us first. I urge you read this post on China MOUs and LOIs 

Once they reach a tentative oral agreement on the above, we can start drafting the licensing agreement.

China employer audit

As we are in the third quarter of the calendar year, we are just starting to ramp up our employer-employee audit for our China clients. The importance of these audits has significantly increased over the years.

The below is not intended to be an exhaustive list of what you should be working on to bring your company into compliance with China’s employment laws, but it is a good starting point. Working through the below will not only give you a clearer picture of how things stand with your employment law compliance, but it will also help you map out what you need to minimize your regulatory/lawsuit exposure.

1. Employment contractsDo you have a written contract with every full-time employee? What sorts of contracts do your part-time employees have? Are all your China employment contracts current? Are all your open-term employees on open-term contracts? Do you employ independent contractors who should be classified as employees?

2. Employer rules and regulations. Do you have an employee handbook for each of your China offices? Have you provided it to your employees and have they signed a Chinese language form acknowledging receipt? When was the last time you checked and updated your handbook?

3. Vacation days. Are your employees using up their accrued vacation time each year? If they refuse to take their vacation days, are you documenting it? If they are not giving up their vacation balance, can you arrange for them to use up such balance?

4. Working hours. Are you staying on top of your employees’ overtime? Are your employees designated to work under the alternate working hours system (such as the flexible working hours system) within the validity period as approved by the relevant employment authorities? If not, have you submitted a renewal application? Are you paying attention to the employees’ actual working hours and workload to make sure it accords with their respective working hours system?

5. Employee remuneration. Are you meeting the minimum wage requirements? Are you making salary payments on time and in full? Are you implementing pay cuts in a lawful manner? Does your bonus policy spell out how your company distributes bonuses to employees?

6. Social insurance and housing fund contributions. Are you making all mandatory social benefits contributions required by the local law? What about employees based in a different city from your office? How do you treat your expats?

7. Expats. Are you current on all paperwork for your expats? Are you providing employee social benefits as mandated by law? Are your expat employment-related agreements such as non-compete agreements in good shape?

8. Female employees, especially those who are pregnant or nursing or are maternity leave. Are you providing labor protections and accommodations as required by law? Are you providing the required maternity leave? Are your employees on maternity leave being paid what they should be paid during the entire period of their leave?

9. Employee terminations. Do you have a plan in place before you terminate an employee? Do you document all your employee terminations in writing? What about employee resignations? Do you have an off-boarding checklist? Do you timely transfer your terminated employees’ files and social insurance accounts? Do you perform all your obligations upon employee departure, such as providing a Proof of Termination of Employment Relationship document?

How’d you do?

 

China lawyers

This post focuses on protecting against intellectual property losses arise from what we call leakage — the situation where a company has a contract preventing its foreign counter-party (usually a foreign manufacturer) from using its proprietary information, but fails to prevent that information from leaking to third parties not bound by such a contract.

When our international manufacturing lawyers draft a manufacturing contract with an overseas factory, one of the main things we engage in is “contract plumbing.” This involves us working to make sure the contract is thoroughly sealed so as to prevent leakage of proprietary information to third parties outside the contract.

What do we mean by leakage? Most foreign buyers are concerned about the owner of their factory appropriating their product design and making that product for its own use. Since most contract manufacturers are direct competitors of the product buyer, this is a realistic concern. So we draft the manufacturing contract to prevent this sort of direct appropriation of the product design.

However, our experience shows that just preventing direct appropriation by the contract manufacturing company is not nearly enough. If you block just your factory owning company  from appropriating  proprietary information, they will almost inevitably find ways to provide your propriety information to other parties who will make use of the information. Since the factory owner did not commit the deed directly, it will then claim it is off the hook and “not responsible for any misappropriation that may have occurred.”

Sometimes the factory owner sincerely seeks to maintain control over the product design because its contract with its foreign buyer is valuable and it makes better economic sense for it to maintain good relations with its foreign buyer than to go to the trouble and expense of marketing the appropriated product in the United States and/or Europe. In this case, however, there are still other parties involved in the manufacturing process that will benefit from stealing the product design from both the product buyer and the factory owner. In this sort of situation, proprietary product information “leaked” away from the factory owner to a third party in a way that benefits the third party, not the factory owner.

No matter the cause of the leakage though, the effect is the same on the product buyer; the product buyer has lost its proprietary information to a foreign company. In our experience, the losses from this sort of third party leakage roughly match the losses from direct appropriation by factory owners. For this reason, we focus on preventing such leakage in any contract manufacturing arrangement, even when our clients insist “my relationship with the factory is so good there is no way this it would ever take our proprietary information.”

 

The Most Common Forms of IP Leakage

The list of common ways leakage of proprietary information/intellectual property occurs is long, with the following the most common:

Related parties. When an overseas factory intentionally seeks to appropriate proprietary information from a foreign party, leaking that information to a related third party company is the most common technique it will employ to achieve that.

Many manufacturing companies — particularly in Asia — are organized as part of a large group company. Many of these group companies consist of many separate companies ultimately owned by a single shareholder or shareholder group. In the classic scheme, the group company will form a special purpose entity that then enters into the contract manufacturing contract with the product buying company. This special purpose entity then leaks the proprietary information to a different company which, though a separate legal entity, is actually a member of the same group. The product buying company has no contract with the entity that actually manufactures the infringing product. The factory that entered into the contract with the product buying company then asserts that it is free from liability because it is not the offending manufacturer.

Employees. You should assume many employees of your contract manufacturer are on the look out for a new idea (i.e., your idea) that will give them their start as a factory owner rather than wage slave. Appropriating confidential information revealed by a foreign customer is a convenient way to get this kind of head start. Employees are quite enterprising: they will not only run off with your design, they will also run off with your customer list. In just a few months, they will be contacting your customers with offers to sell your product at 30% below your wholesale price.

Subcontractors. Our clients are often surprised by the number of subcontractors involved in manufacturing their products and in some cases, their “factory” does not actually manufacture the product. All production is actually done in a different factory down the street. In other cases, when their factory has too much work, it subcontracts out its excess production. Complex products nearly always require subcontractors. Take Internet of Things products (IoT) as an example. Such products are usually a mix of a main product with numerous subassemblies and the contract manufacturer will often subcontract out production of subassemblies and related components, acting as little more than a assembler. These subassemblies and components often embody the truly innovative portion of the product. To get production done, the main factory is generally quite free in disseminating the foreign buyer’s confidential information through a large group of loosely related factories, none of which have any contractual obligation to protect the confidential information or refrain from using it to directly compete with both the foreign buyer and the contract manufacturer.

Molds and tooling. The key step in contract manufacturing is often designing and production of the molds and tooling used in the manufacturing process. The molds are often the primary repository of the unique design of a product and the tooling often embodies years of manufacturing know-how on the part of the foreign party. Product buying companies often take great care in specifying the ownership of the molds and tooling without realizing that molds and tooling are rarely made by their contract manufacturer. Instead, that factory hires third parties to do the mold design and tooling manufacture. As a part of this process, the factory discloses the product buyer’s confidential information related to those designs to a mold or tooling manufacturer that can (and often does) freely sell the design to a third party or use it for its own purposes. Consider the case of a foreign product buyer that has not obtained a design patent on its basic product look and feel: its molds are likely the most important element of its product value. If its mold design leaks away, the value of its product design can be destroyed.

Third party programmers and designers. Few small or start up companies have their own product designers, graphic artists or software programmers and so most contract these tasks to third party shops. Product buyers frequently leave these tasks to their factory, which takes us back to the standard situation: to get the work done, the factory must disclose the product buyer’s  proprietary information. Often, no one in the process pays much attention to who really has the rights to the work product of these third parties. Consider an example: say the GUI for the interface for your smartphone app that controls your IoT product becomes popular and is identified with your company and you want to use that GUI design as part of your branding. Do you own the copyright? Does your China factory own the copyright? Does the third party designer own the copyright? Does anyone know? Did anyone clarify this from the start? Do you know what the law of the manufacturing country says about this? What about your own country’s laws? Third party “shops” have become a significant source of IP leakage.

How to Stop the Leakage

The first step to preventing your information from leaking is to have contract provisions written to prevent this. If your contract with your manufacturer does not cover the issue, you have little hope. This is why a contract is required and why a simple purchase order is virtually never adequate. But what sort of contract provisions are appropriate? The key is to deal with related parties (See above for a list of the riskiest related parties) by stating all disclosures to related parties are prohibited and your factory will be liable for all improper use of the information by a related party.

In dealing with third parties other than related parties, the situation is more difficult. An absolute prohibition will not work. Your manufacturer must disclose your key information to its employees. And in the modern manufacturing world, few factories are wholly self contained, so sharing of information with other companies is virtually always required as part of the manufacturing process.

There are two ways to deal with the situation. The approach we previously took was to require the factory to identify each individual entity that would receive our client’s confidential information and our client would then enter into a separate NNN Agreement with each of these individuals or entities. Under this approach, the factory would be liable only for damages caused to our client that arose from disclosures to persons or entities the factory never identified. But as manufacturing practices evolved, and especially as  factories began manufacturing increasingly complex products (such as Internet of Things devices) that require a whole slew of different companies, this careful system (that worked great for socks and rubber duckies) has become less and less workable. The factory will seldom identify every involved party and those that have been identified are becoming increasingly unwilling to execute their own NNN agreements, and the fact that the factory ends up “off the hook” means the factory becomes careless with information.

So our most common approach today is to allow the factory to disclose information as necessary, but to make it liable for all damages caused to our client from misuse of the confidential information. If a key employee steals the information, the factory is liable. If a subcontractor steals the information, the factory is liable. If a mold manufacturer steals the information, the factory is liable. This approach allows the factory the flexibility to get its job done but also giving it a strong incentive to impose its own mechanisms to maintain the confidentiality of the information provided to it by our product buyer client. Factories often complain about our seeking to load the liability on them. Our response to this is that “if you cannot trust the persons to whom you disclose our client’s information, you should not make the disclosure.” Our record in getting these sorts of agreements signed is shockingly good.

When you manufacture overseas, your goal must be to stop leaks of your IP and key information. This is not an easy job, but it is doable.

Spain After Covid

Register HERE!

On Tuesday, September 22nd, three of our Spain-based attorneys, Andrés Monereo, Nadja Vietz, and Consuelo Álvarez, will present an overview of topics of importance to companies doing business in or with Spain, or considering doing so.

The International Practice Section of the Washington State Bar Association (WSBA) is sponsoring this event and it is approved for CLE credit. It is free for International Practice section members, $18.75 for law students and $35 for the general public.The event will start at 12:00 PM Pacific on Tuesday, September 22nd.  Register today!

During the presentation, these three Spanish lawyers will discuss the most salient aspects of Spain’s legal and regulatory regime as it pertains to foreign businesses, including intellectual property protection, labor compliance, and the European Union’s General Data Protection Regulation (GDPR). They will also explore COVID-19-specific challenges and how to best address these.

At the time coronavirus brought international travel to an almost complete halt earlier this year, we were in the midst of planning a series of live and in person Spain-related events here in the United States featuring our colleagues from Spain. Fortunately, technology will allow most of the events to take place in virtual format. Stay tuned for more details regarding other events.

 

Cannabis in Asia

Listen HERE or stream on SpotifyApple PodcastsGoogle PlayStitcher, or Soundcloud!

The large-scale shift to telework brought on by the COVID-19 pandemic is prompting businesses around the world to explore new avenues to engage with clients and friends. Harris Bricken is no exception, and we are proud to announce our new podcast series: Global Law and Business, hosted by international attorneys Fred Rocafort and Jonathan Bench.

In Episode #22, we are joined by Glenn Davies, CEO of CannAcubed, a cannabis technology company based in Singapore. We discuss:

  • Why cannabis is an attractive crop for countries in Asia, even where legalization for domestic consumption may not be on the horizon for many years.
  • How the UN’s sustainability goals dovetail with cannabis growth, including Life on Land, Responsible Production, Poverty Alleviation, and Climate Action.
  • Which countries in Asia are rising stars in the cannabis space.
  • Why Asian cannabis is more sustainable than the North American cannabis model.
  • The launch of the Asia Industrial Hemp Association and what it is doing for governments and companies in Asia.
  • Reading, listening, and watching recommendations from:

If you have comments on this episode or if you’d like to suggest topics for future episodes, please email globallawbiz@harrisbricken.com.

And please follow Fred and Jonathan on social media to stay informed on upcoming guests and topics:

We’ll see you next week for another discussion on the global business environment as we sit down with Nathan Sheranian to discuss global human resources.