Skip to content

The seemingly endless U.S.-China trade war keeps slogging along. The Office of the U.S. Trade Representative (USTR) has already imposed 25% tariffs on $250 billion of Chinese imports on three previous lists (List 1 = $34 billion starting from July 2018, List 2 = $16 billion from August 2018, List 3 = $200 billion from September 2018) and in August 2019, President Trump ordered all remaining Chinese imports (about $300 billion) also be hit with tariffs.  On September 1, 2019, 15% tariffs were imposed on the first part of List 4A products and additional tariffs have been proposed for the remaining List 4B products effective December 15, 2019, but these tariffs may be delayed or cancelled depending on negotiations between the U.S. and China.

The products on the first two lists consisted primarily of products that were inputs, parts, and components used to manufacture finished products. The products on the third and fourth lists covered primarily finished products (e.g., clothing, household products, car seats/ baby products, sporting equipment, electronics).

The latest development in the Section 301 China tariff disputes is that USTR has officially announced the opening of an exclusion request process for those Chinese products that had a tariff rate of 15% imposed effective from September 1, 2019 (i.e., the List 4A tariffs). Your opportunity to submit List 4 product exclusion requests began on October 31, 2019 and will remain open through January 31, 2020. All exclusion requests must be submitted through USTR’s web portal. Any granted exclusions will be valid for one year from the date the exclusion grant is published in the Federal Register. The List 4A product exclusion request is similar to that used for the prior three lists of tariffed Chinese products.

Exclusion requests are to cover only a single product, and must include the following information:

  • The 10 digit subheading of the Harmonized Tariff Schedule (HTSUS) applicable to the particular product requested for exclusion.
  • Product name and detailed description, including the physical characteristics (e.g., dimensions, material composition, or other characteristics) of the product that distinguish it from other products within the covered 8-digit subheading.
    • USTR will not consider requests that identify the product using criteria that cannot be made available to the public.
  • The product function, application, and principal use.
    • Requesters may submit attachments with publicly available information that help distinguish the products (e.g., CBP rulings, photos and specification sheets, and previous import documentation).
  • Whether the product is subject to an antidumping or countervailing duty order.

USTR also is asking the requesting parties to provide the following more detailed sales and financial information:

  • Identify their relationship to the product (e.g., importer, U.S. producer, purchaser, industry association, other).
  • The company’s gross revenue for 2018 and first half 2019.
  • Report the quantity and value of the company’s purchases of the product for 2017, 2018 and first half 2019, not only for the Chinese imports, but also from domestic and third-country suppliers.
  • For imports sold as final products, the percentage of the company’s 2018 total US gross sales that were accounted for by the Chinese products.
  • For imports used in the production of final products, companies will need to report the percentage of the total cost of the finished product that is accounted for by the imported Chinese input, and the percentage of the company’s 2018 total US gross sales that were accounted for by the final products.
  • Is your company a “small business” as defined by the Small Business Administration.

Exclusion requests also should address the following factors:

  • Whether the particular product is available only from China.  In addressing this factor, requesters should address specifically whether the particular product and/or a comparable product is available from sources in the United States and/or in third countries.
    • Requestors are asked to discuss any attempts to source the product from the United States or third countries.
  • Whether imposition of additional duties on the particular product would cause severe economic harm to the requester or other U.S. interests.
  • Whether the particular product is strategically important or related to “Made in China 2025” or other Chinese industrial programs.

Requesters may also provide any other information or data that they consider relevant to an evaluation of the request.

These last factors appear to be key considerations to whether an exclusion will be granted or not.  Products that are available from U.S. or third-country suppliers are more likely to be denied than products that can only be sourced from China.  Successful exclusion requests usually have a good story describing the harm to American economic or other interests that would be caused by the tariffs.

USTR has completed its review of exclusion requests for all of List 1 ($34 billion) and most of List 2 ($16 billion). The Wall Street Journal reported in early October that about 61 percent of the exclusion requests for these two lists had been denied, 31 percent had been granted, and the rest were still pending. In other words, requests to exclude products from tariffs have about a one in three chance of succeeding.

The deadline to submit exclusion requests for List 3 just closed September 30, 2019. Although USTR has only just started its review of List 3 exclusion requests, it has already granted a small number of exclusion requests for List 3 products.

If you want to avoid the next round of tariffs against your China products, you need to submit your exclusion request by January 31, 2020.

Africa lawyers

This is the third of a series of posts on how companies can benefit from China’s Belt and Road Initiative and the second post focused on Africa. To read the first post, click here. To read the second post, click here. The goal of these posts is to help companies better understand what China is doing with its Belt and Road Initiative so that they can benefit from utilizing Chinese-funded or Chinese-built infrastructure as a springboard to their own growth. This and other posts will focus on general enabling environments, including legal frameworks for doing business in these countries. This post is presented in a Q&A format with David Baxter, my longtime friend and PPP (Public Private Partnerships) expert, who is based in Washington, D.C.

Does Africa present a viable alternative to companies that want to move manufacturing from China?

Many products manufactured in China could be manufactured in Africa. Textiles, shoes, and glassware could easily be produced in Africa. The key is to find partners in countries that have created an enabling environment,  meaning that the country is stable for foreign competitive and transparent investment. Companies should focus on the ease of starting up business indices, which vary from country to country. Many Southeast Asian countries are no longer inexpensive labor markets, but there are still inexpensive labor markets in many regional hubs in Africa. These hubs contain skilled people seeking jobs and a rapidly growing middle class. These African countries present great opportunities to build a sustainable market base. Some US companies have been in Africa for over a hundred years. Companies like Coke, Ford, and IBM know about Africa’s potential and have done well there, and their market penetration strategies should be emulated.

Which African nations are most welcoming to Chinese development projects? Are these same countries also welcoming to U.S. and European companies?

Poorer countries like Mozambique, Somalia, and Sudan are some of those that have welcomed China. More developed African nations have been pushing back against China. African countries with strong anti-corruption policies and competitive and transparent procurement practices are more interested in doing business with Western companies. Chinese companies typically want handshake deals; they often do not want transparency or competition. Countries with good legal frameworks and enabling environments (e.g. South Africa and Ghana) have great potential and present a better chance for Western companies to compete because deals are not being made behind closed doors. Studying and utilizing the World Bank’s ease of doing business index will be helpful in selecting good markets to enter. Countries with strong contract enforcement and less strict controls on repatriation of profits will be more attractive to Western companies. Many African countries have laws with strict profit remittance controls. These restrictions do not bother the Chinese companies because they generally do not remit money back to China; they remit raw goods to their home country instead.

What most concerns you regarding the current state of African development?

Africa’s public sector funding gap is its biggest challenge. Countries have significant needs, such as hospitals, schools, road, bridges, but they do not have the funds to build them. Sectors such as healthcare, education, water, wastewater disposal, energy, and transportation are already a big focus. These generally enhance the sustainable development goals of the UN and require business partners that support sustainability and resilience. There is great potential for Western companies with responsible market policies. The current Chinese and Indian consumer markets will be dwarfed by the end of this century by Africa’s domestic market demands. This demand, supported by a movement to develop free trade zones, will enhance African development objectives by encouraging these countries to work together, integrate their economies, and share resources in sub-Saharan Africa.

How important are the geopolitics of Africa to current and future business prospects in Africa?

Pan-African identity is continually evolving. The countries and markets may be inclusive or exclusive. It is important to pay attention to how different regional blocks or customs unions develop. Will they collaborate or will they compete with each other? Which foreign companies will gain footholds in these post-colonial regions? The Chinese are present across Africa. So are the French in Francophone West Africa. Former British colonies (Commonwealth countries) comprise their own geopolitical unit, as do the Lusophone colonies (colonized by the Portuguese) and the Saharan African blocks. The African Free Trade Zone has not developed yet because of the disparate geopolitical aspirations among these regions. The rule of law is significant due to the starkly different legal structures present. For instance, some countries operate under the “Napoleonic code” (French Colonies). Others operate under Roman/Dutch law, like South Africa and its immediate neighbors. Then you have the English common law, along with the legal philosophies and practices. Similarly aligned countries are well positioned to do business across borders, but there are still complexities in procuring large transnational infrastructure. Overall political stability is a significant factor. Look at East Africa – the Somalia/Somaliland split is problematic and needs to be resolved. The Democratic Republic of the Congo and the Central African Republic essentially do not even exist as functioning states. Their boundaries were drawn by foreign powers in Berlin a hundred years ago, and these regions are facing difficult issues centered around the different ethnicities of their people. The typical Western company will be better off to focus on the African countries that have had multiple successful democratic elections resulting in progressive leaders who provide political and economic stability.

What does Africa need that foreign companies can provide?

Africans need Western innovation and new technology. Western companies need partners in countries that have a strong rule of law to protect these valuable business investments in infrastructure.

What does Africa have that foreign companies need?

Africa’s burgeoning middle class makes for a large and growing consumer market, and the rapidly increasing number of well-educated Africans needing employment make for a strong workforce. Africa can provide both skilled and semi-skilled labor to meet most any company’s needs.

Can you give examples of industries in which Africa is doing well and in which it will likely emerge as a global leader?

Africa currently excels at producing basic essentials, such as textiles and shoes. Vehicle manufacturing is growing. Japanese and German companies established large auto manufacturing facilities in South Africa years ago, and Africa now exports Toyota, Nissan, and Mercedes-Benz vehicles to their countries of origin. Petrochemicals will be big for a long time. Tanzania and Mozambique recently discovered oil and gas reserves. In Uganda and Kenya’s Rift Valley they have been developing numerous renewables: geothermal, solar, wind, and hydroelectric energy. Africa’s ports are important for its import and export economies, including for landlocked countries. Africa has the most landlocked countries in the world, and the growing transportation infrastructure that can unlock those countries will be important. Unfortunately, Africa’s airline industry is problematic and has a long way to go.

What should foreign companies consider when making their first foray into Africa to do business?

You need reputable local partners. It is difficult to get into certain countries without them. I am not talking about “fixers” or “facilitators” who will lead your company toward a path of corruption. Do not assume Africa doesn’t have skilled people. South Africans are highly skilled. Namibia is very advanced; Rwanda is quickly becoming the IT hub of Africa. Reach back into the African diaspora for assistance from people who live in your home country — people like me. Do not hire foreigners who know little about the complexities of Africa. For example, the Nigerian expat communities in the U.S.  and in Europe are enormous and can offer much. There is a large Ethiopian community here in D.C. and in various other cities in the United States and Europe. Many of these Africans have come to the U.S. and other Western countries and become trained as professionals, and many are looking for opportunities to invest their time and money in their home countries in Africa. They are looking to collaborate with U.S. companies in those future opportunities. Western companies have largely ignored the opportunities that members of the African diaspora offer.

Africa is ready to do business with the world.

The World Bank’s 2019 rankings for ease of doing business can be found here, with the following African countries in the top 100:

38. Rwanda

53. Morocco

56. Kenya

78. Tunisia

84. South Africa

85. Zambia

87. Botswana

97. Togo

In our future posts we will look at additional world regions and zoom in on promising markets with strong enabling environments and rule of law that provide businesses with a sufficient level of certainty to move forward in developing relationships in those countries as alternatives to China.

China trademark lawyers

In yesterday’s post, Mathew Alderson wrote about how Beijing IP Court statistics released during the UK-China IP Symposium he attended in Beijing on November 1st. Mathew concluded his post by noting the following:

These statistics and the underlying cases on which these statistics are based tell us that foreign companies can prevail in intellectual property disputes against Chinese companies, but to do so they invariably must have either proper China IP registrations that they can allege were infringed and/or a good contract that they can allege was breached.”

In other words you should be taking steps to protect your IP in China so as to protect your IP in China so as to minimize your chances of having to sue in China while also increasing your chances of prevailing in China if you do need to sue. In a subsequent post we will take you through those steps.

In this post we set out the four most important steps you should take to both minimize the likelihood of having a China IP problem and to maximize your chances of prevailing should such a problem actually arise.

1. Protect Your IP in China by Registering your IP in China. Register your trademarks, copyrights, and patents in China. Registering your IP in the United States or the EU or Australia or any other country does not provide you with IP protection in China.

— China Trademarks: Trademarks are nearly always fast, easy and inexpensive to register in China.  If you ever plan to sell your products or services or even just have your products made in China, trademark registration in China is a must. China has a first-to-file trademark system, not a first-to-use system. This means what it sounds like; whoever files and secures a trademark registration first for a brand name or a logo gets it, whether or not you have been using that same brand name or logo in your home country for the last 100 years. Chinese squatters are constantly on the look out for up and coming startups whose trademarks they can register in China and use for “ransom.”  Chinese squatters also love securing the trademarks for brand names of products made in China for export. Oftentimes these squatters are friends and family of your own manufacturer who register “your” trademark in China and then use that registration to raise your manufacturing costs and then hold you hostage when you try to switch to another manufacturer. See Why Changing China Suppliers Can Be So Risky, where we described this typical scenario:

Western company tells its China manufacturer it will be ceasing to use China manufacturer for its production. A few weeks later, Western company has its products seized at the China border for violating someone’s trademark. The Western company is (rightly) convinced that its China manufacturer is the one behind the product seizure, believing the Chinese manufacturer registered the Western 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 usually not possible to prove that your manufacturer in Shenzhen had a cousin in Xi’an do the registering, this sort of thing goes on unchecked. This sort of thing is increasingly happening with design patents as well. For how to prevent this from happening to you, check out the following:

Register Your China Trademark Or Go Home

Register Your China Trademark Or Go Home, Part II.

China Trademarks. Register Them In China Not Madrid.

China: Do Just One Thing. Trademarks.

— China Copyrights. Copyrights are automatically protected in China under the Berne Convention, but to be able to sue quickly for a copyright violation and to have full copyright protection in China, it almost always makes sense to file your copyrights there. Just as in the United States and the EU, you need only submit a small portion of your software code to secure copyright protection on the entire program.

— China Patents: China patents typically must be filed in China before any public disclosure, though there are situations where the application can work so long as it is filed in China within 12 (sometimes more) months of your first foreign patent filing. China also has design patents which are shockingly fast and easy to secure. See The ABCs of China Design Patents.

In most instances it will also make sense for you to secure the appropriate trademarks, copyrights and patents in whatever country you will be selling your product.

2. Protect Your IP in China With China-Centric Contracts. Having a good contract with anyone in China to whom you will be revealing your IP is the second key to avoiding IP disputes in China and to prevailing in such disputes. The right contract or contracts will depend on your specific situation. The most common contract for IP protection is an NNN Agreement (this is a more thorough, more complicated and, most importantly, more China-centric version of an NDA). But this might also include a trade secret agreement, a non-compete agreement, a confidentiality agreement, a non-use agreement, a licensing agreement, or many other sorts of contracts tailored for your specific situation.  For making sure whatever contract you use to protect your IP actually works for China, check out The Five Keys to A China Contract That Works.

In addition to registering your IP in China and having China-centric contracts to protect your IP in China, performing takedowns of products on Chinese websites that infringe your IP and registering your IP with China customs will also usually make sense because these two things are usually both effective and relatively inexpensive.

3. Perform Takedowns on Chinese Websites.  Once you have registered your IP in China, you will be well prepared to perform takedowns of infringing products you find on Chinese websites. This is especially true of products that violate your China trademark or images of products that violate your China copyrights.  The major Chinese online marketplaces all have their own takedown procedures which typically require you prove your identity and your company’s bona fides and also that you prove you possess the rights to the IP that is being infringed. Our China IP lawyers/paralegals usually can accomplish a takedown of infringing IP from a Chinese online marketplace within a week or two. I previously wrote a six part series on Copyright takedowns in China that proceeded as follows:

Copyright Takedowns in China was a general summary of the regulations that establish China’s copyright takedown procedures. Copyright Takedowns in China Part II: Searching, Linking or Storing? looked at how providers of storage space face more liabilities than those merely providing searching or linking services. Copyright Takedowns in China Part III — Audiovisual and Sound Recordings in the Cloud discussed how China’s takedown regulations apply to cloud service providers. Copyright Takedowns in China, Part IV: Whatever you do, Register your Copyrights First, made clear that “if you ever expect to have infringing content taken down the single most important thing you should do is register your copyright in China in advance.” Copyright Takedowns in China, Part V: The End of Online Anonymity? was on the things you should do after you succeed in taking down copyright material. See also Getting Counterfeits off Alibaba: Anger is NOT a Strategy.

4. Register your IP with China Customs. China Customs will block products that infringe on China IP from entering OR leaving China. The “leaving China” part is why it is 100% essential that you register your IP in China even if all you are doing in China is having your products made there. The leaving China part is also why it usually makes sense for foreign companies that have registered their IP in China to also register that IP with China customs. Even though manufacturing in China is on the decline, China still manufactures way more than any other country in the world and it is still by far the world center for counterfeiting. If you register your IP in China and then also register that IP with China customs you will have positioned yourself to be able to block counterfeit versions of your products from leaving China for anywhere in the world.

China IP lawyers

Many foreign IP owners doing business in or with China do not believe the Chinese court system works. They or their foreign lawyers therefore tend to choose foreign law and jurisdiction in their contracts. When this results in contracts that are unenforceable against a Chinese party, everyone blames the Chinese. The prophesy about the lack of IP protection when dealing with China becomes self-fulfilling.

Now, nobody would suggest that China’s court system is perfect but it’s certainly improving. It’s a lot better than nothing; and nothing’s what you get if you make the wrong choice of law and jurisdiction in your China contracts.

The improvement in China’s court system is borne out by some interesting Beijing IP Court statistics released during the UK-China IP Symposium in Beijing on November 1st. The Beijing IP Court is now hearing diverse claims from across China and it is rapidly becoming the preferred venue for foreign-related IP litigation.

Here are some key points from the Symposium’s Beijing IP Court session:

  • In the first half of this year the Beijing IP Court accepted around 1,200 cases involving foreign parties and resolved around 2,500 such cases. Last year, the Court accepted more than 3,500 and resolved more than 3,250.
  • Less than 4% of these foreign-related IP cases are civil. More than 95% are administrative. Patent disputes account for 48% of the civil cases, with trademark and copyright disputes each accounting for roughly 20%.
  • Of the foreign-related civil cases heard by the Beijing IP Court, foreigners comprised 76% of the plaintiffs and 19% of the defendants.
  • Foreigners won 68% of their civil cases.
  • The average award sought in foreign-related civil cases was $400,000 (CNY 2.8 million).
  • Awards were made in 49% of the cases and the average award was $194,000 (CNY 1.36 million).

The above statistics and the underlying cases on which these statistics are based tell us that foreign companies can prevail in intellectual property disputes against Chinese companies, but to do so they invariably must have either proper China IP registrations that they can allege were infringed and/or a good contract that they can allege was breached.

In other words you should be taking steps to protect your IP in China so as to minimize your chances of having to sue in China while also increasing your chances of prevailing in China if you do need to sue. In a subsequent post we will take you through those steps.

 

Africa lawyers

This is the second of a series of posts regarding the effect of China’s Belt and Road Initiative on the global economy. (To read the initial post, click here.) The goal of this and future connected blog posts is to help U.S. and international companies understand what China is doing in target international markets so as to be able to benefit from Chinese-funded or Chinese-built infrastructure as a springboard to their own growth. This and other posts will focus on general enabling environments, including legal frameworks for doing business in these countries. This post is presented in a Q&A format with David Baxter, my longtime friend and PPP (Public Private Partnerships) expert, who is based in Washington, D.C.

You have spent a large portion of your life in Africa, which has historically been exploited by colonial powers. How do today’s Africans view themselves, their countries, and their continent with respect to the rest of the world? In other words, what is Africa’s current “social consciousness”?

When I was in Uganda recently, I heard pragmatism among Africans, about their past, current, and potential future problems. But I routinely hear enthusiasm among Africans who are becoming more educated and skilled. They believe that they can make this century “Africa’s century.” To me it seems like the more they have been poorly treated, the more determined they have become to build Africa with African objectives for a strong African future. Africans want relevant, sustainable growth for Africa. Mostly when I talk about Africa, I am referring to sub-Saharan Africa, not Arab North Africa which forms part of the MENA (Middle East, North Africa) Region. The enthusiasm that I am referring to is regional in nature: West Africa (e.g. Ivory Coast, Ghana, and Nigeria); East Africa (e.g. Tanzania, Uganda, Rwanda, and Kenya); and Southern Africa (e.g. South Africa, Namibia, Botswana, Mozambique, Zambia, and Zimbabwe). Each region has different opinions and approaches to its development path. East Africans are probably the most enthusiastic and pragmatic about development strategies because they have less resources than their counterparts in other regions. They believe they must do a lot with little. West Africans, particularly Nigerians, know their country is such a juggernaut, so they feel that they can accomplish almost anything. However, they know they face corruption related to oil revenues: weak governance and bad investment decisions. They stoically recognize their missteps, and they’re trying to fix them. I am from South Africa, where some South Africans are unfortunately stuck in a post-Apartheid political paradigm that has stalled forward progress. Fortunately, most of the younger post-Apartheid generation are focused on looking forward, not backwards and are embracing economic innovations that will help lift Southern Africans out of their current challenges. Africa has some dysfunctional countries like the Democratic Republic of Congo and the Central African Republic, which are prone to misadventures when it comes to development. Because they are desperate for investment in development projects, they are more prone to exploitative “good deal” that is not in their national interest.  In many cases, the leadership of these countries have mortgaged their future for ill-conceived projects that have poor long-term prospects.  However, Southern Africans, Western Africans, and Eastern Africans are becoming more discerning about how they engage with investors. They better understand the types of projects they need, and what should be the long-term objectives of realistic strategies (usually tied to sustainable development goals). Landlocked countries are particularly tied to the fates of their coastal neighbors, and this is driving regional integration efforts. This can be both advantageous and disadvantageous for those landlocked countries, depending on their neighbor’s willingness to develop common development objectives.

What do you see as Africa’s greatest opportunities, either for African companies or foreign companies looking to do business with Africa?

Africa is beginning to shine in leapfrogging technology: cellular networks, renewable/sustainable energy, and telecommunications have all flourished because countries did not have to invest in outdated infrastructure for these new technologies. Renewable energy (i.e. photo-voltaic power generation) does not require big power grids, for example. They can utilize small, off-grid systems. Solar and hydro are being developed throughout Africa, and geothermal specifically in East Africa. I see a lot of PPP/infrastructure projects emerging in those sectors. South Africa and Rwanda are becoming service-focused economies with call centers and technology centers. They have the expertise, which helps their neighbors, as well. There has always been a political focus on pan-African projects to connect and integrate Africa: trans-Africa highway projects (the Cape to Cairo road has been a dream for hundreds of years; also, east-to-west access routes for trade). These transnational connections that will integrate economies and allow them to share resources is becoming a greater focus of governments. Air transportation is still a challenge in Africa. In some regions people must fly via Europe to reach their neighbors. The biggest growth is in developing railway networks and transnational highways. Big rivers like the Congo River and Niger River are being revisited as routes to trade goods and access raw materials. Ironically, these rivers, which were first used in the colonial era, saw their ferry and river transport infrastructure fall into disuse. Now Africans are beginning to realize that river transportation can be an infrastructure backbone for countries like the Democratic Republic of Congo if their supporting infrastructure is revitalized through investment.

How is Africa reacting to China’s increasing presence through its Belt and Road Initiative?

It is a mixed bag. East Africa has two big projects that have been teetering on failure. In a transnational railway project that was supposed to connect Kenya, Uganda, and Rwanda, things stalled after their governments said the project was too expensive. When they said that they could not afford the debt burden, Chinese investors pulled out, citing project risk. The project is half finished, and now it is called the “railway to nowhere.” The new Addis Abba, Ethiopia to Djibouti railway to the Red Sea was completed. It was built and financed by the Chinese, but the Ethiopian government now faces excessive debt because it paid more for the debt that these projects incurred than they should have. Africans are beginning to realize that these types of procurements are not transparent or competitive. Many governments are now questioning how these types of projects bind these countries to foreign economic interests, not domestic development interests. Generally, Africans are a little more apprehensive about enthusiastically agreeing to proposed terms from unsolicited infrastructure deals. However, irrespective of this, China is increasingly making inroads Africa. China is beginning to recognize it needs to offer better deals, especially in countries with more vibrant African democracies. Where governance has changed hands through the ballot boxes rather than coup d’états, these new governments are stronger. But countries that lean more toward authoritarian leaders, like the Central African Republic and the Democratic Republic of Congo, grabs onto a Belt and Road project as a short-term way to show their country’s citizens economic growth without explaining the long-term future implications. These short-term vies are resulting in the “sale” of national resources to the Chinese investors with dire consequences if they default on their loans. This “debt trap” is a big discussion in Africa. There are also concerns that Chinese businesses will squash local businesses where Africans are not as well skilled, trained, educated, or experienced in the craft of competitively doing business. In some African countries, goods that are cheap, made in China, and sold by Chinese businessmen are suffocating local businessmen. Consequently, U.S. and other foreign countries with strong social corporate responsibility practices will find Africa an inviting market. It is an enormous market that will grow exponentially in the next 20-30 years. The demographic momentum is there. Even with zero marketing, companies will find that there is already a great demand for durable goods.

In our future posts we will look at additional world regions and zoom in on promising markets with strong enabling environments and rule of law, providing businesses with a base level of certainty to move forward in developing relationships in those countries.

China employee non-compete agreementsChina’s employment laws generally permit employee non-compete agreements that prevent an employee from competing with its former employer for up to two years after employment ends. But there are all sorts of restrictions on these agreements, as explained below.

Only some China employees can be bound by non-compete agreements. Employee non-compete agreements are generally limited to senior management, senior technicians, and other personnel who have confidentiality obligations. Senior management usually means a management level person who has access to company confidential information. Senior technician usually means someone who engages in technology research and development and who has access to company technology information. Whether an employee is deemed have a confidentiality obligation is determined on a case-by-case basis by considering all relevant facts, including the following:

  • The employee’s compensation
  • The employee’s job title
  • The employee’s responsibilities
  • The likelihood of the employee getting access to and using confidential information
  • Whether the employee has signed a confidentiality agreement with its employer

The Duration of the Non-Compete. China’s employment laws generally limit employee non-compete periods to a maximum of two years from the date on which the employment contract ends or gets terminated.

China Requires You Compensate an Employee for Not Competing. Chinese law requires employers compensate their employees for agreeing not to compete during the entire post-employment non-compete period and failing to pay this required compensation will free up the employee to compete. Therefore it’s best to have a non-compete compensation provision that specifies how much you will pay or how the amount of the compensation will be calculated. If there is no written agreement regarding the amount of an employee’s compensation for not competing, the employer must pay the employee 30% of the employee’s average monthly salary in the twelve months before termination, or the local minimum wage, whichever is higher. However, as is true with just about everything involving Chinese employment law, there are local differences regarding the required amount for non-compete compensation. See China Employment Contracts: Localization is Key.

Our China employment lawyers have over the last few years been seeing a trend where the courts in China’s major business cities strictly enforce contractual non-competes even when the non-compete compensation in the employment contract is very low. However, we advise our clients to provide for non-compete compensation at least greater than the local minimum wage so as to minimize the likelihood of their having to defend their non-compete compensations before a Chinese court.

China Allows for Contractual Penalties Against Employees that Breach their Non-Compete Agreements. Employee non-compete agreements are one of the few instances where China employers are allowed to impose a penalty on their employees. This can be done with a contract damages provision requiring the employee pay a specific damage amount for failing to comply with the non-compete provision. But for non-compete contract damages to be effective, they must be reasonable. If a Chinese court or arbitral body determines your contract damages are too high it will reduce this amount or maybe even eliminate it entirely. For the difficulties inherent in coming up with an appropriate contract damages amount, see On the Importance of Contract Damages in China Contracts.

Permissible Geographic scope of China Employee Non-Competes. The geographic scope of your employee non-compete must also be “reasonable.” The Chinese courts and arbitral bodies consider all sorts of facts in determining whether the geographic scope of an employee non-compete is reasonable, including the employee’s position, the employer’s business scope and size and industry.

Chinese courts do not usually strike down non-compete provisions solely because its geographic scope is too great; they instead will usually simply reduce its geographic scope. Because it is nearly impossible to expand the scope of an employee non-compete in court we usually advise our clients to make their non-compete agreements geographically broad, but not so broad that the court will throw up its hands and strike the whole thing.

Employers May Not Terminate an Employee Non-Compete Agreement Early. China employers are not allowed to unilaterally terminate a non-compete agreement without being subjected to a penalty and employers that do so during the non-compete period must pay the employee three additional months of non-compete compensation for the early termination.

Employers Must Pay the Required Non-Compete Compensation. A China employee may unilaterally terminate a non-compete if its employer has failed to make its required non-compete compensation payments for three months or longer, so long as the employee performed his or her non-compete obligations. In other words, if you want your non-compete agreement to remain in force you must pay for it.

China Contract Law Force Majeure

Pull out and look at your contract with your Chinese counter-party. Does it have a force majeure clause? If it does not, put it away and count yourself lucky. If it has a force majeure clause, pour gasoline or lighter fluid or nail polish all over it and light it.

JUST KIDDING.

Well only sort of. Chinese companies love using force majeure provisions in their contracts and American and European companies consistently let them, to their detriment.

Force majeure provisions are often included in contracts to free a party from a legal obligation when an extraordinary event or circumstance occurs. For example, if party A agrees to sell Party B a car but the day before the before the sale goes down the car is stolen, Party A will almost certainly not be held liable for not selling the car due to a force majeure provision. Example 2, if Party A contracts to make 100,000 widgets for Party B but a war breaks out and Party A must abandon its factory and therefore cannot make the widgets, Party A will almost certainly not be held liable for having provided the 100,000 widgets due to a force majeure provision. These examples rightly color how Western companies view force majeure provisions.

This though is not how Chinese companies and often the Chinese court view force majeure provisions. For example, if you enter into a contract that requires your Chinese counter-party to pay you a $5 million dollars to license your technology and your Chinese counter-party is then blocked by the Chinese government from sending you the $5 million because your licensing agreement was never filed with the Chinese government and the Chinese government never approved your Chinese counter-party sending out $5 million in hard currency, you should expect your Chinese counter-party to claim force majeure. What will then happen if you have to sue your Chinese counter-party in a Chinese court? Even though everyone knows it can be difficult for Chinese companies to get money out of the country and even though the Chinese company could have planned so as to be able to get the money out (which essentially should negate its ability to rely on a force majeure defense), you will be in for a tough fight and you very well might lose.

The real problem with these provisions is that Chinese companies interpret the provision in a way that is completely different from the standard legal interpretation. The standard approach is that the impact of force majeure is: a) the contract is terminated, b) the parties are taken back to their position that prevailed before the contract was executed and c) the party invoking force majeure is liable for the costs of the other party resulting from going back to that pre-contract status. Chinese companies interpret in an entirely different way. In the Chinese interpretation, when the invoke force majeure, they are not obligated in any way BUT the other party is still obligated to perform. That is, if a payment is required but is blocked by the Chinese government, the Chinese side does not have to pay but the foreign side still has to perform. Moreover, any costs incurred by the foreign side are not reimbursed.

This is “force majeure with Chinese characteristics”. The position is not consistent with law and is  completely unacceptable as a commercial matter. But this is always what the Chinese side means when they include a force majeure provision in their contracts. It looks like boiler plate, and most lawyers just ignore the provision. But the real intent is to set a trap for the unwary.  You should not fall into this trap. It is important that you either strike any force majeure provision entirely from your contracts with Chinese companies or — better yet — draft the force majeure clause to include all the provisions required to make it reasonable under standard international commercial law. That is, you have to go beyond a definition of what is or is not force majeure. You must spell out specifically the procedure for invoking force majeure and the result. Those results will depend on the specific nature of the underlying business deal. Note also that most Chinese companies are seeking to use force majeure so that they can escape from the impact of arbitrary actions on the part of their government. Parties should recognize that arbitrary government action is now common in the international trade system. Dealing in a practical way with the impact of those decisions is now an essential component of all trade deals. The old practice of just throwing in a bolier plate standard term will no longer serve a useful purpose.

If you are thinking that you can solve the China force majeure problem by having your contract provide for disputes to be resolved before a court or arbitration panel in your home country, you would probably be wrong. Chinese courts almost never enforce foreign judgments and they also can choose not to enforce foreign arbitration awards on public policy grounds. So even if you choose a foreign court or a foreign arbitration, you will almost certainly need to confront the force majeure issue at some point in a Chinese court.

Bottom Line: Beware of “force majeure with Chinese characteristics”  provisions in your contracts with Chinese companies.

China Company Audit Lawyers

There has been much talk this week about the United States blacklisting Chinese companies that steal IP from doing business in the United States.  Per the Washington Post, the White House (led by China hawk Peter Navarro) has been exploring “the possibility of blacklisting Chinese companies that violate numerous U.S. copyright and patent laws by placing them on the Commerce Department’s ‘entity list’.”

Once on the list the Chinese companies cannot operate in the United States “without obtaining a special license.” The United States already has such an entity list, but it now mostly includes companies that pose a military or terrorist threat to the United States or aids in violating human rights.

Navarro denies he is working on such a list but many sources say that he is. The Washington Post quotes Eric Altbach, a former deputy assistant U.S. Trade Representative focused on China saying that such a list “would put the U.S. government in the position of having to make an assessment of IP claims without a particularly clear process to do it.”

Boy, would it.

My friend Mark Cohen, director of the Berkeley Center for Law and Technology and the blogger behind China IPR has views this plan as “hopelessly stupid,” and he asks “When did Peter Navarro become a federal judge?”

I agree.

As the Washington Post article notes, “in the United States [and in many other countries as well], most patent infringement cases are settled with no one admitting wrongdoing, making it difficult to assess if a firm is a repeat violator or not.”

The WaPo article also writes how “groups like the Information Technology and Innovation Foundation, a think tank, have called for the United States and its allies to at least publish a bad actors list to publicly call out Chinese firms and individuals, even if the list doesn’t have the legal ramifications of being on Commerce’s entity list.”

I think even that could prove troubling and a bit weird, for the following reasons:

  • Not sure it’s the role of the U.S. Government to decide what is a good company and what is a bad company. The role of the U.S. Government is to prosecute and sanction companies that engage in illegal activity and when they do that, what they do is public and that can serve as “the list.”
  • I don’t like the idea of any person or company being publicly tarnished by a government without full due process — essentially either an admission of guilt/liability or a finding of guilt/liability after a fair trial/hearing.
  • What will be the criteria for inclusion on the list? If one U.S. company complains about a Chinese company IP violation will that be enough? Two companies? Three companies? We frequently get comments that mention a “cheating” Chinese company and even requests that we list on our blog all of the Chinese companies we know. We long ago chose not to single out any Chinese company like this unless we have our own independent proof of wrongdoing. Truth is that we have heard from many foreign companies that allege IP theft by Chinese companies when in fact the Chinese company acted perfectly legally and the “theft” occurred because the foreign company just assumed Chinese law would be the same in their home country and so failed to protect themselves. See China: Do Just ONE Thing: Register Your Trademarks AND Your Design Patents, Part 1 and China: Do Just ONE Thing: Register Your Trademarks AND Your Design Patents, Part 2.
  • Pretty much every single Chinese company is an IP risk. Pretty much every single Chinese company will steal your IP if their cost-benefit analysis favors their doing that. In other words, those on the list will likely not be much more of an IP risk than those not on the list. I fear such a list might only create a false sense of security. I oftentimes begin my speeches on “How to Protect Your IP from Chinese Companies” with the following:”If you are doing business with or in China, you need to plan on someone in China making a play for your intellectual property.  It’s not a matter of if, but when. It may be your partner, your distributer, your manufacturer, your sales manager, your top scientist, your supplier, or your customer who seeks to take and then use your IP.  Big Chinese companies steal IP.  Small Chinese companies steal IP.  State owned Chinese companies steal IP.  Privately owned Chinese companies steal IP.  And despite the beliefs of many Americans just starting out in China, Chinese companies with people who speak great English and invite you to their family weddings also steal IP.I am NOT saying that every Chinese company will try to take your IP all the time, but I am saying that if it is in the best interests of a Chinese company to take your IP, it almost certainly will try to do so. (Frankly, I think this is true of most companies in the world, not just in China.) And the Chinese government to a large extent just goes along with this. As recently as 2010, the Chinese Academy of Sciences’ annual report essentially said that because China is not so good at innovating it needs to do what it can to get technology from others. In 2006, China’s Medium and Long-Term Plan for Science and Technology Development stated that if foreign companies want to compete for government contracts they must transfer their IP to their Chinese partners. International outcry eventually led to this policy being cancelled, but so what?  The Chinese government’s desire to see Chinese companies secure foreign technology and its favoritism towards Chinese companies remains.China’s courts are not particularly good venues for pursuing IP theft. They are reluctant to award lost profits (this is true for both domestic and foreign companies) and they tend not to be comfortable with large damages claims.  On top of this, the damages available for IP theft are somewhat limited in that they are usually confined to the amount of lost sales in China, not worldwide.  I remember a big victory for NIKE in an IP case against someone who had been making huge amounts of fake NIKEs. I think the damage award was something like $75,000. It is also extremely difficult to get a Chinese court to order someone to stop using your IP unless and until you prevail at trial. And if you are in a court outside Shanghai or Beijing or a few other cities, you should count on home-town favoritism operating against you.Some of you have no doubt heard that IP protection is getting better in China. And it is. A bit.  But again so what?  You are still at major risk and you have to operate accordingly.  Even if you think I am being too harsh in my assessment of IP in China or even if you think I am just flat out wrong, it still behooves you to at least act as though every Chinese company is a mortal threat to your IP.”

There is one great reason for instituting such a list, but it does not override the problems I list above. It is in many ways a perfect tit-for-tat for China’s new “Company Tracking System” which will give both foreign and domestic Chinese companies based on how well they hew to The Party line. See China’s New Company Tracking System: Comply, Comply, Comply. I fully expect this company tracking system will be unfair, arbitrary and corrupt and maybe the U.S. just threatening to engage in something at least somewhat similar for Chinese companies will moderate China’s company tracking system just a bit, at least as against foreign companies.

What do you think?

China Lawyer

Way back in 2006, in China’s Five Surprises, we did a short post listing out five things that surprise people about China. This post was based on a 2005 paper, called “China’s Five Surprises,” written by Dr. Edward Tse.  Out of the blue, a China lawyer friend of mine sent me a link to that post yesterday with a note saying: “Things were so much simpler and more innocent back then, weren’t they?” Yes, they sure were.

The paper listed the following as the five surprises:

1.  Many Chinese companies are already more than simply low cost competitors and even more of them will compete on quality in the future.

2.  We should expect Chinese companies to become more innovative over time.

3.  China has been able to draw top people from around the world, accelerating business competence.

4.  “Out from Guanxi.” Guanxi is overrated and rapidly declining. “High-quality management and transparent governance structures count more.”

5.  Chinese companies are going overseas.

At the time we had this to say about Dr. Tse’s paper:

This paper does an excellent job discussing where China business is today and where we can expect it to be in the future. Our own experiences cause us to agree with all five of these themes and we have already discussed some of these on our blog, here, here, here and here.  No controversial stand here, but we also agree with Dr. Tse that neither the “China will take over the world” nor the “China will crash and burn” scenarios reflect the reality on the ground in China.

My thoughts on the five today are as follows;

  1. Undisputed today. No longer a surprise.
  2. Undisputed today. No longer a surprise.
  3. Mostly true.
  4. Mostly true, but role of government has not declined and, if anything, has probably increased.
  5. Yes, but they are generally not terribly adept at it.

Your thoughts?

China NDA versus NNN Agreement
Just say no to China NDAs

As we have been writing of late, IP theft is on the rise in China. In Tariffs Against China Increase China IP Problems, we explained why this is the case:

I first wrote about the increase in China IP risks back in August, 2018, in China Trademark Theft. It’s Baaaaaack in a Big Way. Back then I attributed it mostly to China factories “hurting”:

Many (most) Chinese factories are hurting and they desperately want to improve their profit margins. What better way to do so than to sell a product under a prestigious or well-known American brand name — or even just any American brand name? See Your China Factory as Your Toughest Competitor.

I now attribute the increase in China IP thefts/problems to the trade war. Many Chinese companies are hurting and that explains the increase in IP theft, but of course many are hurting because of the trade war. But even beyond that, Chinese companies view foreign companies — especially US and Canadian companies — as looking to leave China, and that is because so many US and Canadian (and many European companies too) are indeed looking to leave China, or at least reduce their footprint there.

In response to so many foreign companies having one foot out the China door, many Chinese companies no longer consider their relationships with foreign companies as long-term. When a Chinese company does not believe its relationship with its foreign company counterpart will be a long term one, its incentives for stealing the foreign company’s IP greatly increases. It does not make economic sense to steal IP worth a million dollars from a company from which you can make $500,000 in yearly profits over the next ten years, but it does make economic sense to steal IP worth a million dollars from a company you believe will be jettisoning you within the next year.

We concluded that post by promising in “subsequent posts . . . [to] lay out what exactly foreign companies should do to protect their IP. Consider this part one of our posts setting out exactly what foreign companies should do (and not do) to protect their IP in China.

I lead this post off with the following amalgamation of a bunch of emails our China IP lawyers received in just the past week.

My name is __________ and I am reaching out to you because I was told you might be able to assist with a situation that just happened to me.  Any advice and recommendation regarding this matter will be much appreciated.

In April I chose a product I wanted to have made in China to sell on Amazon. I reached out to a Chinese manufacturer and I got a sample back. I did not like the product as it was so I developed a few changes that could be done to it to make it better. I realized that at least one of my ideas/changes could be patented so I reached out to a patent lawyer in the United States and I now have a patent pending.

After I filed for my patent I reached back out to the same manufacturer in China and got them to sign the attached NDA. I then gave them my product information and the design for the mold. They told me the mold would be ready in early August but ever since then they just kept telling me that they needed more time. Yesterday, however, they told me that they need a little more time to complete my mold, but in the meantime they wanted to show me their new product. To my surprise the picture of “their” prototype product they sent me has the exact same new features and functions I requested for my mold and my product.

They are now claiming that they started developing the same product with the same features that I requested back in April and that some of their clients placed orders for their product last month with deliveries starting this upcoming week. The only difference between my product and “their” product is the color.

How can they do this after signing the NDA and when I have the patent? Can you help me and what will you charge?

The below is the amalgamated responses from our China intellectual property lawyers:

Thanks for writing. There is not much you/we can do here because the NDA you had this Chinese manufacturer signed is worthless in China. See this: China NNN ≠ Foreign NDA. You might have a trade secrets case in against the manufacturer in a Chinese court but those are usually very difficult cases to prove and win on and that means pursuing such an action will almost certainly be difficult and expensive. We rarely recommend pursuing such cases, but we would be happy to analyze your case to determine whether it might make sense for you to move forward with such a claim. That would involve our gathering up a lot more facts and then working with you in weighing the costs versus the benefits of moving forward with such a claim. Trade secrets cases are virtually always very fact intensive and that is one of the reasons why they are so expensive.

 U.S. patents will protect your product in the United States, but even with a patent the odds are not good that U.S. customs will discover and seize the infringing products and getting products taken off online marketplaces for alleged patent infringement is also not very likely. I urge you to read China and Worldwide: Trademarks Good, Patents Bad where we discuss why patents for companies like yours are not as valuable as so many believe. Also, your U.S. patent is not going to help you in most other countries in which your product will be sold.

If I were you I would consider moving forward with getting your product made elsewhere as quickly as I could and we can help you with that too and making sure that you avoid a repeat of this IP theft in the next country you go to for manufacturing your product. Moving Your Manufacturing Out of China: The Initial Decisions. If you will be looking to move your manufacturing elsewhere, the first thing we will need to look at is whether you can claim ownership in the mold that they claim to have been working on making for you and whether it will even make economic sense to do so. Do you have any agreement with them regarding the mold? Maybe something like what we describe here

Please let me know how you wish to proceed.

Your takeaways from the above should be as follows:

  1. Do not rely on a Western contract to protect your IP from a Chinese company.
  2. NDAs do not work for China. You need a China-Specific NNN Agreement. See China-Specific NNN Agreements Versus a Template Non Disclosure Agreement (NDA).
  3. Patents are sometimes great, but oftentimes they cost way more than other, better, ways to protect your IP from China.
  4. You need to protect your molds by contract as well. See How to Protect Your Molds and Tooling When Manufacturing Overseas, Part 1, Part 2, and Part 3.

Non Disclosure Agreements in China.

It is understandable why so many Western entrepreneurs believe an NDA Agreement will protect them in China; they are simply used to pulling one out for signing just about everywhere in Western world. What you must realize though is that the Chinese legal system is very different from those in the United States, the EU, Australia, Canada and Latin America (and many other places as well) and you just cannot assume that the procedures/standards/analysis/laws that apply in the West will apply equally in China, especially because they rarely do and they certainly do not when it comes to non-disclosure agreements. It is nearly pointless to use a Western-style NDA with Chinese companies and oftentimes using such an NDA is worse than having no contract at all. See Why Your NDA is WORSE Than Nothing for China.

But why?

For oh so many reasons, but most critically for the following two:

1. NDAs normally require the party receiving the confidential information maintain the confidentiality of the trade secrets it receives. This is NOT What You Need for China.

NDA agreements focus on protecting trade secrets. For a trade secret to be protectable property, the information must remain a secret. For this reason, NDA agreements are geared to preventing disclosure of a trade secret to the public. NDAs focus on preventing secret information from being revealed to the public. Since Western companies generally focus on maintaining their domestic intellectual property portfolio, they have a natural tendency to believe they can rely on a single NDA agreement, written in English, subject to the laws of their home country and exclusively enforceable there. But for the following two reasons, this kind of NDA is of no value in China.

First, the fundamental issue in China is not protection from disclosure to the general public. The Chinese company that steals your idea does not do so to reveal it to the general public. It steals your idea to use for its own benefit. This means that your contract with Chinese companies must make clear that whether the information you provide is a secret or not, the Chinese company agrees not to use the information in competition with you. Your primary risk is NOT your Chinese counterparty revealing your confidential information to the public and thereby violating its non-disclosure risks. Your primary risk is your Chinese counterparty using the information you give it to create a similar product or service and then using that similar product or service to COMPETE against you.

The protection you need therefore is not merely protection of confidential information but also, prevention of usage of your confidential information by the Chinese manufacturer to build their own version of your product for sale or to allow an unauthorized third party to do it. Now that you know what is really required for China, you can see why Western-style NDA agreements are far removed from what is needed to protect your IP from China.

2. NDA Agreements are Not Enforceable in China.

The second fundamental problem with typical NDA agreements is that they are not enforceable in China. Chinese law allows for protecting trade secrets and for contracts that provide NNN protections. But if such a contract is going to be effective in China it should be written in Chinese, governed by Chinese law, and exclusively enforceable in a Chinese court. See China NNN Agreements: Do Them Correctly or Walk Away. What you need is something that clearly prevents your Chinese counterparty from using any information you give it (whether it be a trade secret or not), to compete against you. And that something must also be crafted in such a way as to dovetail both with the reality on the ground in China and the reality of China’s courts. What you really need instead of an NDA is an NNN Agreement that works for China and that typically requires — among other things — the following:

  1. Include all necessary parties
  2. Make Chinese law the governing law.
  3. Make Chinese the official language.
  4. Do not choose two official languages. See Dual Language China Contracts: Don’t Get Fooled!
  5. Choose China courts as your jurisdiction (usually).
  6. Do not choose arbitration (usually).
  7. Choose the right Chinese court as your venue.
  8. Protect against subcontractors and related parties.
  9. Include a contract damages provision.
  10. Make sure your contract damages amounts are in line with what Chinese courts will accept.

More specifically, it should provide for all of the below.

NNN Agreements for China

You need a China-centric NNN agreement to protect your IP in China. The three “Ns” that make up a China NNN agreement are: non-use, non-disclosure, and non-circumvention. Consider each in turn.

a. Non-Use

Non-use means your China counterparty agrees not to use your idea or concept or product in a way that competes with you. The key here is that this obligation arises by Chinese contract, not from some abstract property right arising under intellectual property law. A contractual provision prohibiting use will protect you not because your concept is classified as some form of intellectual property such as trademark, copyright, patent, or trade secret. Rather, it will protect you because your Chinese counterparty cannot use your work because if it does so it will be in breach of its contract with you. Getting a Chinese company to sign a contract with a non-use provision means you will not need to look outside that contract for you or for China’s courts to be able to control the Chinese factory.

b. Non-Disclosure

The next “N” in a China NNN agreement is non-disclosure. In most instances, you need not be terribly concerned with your Chinese counterparty making your secrets public because it usually has no interest in letting the general public in on its good thing as it typically wants to use your idea or concept for its own purposes. But as we mentioned above, this is usually all that an NDA can accomplish and it cannot usually even accomplish that in a China context.

If you prohibit a Chinese company from using your protected information, the clever Chinese company will not directly breach the non-use prohibition. It will instead disclose the protected information to someone in its “group” and then deny having breached the non-use prohibition because it did not directly use the protected information. For this reason, it is important to understand the type of group with which you are dealing and to make clear in writing that: 1) disclosure is specifically prohibited within the group and 2) if there is infringement by any member of the group, the company that signed the agreement and made the disclosure will be fully liable, no matter what.

Usually some education on this issue is required because Chinese companies often do not view disclosure to a member of their group as violating a non-disclosure prohibition. The following are some of the common situations our China lawyers see when dealing with Chinese companies:

  • It is common in China for an extended family to own a group of small- to medium-sized companies and for the family to consider all these companies as the same entity for disclosure purposes.
  • Chinese companies typically use a team of constantly changing subcontractors. Some of these subcontractors are part of the family group, some are related by co-ownership, some are viewed as related due only to their roles or even their physical proximity. Chinese companies often will assert that they must disclose your information to these subcontractors to provide a costing for your product or project.
  • Many Chinese companies are part of a large and extensive “group company” arrangement involving numerous subsidiaries owned by a single parent. Members of the group do not see other members as outsiders for disclosure purposes.
  • Chinese state-owned enterprises often do not regard other SOEs as separate competitors. SOEs are all state-owned and so information held by one SOE should be freely shareable with another SOE. This is particularly true in sectors with a public service focus, such as healthcare and aeronautics. Since all SOEs in these sectors are pursuing the public good, there is no reason for them not to share your information with their brother SEOs.

c. Non-Circumvention

Non-circumvention is the third and last “N” and its importance varies with the situation. By way of one common example: Your Chinese factory knows you are purchasing product from it at the China price and then adding a big margin before you sell it in a foreign market. How would you be impacted if your Chinese factory seeks to sell your product to your customers at 50% less than you charge? What if your Chinese factory were to start selling your product to the rest of the world? In industries where quality and service are critical, many of your customers would probably stay with you. But in other industries, this is less likely to be the case. The best way to prevent circumvention by your Chinese supplier is by having a China-appropriate non-circumvention provision in your China NNN Agreement.

Use an NNN Agreement a Chinese Court Will Enforce

a. Draft your NNN for China 

Your NNN agreement usually must be written to be enforceable in a Chinese court with jurisdiction over the Chinese defendant. This means Chinese law should be the governing law, the Chinese language should be the governing language, and exclusive jurisdiction should be in a Chinese court with jurisdiction over your Chinese counterparty. The fundamental reason for this China-focused approach is that you must be able to move quickly against your Chinese counterparty if it breaches its NNN Agreement with you. For the following reasons, any other approach will make the agreement unenforceable or delay enforcement for so long as to render the agreement useless

  • Foreign judgments are generally not enforceable in China. So a provision that provides for jurisdiction in your home country will likely render your NNN agreement unenforceable in China and therefore nearly always useless.
  • Foreign arbitration awards from most countries are technically enforceable in China, but Chinese courts have a poor record of enforcing foreign arbitration awards. Chinese courts are generally of the view that disputes with Chinese companies should be resolved in China. Even if your foreign arbitration award ends up getting enforced in China, the time and the cost of getting to that point will likely be too much.
  • Arbitration in China is subject to delay and uncertain enforcement. Arbitration panels also have no power to seize assets or take other action to force the infringer to cease its infringing conduct.
  • Though Chinese law allows for a foreign law to govern a contract, the Chinese courts will require the parties to prove every element of foreign law. Since interpretation of foreign law is virtually always subject to dispute, this leads to long delays.
  • Though Chinese law technically allows for English as the governing language of a contract, most Chinese courts will not deal with foreign language documents and when they do they will use a translation done by a court appointed translator. Disputes over translation are common, again leading to long delays. This also means you will essentially not know what your own contract says until you see the court’s translation of it.
  • Chinese courts do not allow forum shopping. Litigation must occur in the court with jurisdiction over the defendant, usually the city where the defendant is registered or where it normally conducts business. Any provision that provides for jurisdiction in another court will be ignored and might even void your contract.

b. Draft your NNN Agreement to Convince your Chinese Counter-party not to Breach it.

Your China NNN Agreement must be written so your Chinese counterparty truly fears breaching it. This requires your NNN agreement will have an immediate and negative impact on your Chinese counterparty if it breaches it. The first step to generating this necessary fear is to make your NNN agreement enforceable, as described above. The second step is to ensure that your NNN agreement provides for contract damages in a specific monetary amount for every act of breach.

c. Draft your NNN Agreement with an Appropriate Damages Provision

Contract damages provisions in a China NNN contract provide two main benefits. First, they force the Chinese party to realize it will face real and quantifiable consequences if it breaches the NNN agreement. Second, a specific monetary amount provides for a specific minimum level of damages. This sum certain amount then provides a Chinese court with the basis for a pre-judgment seizure of assets. A credible threat of your seizing your Chinese counterparty’s assets greatly increases the likelihood of that Chinese company abiding by your NNN agreement and of your being able to quickly bring the Chinese company to heel if it does not.

An NNN agreement must include a sum certain contract damage provision that a Chinese court can and will enforce by ordering seizure of the defendant’s assets. Care is required, however, because the Chinese legal system does not allow for punitive damages and it also does not allow for extensive consequential damages. It is therefore important to set the contract damages at an amount that reasonably substitutes for the damages that result from a breach of the agreement. See China Contract Damages Done Right.

Because Chinese companies know that breaching a well drafted China-centered NNN Agreement, will likely lead a Chinese court to order a freeze on their assets, we typically encounter the following three responses from Chinese companies to our NNN agreements:

  1. Some Chinese companies refuse to sign. These are the companies that planned to steal the foreign technology from the very beginning. This sort of situation has in the last few years become incredibly rare.
  2. Some Chinese companies will enter into serious discussion about what they believe should be excluded from the NNN Agreement. Our China lawyers usually view this as a positive because it indicates the Chinese company is taking the NNN Agreement seriously and it often generates productive discussions regarding technical issues.
  3. Most Chinese companies execute the NNN agreement and then treat their NNN obligations seriously. This does not mean every Chinese company will abandon years of bad practice and begin behaving well. But it usually means that when a Chinese company violates the NNN agreement, litigation is not required. In most cases, a reference to the NNN agreement and the credible threat of litigation/asset seizure is enough to induce the Chinese company to step back into line.

d. Draft Your NNN Agreement to Avoid Litigation

The above illustrates the general approach our China lawyers take when drafting any agreement involving China. We do not want to see our clients have to litigate. To reduce the likelihood of you having to go to court it is essential the Chinese side believe it would be relatively easy for you to sue and prevail. China appropriate NNN agreements do exactly that.