China trademark registration

Ron Hesse of recently interviewed Fred Rocafort — one of our firm’s China lawyers — on “Important Tips for Protecting Your IP from China.

Per, the 14 minute interview focused on the following:

• With regards to IP, what are the most serious IP-related risks faced by U.S. and other foreign companies when doing business in China?
• Are there any essential steps that foreign companies must take in order to protect their IP in China?
• Can foreign companies expect fair treatment when dealing with Chinese law enforcement and courts?
• Are any of your recommendations applicable in countries other than China, such as alternative manufacturing destinations in Southeast Asia?

I so loved the description of Fred that I cannot resist repeating much of it below:

About Fred Rocafort:
Fred is an Attorney with HarrisBricken who focuses on international IP, and customs & trade issues.

Fred is a former diplomat who joined Harris Bricken after more than a decade of international legal experience, primarily in China, Vietnam, and Thailand. His wide range of experience includes starting and operating his own business in Asia, working as an in-house counsel for a Hong Kong-based multinational, as well as many years as a State Department official, providing a client-centric perspective to his legal work.

Fred began his career overseas as a U.S. vice-consul in Guangzhou, China, adjudicating thousands of visa applications and advocating for fairer treatment of American companies and citizens in China and for stronger anti-counterfeiting enforcement. After entering the private sector, Fred worked at a Shanghai law firm as a foreign legal advisor and later joined one of the oldest American law firms in China. He also led the legal team at a Hong Kong-based brand protection consultancy, spending most of his time out in the field, protecting clients against counterfeiters and fraudsters from Binh Duong to Buenos Aires.

Fred is an ardent supporter of FC Barcelona—and would be even in the absence of Catalan forebears who immigrated to Puerto Rico in the mid-1800s. An avid explorer of Hong Kong’s countryside, he now spends much of his free time discovering the Pacific Northwest’s natural charms.

The below is Fred’s interview, but to capture all of its tones and nuances, I urge you to go here and give it a full listen.

Ron Hesse: Welcome to the globalauto audio interview series. I’m Ron Hesse and today I’m interviewing Fred Roca forward. Fred is an attorney with Harris Bricken whoo focuses on international IP and customs/trade issues. Today’s topic is important tips for protecting your IP from China. How are you doing Fred?

Fred Rocafort: Good, Ron. It’s a pleasure to be on your podcast. Thanks for having me.

Ron Hesse: You’re welcome. Let’s get started. Let me start off with this Fred, with regards to IP, what are the most serious IP related risks faced by U.S. and other foreign companies when doing business in China?

Fred Rocafort: The first risk is the one I think most people think of right away, which is a potential loss of revenue both from customers who unwittingly buy fake products but also from from those who for whatever reason, find that purchasing a fake is an acceptable compromise. This may be because they’re buying a shirt or shoes and then they’re more most concerned with sending out a particular image, but in other cases it may be a misunderstanding of what the genuine product can achieve as compared to a fake one. So this would be the case perhaps of something like a phone charger. In addition to that, they’re so related to risk the form of brand dilution. If you have too many fakes out in the market, some customers may decide it’s simply not worth paying for the real thing.

They may feel that the fakes out there take away some of the prestige, some of the cachet from the genuine articles. And they think there’s no point in buying the genuine product because people might assume it’s fake. You also have reputational costs. If a user or especially someone unwittingly using a counterfeit product has problems with the quality of the product, if there are any accidents or injuries resulting from the use of the counterfeits, the reputational impact might still fall on the genuine brand, especially if you cannot determine with clarity that it was indeed a fake product. And finally, and there is the risk — which is becoming more severe actually as we enter this new period with China — the risk of industrial espionage.

And of course this sometimes is carried out by commercial rivals who want to a copy products or use them as part of their own development processes. But in the case of China, there is the very real risk that these efforts could be aided by government authorities, for example, in the form of inspections that are going to be taking place there — new cybersecurity measures. So there’s a whole host of risks against which foreign companies must protect themselves. Are there any essential steps foreign companies must to protect their IP in China? Yeah, certainly. The first, and this might seem obvious to some people, but the first step is to register your IP in China. Again, this might seem like something obvious like, well of course if you want to protect your trademark, if you want to protect your patents, you have to register them.

But many would be surprised to discover that many foreign companies fail to register their IP in places like China for example. They might feel that because they’re not planning to to sell in China they do not need to register their IP there. However, in those cases you are exposed to what we call bad faith registrations by people who have nothing to do with your brand. And this can lead to another risk — the risk of detentions and seizures by customs when the products are being exported. If you have not registered a trademark but someone else has, as far as Chinese law is concerned, they [not you] . are the legitimate owner of the IP and your products using that IP can be seized at the Chinese border.. In addition to registering the IP with China’s patent and trade office you should also register your IP registration with China customs.

And then the same way you would do it here in the U.S., it’s essentially a two step approach. You, you have to obtain legal title if you will, but then you also have to inform the enforcement authorities of your problem and your desire to get them to help you out with enforcement. Registration is very important, but it’s just a start. It’s also critical to cooperate with law enforcement and facilitate their efforts, and also with the courts. Again, this might seem like an obvious thing to do, but again it is surprising to see foreign companies fail to cooperate efficiently. They don’t respond to requests, for example, from authorities for assistance with identifying products with to determine if they are in fake or not.

If the seizure figures are low, some foreign companies feel it’s really not worth their trouble to prepare all the documentation. But this is counterproductive. And finally, don’t ignore your own backyard. Basically this means the idea here is to guard against internal risks that may actually be a lot more harmful than external risks. We’re talking about things like, like leakage, whether it’s intentional or whether simply you’re allowing back doors that allow outside parties to come in take your design files or facilitate their own efforts to copy your product to then make a product that competes against yours. So, it’s very important to audit your own facilities and your own suppliers with an eye to makin sure there are no problems contributing to the counterfeiting problem.

Foreign companies expect fair treatment when dealing with Chinese law enforcement and courts. Based on my own experience with China’s courts I can tell you that they regularly handed down judgments in favor of my foreign clients. Perhaps in some instances the damages  were not that spectacular from the point of view of U. S. plaintiffs who are used to more generous awards.

In China, it’s important to be careful when litigating in some of the economically less developed areas where judges might be more sensitive to social pressures and they might be hesitant to impose damage awards, especially when the plaintiff is a large multinational. Obviously political winds can also play a role. In the current environment it’s probably fair to say that at least some Chinese judges would think they would stand to lose if they were to side with a U.S. firm against a, a local defendant. Another thing to remember is that while some parts of China — especially the larger cities like Beijing and Shanghai — have specialized IP courts where the judges feel very comfortable tackling the issues surrounding intellectual property, many areas do not. Judges that deal with very few IP related cases might apply legal reasoning that perhaps works when dealing with a different kind of case, but not with with IP.

Ron Hesse:  Are any of your recommendations applicable in countries other than China such as alternative manufacturing destinations in Southeast Asia?

Fred Rocafort: Definitely. On the one hand, the, the legal IP protection framework in China is more robust really than in places like Vietnam and Cambodia, especially if you’re looking at the protections as they exist on paper. However, one thing we always point out to clients is that that’s not the full picture. You also have to consider the actual likelihood of someone — let’s say your supplier or one of your own employees actually going in and stealing your IP. And you also have to consider things such as the ease of finding another manufacturing facility that will very quickly be able to copy  whatever material, whatever prototypes, whatever designs are brought to them. In this regard, I think it’s fair to say that the IP risks in China are still greater than in places like Southeast Asia.

Fred Rocafort:
All of these tips, all of these recommendations that I provided, by and large apply to all these destinations. Registering your IP is something you need to do no matter where you are and no matter where you are it makes sense to work with local law enforcement. Something that is also true across the board is the need to protect your own facilities. It may be the case that you’re manufacturing in a country that doesn’t have much of a counterfeiting problem. However, if there are weaknesses at your supplier’s facility — if it is possible to get access to your sensitive designs the counterfeiting groups will figure out a way to get access to that. Right? I mean, if it’s easier for them to go to another country and work with employees there to support a counterfeiting operation, they’ll do it. Crime nowadays is international. Criminal groups are perhaps some of the most adept organizations when it comes to working across borders. So pretty much everything that you’d be doing in China to protect your IP, you should be doing in other countries that are becoming popular manufacturing destinations.

Ron Hesse: Excellent points. Thank you for your great insight, Fred. And that concludes today’s audio interview. Everyone have a wonderful day.

China data privacy lawyers
Photo by Candida.Performa

Our China data privacy lawyers  have been getting a steady stream of questions regarding our recent post, China’s New Cybersecurity Program: NO Place to Hide, regarding the Chinese government’s rolling out a new system for monitoring company data.

These questions are coming from our readers, our clients and the media. Most are seeking answers to the following two questions:

  1. In the post, I referred to a “roll-out” of this new monitoring system on December 1, 2019 and people what to know exactly what will be rolled-out.
  2. In the post I stated that the PRC government will have access to and be able to take whatever information it wants. We are being asked whether I say this based on written Chinese law or on my on the ground experience with China.

This post answers both questions.

First, the “program” that will be rolling is the Cybersecurity Multi-level Protection Scheme (“MLPS 2.0”) and that is set to come into effect on December 1, 2019. This scheme sets out the technical and organizational controls all companies and individuals in China must follow to comply with MLPS-related Internet security obligations mandated by China’s Cybersecurity Law. All companies and individuals must abide by the following three standards:

  1. GB/T 22239 – 2019 Information Security Technology – Baseline for Multi-level Protection Scheme
  2. GB/T 25070 – 2019 Information Security Technology – Technical Requirements of Security Design for Multi-level Protection Scheme.
  3. GB/T 28448 – 2019 Information Security Technology – Evaluation Requirements for Multi-level Protection Scheme.

The Chinese language versions of these standards can be found here; we are not aware of any English language translation of these standards.

My personal file on the laws and regulations relating to the MLPS 2.0 system consists of 800+ pages of very technical Chinese. But even this vast documentation is not sufficient to fully understand the function of the system. To fully understand, one must also consider the objectives of other key Chinese government planning documents, such as the national artificial intelligence program, the Internet+ program, the social credit system for individuals and businesses (See China’s New Company Tracking System: Comply, Comply, Comply), and various other network/Internet/data gathering and surveillance programs being implemented in China.

When one examines all of these various different programs together, it becomes apparent that the MLPS 2.0 system is the “hardware” component of a comprehensive data gathering, surveillance and control program. China’s plan is to create a system that covers every form of network activity in China: Internet, mobile phone, WeChat type social networks, cloud systems, domestic and international email. China’s goal is not to create a commercial system where individual players can participate and make money. It’s goals are surveillance and control by the PRC government and the CCP.

To achieve those goals China is creating a system to achieve two ultimately contradictory objectives: the system will be closed against intrusion by “bad actors” (foreigners and internal dissidents), but completely transparent to the Ministry of Public Security and other internet security agencies of the PRC government and the CCP. Transparency to the Ministry of Public Security means what it says: No technology that blocks access by the Ministry of Public Security is permitted. No VPN, no encryption, no private servers. If the Ministry of Public Security is required to install back doors or other message/data interception devices or systems to achieve full access, then China Telecom and Chinese based ISPs are required to comply. But because providing open access to the Ministry of Public Security directly conflicts with the goal of hardened security from intrusion, how to mediate between these conflicting goals is chief reason for the length and complexity of the MLPS 2.0 standards.

Second, the legal basis for allowing China’s Ministry of Public Security to access networks and data comes from a regulation not included within the MLPS 2.0 standards. As I noted above, full understanding requires pulling together all the applicable regulations. This is just one example of this. The written regulations that give the Ministry of Public Security the right to just “take it” are the Regulation on Internet Security Supervision and Inspection by Public Security Organs (公安机关互联网安全监督检查规定). This regulation was promulgated on September 15, 2018 and came into effect on November 1, 2018. My references to this regulation below are to the articles of the Chinese language version published by the Chinese government. It is important to base comments on the Regulation to what was actually adopted, not to earlier discussion drafts containing provisions that were not adopted.

As a preliminary issue, a key matter confirmed by the Regulation on Internet Security Supervision and Inspection by Public Security Organs is that the Ministry of Public Security has lead authority to take on the front line enforcement duties related to the Internet and to network security in China. This means that MIIT (China Telecom), CAC, CNNIC and the alphabet soup of other Chinese agencies that sought a role in cybersecurity administration have been pushed aside in favor of the Ministry of Public Security. This means enforcement will be handled by the police rather than by local bureaucrats. This decision on enforcement has real meaning for foreign companies doing business in China and for its foreign employees who live and work there. When a Chinese bureaucrat shows up to your door asking for information, you can perhaps send that bureaucrat on his or her way. But when two or more uniformed police officer show up at your door, you pretty much have no option but to comply.

The Regulation on Internet Security Supervision and Inspection by Public Security Organs provides for two levels of inspection of networked servers: on-site inspection and offline, remote access. See Article 13. When an on-site inspection is conducted, a minimum of two local police officers must be present. See Article 14. The police officers will be accompanied by local government agency staff who are charged with Internet security. If local government agency staff are not sufficient, the Ministry of Public Security may employ independent contractors to do the work.

The inspection team has complete access to the network system. Inspection can cover both the technical aspects of the network system and the  data/information maintained on the servers. See Article 10. The inspectors can fully access the system and they are permitted to copy any data they find. See Article 15. The only restriction on the inspectors copying the data in your company’s system is that the inspectors must provide you with a receipt. Though Article 10 “restricts” access to matters involving national security, the definition of national security in China is so broad that there is no real limitation on what can be accessed, copied and removed.

In cases where the Ministry of Public Security determines there is an Internet security issue, it has the right to perform a remote access inspection. the scope of which is set out in Article 10. Prior notice of remote access is required. There are two issues related to such notice: First, the purpose of the notice is not to protect the rights of the party being inspected. Rather, the purpose of the notice is to ensure that the server has been completely opened to access by the Ministry of Public Security. Second, for servers maintained by a cloud provider, it is not clear whether notice goes only to the cloud provided or to both the cloud provider and the customer of the cloud provider as. That is, it is not clear whether the cloud customer will ever receive notice that its server and data were viewed and copied by the Ministry of Public Security. Time will tell on this, but my guess is that the cloud customer will never know unless its cloud provider tells them.

This off site access rule is awkward to manage. The structure of the MLPS 2.0 standards suggest that the Ministry of Public Security plans to work with cloud providers and Managed Service Providers to get them to install systems that will allow the Ministry of Public Security easy off site access at any time, without need to go through an incident by incident prior notice then access procedure. However, this type of constant access system is not contemplated by the Regulation. However, even if the Regulation on Internet Security Supervision and Inspection by Public Security Organs is strictly followed there is no getting around the fact that it provides for China’s Ministry of Public Security to have essentially unfettered access to all servers and data. Referring to this as “cybersecurity” is fundamentally misleading. As the Regulation itself states, this is regime for inspecting and controlling by the Chinese government. It really has nothing to do with cybersecurity as normally considered in the open Internet world.

The key issue then becomes what happens to the data collected by China’s Ministry of Public Security? Your company’s data, for instance. The Ministry is permitted to copy and remove virtually any information or data it finds on the servers it inspects. What about the confidentiality of that information? Article 5 of the Regulation on Internet Security Supervision and Inspection by Public Security Organs addresses this issue : “The personal information, privacy, trade secrets and state secrets that the public security organs and their staff members are aware of in the fulfillment of the duties of Internet security supervision and inspection shall be strictly kept confidential and shall not be disclosed, sold or illegally provided for others.” This provision must be read carefully because it provides for “confidentiality with Chinese characteristics”.

The key point is that the term “others” does not include any agency of the Chinese government or of the CCP. In other words, it does not include universities and other research centers operated or controlled by the Chinese government. It also does not include the Chinese military or Chinese arms manufacturers. It also does not include China’s State Owned Entities (SOEs). Though not clear, the term “others” also probably does not include nominally private entities controlled by the Chinese. See e.g., Huawei.

So again, what does this confidentiality provision mean? As applied in China, the confidentiality rule of Article 5 is intended to prevent Ministry of Public Security officers from doing two things: selling data to Chinese or foreign companies for personal profit and two, disclosing data to foreign agents (spies). This rule is not intended to prevent the Ministry from sharing the data it collects with the insiders described above. In fact, such sharing is mandated as part of the data needs of the entire Chinese government and the CCP. The Ministry of Public Security is not permitted to hoard the data; it is required to spread it around.

This result then leads to the key issue. Confidential information housed on any server located in China is subject to being viewed and copied by China’s Ministry of Public Security and that information then becomes open to access by the entire PRC government system. But the PRC government is the shareholder of the State Owned Entities (SOEs) which are the key industries in China. The PRC government also essentially controls the key private companies in China such as Huawei and ZTE and more recently Alibaba and Tencent and many others. See China is sending government officials into companies like Alibaba and Geely and China to place government officials inside 100 private companies, including Alibaba. The PRC government also either owns or controls China’s entire arms industry.

Simply put, the data the Ministry of Public Security obtains from foreign companies will be available to the key competitors of foreign businesses, to the Chinese government controlled and private R&D system, and to the Chinese arms industry and military.

The negative consequences of this should be obvious. But the critical issue is that the consequences go far beyond just the commercial impact. China’s new Systems will become a matter of national security for the U.S. and other governments. This then sets up a conflict that private companies will not be able to avoid. Do they make their data available to China’s Ministry of Public Security as required by Chinese law or do they keep that data from the Ministry (and in turn the Chinese Military) as required under the laws of their home country? In other words, do they simply stop using or providing data to their China operations?

The final result will be that as far as China is concerned, “free trade” in the critical areas of technology will end up being severely curtailed. Welcome to the New Normal.

China employment lawyer

As we enter the final quarter of the year, I was thinking it would make sense to provide a brief summary of the China employment law trends our China employment lawyers are seeing.

We have seen a significant rise in employee terminations by foreign companies in China. This increase in employee terminations has mostly stemmed from employee layoffs and not from any huge rise in the number of terminations because of employee wrongdoing. This increase in employee terminations has included both what I call “true terminations” and contract non-renewals. Most of these terminations are because the foreign company is downsizing or because their China footprint has changed and the employee no longer fits.

Perhaps most importantly, we are seeing a massive increase in problems arising from terminations. Instead of fairly smooth mutual terminations where the employee somewhat amicably agrees to accept a lump sum payment we are seeing a ton of drawn out and contentious employee termination negotiations. The primary reason for this change in the nature of China employee terminations is the change in China’s job market. With China’s job market not thriving as it did in the past, employees are fighting hard for better severance packages or to even to keep their jobs. In the past, most terminated Chinese employees were eager just to get what they could so they could quickly move on to a “better” job. With better jobs difficult to find these days, terminated Chinese employees are a lot more willing to hunker down for long fights. Chinese employees are a lot more willing today than even a year ago to threaten and follow through with legal actions. Our China employment lawyers have gotten more calls this year about actual complaints/labor arbitration cases filed with the authorities than in the previous three years combined. For these reasons, having the right strategy before approaching an employee about termination is more critical than ever.

On the preventive (i.e., employment-related document drafting) front, we have seen more employers taking a more proactive approach to preventing employee disputes. In other words, they are recognizing that things in China have changed and the need to get “out in front” of employee problems has become more important. In concrete terms, this has meant that more foreign employers are coming to us very early on to make sure they have the right set of employment documents before they onboard any new employee. This is obviously good news for my firm’s China employment team and we have drafted more China-centric employment contracts already this year than in any year previously.

We are also experiencing a much greater demand from employers for assistance in making sure their China employer rules and regulations (often referred to as employee handbook/manual) not only fully comply with China’s national and local employer laws but also address the real issues/questions/problems specific to their business in China. I recently attended an employment law seminar where one of the speakers said that when her state first rolled out new family and medical leave laws she thought she could create a nice “one-size-fits-all” policy document she could offer her clients for a flat fee. But she soon came to realize that would not work because each company’s situation, programs, policies, and needs are so different that each company’s family and medical leave policy needs to vary as well, though of course still remaining within the law. The same is even more true for China employee handbooks because in addition to every company having different cultures, programs, policies and rules, the employment laws and practices in China vary by locale. When it comes to China employment law, there is nothing more important than having your employment documents (starting with your employment contracts and your rules and regulations) be appropriate and enforceable and workable for every single location in China in which you have an employee.

Last and certainly not least, we have been conducting China employer audits pretty much non-stop this year as foreign companies strive to stay in full compliance with China’s employment laws and seek to prevent and tamper employee problems. See Why NOW is the Time to Comply with China’s Employment Laws.

China is getting a lot tougher on how foreign companies (especially American companies) in China treat their employees and at the same time our work as China employment lawyers is getting tougher but more rewarding as we work to prevent and resolve our clients’ employment matters. See China’s New Company Tracking System: Comply, Comply, Comply.

Want to learn more about China’s employment laws and how you can prevent China employment law problems? Tune in on Tuesday, October 22 for my webinar.

international law

This is the twentieth episode in our ongoing Saturday series on eight+ things to read about China and a lot more. We constantly get emails from readers asking what to read on China and all sorts of things related and even barely related to China and this series is intended to constantly and consistently answer these questions.

As we said in our initial post on this, our plan is to list out eight (or so) articles we benefitted from reading and think you our readers would also benefit from reading, along with a very brief explanation as to why the particular article was included. More specifically:

The articles will likely include many on China and on Asia and a few on international trade, international politics, Spain and Latin America, economics and really just anything else we believe might benefit our readers or even that we just want people to read. We do not plan to choose articles that push our or any other political agenda or any other agenda for that matter, but having said that, we are not objective and our views may creep through. Our goal though is to focus on articles that are important or helpful or — most importantly — that make you think. Our posting of an article will NOT mean we agree with all of it or even any of it. Most of the articles will be from the week preceding the post but we will also sometimes throw in older articles (classics if you will) as well.

Please do not hesitate to comment at the end of this or any other post. We cannot tell you how much we appreciate your comments, good, bad and indifferent.

Here we go, in absolutely no particular order.

1.  A Mysterious Pencil Factory Sharpens Focus On Tariff Scams. NPR. Because tariff abuse is incredibly rampant in large part because many do not realize that it can and does lead to jail time. Because our international trade lawyers worked on a case that led to a $62.5 million settlement against a subsidiary of Univar for allegedly “mishandling” the location from which it was getting its saccharin. Because there are going to be a ton more of these cases in the next few years and companies need to know that skirting U.S. tariffs is a bad idea. Because there is money to be made by reporting your competitors for illegal transshipping. See How To Get Rich From Your Competitor’s Illegal Transshipping: Moiety and the False Claims Act

2. An acclaimed French chef is suing over a lost Michelin star. It all started with a cheesy allegation. Washington Post. Because we live in the age of ranking services. Because the validity of nearly all ranking services are overrated but because of that, they can matter for your business. Because I spent two years of my life living in France (Aix-en- Provence and in Tours) I totally grasp how unbelievably insulting it is to be accused of having used cheddar cheese in a soufflé. Quelle horreur!

3. All-Time Player Rankings: NBA’s Top 50 Revealed. Bleacher Report. Because for a large chunk of my life, basketball was everything. Because with the exception of relegating Pistol Pete Maravich to an honorable mention and not ranking Elgin Baylor high enough it does a pretty good job.

4. Harvesting organs to serve a thriving global market. Quartz. Because where there is constant smoke there is nearly always fire. Because the world needs to know.

5. Nasdaq cracks down on IPOs of Chinese companies. Because even though President Trump has said he is backing down from blocking Americans from investing in Chinese companies it is going to get increasingly tougher for Chinese companies to list on U.S. stock exchanges or even to remain listed.

6. Mapped: The World’s Largest Exporters. Virtual Capitalist. Because the graphic is way cool and super revealing. Because the only countries to export more than 500 billion dollars in product a year are the China ($2.5 trillion), the United States ($1.7 trillion), Germany ($1.6 trillion), Japan ($738 billion) The Netherlands $723 billion, South Korea ($605 billion,  and Italy $547 billion). Oh, and Hong Kong shows up at $569 billion, but much of that is really from the PRC. I am shocked Germany is so close to the U.S., that Italy is so high and that India is so low (at $326 billion). I am delighted Spain shows up so high at $345 billion because we have offices there and because a bunch of our lawyers will be speaking in both Madrid and Barcelona in early November.

7. Chinese citizens must pass a facial-recognition test to use the internet as part of Beijing’s social credit system. Daily Mail. Because nothing need even be said about this.

8. Five Charts That Will Change The Way You Think About Racial Inequality. Forbes. Because “most Americans assume the wealth gap between white and black families with post-graduate educations is virtually negligible. The truth is that black families with post-graduate degrees are still only worth about 30 cents to every white families’ dollar.” Because most Americans believe that racism has pretty much ended and then completely ignore that holding people back for hundreds of years does not immediately mean they are at the same starting line as everyone else. Because if you truly look at these charts it likely will change how you think about racial inequality.

9. Goldman Says Up to $4 Billion Moved From Hong Kong to Singapore Amid Unrest. Bloomberg. Because there are still some people who insist Hong Kong will be just fine. Because my law firm’s immigration lawyers are seeing an increase in all sorts of people fleeing Hong Kong for the United States and the EU.

10. Zika Was Soaring Across Cuba. Few Outside the Country Knew. New York Times. Because it shows a government’s ability to keep things quiet. Because I went to Cuba with my family while Zika was raging instead of Oaxaca because I was concerned about my two daughters.

11. Why Chinese and U.S. Stakeholders Should Listen Carefully to What PLO Lumumba Has to Say. The China/Africa Project. Because Lumumba does have a lot to say and for many who fail to listen it will be at their peril. Because whatever China giveth with the one hand as part of its Belt and Road Initiative, it taketh with the other hand. See, e.g. It Doesn’t Matter if Ecuador Can Afford This Dam, China Still Gets Paid.

12. The teenager married too many times to count. BBC. Because sex trafficking is bad enough, but when done by religious clerics to children as young as nine years old and all the while justifying it on religious grounds, it seems even more horrible.

Please share any of your thoughts on the above as a comment below.

Doing Business in China
On Tuesday, October 8, from 11:30 a.m. to 2:00 p.m. at the Fluno Center in Madison, Wisconsin, the Madison International Trade Association will be putting on an event focused on “setting up a successful business in China.” The event is entitled Top Tips & Tactics for Setting up a Successful Business in China and you can find out more about it here.
I like how it describes doing business in China: “Establishing business in China, whether for import, export or production is incredibly complex. No other market holds as much potential or risk.”

This event is intended for those “looking for best practices on expanding your business in China” or who “want to be inspired by successful turn-around stories from professionals who have overcome the challenges China poses and later found success.”  It’s goal is to “guide you on how to develop a market entry and expansion strategy that will set you up for success: and it is intended for “CEO’s/Presidents, Owners, Chief Legal Officers, Business Development Executives, VP and Directors of Sales.”

I will be one of the two speakers. Tom Hack, an international marketing consultent for Wisconsin Ginseng will also be speaking.

Though I have spoken countless times on how to go into China, this will be my first such speech since China has done the following:
  1. Instituted a company tracking system that applies to foreign companies. See China’s New Company Tracking System: Comply, Comply, Comply.
  2. Announced a draconiana cybersecurity program that essentially gives the Chinese government access to foreign company servers and data. See China’s New Cybersecurity Program: NO Place to Hide.
  3. Started cracking down on foreign companies and individuals in ways not seen for the last 30 years and created all sorts of new risks for foreign companies in China. See The Top 14 China Wild Cards/Future Risks.
My old speech on the choices between a WFOE or a Joint Venture will not cut it and I will not give it.
Instead, my speech will consist of my proposing one overarching and surprising and controversial tip. Join us in Madison if you want to hear what that is. I hope to see you there.

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

Earlier this week, In China’s New Cybersecurity Program: NO Place to Hide, we wrote about how China would soon be rolling out a new cybersecurity regime which would effectively give the Chinese government to pretty much all of your company’s data. This post followed on the heels of our post on China’s new company tracking system, entitled,  China’s New Company Tracking System: Comply, Comply, Comply. These two posts have led to our China data privacy lawyers receiving a whole hosts of questions from readers, clients and the media, mostly focusing on whether things will necessarily become “that bad in China” to requests for additional legal background, to asking whether it makes sense for foreign companies to do business at all in China anymore.

The quick answers are that things will probably be “that bad” for data protection in China, yet it will still make sense for most foreign companies to continue doing business in China and on Sunday we will be coming out with a new post further explaining the new laws. in other words, you be sure to stay tuned.

International arbitration lawyers

This is Part 4 of this series on how to sue a China company. Part 1, How to Sue a Chinese Company: The 101,  was on how to effect service of process on a Chinese company under the Hague Convention Service of Process rules and on the jurisdictional issues involved in suing a Chinese company. Part 2 dealt with conducting discovery (or not) against a Chinese company you have sued outside China — mostly in the United States. Part 3 discussed litigation strategies against Chinese companies and how to enforce a foreign judgment against them — again, mostly in the United States. This Part 4 is on how to sue Chinese companies in Chinese courts and in arbitration. We are writing this series on suing Chinese companies now because our international litigation and arbitration lawyers have seen a massive uptick in disputes between foreign and Chinese companies and both the China-based litigators and international litigators with whom we talk are seeing the same thing.

Arbitration in the United States. China is a signatory to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. This means that its courts generally enforce foreign arbitral awards from recognized foreign arbitral bodies. However Chinese courts (like courts all over the world), however, are considerably less likely to enforce foreign arbitral awards obtained by default. Default arbitration awards typically occur when the arbitration panel issues an award against a party that has failed to show up for the arbitration. Chinese companies know that their courts are reluctant to enforce arbitration awards against a Chinese company that fails to show up for a foreign arbitration and so it is not uncommon for them to fail to show up for a foreign arbitration and then argue against the foreign arbitration award being enforced on the grounds that they never got notice of the underlying arbitration and/or that the method they were given notice was not proper.

Chinese courts also sometimes stall foreign arbitration award cases for years as a way to avoid enforcement while making their enforcement numbers look better than they really are. You will find this most likely to be true of your arbitration award if the Chinese courts consider your award to be inequitable or if it is against a powerful company in a small town.

So yes, Chinese courts are required by international treaty to enforce arbitration awards but getting that done is not 100%.

In addition to a general reluctance (perhaps distate would be a better word) to defer to foreign arbitral bodies, China’s signing of the New York Convention on arbitration was limited to enforcing only the awards from another contracting state that result from commercial legal relationships considered commercial under Chinese law.

In addition to having signed the New York Convention on arbitration, China has the following separate agreements regarding the enforcement of Hong Kong, Macau and Taiwan arbitration awards:

  • SPC Arrangement on the Mutual Enforcement of Arbitral Awards by the Mainland and the Hong Kong Special Administrative Region.
  • SPC Arrangement on the Mutual Acknowledgement and Enforcement of Arbitral Awards by the Mainland and the Macau Special Administrative Region.
  • SPC Directives on the Enforcement of Arbitral Awards Rendered in Taiwan Region. This directive is relatively new, having come out in 2015.

Procedure for Enforcing a New York Convention Arbitration Award. If you prevail against a Chinese party in a New York Convention arbitration outside China, you generally should go to the appropriate Chinese Intermediate Court (usually the one in the location where your defendant resides) and submit the following to that court:

  • A written application requesting it enforce your award by converting it to a court judgment.
  • An apostilled and consularized original of your arbitration award.See China Notarizations, Legalizations, Consularizations, Apostilles, and Powers of Attorney, Oh My.
  • The original agreement that contains the arbitration provision that allowed you to pursue your claim in arbitration. This too should be apostilled and consularized.
  • Chinese translations of the above documents and whatever else you will be submitting.

The Chinese court can deny your request to enforce your foreign arbitration award against the Chinese company on the following grounds:

  • Lack of a valid arbitration agreement.
  • The Chinese company was not served with the arbitral proceeding or given notice of its opportunity to appoint an arbitrator, or it did not have the opportunity to present a case for reasons not of its own making.
  • The arbitral tribunal or the conduct of the arbitral procedure was not in line with the arbitration rules.
  • The matter that was arbitrated was not arbitrable or was outside the scope of the arbitration agreement.
  • Enforcing the arbitration award would be contrary to China’s social and public interests.

If you think some of the above provisions are vague or broad enough for a Chinese court to drive a proverbial truck through, you would be right. In real life, if a Chinese court does not want to enforce your arbitration award it will nearly always be able to come up with good grounds for not doing so. In terms of how often this happens, we have seen and heard various different statistics, but generally it would be fair to say that with the typical award, your chances of getting a foreign arbitration enforced is upwards of 90 percent and some of that ten percent is no doubt due to foreign companies that simply failed to follow all of the rules.

Arbitration in China. China has some legitimate arbitral bodies, with the China International Economic Arbitration Commission (CIETAC) and the Beijing Arbitration Commission probably being the most prominent and reputable. See Arbitration in China: It’s Just Fine, Thank You and CIETAC Arbitrations: U.S. Companies Can Win. China’s arbitral bodies tend to allow little to no discovery and they oftentimes do not even allow live testimony. Even if live testimony is allowed, you should expect your case to be won or lost on the documents.

If your contract with your Chinese counter-party is going to call for arbitrating disputes in China, it will typically make sense for you to provide for English language arbitration and as many foreign arbitrators as your Chinese counter-party will accept. In part 5 of this series we will go into the weeds in discussing dispute resolution clauses for your contracts with Chinese companies.

Suing in a China Court. If suing a Chinese company in the United States does not make sense (see Part 3 as to why it usually does not), pursuing litigation in China may. Though China’s court system is very different from that to which American lawyers are accustomed, it is more navigable than many American lawyers believe it to be. Foreign companies can and do win cases against Chinese companies in Chinese courts. Before suing in a Chinese court, though, it is important to understand some basics about its court system.

First, though Chinese courts will enforce the law prescribed in a contract, Chinese judges place more emphasis on the overall context and “fairness” of the case and much less on legal technicalities than their American counterparts. For example, if an incompetent or uncaring low-level employee causes a company to violate its contract, a U.S. court would almost certainly hold the company liable for all damages arising from the breach. A Chinese court, on the other hand, might either not find liability at all or severely limit the damages, believing it unfair to penalize a company for the incompetence of one employee.

Second, Chinese courts do not typically allow for any discovery. Companies suing in China without a strong case at the outset seldom prevail. This also means that you should have your proof ready to go before you sue, especially since the time from filing to trial is usually less than a year.

Third, Chinese courts base their rulings almost exclusively on documentary evidence, not testimony. So as we said about arbitration in China, you should be prepared to win or lose your case based on the documents. What this also means is that you need to have your documents ready before you sue or if sued, you had better get your documents ready as soon as possible. This is critical because oftentimes “having your documents ready” means that they have been apostilled somewhere outside China and then consularized by the appropriate Chinese Consulate or Embassy.

We cannot stress enough the need to move quickly to get your documents apostilled and consularized for a Chinese trial. Twice in the last year, American companies have called one of our international litigation lawyers asking how they could appeal Chinese lawsuits they lost because — in their own words — they were not able to get critical documents documents apostilled and consularized soon enough to be admitted into evidence by the Chinese court for the trial. Losing at the lower court level and then appealing with the argument that you were unfairly blocked from getting your documents into evidence at the lower court is generally not a good way to go. If you are planning to sue in a Chinese court (or even arbitration) or have just been sued, you should immediately start getting your documents ready for trial .

Fourth, settlement is rare in Chinese business litigation matters. The cost of litigating in China is typically much lower than in the United States, and once a complaint has been filed, settling a case is often viewed as losing face. The Chinese company you are suing may prefer to lose the case and blame it on the judge than to settle and be viewed by its employees and its customers as having been at fault.

Fifth, Chinese courts rarely issue large damage awards, no matter the case and no matter the plaintiff. Chinese companies generally operate at low margins and Chinese courts are loath to badly harm a functioning business or to cause layoffs. In particular, Chinese judges are hesitant to award damages for lost profits or for pain and suffering. Chinese courts simply do not award the sort of damages available in a U.S. court. This is one of the reasons why we so often put liquidated damages provisions into our China contracts. See How To Write A China Contract. Liquidated Damages.

Sixth, though the ability to collect on judgments in China is improving, it is still not near the level of the United States. Chinese courts often lack the authority and fail to receive the assistance from other law enforcement agencies necessary to enforce collection on their judgments. In addition, Chinese companies sometimes find it more cost effective to avoid a judgment by shutting down and re‐opening under a new name. In other words, just as is true in the United States, you should consider the collectability of your judgment before you sue in China, only more so.

International litigation lawyersThis series of posts addresses how to sue a Chinese company that owes you money or has wronged you. Part 1, How to Sue a Chinese Company: The 101,  was on how to effect service of process on a Chinese company under the Hague Convention Service of Process rules and on the jurisdictional issues involved in suing a Chinese company. Part 2 dealt with conducting discovery (or not) against a Chinese company you have sued outside China — mostly in the United States. This third post in the series discusses litigation strategies against Chinese companies and how to enforce a foreign judgment against them — again, mostly in the United States. We are writing this series on suing Chinese companies now because our international litigation and arbitration lawyers have seen a massive uptick in disputes between foreign and Chinese companies and both the China-based litigators and international litigators with whom we talk are seeing the very same thing.

Litigation Strategies. U.S. companies hold many advantages over Chinese companies in U.S. litigation. American jurors generally view Chinese companies unfavorably and that is even truer today than five years ago. See U.S. Views of China Turn Sharply Negative Amid Trade Tensions.

Chinese companies frequently try to skirt U.S. discovery rules and bringing this to the court’s attention often can cost the Chinese company credibility or force it to incur sanctions. Perhaps most importantly, Chinese companies generally underestimate the importance of U.S. trial court decisions, often holding back on vigorously defending a lawsuit until appeal. From Chinese Companies Court Disaster:

Appeals in China are usually de novo, meaning that if a trial court judge disagrees with your version of the facts, you can make another attempt to tell your side of the story at the appellate level. But in the U.S., appeals courts take as a given the trial court’s findings of fact and will hear only disputes about the trial judge’s interpretation of legal questions. This means that in America you rarely get more than one chance to put forth your version of the facts, so you had better do it right the first time. In China the fight often begins only once a case hits the appeals court.

Just yesterday, a Chinese lawyer friend of mine explained another reason why Chinese companies tend to ignore U.S. discovery rules and even U.S. court orders: “they are used to getting away with ignoring the rules in China and the Chinese courts are simply not all that powerful.”

Foreign Court Judgments In China. U.S. judgments have virtually no value in China. There is no treaty nor any reciprocal arrangement between China and the United States regarding recognition or enforcement of civil judgments. For these reasons, Chinese courts will nearly always disregard U.S. judgments. See China Enforces United States Judgment: This Changes Pretty Much Nothing. Note though that this is not necessarily true of all country’s judgments, especially those from the approximately 40 countries that have a treaty with China for the mutual enforcement of court judgments. China also generally enforces court judgments on a reciprocal basis from countries that clearly enforce Chinese court judgments.

The Logistics of Enforcing Your Foreign Court Judgment in China. If you have a court judgment from a country that will be enforced in China, your application for enforcement of that foreign judgment in a Chinese court must include the following documents, all in or translated into Chinese:

  • A written application for enforcement.
  • Your identification certificate or business registration certificate . If your company is a foreign business you must must also produce the ID certificates of your authorised representative or primary responsible person.
  • A power of attorney.
  • An original copy of the foreign judgment or ruling or its certified duplicate and its translation into Chinese.
  • For default judgments, a certificate that the party that failed to show up at the hearing/trial was legally summoned to the hearing
  • Chinese courts accept only certified translations and most Chinese courts have a list of the translation agencies whose certified translations they accepts.

    As is generally true regarding the submission of all foreign documents to a Chinese court, the judgment or ruling along with the proof of the legal summons must be notarized by a local notary and then apostilled in the foreign country where the relevant documents were generated and then certified by the correct Chinese consulate or the Chinese embassy in that country. See China Notarizations, Legalizations, Consularizations, Apostilles, and Powers of Attorney, Oh My.

    If the Chinese company you are suing has assets in the United States or in another country that generally enforces U.S. judgments (such as the United Kingdom, Taiwan, Canada, or South Korea), suing in a U.S. court may be the best way to proceed. Otherwise, your judgment from a U.S. court may end up being of little to no use. I cannot tell you how many times our international litigation attorneys have had to tell a fellow U.S. attorney that the time and money they spent in getting their U.S. judgment will likely be for naught because it cannot be enforced in China. See Enforcing US Judgments in China. Not Yet.

    Our next post in this series will be on suing Chinese companies in Chinese courts and in arbitration.

    Internationnal Manufacturing LawyerAt least once a month someone will tell one of our China manufacturing lawyers that they don’t need a China-centric contract with their China-based manufacturer because their China-based manufacturer is owned by an American or a European company. To which we always say, “no it isn’t.”

    How do we know this? Because no American or European or Australian company (or any other non-Chinese company) can own a Chinese factory directly. It is possible for an American or European or Australian company to own a Chinese company (a WFOE maybe or a China Joint Venture) that in turn owns a Chinese factory, but the odds of this are really slim. I don’t believe any of our China lawyers have ever encountered a foreign company that owns a Chinese company that owns a Chinese factory that does contract manufacturing for third party companies. Something like this is possible, but it is extremely rare.

    So what does it mean when a foreign company claims to own the Chinese factory from which it is trying to get you to place your orders? This pretty much can mean one of the following two things:

    1. The foreign company that claims to own a Chinese factory is flat out lying. It is amazing how often our China manufacturing attorneys see this and when I say “see this” I mean the foreign company puts in writing “that your products will be made by factories we own in China.” If you see this, you probably should run away. Or maybe you stay and if you ever have a problem you sue the foreign company for misrepresentation. Our international litigators have done that and gotten some pretty large settlements.

    2. The foreign company is fudging the truth. A lot. This occurs when the foreign company speaks of having your products made by “our factories” in China. If you push them on what they mean by “our factories,” they will usually state that these are factories with which they have worked for many years and know well and trust.

    Why though does any of this matter? As someone whose law firm has been involved in many lawsuits on this one issue, let me tell you that it matters a lot. It matters because companies that believe they are buying their products from an American or European or Australian company are generally going to be willing to pay more for the “safety” that comes from doing business with an American/European/Australian company and they also are likely to be much less careful about the contract they sign and about protecting their IP.

    What instead ends up happening is that the foreign company enters into a contract with an American/European/Australian company with no legal connection with the Chinese manufacturer making their products. The buyer has no contract with its Chinese manufacturer mandating that Chinese manufacturer deliver quality products on time and at a certain price and no contract with its Chinese manufacturer prohibiting the Chinese manufacturer from using its IP or from selling your product to your customers.

    Almost invariably, if you give this sort of tripartite relationship 6-12 months, you will have problems that are extremely difficult or even impossible to solve.

    In China Sourcing: Does Your Sales Contact Really Work At The Factory? Renaud Anjoran wrote of the importance of making sure you know who actually owns the factory in which you will be having your products made. In his post Renaud focuses on another very common type of situation where the foreign buyer ends up not knowing who the owner of its manufacturer actually is and ends up dealing with a non-owner. Per Renaud (and also what our China manufacturing lawyers have so often seen), the following is common:

    1. The purchaser researches Alibaba and has about an 80% chance of ending up with a trading company.
    2. The sales contact person keeps saying he/she works “at the factory”, but they don’t.
    3. The supplier’s company name (which will receive the payment) is that of the trading company. It usually doesn’t include the words “Trading” or “Import & Export”. (They still do NOT look like a manufacturer’s company name, but foreign buyers seldom know that.) Alternatively, that company is in Hong Kong or Taiwan and is presented as “the factory’s sales office, for greater convenience”.
    4. The purchaser does not research and is misled all along.
    5. The situation often becomes clear when things have gone wrong… and the whole supply chain needs to be re-built.

    In the last year, with so many foreign companies moving their manufacturing from China to places like Taiwan, Thailand, Vietnam, Malaysia, Pakistan, and Mexico, among other places, we are seeing this same sort of deception again, but with a new twist. This time around, about 80 percent of the time it is a Chinese company that is claiming to own the factory in some foreign company and it usually insists that because of that there is no need even for a new contract. But we are finding — so far, without a single exception — that the Chinese company with which our client had a contract for manufacturing in China does not directly own the factory in the country in which it claims to be doing its manufacturing. In other words, the existing contract will be nearly 100% worthless for protecting your company when manufacturing in that third country.

    The bottom line is that if you are going to have your products made in Thailand or Vietnam, it will almost always (but not always) make sense for you to have your contract with the company that will be making your products in Thailand or Vietnam and to have that contract written for Thailand or Vietnam pursuant to Thai or Vietnamese law. The same holds true for Taiwan, Malaysia, Indonesia, or wherever. If your contracts is not with the actual owner of the factory in which your products will be made and tailored to the country in which you are manufacturing, you are asking for trouble. See Manufacturing Contracts When Manufacturing in Multiple Countries. 

    For more on moving your manufacturing from China, check out the following:

    1. Articles on deciding whether to move your manufacturing from China and to where.

    2. Articles on what you should be doing to protect your company when moving your manufacturing from China:

    I apologize for just “dumping” so many articles on you, but I have done so because our international manufacturing lawyers are constantly getting asked “what should I be reading on moving our manufacturing out of China” and I just really wanted to get these various articles in one place. I do not suggest you read all of them, but I would appreciate any feedback on them!






    China cybersecurity lawyers export control

    The Chinese government has been working for several years on a comprehensive Internet security/surveillance program.  This program is based on the Cybersecurity Law adopted on 2016. The plan is vast and includes a number of subsidiary laws and regulations. On December 1, 2018, the Chinese Ministry of Public Security announced it will finally roll-out the full plan.

    The core of the plan is for China’s Ministry of Security to fully access the massive amounts of raw data transmitted across Chinese networks and housed on servers in China. Since raw data has little value, the key to the Ministry’s success will be in processing that data. Seeing that this is the key issue, the Ministry has appointed Wang Yingwei to be its new head of the Cybersecurity Bureau. Wang is a noted “big data” expert and he will be tasked with making sense of the raw data that will be gathered under the new system.

    The plan for the new system is ambitious and comprehensive. As explained by Guo Qiquan, the chief cheerleader for the plan, the main goal of the new system is to provide “full coverage”.  As explained by Guo, “It will cover every district, every ministry, every business and other institution, basically covering the whole society. It will also cover all targets that need [cybersecurity] protection, including all networks, information systems, cloud platforms, the internet of things, control systems, big data and mobile internet.”

    This system will apply to foreign owned companies in China on the same basis as to all Chinese persons, entities or individuals. No information contained on any server located within China will be exempted from this full coverage program. No communication from or to China will be exempted. There will be no secrets. No VPNs. No private or encrypted messages. No anonymous online accounts. No trade secrets. No confidential data. Any and all data will be available and open to the Chinese government. Since the Chinese government is the shareholder in all SOEs and is now exercising de facto control over China’s major private companies as well, all of this information will then be available to those SOEs and Chinese companies. See e.g. China to place government officials inside 100 private companies, including Alibaba. All this information will be available to the Chinese military and military research institutes. The Chinese are being very clear that this is their plan.

    In the past, foreign owned companies in China were generally able to avoid the impact of this type of system in two ways. They did this primarily by establishing VPN internet servers in their own offices. These servers used VPN technologies to isolate data from the Chinese controlled networks, allowing for the use of a company intranet that maintained the secrecy of emails and data stored on the company servers in China. As cloud computing has advanced, foreign owned companies typically use the same VPN technologies to isolate their cloud based servers from the Chinese controlled system. Though the Chinese authorities often complained about these VPN systems, foreign companies were usually able to claim that their special WFOE status exempted them from Chinese data controls.

    However, with the roll-out of the new system, that will all change. First, the Cybersecurity Law and related laws and regulations are very clear that they apply to all individuals and entities in China without regard to ownership or nationality. There are no exceptions. More important, the new Foreign Investment Law that goes into effect on January 1, 2020 eliminates any special status associated with being a WFOE or other foreign invested enterprise. Foreign owned companies will be treated in exactly the same way as Chinese owned companies. See China’s New Foreign Investment Law Benefits: Like Putting Lipstick on a Pig. This means the Cybersecurity Law will apply to foreign owned companies (WFOEs, joint ventures, and Representative Offices) in the exact same way it applies to Chinese owned companies and individuals. There will be no place for foreign owned companies to hide.

    This means intra-company VPN systems will no longer be authorized in China by anyone, including foreign companies. This in turn means all company email and data transfer will be required to use Chinese operated communication systems that are fully open to the China’s Cybersecurity Bureau. All data servers that make any use of Chinese based communications networks will also be required to be open to the Cybersecurity Bureau’s surveillance and monitoring system.

    It is important to fully understand what this means. Under the Cybersecurity Law, the Chinese government has the right to obtain from any person or entity in China any information the Chinese government deems has any impact on Chinese security. The Chinese government understands that foreign companies and individuals will be reluctant to simply turn over their information to the Chinese government when asked. For that reason, the Chinese Cybersecurity Bureau does not plan to politely make a formal request for the information. The fundamental premise of the new cybersecurity systems is that the government will use its control of communications to simply take the information without discussing the matter with the user. All data will be open to the Chinese government.

    This system of constant and pervasive access to and monitoring of data sets up a fundamental conflict for U.S. and many foreign companies operating in China because U.S. law in many cases mandates much information be kept secret. But Chinese law now requires complete government access to those secrets if those secrets cross the Chinese border for any reason. This conflict puts many U.S. and foreign companies that operate in China in an impossible legal bind. I include foreign companies because foreign companies with U.S. subsidiaries or even certain sorts of relationships with U.S. companies will also be bound or at least impacted by these U.S. secrecy laws.

    First, as the scope of what the U.S. government designates as controlled information and technology begins to expand, the restrictions on what cannot be transmitted across the Chinese border increases. See this post on what will likely constitute a restricted “emerging technology” under U.S. law. U.S. companies used to take the position that their information in China is on a private server isolated from the Chinese government and if the Chinese government requests this information, “we will refuse to comply.” This argument will not longer work because the Chinese government will no longer ask for the information, it will simply take it without asking for permission.

    Second, much intellectual property is protected as a trade secret rather than because it is registered as a patent. In fact, the value of many U.S. patents lies in its supporting trade secret know-how. Trade secrets are a form of property and as property such trade secrets are protected under U.S. law. However, the general rule for being able to maintain something as a trade secret (under U.S. and China and EU law) is that the holder of the trade secret must take reasonable steps to maintain its secrecy. Once a trade secret has been intentionally or unreasonably revealed by its holder, its protection as trade secret property is terminated. This then leads to the conflict.

    Under the new Chinese system, trade secrets are not permitted. This means that U.S. and EU companies operating in China will now need to assume any “secret” they seek to maintain on a server or network in China will automatically become available to the Chinese government and then to all of their Chinese government controlled competitors in China, including the Chinese military. This includes phone calls, emails, WeChat messages and any other form of electronic communication. Since no company can reasonably assume its trade secrets will remain secret once transmitted into China over a Chinese controlled network, they are at great risk of having their trade secret protections outside China evaporating as well.

    The U.S. or EU company may have an enforceable agreement with the Chinese recipient of its confidential information. So trade secrecy is protected with respect to that authorized recipient. But if the secret is easily available to the Chinese government, there is no real trade secret protection.

    By giving the Chinese government and its cronies full access to its data, the U.S. or EU company may very well be deemed to have illegally exported technology to China and it could face millions of dollars in fines and even prison sentences for some of its officers and directors. There is an inherent conflict between foreign laws mandating a company not transfer its technology and China’s laws which effectively mandate that transfer.

    Under China’s new cybersecurity system, there will be no place to hide.


    9-30 Update.  The New York Times hasa story today on “the Communist Party’s view of business as a means of control.”