Sinosure lawyer

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

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

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

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

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

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

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

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

China Manufacturing ContractsIn yesterday’s post, On SMEs Trusting China Manufacturers. Don’t. Just Don’t., we wrote about product outsourcing mistakes often made by small companies (SMEs). The same day we wrote that post, The Quality Inspection Blog did a post, 9 Things Only a Large Company Can Obtain in China/Vietnam, comparing what large companies are able to achieve when outsourcing their product manufacturing that small companies cannot.Before I discuss Quality Inspection Blog’s post (by analyzing the nine things it cites) I want to note how true it is. Small companies sometimes read how they should do X with their product manufacturing and then insist on doing X even though virtually no product manufacturer in China or Vietnam or Thailand or Mexico or Cambodia or the Philipines or wherever would ever go along with X unless HUGE product quantities are ordered. Put simply, Walmart can require certain things of its product suppliers around the world that your company cannot.

The first thing that springs to mind is product exclusivity. Our manufacturing lawyers usually ask our clients that are looking to have a product made overseas whether they are concerned with their foreign manufacturer making the same product for others. When we ask the question using the word “same,” and our client responds “yes,” we then ask what for them constitutes the same product. Sometimes they will respond with something broad like “I don’t want them making IoT devices for anyone else” When I get this sort of response, my thought is that this is never go to happen unless our client is prepared to purchase billions of dollars a year in IoT devices from this one manufacturer. I say this because most contract manufacturers that make products for small companies make their products for from 3 to 300 foreign companies. No manufacturer that makes IoT devices for 100 companies will stop making IoT products for all 100 companies just to secure your $800,000 in yearly business. The economics of that are just not there.

In this sort of situation, our manufacturing lawyers will usually provide the following sort of explanation as to why what our client seeks is both impossible and unnecessary:

Wait a second. This company you wish to use to make your IoT product. It makes all sorts of IoT products for all sorts of other companies around the world, right? And your IoT product is a health device you plan to sell to health clubs in Canada and the United States, correct? So why do you even care that this company makes and sells IoT devices for olive growers in Spain, Israel and Greece? You don’t care about that do you? I am asking these questions because there is no way this manufacturer is going to stop making IoT devices for olive growers in Spain, Israel, and Greece just to get your start-up order for 10,000 health club IoT devices and I am not aware of any reason why this should matter to you. So how about we just try to get this manufacturer to agree (with China-enforceable NNN provisions) not to make or sell health club IoT devices?

Quality Inspection Blog starts its post by discussing how there is much good advice on “Linkedin and elsewhere, aimed at importers sourcing products from China, Vietnam, or other low-cost Asian countries” but much of this advice is NOT applicable to companies buying under 20 million USD a year — and, sometimes, not under 1 billion USD a year.” It then lists out the following nine things large importers can get from their suppliers but small companies usually cannot. Note that my summary below of the Quality Inspection Blog is in regular font and my own comments/opinions are in italics.

1. Negotiate with large contract manufacturers in many countries. Apple has been looking at producing iPhones in Vietnam and/or in India. Apple knows “large contract manufacturers (e.g. Foxconn) are willing to set up a plant wherever Apple wants.” But if you are a company looking to buy 5,000 mobile phones in Vietnam or India, you very well may not be able to find anyone to make them for you in such a small quantity. This is so true. Our law firm has been working a lot lately with clients looking to source electronic products from Vietnam and Thailand and the Philipines and unless they are willing to buy in fairly large quantities, they are not having much luck in finding suppliers. But much depends on the product and the country. For instance, many of our toy and houseware product clients were able to relatively easily shift their contract manufacturing manufacturing to Vietnam and Thailand. 

2. Reserve production capacity for the mid- or even the long-term. Quality Inspection Blog mentions having heard how VF Corporation was able to reserve the capacity of several buildings in Chittagong, Bangladesh. Large companies with mature planning and distribution systems have a good idea about their needs five years into the future and they can often find contract manufacturing companies that will reserve them the capacity to realize those plans. So true, but for a small company this is just virtually never going to happen. 

3. Negotiate directly with large sub-suppliers. Li & Fung can reserve greige fabric and dyeing capacity before it knows for certain the colors its massive list of clients will choose. Li & Fung can do this because it has massive buying power and because it is able to talk directly with large sub-suppliers. In many cases, contract manufacturers will refuse even to reveal from where it gets its materials and components to its small company buyers.

4. Open-book visibility about the manufacturing facility. Large buyers are often able to get deep-dive costing information from their contract manufacturers. Things like the “what their supplier pays for rent, per employee, for each line on the bill of materials, and so on. For large buyers such as General Motors or Airbus, this is a given. Any part supplier not willing to share this level of detail is discarded.” Small companies generally should not even bother asking for such information. 

5. Force the factory to use your own ERP system. Many tier-one auto suppliers have to use an SAP implementation that perfectly integrates with the SAP implementation used by their buyers. “So, if 50% of a plant’s activity is for GM, 40% is for Chrysler, and the rest is for smaller customers, the plant will need to use 3 different ERP instances.” Small companies often work with suppliers that don’t use ERP at all.

6. ‘Open account’ payment terms. This is much more common for large companies. I am always impressed by small companies that are able to pay 50% or less upfront. For more on manufacturing payment terms, check out China Manufacturing Payment Terms.

7. Product warranty & liability from the supplier. Large companies can get their manufacturer to sign legally-enforceable contracts that make it liable for product warranty and liability obligations and that require the manufacturer to carry liability insurance. “This is pretty much unheard of for an importer buying ‘only’ 500,000 USD a year from a given factory.” I disagree with this statement as we are nearly always able to get overseas factories to sign for good warranties. However, this whole area of warranties and liability insurance is a minefield. How valuable is a warranty if you are working with a manufacturer that has only $100,000 a year in profits? See China Manufacturing WarrantiesHow valuable is it to get your manufacturer to buy a crappy insurance policy written in Vietnamese? Also, if you require your manufacturer to spend 30 cents per widget for insurance, it likely will just flip around and charge you 30 cents more per widget to cover this cost. Might you not not be better off just buying your own insurance in your own country for 30 cents per widget? See The China Price and Product Liability Insurance: Never the Twain Shall Meet

8. Shaping the supply chain PHYSICALLY. “You set up a mammoth plant and you don’t want your high-value component suppliers to be more than 1 hour away from you, for just-in-time inventory replenishment? They can be requested to set up a new manufacturing facility next to you.” Small company? No way.

9. Have their own teams on site all the time. “When you develop new products, can you afford to have your own engineers at the main factory, and going around component factories as well? Probably not with the same intensity as, say Apple (who dispatch not only engineers but also supply chain security staff and so on and so forth). In the end, that makes a very large difference in quality & time-to-market performance.” True, but there are a number of very good quality inspection companies, including the company — Sofeast —behind the Quality Inspection Blog. Not quite the same thing as having ten of your own people live in the factory, but a thousand times better than no monitoring at all. 

I am going to add a tenth item: price stability. Large companies are often able to get their suppliers to commit to long-term pricing, whereas this is just not possible for most small companies.

So what can small companies that use overseas contract manufacturers do to protect themselves? Go with the basics, as described (at least in part) in our post yesterday.

What are you seeing out there?

China manufacturing lawyer
China manufacturing: Trust but verify. Better yet, just verify.

One of the things I love about my law firm’s China practice is its diversity. We represent all sizes of businesses, from start-ups that never really start to Fortune 50 companies that have been in China for more than twenty years. This sort of diversity more than holds true on the manufacturing side of our legal work as well.

I am bringing all of this up because with the massive changes we have been seeing in outsourced manufacturing this year, the operational differences between our biggest clients and our smallest clients have been coming to the fore. This is happening because having a product made in China is far more complicated today than it was five years ago, for the following reasons:

  1. The U.S. tariffs. This is having a deep and a wide impact. Any company that has products shipped into the United States from China has already been directly impacted by this or likely will be within the next few months. Any company that has products made in China is — at least to a certain extent — already impacted by this.
  2. Chinese manufacturing companies are very concerned about the US tariffs and you should not believe anyone who tells you otherwise. Our China manufacturing lawyers know this because we have seen a massive increase in Chinese companies walking off (early) with the IP they are shown by their foreign buyers and potential buyers.
  3. Chinese manufacturing companies are very concerned about the US tariffs and you should not believe anyone who tells you otherwise. Our China manufacturing lawyers know this because we have seen a massive increase in Chinese companies taking foreign company money and then disappearing. We also keep hearing rumors of Chinese factories that will not be re-opening after the Chinese New Year. If this rumor holds for a Chinese factory you are using, you should do whatever you can not to allow that factory to tie up your money in the meantime.
  4. Chinese manufacturing companies are very concerned about foreign companies leaving them and switching their manufacturing to Vietnam or to Thailand or to Cambodia or to Mexico or to the Philippines or to wherever. Our China manufacturing lawyers know this because we see this switching happening with our own clients and because our own clients are telling us that their own factories are saying this. Our law firm drafted more contracts for Vietnam, Thailand, Mexico and the Philippines in the last six months than probably the previous three years.

So what does this all mean for your China manufacturing and why did I start this post by talking about how the difference between big and small foreign companies is coming to the fore.

Well, let me start out by describing how most big companies handle their outsourced China manufacturing. The typical large company will send one or two or three of its own people to China to research and investigate and examine and test potential Chinese factories. If they don’t send 1-3 of its own people, they will hire a high end and highly regarded China sourcing company (expert in their particular products) to do this researching and investigating and examining and testing for them. Once the big company has found its potential Chinese factories, it might have them compete against each other to see who can make the best widget. Before doing anything with anyone in China, however, this big company most likely went off and secured China trademarks for its company name, its brand name, and its logos — at least whatever names and logos it will be putting on the products and packaging it will be having made in China. China Trademarks: Register Yours BEFORE You Do ANYTHING Else. This big company also required each of its potential China NNN AgreementChinese suppliers to sign an enforceable before it showed any supplier anything that might be deemed to be a trade secret.

Then once the big company determines the Chinese factory (or factory) it will be using to make its products, it makes that factory sign a comprehensive China manufacturing agreement. See China Manufacturing Contracts: OEM, CM, and ODM Arrangements, China Manufacturing Contracts, Part 2: ODM ArrangementsChina Manufacturing Contracts, Part 3: An Original Development Manufacturing Agreement that Works. This contract will almost certainly be in both Chinese and in English and, most importantly, it will be enforceable in China and contain well-thought out contract damages/liquidated damages provisions. See China Contracts: Make Them Enforceable Or Don’t Bother and China Manufacturing Agreements. Make Liquidated Damages Your Friend. This manufacturing agreement will also not be in just the English language and it will provide for various protections of the IP in their product and their mold. See China OEM Agreements. Why Ours Are In Chinese. Flat Out. and Protecting Your Product From China: The 101. In other words, the typical big company analyzes its various China risks and it registers its IP in China and drafts its contracts for China so as to greatly reduce those risks. These big companies do not subscribe to the myth that “Chinese contracts are not worth the paper they are printed on.” Note that the World Bank ranks China number 6 out of 190 countries on “enforcing contracts.” This

Unfortunately, most small companies do not act at all similarly and the risks of this are now sky-high. These risks are sky-high right now because so many Chinese companies now see themselves at great risk of going under. This fear is driving them to take short term actions that they were a lot less likely to take when times were good. This fear is driving Chinese factories to take foreign company IP and money way faster than in the past.

In China Trademark Theft. It’s Baaaaaack in a Big Way, we explained how we were seeing a massive increase in quick-fire trademark thefts:

For years we probably averaged a call a week from someone who had lost their trademark to China, to someone who had gone ahead and filed it before the non-Chinese company did so. Then, starting maybe 5 or 6 years ago, the number of these calls declined. I have ascribed this decline to two things. First, American companies started getting wiser about the need to get their brands, their logos and their company names registered as trademarks in China, due in small part to this blog even. Second, and of equal importance, China instituted rules to try to stop Chinese manufacturers and trading companies from registering as trademarks the brand names and logos and company names of the foreign companies for whom they were manufacturing or sourcing products. To simplify a bit, your China agent could not hang on to a China trademark that you were using before you brought them on for your manufacturing or product sourcing. We went from one China trademark “theft” call a week to maybe one a month.

But starting about a year or so ago, our China trademark lawyers started getting a ton of China trademark theft calls and the number of those calls has been accelerating ever since. Why has the tide on trademark “theft” come in again? Two reasons. One, there is hardly a sole in China who does not know how to get around the prohibition on an agent registering the trademark that rightfully should go to the foreign company for whom it is acting as an agent. If your manufacturer in Shenzhen wants to secure “your” trademark in China it will not go off and register it under its name as it knows that cannot work. So instead of registering the trademark under its own Shenzhen company name, it will ask a cousin or a nephew in Xi’an to register it under its company name, making it nearly impossible for you to invalidate the trademark. Two, 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.

Similarly, in just the last 4-5 months, our law firm has seen a massive rise in situations where a foreign company (usually American or European or Australian) has paid its Chinese factory for its products yet never received anything, or received product of such bad quality as to indicate that the factory did not even try. We are also seeing a massive increase in small companies getting victimized by the China bank switch scam. See China Scam Week, Part 3: The Switched Bank Account Scam. But with this twist: half the time we believe the factory itself is somehow participating in this scam and it is doing so because it believes it will soon be out of business and so it’s grabbing money from wherever and however it can.

Why do all of these terrible things happen to small businesses that want nothing more than to have good product made in China? I think it is because they have let their guard down at the absolute worst time. These small companies have seen how good it can be to have products made in China and they are ignoring how bad it can be. What should these small companies be doing that they can actually afford to do? What is the baseline of what these SMEs should be doing to protect themselves from China? I say it’s the below and if you are not willing to do at least these things, you should not be having your product made in China (or in Vietnam or Thailand or the Philipines or Mexico for that matter either).

1. Go yourself and check out your potential China factories. If possible, bring along someone you trust who is fluent in Chinese.

2. Register your company name and your brand name as a China trademark before you reveal either to anyone in China.

3. Make your potential China factories sign a well-crafted China-centric NNN Agreement before you reveal ANY secret.

4. If it makes economic sense to do so, have a well-crafted China-centric agreement (or agreements) that protects your molds and tooling and that specifies exactly what it is that your factory will be making and exactly when it must deliver that. See How To Get Good Product From China; Specificity is THE Key To Your OEM Agreement.

5. Check in from time to time with your China factory, if only just by phone. Talk with the factory owner. Ask him or her “how things are going.” Oftentimes they reveal their fears.

6. Read China’s Economic Slowdown and YOUR Business: The Times they are a Changin’.

7.  Be careful out there. And towards that end, please note that the US State Department raised the risk level on going to China, with the following explanation:

Exercise increased caution in China due to arbitrary enforcement of local laws as well as special restrictions on dual U.S.-Chinese nationals.

Chinese authorities have asserted broad authority to prohibit U.S. citizens from leaving China by using ‘exit bans,’ sometimes keeping U.S. citizens in China for years. China uses exit bans coercively:

  • to compel U.S. citizens to participate in Chinese government investigations,
  • to lure individuals back to China from abroad, and
  • to aid Chinese authorities in resolving civil disputes in favor of Chinese parties.

In most cases, U.S. citizens only become aware of the exit ban when they attempt to depart China, and there is no method to find out how long the ban may continue. U.S. citizens under exit bans have been harassed and threatened.

U.S. citizens may be detained without access to U.S. consular services or information about their alleged crime. U.S. citizens may be subjected to prolonged interrogations and extended detention for reasons related to “state security.” Security personnel may detain and/or deport U.S. citizens for sending private electronic messages critical of the Chinese government.

What are you seeing out there? How do you protect your company and yourself from China?

 

 

China IP Lawyers
Photo by Ina Centaur

Barely a day goes by without one of our China IP lawyers getting contacted by an American or European company telling us that its products are being counterfeited and would we please get so and so (usually the alleged counterfeiter or the online site on which the counterfeit products are posted) — to remove the offending items immediately. If only it were that simple. Our lawyers have a near 100% success rate at getting counterfeit products removed from Chinese e-commerce websites like Tmall and Taobao and the same holds true for American e-commerce sites. But our success rate depends largely on the advertised product truly being a counterfeit, as that term is commonly defined by lawyers not businesspeople.

All of the big American and Chinese e-commerce sites, including the Alibaba family of sites (Taobao, Tmall, Alibaba, AliExpress, 1688.com, etc.), have formal internal procedures for removing product listings that infringe a third party’s IP rights. To secure the removal of infringing listings, you must follow their procedures to the letter. Among other things, you must provide documentation proving (1) that you exist and you are the IP owner and (2) that you as the IP owner still have the rights to the IP in question. Only after you have submitted these documents and had them verified by the e-commerce site can you even submit a takedown request.

When you do submit your takedown request (assuming everything goes well), most e-commerce sites will remove the counterfeit products within a week or so. When things don’t go well with a Chinese e-commerce site (which judging from the volume of phone calls and emails is rather frequently) it is vital to have a person on your side who speaks Chinese, understands Chinese intellectual property law, and is experienced in dealing with the particular Chinese website posting the counterfeits of your products. This person is necessary to get to higher-level employees at the Chinese e-commerce site to explain to them why the listing does in fact violate your IP. Sometimes it seems we get products taken down simply by constantly pushing the problem to higher and higher levels at the Chinese e-commerce company, all the while making clear that things will go easier for them if they take it down than if they do not.

To date, our China IP lawyers have succeeded with nearly every takedown request seeking removal of products that infringe our client’s trademarks or copyrights. But about half the time, we have to tell the potential client that they should not bother retaining our law firm for their product removal because there is such a small likelihood of success. The below email from one of our China IP lawyers who regularly works on takedown matters across multiple websites (both in China and elsewhere) explains in the below email summary why this is the case:

Every Chinese website has its own takedown protocols and following that protocol to the letter is the key to getting a product removed. You mention wanting to sue these websites. We emphatically do not advise that unless and until we have sought to get your products taken down and failed. Lawsuits are expensive and based on our track record in securing takedowns, the odds are overwhelming that we will never need to file one on your behalf.

Note that  only the copyright or trademark owner or its authorized representative can make takedown requests. However, sites vary as to the sort of authentication they require for Powers of Attorney and most of the sites know our lawyers well enough that they almost never require we provide them with a formal Power of Attorney to achieve a takedown.

It is critical we can prove you have registered your IP (your trademark or your copyright) somewhere. Some Chinese sites sometimes will take down products with foreign IP (i.e., non-China) registrations, but China registrations are always much better. Technically, China is obligated to recognize copyrights registered in any Berne Convention signatory nation, but explaining China’s WTO obligations to a 21-year-old customer service representative seldom works. And as you can probably imagine, securing the removal of copyrighted IP for which a copyright has never been registered anywhere is even more difficult.

The more sophisticated/well-heeled the website, the more likely it is that they have a formal takedown procedure. For the smaller websites, we generally have to contact someone directly (usually by telephone) because there are no instructions on the website or the instructions that are there either make no sense or simply do not work. But unless the website is a pirate site (which is rarely the case), it does not want to be sued for hosting counterfeit or pirated items and so long as we do all the work for them, they’ll be happy to take down rogue products and content.

Once the whole takedown process begins, it pretty much continues forever. because the pirates and counterfeiters don’t just give up after their first upload is taken down. Even after we stop one or two of the counterfeiters, we should expect more to pop up. This is why companies hire us to monitor and report and after we remove the existing counterfeits, we should discuss what sort of future programs make sense for your company and your situation.. One of the things we should do is try to figure out who is doing the counterfeiting, how they are doing it, and what we can do — if anything — to try to stop it or slow it down. Oftentimes it can be your own factory or distributor.

Our law firm has an Alibaba account that makes us eligible to seek removal of links that infringe our clients’ IP. We do this by submitting proof of identification and authorization, as well as information regarding the IP being infringed upon. We do this by providing the following to Alibaba: (i) our client’s “business license,” (ii) any formal IP registration documents and (iii) (sometimes) a power of attorney signed by the client, authorizing us to file the complaint on its behalf. We also submit the following information: the IP registration number(s), the title of the IP, the name of the IP owner, the type of IP, the country of registration, the time period during which the IP registration is effective, and the period during which the IP owner wishes to protect its IP rights. We translate these documents into Chinese to make things easier on the Chinese website company and because doing so greatly speeds things up.

Once Alibaba verifies the above information, we provide the infringing links and removal nearly always occurs quite quickly after that. For complaints concerning patent rights, we also need to provide proof of the connection between the infringing material and the IP being infringed. Alibaba normally then sends our complaint to the infringing party. If the infringing party does not respond to our complaint within three working days of receipt — either by deleting the infringing link or by filing a cross-complaint — Alibaba will delete the infringing link. Absent prior written permission from Alibaba, the infringing party would then be prohibited from posting the same information on Alibaba again. If the infringing party files a cross-complaint, we would then need to deny the cross-complaint, and then Alibaba would handle the “dispute.” Alibaba normally resolves such disputes within a few days. As you would probably imagine, counterfeiters almost never file cross-complaints; they typically just slink away.

We have achieved similar results with China’s other leading and legitimate online marketplaces. But as you would expect, China’s smaller and sketchier marketplaces are more difficult when it comes to IP protection.

If your IP (especially your trademark or your copyright) is registered in China, securing removal of counterfeit products from Chinese websites is usually relatively fast and easy. If your IP is registered in a country other than China, securing the removal of counterfeit products from Chinese websites is definitely possible, but less certain. If your IP (your unregistered U.S. trademark, for instance, or your unregistered copyright) is not registered anywhere, your best strategy for securing removal of infringing products is usually (but not always) to register it first (typically wherever it can be done fastest and cheapest) and then seek removal, rather than to seek removal first. The same generally holds true for US websites, but US websites are much less likely to remove products that infringe on your patent rights than are Chinese websites. US websites typically take the position that you need a US court order stating that the product or products infringe on your patent for a removal based on patent infringement.

If you want to protect your products from counterfeits popping up on the web (and then staying there), plan now with your IP filings for takedowns later. See China Trademarks: Register Yours BEFORE You Do ANYTHING Else.

China employment lawyerIf you are a China employer, you need a set of Employer Rules and Regulations that are not only enforceable and up-to-date but also practical for your specific locale in China. Employer rules and regulations are so important because China does not have employment at will and this means that without enforceable rules and regulations you as an employer generally cannot discipline or terminate your employees.

Let’s consider a recent case in Guangzhou City. In this case, the employer required all employees clock in and out with their fingers on a time clock system. An employee made a mold of his fingers and asked a co-worker to clock in and out on his behalf for several days in a row. The employee failed to show up at work during those days without any justification. The employer terminated the employee on the basis of a serious breach of the employer’s rules and regulations and the employee brought a labor arbitration claim.

The employer was able to produce a copy of the employer’s rules and regulations, the employee’s acknowledgement of receipt of the employer’s rules and regulations, witness statements, fingerprint records showing there were clock ins and outs with the employee’s fingerprints, and security footage showing the employee himself was not present at the clock ins/outs, and WeChat screenshots of the employee’s video and phots posts showing the employee was sightseeing at a tourist attraction during the days at issue.

Notwithstanding all of this (granted, the employer failed to produce all of the evidence at once), the employer lost at labor arbitration for failing to produce sufficient evidence proving the lawfulness of its unilateral termination decision. The employer appealed to the court and lost there as well and was ordered to pay the employee a substantial amount in damages to the employee for unlawful termination.

Finally however, the appellate court reversed the lower court’s ruling (and that of the labor arbitration board) and held that the employer did not have to pay any employee damages. The appellate court first emphasized that the employer bears the burden of proof in an employee dispute that arises from the employer’s unilateral termination decision. It further stated that since unilateral termination on the basis of an employee’s wrongdoing is the most severe punishment by an employer and since the employer is usually better positioned to obtain evidence, employers will be held to a high standard in that regard. But in the end the appellate court ruled the employer had come forward with enough evidence to support its claim that the employee was absent from work for days without a proper reason and had used a co-worker to clock in and out for him. Therefore, even though the employer rules and regulations did not specifically list having another employee clock in/out with a finger mold as employee misconduct, the employee’s behavior violated the good-faith principle and the employer was justified in making the unilateral termination decision.

The big lesson from this case is that if you want to minimize future employee problems and avoid costly employee litigation, you should make sure right now that you have comprehensive and enforceable employer rules and regulations and you save all evidence that may be used in any future employment disputes.

Though the appellate court finally ruled in favor of the employer on the basis of the employee having failed to act in good faith, I’m convinced that the employer having a thorough set of rules and regulations and having strived to maintain good employee records was a major factor in the decision. Nonetheless, as a China employment lawyer who spends much of my day helping China employers avoid employee disputes I cannot resist pointing out how the employer in this case would likely have made its life considerably easier had it maintained clearer attendance records and required the employee provide his signature as confirmation of such attendance records, kept the pay stubs that corresponded to the days actually worked and had the employee sign such documentation during the course of the employment relationship. In other words, as a China employer (especially if you are a foreign company), it is critical that you document everything every step of the way as though you are right now preparing for an employee lawsuit down the road.

 

China lawyer negotiation specialistTen years ago, when one of our China lawyers would write to a Chinese company to demand it do or pay something, we usually received one of two responses:

  1. No response at all. This was the Chinese company’s way of “saying” no to our demand.
  2. A long rambling response from the Chinese company both denying that it had done what we accused it of having done,  but then either somewhat admitting that it had actually done it or saying that it’s own subcontractor had done it. These responses usually included a discount going forward or some really small amount as compared to the actual damage.

Starting maybe three to four years ago, when one of our China lawyers when one of our China lawyers would write to a Chinese company to demand it do or pay something, we usually received a response to the effect that “we didn’t do anything wrong and we are never going to do what you are requesting, but let’s negotiate.

Starting maybe a year or so ago, when one of our China lawyers when one of our China lawyers would write to a Chinese company to demand it do or pay something, we usually receive a response to the effect that “we didn’t do anything wrong and we are never going to do what you are requesting, and if you don’t cease accusing us of having done something we will sue in a Chinese court you for that and, oh by the way, we also are going to sue you for this other ridiculous thing that you did (even though you never did and even though it would probably be legally irrelevant if you had. And yet, they still usually then offer to negotiate or propose a low settlement amount.

At my law firm, we call this latest sort of response “bluster” and it is intended by the Chinese to scare you away, and the fact that it has become so common makes me think that it often works. But how then should you respond if you do not wish to just turn tail and run?

There are two ways to respond, one way better than the other:

  1. Fight fire with fire and punch back with a slew of your own threats. This method is not terribly effective in the West and it is even less so the case in China. These “bluster” letters are designed to make you run away, but secondarily, they are designed to throw you off your game. Don’t let it. Never let the other side see you sweat.
  2. Play it cool and respond very briefly and without any acrimony by making clear your position and what it will take for you not to follow through on your threat.

Negotiation 101. Andrew Hupert, my negotiation specialist friend, can you please comment on the above and the psychology behind it? Or anyone else?

China trade war

The trade war with China continues. The U.S. declared a 90 day truce which ends on March 1. Negotiators from the two sides will meet in Beijing on January 7. Many are looking for a “sign” from the Chinese government on the position China will take in the negotiations.

As stated in the U.S. Section 301 complaint, the United States’ position is that China must make major changes in the fundamentals of the Chinese economic system. So the question is whether such a major change is likely? Or will the Chinese side simply offer the same old thing? To date, no formal proposals from the Chinese government have been revealed to the public. So we are required to look for other indicators.

Normally, the strongest indicator would come from the CCP Central Committee meeting held each November. However, no meeting was held in 2018. This is in itself big news because major reform proposals are usually unveiled at this meeting. See The biggest story in Chinese politics right now — silence over Communist Party’s autumn meeting. The absence of a Central Committee meeting then logically suggests no reforms of the Chinese system are planned for 2019. So if the U.S. plan is designed to precipitate a series of reforms in China, this is not likely to happen.

This conclusion is supported by Chairman Xi Jinping’s recent speech at the meeting commemorating the 40th year of China’s reform and opening-up program. The content of that talk is generally taken as the definitive statement of the Chinese government program for 2019. A copy of the full speech (in Chinese) can be found here.  Foreign response to the speech has not been positive. See Xi’s Scary Interpretation of the Last 40 Years of Chinese History.

What did Xi actually say? He started by listing the obvious achievements of the Chinese economy over the past 40 years. This remarkable economic progress was initiated with the announcement of the reform program at the 3rd Plenum of the 11th Party Congress convened on December 18, 1978. There are two initial points to note. First, the reform and opening up program was initiated at exactly the type of meeting that was cancelled for 2018. This suggests we can expect no such reform for 2019. Second, the achievements listed by Xi are entirely economic. Nothing else counts.

In the talk, Xi concludes that Communist Party guidance was entirely responsible for the success of the 40 year economic development program. No other factor is of any significance. Assuming this conclusion is correct, Xi then quite reasonably concludes that the future of China and the fate of the CCP depends on two things. First, the CCP must remain in absolute control of China. Second, the standard for evaluating the success of the CCP depends entirely on the continued economic development of the Chinese economy.

On this basis, Xi then lists the following nine standards the Chinese government will follow for the near future:

1. The CCP will remain in complete control of the government, military and civil society.

2. The sole measure of CCP success is the living standards of the Chinese people.

3. Marxism will remain the core guiding ideology. That is, input from Harvard trained economists and MBAs will mostly be ignored.

4. China will continue to hew closely to socialism with Chinese characteristics. This recognizes that China’s Marxism does not exactly correspond to the works of Marx or Engels.

5. China will follow on and improve the institutions of socialism with Chinese characteristics. No new institutions will be introduced.

6. Economic development is the top priority.

7. China will remain “open” to the rest of the world but it will not accept attempts by other countries to meddle in its internal affairs and it will oppose attempts by any foreign country to impose its will on China. This has to be read as referring to demands from the U.S. and many other countries that China comply with its treaty obligations and follow the rules of international trade and and international relations. China is only obligated to comply with rules that benefit China.

8. The only authority with power to regulate the CCP is the CCP itself. In other words, single party rule outside the constitution and the legal system will continue.

9. Dialectical materialism and historical materialism will be the standards for planning and control of the reform process. Once again, this means no Wharton business school graduates need apply as advisors to the Chinese government.

This set of nine standards is China’s plan for the near future and it should dash the hopes of U.S. analysts pining for a return to the policies of Deng Xiaoping and Zhu Rongji. What does this mean for the U.S.-China trade war and the meetings for next week? It means that if the only solution for the U.S. is for China to fundamentally overhaul its basic economic and trade policies, there will likely be no solution.

However, this rigid view is not the only possible outcome. The truth is that from the standpoint of economic development, China needs the U.S. and the U.S. needs China. Xi’s talk places economic development at the center of Chinese government policy. There is no question the U.S side also sees economic development as a core objective. Given the alignment in those core objectives, it is not unlikely the two sides will put aside ideology and come to some form of agreement. However, that agreement would almost certainly need to be quite different from what is currently being demanded by the U.S. trade representative. What it will look like is anyone’s guess.

China Trademark

Like most countries, China has a use requirement for trademarks: to remain valid, a trademark must be used in commerce at least once every three years. But as we wrote in China Trademarks: When (and How) to Prove Use of a Mark in Commerce:

Unlike the United States, China does not have an affirmative requirement to prove that a trademark is being used in commerce. You do not have to prove use for a trademark application to proceed to registration, and once a trademark is registered you do not have to prove you are still using it to maintain or renew the registration.

China does require proof of use in certain circumstances. The most well-known circumstance is when a trademark is challenged for non-use; at that point a trademark owner has two months to provide evidence of use in the three years prior to the non-use cancellation being filed. (You can’t start using the mark after receiving the notice.) Another circumstance is when a trademark owner is suing a third party for trademark infringement and trying to prove damages. If you can’t show that you have been using the trademark yourself, it’s difficult to convince a Chinese court that you lost money due to another party’s infringement.

In my previous post, I outlined the general sorts of documents that could be used as evidence of trademark use. The Chinese Trademark Office (CTMO) has recently released a document that categorizes acceptable and unacceptable forms of evidence of trademark use in China, helpfully titled Explanations on Submission of Evidence of Trademark Use (提供商标使用证据的相关说明).

Acceptable trademark use on goods includes:

  1. on goods or their packaging/labeling, or including the mark on product tags, manuals, brochures, or price lists;
  2. in documents relating to the sale of goods, such as contracts, invoices, bills, receipts, import/export documents, inspection/quarantine certificates, and customs clearance documents;
  3. on the radio or television, in widely distributed print publications, or in other media;
  4. on billboards, mail, or other forms of advertisements; and
  5. at exhibitions or trade fairs, including printed matter or other material.

Acceptable trademark use on services includes:

  1. on the premises where services are offered, including on service brochures, signboards, decorations, staff attire, posters, menus, price lists, coupons, office stationery, letterheads, and other articles related to the services;
  2. on documents associated with the services, e.g., invoices, remittance advice, service agreements, repair and maintenance certificates;
  3. on the radio or television, in widely distributed print publications, or in other media;
  4. on billboards, mail, or other forms of advertisements; and
  5. at exhibitions or trade fairs, including printed matter or other material.

The above is not an exhaustive list, but for good measure the Explanations note that the following does not constitute acceptable trademark use:

  1. documents relating to a trademark’s registration, including any statements by the trademark owner about its exclusive rights to such mark;
  2. use in private commerce (i.e., not openly);
  3. use on complimentary items;
  4. assignment or licensing of the trademark without actual use by the licensee; and
  5. de minimis use of the trademark merely for the purpose of maintaining the registration of the trademark.

The last item is perhaps the most controversial and subjective, because trademark squatters have been known to make a single Taobao sale of an item to themselves (or to a relative) so they have evidence of use in China. In the past, such use, which to most rational people would be considered both de minimis and in bad faith, has sometimes been deemed acceptable by the CTMO. That being said, such lax rules have also redounded to the benefit of legitimate trademark owners who have not been scrupulous about keeping records and find themselves in need of last-minute evidence of use. But the trend now is for the CTMO to be stricter about de minimis use, and not consider it sufficient proof to maintain trademark rights.

All of the above evidence must come from China, which almost always means the evidence must be in Chinese and be capable of authentication by the issuing entity. This makes sense: to prove use in China, you need evidence from China. A purchase order from a US company (even if it includes the trademark) is unacceptable. An invoice from a Chinese company that specifies the goods but does not mention the trademark is similarly unacceptable.

Most companies selling products in China have no problem providing the necessary evidence. It’s the companies that only manufacture in China that have problems, because they often have no acceptable documentation from China that includes the trademark. Don’t be one of those companies. Think about how you can best gather up your evidence and do so. Now.

international lawyerA startup U.S. consumer product company with an ultra-hot new product line wrote one of my law firm’s international lawyers asking what they needed to do to sell their product through a Chinese company that had expressed interest in being the U.S. company’s “China representative.” After a few emails on various different legal subjects, our international lawyer wrote the following email (modified a bit) that provides such good and basic business advice that I wanted to share it here. It deals with the basics on what to do when you are approached by a foreign company wanting to sell your products in another country.

I am now about to provide you with some business advice, not legal advice.

You are going to get many companies from foreign countries that are interested in selling your products. Most of those companies will not be worth more than ten minutes of your time, either because they are not equipped to do what you do or because their countries are too risky/too small.  Going international can be a great thing but it should be done in a way that suits your business and your plans and not according to who just happens to contact you. I do not purport to be an expert on your product, but I would say that for a company like yours, Mexico, Canada and the EU make the most sense, simply because they are relatively easy, relatively safe, and relatively large. I doubt any one company in any one country has sufficient contacts to sell within the entire EU, so you probably will need to tackle EU sales country by country or at least region by region.

If I were in your shoes I would do the following first:

1. Figure out where selling your product makes sense.

2. Figure out whether those who have contacted you from the countries/regions that make sense are the right people/companies to be selling your products.

3. One of the most important things you need to do if you are going to be going international is to protect your brand name in those countries where your product will be sold. When you decide where it makes sense to sell your products, you should apply for a trademark in those countries. Note that you can get one trademark for the entire EU and that usually (but not always) makes sense.

4. As far as you needing an NNN Agreement before you show your products to potential distributers, that will depend on your exact situation. If you are going to send product samples to companies that could not just buy them somewhere else (to copy), then you should have a signed NNN Agreement in place before you do so. But if those products are already readily available, an NNN Agreement probably will not help you much if at all. If you are going to be discussing anything with these potential distributors that you wish to keep secret (who manufactures your products or your costs, for instance), you should have a signed NNN Agreement in place before you do so. But the safest protection would be for you not to provide samples until you absolutely must do so. You at least want to make sure you have some idea of with whom you are dealing before you reveal much of anything, NNN or no NNN.

The big question is going to be how you will want your relationship with these companies to be structured. Will you want them to be your distributor such that you have a contract with them? See this for what distribution contracts often involve. Or do you just want a situation where you sell to these companies at a reduced price, along with an agreement making clear they are not allowed to re-sell anywhere other than in their own country? We should discuss the pros and cons of these (and other) methods.

US China Trade War

HAPPY NEW YEAR, one and all.

 

The above picture seems so fitting right now as we all are poised between the trade and tariff wars of 2018 and what may happen in 2019. Most who deal day in and day out with China do not believe we will see resolution of the trade war in 2019, yet most fervently hope that does nonetheless occur.

Either way, may your 2019 be filled with joy and prosperity!