manufacturing contracts

Recently we have worked on several matter that involved reviewing multiple contracts and weeks’ worth of emails and WeChat correspondence to piece together how a China manufacturing deal went awry, with the aim to salvage the relationship between the Chinese manufacturer and our client, but mostly with the aim to determine whether we can help our client recover some of its funds that are now in the manufacturer’s Chinese bank account. The funds were paid in exchange for some substandard products. It is important to mention that these clients came to us only after the deals went bad.

Here are some conclusions I have drawn from this process:

Don’t be too eager to make a deal. In the Phase One trade deal between the U.S. and China, one major complaint is that the deal is not really a good deal. In the Trump administration’s haste to make a deal, they put together an agreement that is substandard for a variety of reasons, most notably because it lacks any real enforcement mechanism other than backing out of the deal.

Even good companies with experienced China hands can neglect to incorporate the best China business practices during contract negotiations if they are too focused on signing the contract. This generally happens when companies that are new to China think they cannot afford an attorney to help them conduct due diligence on their Chinese counter-party or draft a solid China contract. These companies typically believe they have enough general business experience not to need an attorney; they have great rapport with their China counter-party and are convinced they will be able to work through any future issues amicably; they have never had an issue in any previous business deal they have done on a handshake or a bare bones contract; their domestic attorney that does not specialize in China matters has looked over it; and/or they are on too tight a timeline to conduct due diligence or negotiate key terms that will matter if the deal starts to fall apart.

Get a good contract now. As a rule, companies need to use strong contracts crafted for enforcement in China unless you are sure you can get the contract enforced in your home country. If you intend to enforce the contract in your home country, then you need a strong contract crafted for your home country. You need a legal expert to confirm to you that you have a strong likelihood of success in a lawsuit.

This is not the same as your gut reaction that because you “know” you’re dealing with a “major Chinese company” that you will have no problem finding a cache of the Chinese company’s assets in your home country. Most of the really big Chinese companies never (and I mean never) do foreign deals with their actual main company. Instead, they set up asset-less shell companies for those deals. By way of one example, our China lawyers have represented parties in at least a dozen deals with one of China’s biggest and best-known companies and every single one of those deals was with a Chinese company formed no more than a month before the contract was signed.

If the Chinese manufacturer’s assets are only in China, you need a law firm that can produce a quality China manufacturing contract for you (see here, here, here, here, here, here, here, and here). Your normal (or top notch) U.S. law firm likely can produce a great U.S. manufacturing contract for you, but they will certainly miss some key elements for a China manufacturing contract.

Stick to your guns during your negotiations. Even if you have a good manufacturing contract, if you or someone in your company with authority decides that one or two provisions are not important (when they actually are), then you are consciously removing your China armor. You should have saved the money you spent on your manufacturing contract because you will need it (and a lot more) to pay your attorney to help you figure out where your negotiations went wrong, why your contract is now substandard, and (hopefully) discerning your best avenue for recovering some of your damages from the substandard products you received and now have no use for.

Make sure your team and your Chinese counter-party know who has authority to bind the company. You need to be clear who in your organization has “actual authority” and who has “apparent authority” to negotiate and contract for the company. Even someone without actual authority can have apparent authority if you do not make clear to your Chinese counterpart that they can only contract with someone who has actual authority. You need to provide this information in writing.

After the contract has been negotiated and signed, and after you have wired your funds and received substandard product, it is not a strong defense to say that you did not approve the prior actions of someone affiliated with your company, whether it is a low-level employee or third party agent.

Good record-keeping only helps if you don’t make a misstep. You may have meticulously documented every exchange with your Chinese manufacturer. And you may believe that you have a good recollection of the events. And you may believe that your employees, co-owners, and other trusted people like your Chinese-based sourcing agent all think and believe and act in lockstep with you. But chances are, you are probably wrong on one or more of these beliefs. Keep good records of all conversations in case you need to fight with your manufacturer at some point down the road. But you also need to prepare yourself for the probability that there will be something less than ideal in your records that you will need to deal with.

China contracting is fraught with dangers even on a good day, and in today’s environment we haven’t had a good day in many years. Remember that making a good deal now does not outweigh the discovery later that your good deal is really a bad deal. The famous Chinese idiom of 同床异梦 (one bed, two dreams) always potentially applies to you and your Chinese manufacturer and to you and everyone else in your organization. Don’t forget to take a step back and review everything before plunging ahead with a seemingly good deal.

Oh, and this review I did. Almost without exception, we ended up having to tell the client that because of its less than stellar contract and its string of various mistakes along the way, we did not think it would make sense for it to pursue their Chinese manufacturer any further. In other words, these companies were now out millions of dollars and we did not think it economical for it to spend a penny more trying to get it back. The client initially complained about our conclusion, to which we essentially said, “Look, if you want to keep paying us to try to recover money for you that we do not believe can be recovered, we will not stop you from doing so, but we do not recommend it.” They ended up taking our advice.

Don’t let this happen to you. Be careful out there.

China trademark lawyers

We constantly stress the importance of securing trademark registrations in China. See e.g., China: Do Just One Thing. Trademarks. But upon seeing an email from one of our international IP attorneys to a client, it occurred to me that we have not written about what companies should do after they secure their China trademark(s).

So here goes, in the form of the fairly standard email we write to our clients once we have received notification from the China trademark office that the trademark application has been accepted and the trademark has now been registered in China.

We are pleased to report that the following China trademarks have been registered for Class 25 goods (i.e., clothing):

(1)    [Brand name]
(2)    [Brand name] logo

Attached please find a scan of the Certificate of Trademark Registration (along with an English translation) for each of the above-referenced trademarks. Please note the following:

1.    If ______[client] LLC (i) changes its name or address; (ii) licenses any third party to use either trademark; or (iii) assigns either trademark, it must file an application with China’s Trademark Office to that effect.

2.    Each trademark will be valid for a period of 10 years, starting on the official registration date of June 21, 2013, and ending on June 20, 2023. If you wish to renew the trademarks, you may do so any time within six months before the expiration date.

3.    Each trademark will be presumptively valid throughout its term, but if a trademark is not used in commerce in China at least once every three years with respect to the covered goods, then it is at risk of cancellation for non-use.

We are still waiting to receive the original trademark certificates. Based on past experience, we will likely get that in about a month or so and when we do, we will send those to you.

As we noted in our previous email, we should discuss some other ways to protect your intellectual property in China.

Registering your trademarks is the first and most important step, but there are two additional steps we recommend, especially to those who manufacture goods at risk of counterfeiting, like branded clothing. First, monitor China for possible infringement of your marks, including monitoring third party applications for similar trademarks. Second, register your trademark with China Customs. The latter is an essential step if you believe counterfeit product may be coming from China because Chinese Customs will not seize allegedly counterfeit products unless you have a registered trademark in China AND you have separately registered that trademark with Chinese Customs.

Please let me know if you wish to discuss these additional steps with us

China employment law FAQ

In China Employment Law Webinar: Questions Answered, Part 1 and Part 2, I answered many questions I was not able to get to during my recent webinar on China employment Law: What Your Company Needs to Know. This is the final part of the additional Q & A.

 

Question: Are China employers obligated to inform an employee regarding employment contract renewal and, if so, how long before the current contract expires must that employer notification be?

Answer: Like so many China employment law matters, the rules on employment renewals vary by locale. Most places require employers give notice of renewal/non-renewal at least one month before the current employment contract expires. Regardless of what local law mandates, our China employment lawyers typically recommend employers start the renewal (or non-renewal) process early because it is much easier to deal with this issue early on before the expiration of the current employment term.

 

Question: Will the non-compete clause be effective even if the employee has not received any compensation for the non-compete clause?

Answer: Do you mean the employee never received any non-compete compensation after termination of employment? Whether a non-compete will be deemed effective will depend on additional facts, such as what exactly the parties agreed on regarding the employee’s obligations, the duration of non-payment by the employer, as well as what the local laws say. Generally speaking though, an employer must continuously pay its employee for a post-employment non-compete agreement to remain in force. In addition, the employee may unilaterally terminate the non-compete agreement/provision if the employer fails to make its required non-compete compensation payments for three months or longer, so long as the employee performed his or her non-compete obligations up to that point.

 

Question: If a non-compete clause has been included in the employment contract, but the employee does not receive any compensation payment, can the employer trigger the clause effectively?

Answer: A lot depends on what the non-compete and the employment contract say. See also my answer to the question above.

 

Question: Can I engage contractors instead of employees in China?

Answer: Generally speaking, China does not allow for independent contractors. This means any individual must be engaged pursuant to an employment contract, and your Chinese company must fulfill all employer obligations stemming from such employment, including paying the employee a salary and making social insurance and other mandatory employee benefit contributions. If you do not have a legal entity in China, you cannot directly hire anyone there and the independent contractor approach will not work. See Doing Business in China Without a WFOE: Will the Defendant Please Rise. There are some complicated work-arounds for this.

 

Question: We are a WOFE with four staff in Shanghai. We use FESCO to handle payroll and contracts. However, we have found FESCO to be slow and in many cases negligent. Aside from doing this ourselves, are there other options?

Answer: It is a little hard to comment on your situation without gathering up additional facts. In our experience, FESCO is generally pretty good overall, (though sometimes slow and always expensive) but this varies by location. If FESCO is not responding to you in a timely manner, you should request to speak to a higher-level manager, and you should also start looking at other HR service providers. Your options will also depend on your contract with FESCO. This goes without saying but you should never rely on FESCO for legal advice because they are not China lawyers, employment or otherwise. There are other options, but all are complicated and each have their own risks and rewards.

 

Question: Can a US company send its employees to China to perform some short-term work for its customers in China without getting any special visa?

Answer: It depends on what you mean by “special visa.” It also depends on other factors such as what the employees will do and how long they will work in China. This is not something you want to get wrong because China has since coronavirus been looking even harder for foreigners in China without the proper visa.

 

Question: I believe one of the latest China developments is the requirement for a business conducting CBEC to now establish a WOFE in China. I was a WOFE legal representative in China in 2009 for a German company. Can you touch on key changes since that time for someone becoming a legal representative again in 2021?

Answer: This is a very specific question and I do not have enough facts to even hazard an answer. I suggest you send me an email with your detailed questions. We will then review and get back to you with our initial thoughts.

 

Question: We have an employee who started out great but now is terrible. She is on an open-term contract though. Are we still allowed to terminate her?

Answer: Just because an employee is on an open-term contract does not mean she is untouchable. For example, you can unilaterally terminate an employee (open-term or otherwise) without having to pay severance if you can show the employee committed a serious wrongdoing in violation of your employer’s rules and regulations. With that said, terminating an open-term employee tends to be much trickier than terminating a fixed-term employee. Your options will largely depend on your employment contract with this employee and on your employer rules and regulations. Generally, if there is a no legally permissible basis for a unilateral termination, you will need to try to get it structured as a mutual termination (which requires a severance payment of at least the statutory severance amount) and she, as an open-term employee, will have a great deal more leverage in terms of severance negotiation.

 

Have more China employment law questions? Please feel free to send them to me at grace@harrisbricken.com. And please feel free to send me any other China or international law questions because if I cannot answer them, there almost certainly will be another lawyer in my law firm who can.

 

China government hacking/data privacy

The Chinese government and its state controlled banks have worked hard over the last decade to “digitize” financial reporting and procedures. These days, a business operating in China virtually never needs to visit a Chinese government agency office or a bank. Transactions and reporting are done online.

For normal daily operations, this means all of the following are done through the Internet:

  1. Day to day banking
  2. Monthly tax reports
  3. Monthly tax and social insurance payments
  4. Issuance of VAT tax receipts
  5. Periodic reports to government agencies
  6. For importers/exporters, reporting to customs

If you try to do this kind of work through the old fashioned method of personal visits to the various Chinese government offices, you will be turned away.

All this appears to be modern and efficient. But this extensive use of the Internet conceals a hidden danger. In all these transactions, Chinese government agencies and the banks require the business make use of software provided by the agency or the bank. No independent software is allowed. This software is usually a package that includes connection software and anti-virus protection. In my experience, these packages are poorly written, buggy, slow and difficult to use. When installed on many businesses’ central computer, they slow operations to the point of being unusable.

But the real issue runs deeper. As I have discussed in earlier posts, the goal of the Chinese government is to make information networks in China closed to outsiders but completely open to the Chinese government. See China’s New Cybersecurity Program: NO Place to Hide and China’s New Cybersecurity System: There is NO Place to Hide. As I said in both of these posts, there is no place to hide. Once on the Internet, the information will be accessed by the Chinese government. To state the matter more clearly, the Chinese government has become the most active information hacker in China. So when a business installs the required software on its systems, this software is being provided by a hacker. The risks are obvious. In response to these two posts, many of our readers “suggested” we not be “so negative” about this hacking because “some of us still need to do business in China,” but nobody has  questioned our conclusion regarding the risks.

The reality of the risk has recently been exposed by Trustwave, a U.S. based cybersecurity consultant, in its report on a case where malware was included in software required by a Chinese bank for payment of taxes. See The Golden Tax Department and the Emergence of GoldenSpy Malware, subtitled, Trustwave SpiderLabs has discovered a new malware family, dubbed GoldenSpy, embedded in tax payment software a Chinese bank requires corporations to install to conduct business operations in China. The basic story is typical of China. The bank requires installation of its mandated software created by a private “big data” Chinese company working under contract with the Chinese national tax department. In other words, the mandate requiring the use of this spyware comes straight from China’s national government in Beijing.

The software contains a backdoor that takes two actions. First, all data submitted to the bank and all other data on the host computer is transmitted to a server owned by a private Chinese company connected with China’s national tax department. This server is housed on the AliBaba cloud. Second, the software allows the operator of the backdoor complete access to the entire host computer system. Trustwave provides standard advice on best practices for dealing with this type of infection. Their advice to remove the software is, however, simply not practical, since companies are required to use this spyware to do business in China. Their alternative is to install the software on a dedicated laptop that is fully insulated from the main company computer system. This approach prevents infection of the main company network system. However, it does not prevent the private data transmitted to the local tax authority from being transmitted to the malware server to be used for undisclosed purposes. It also is not clear how the Chinese government will treat a foreign company that isolates its exposed data to a sole, non-networked computer.

So now we know why all this Chinese government mandated software works so badly. The software is so filled with malware, backdoors and surveillance protocols that normal operation is slowed to the point of making many systems unusable. Those of us who work in China have always assumed this and now the Trustware report provides a concrete example.

The larger issue is that this forced installation of backdoor malware is a constant issue in China. It is not just the case of one piece of software from one bank. As this case shows, the national government works with government controlled banks, local governments, private software/big data companies and Chinese based cloud service providers to implement a system that allows total access to all information available on the networks located in China.

It might be possible to implement protections against one single piece of malware, as Trustware advises. But as a practical matter, it is impossible to implement protection against the constant and pervasive measures the Chinese government takes to access private company data. There are too many points of access. For example, government mandated inspection of company networks allows for installation of similar backdoor malware as part of the inspection process.

The issue is not simply the compromise of the China based system of foreign investors. Once the China system is compromised, the hacker (Chinese government) can almost always then gain access to the entire international network linked to the hacked system. The infection spreads from China around the world. Informatization, big data and full spectrum dominance is the Chinese government’s highest priority. If you operate within China’s borders, there is no place to hide. This has important implications for companies operating in China and this reality must be carefully assessed.

AD/CVD cases

Earlier this week we summarized the new antidumping (AD) and countervailing duty (CVD) petitions against Twist Ties from China.  But also that same week there were four additional sets of new United States AD/CVD petitions filed against the following:

  • Phosphate Fertilizers from Morocco and Russia (filed 6/26/20)
  • Silicon Metal from Bosnia and Herzegovina, Iceland, Kazakhstan, and Malaysia (filed 6/30/20)
  • Standard Steel Wire Mesh from Mexico (filed 6/30/20)
  • Seamless Refined Copper Pipe and Tube from Vietnam (filed 6/30/20)

Though none of these cases target China specifically, they all have some China angle as to what is happening in the affected industries or why these new cases were filed.  Below, we will discuss these Chinese connections and provide links to the proposed scope definition, list of exporters, and list of U.S. importers identified in each petition.

Phosphate Fertilizers from Morocco and Russia

The Mosaic Company filed this CVD petition targeting three companies, OCP, S.A. of Morocco and PhosAgro and Eurochem of Russia and alleged them for causing an unprecedented surge of low-priced imports that were heavily subsidized by the Moroccan and Russian governments.  Mosaic blames these imports for loss of market share, plummeting prices, declines in profitability and plant closures.

Mosaic as a publicly traded company, however, has stock analysts who have more prominently discussed how its recent performance were adversely affected by the prolonged U.S.-China trade war, the coronavirus, and unfavorable weather patterns that caused a delayed planting season which affected fertilizer volumes and prices through 2019 into 2020. China has been one of Mosaic’s most important markets, but between U.S. and China throwing tariffs at each other and the coronavirus shutting down China, demand for Mosaic’s fertilizer in China dropped sharply.  China has begun to lift some coronavirus restrictions and has started to resume economic activity. The U.S.-China Phase 1 deal, also provides further hope that the Chinese demand for fertilizer will resume. But neither the continued containment of coronavirus nor the continued viability of the Phase 1 deal are far from certain.

Scope – See here for the proposed scope definition from the petition.

Named Exporters/ Producers – See attached list here for a list of companies that Petitioner believes are producers and exporters of the subject merchandise.

Named U.S. Importers – See attached list here for a list of companies that Petitioner believes are U.S. importers of the subject merchandise.

 

Silicon Metal from Bosnia and Herzegovina, Iceland, Kazakhstan, and Malaysia

There have been five prior sets of AD/CVD proceedings against imported silicon metal, going back to 1978 when the first case was filed against Canada. The second wave of cases targeted silicon metal from China, Argentina and Brazil that resulted in AD orders issued in 1991.  Only the AD order on China still remains in effect out of this first batch.

The domestic industry then successfully targeted silicon metal imports from Russia in 2003.  A petition was filed against Brazil and South Africa in 2004, but then withdrawn.  Before filing this case, the same petitioner, Globe Specialty Metals (GSM), most recently filed a case in 2017 that targeted silicon metal from Australia, Brazil, Norway and Kazakhstan, but the ITC found that there was no injury caused by the subject imports.

Petitioner GSM is a serial user of the US trade laws that has repeatedly tried to stop the latest wave of silicon metal imports.  Even if AD/CVD duties are imposed, the US silicon metal market has always adjusted and found new import sources that could meet the demand that the US producers clearly could not satisfy. It’s gotten to the point that the domestic industry now has to target imports from countries such as Bosnia Herzegovina and Iceland that previously have never been the target of a US AD case.

Scope – See here for the proposed scope definition from the petition.

Named Exporters/ Producers – See attached list here for a list of companies that Petitioner believes are producers and exporters of the subject merchandise.

Named U.S. Importers – See attached list here for a list of companies that Petitioner believes are U.S. importers of the subject merchandise.

 

Standard Steel Wire Mesh from Mexico

Mexico is by far the biggest import source of wire mesh with Mexico accounting for over 40,000 short tons out of the total imports from all countries of 62,000 short tons in 2019.  China along with Canada were the next largest import sources, but only with about 8,000 short tons. Although this case may result in Mexican steel wire mesh imports being reduced, it appears unlikely that China will be able to step in as a replacement import source, as Chinese steel wire mesh are subject to Section 301 China tariffs.

Steel wire mesh is made from steel wire which was among the steel products covered by the Section 232 national emergency tariffs that President Trump imposed on steel and aluminum imports from most countries. US companies that were downstream consumers of steel products, such as the US steel wire mesh producers, likely were harmed by these Section 232 tariffs with reduced supply and/or increased prices, making it much harder for them to compete against steel wire mesh imports that did not have to deal with any Section 232 tariff costs.

Scope – See here for the proposed scope definition from the petition.

Named Exporters/ Producers – See attached list here for a list of companies that Petitioner believes are producers and exporters of the subject merchandise.

Named U.S. Importers – See attached list here for a list of companies that Petitioner believes are U.S. importers of the subject merchandise.

 

Seamless Refined Copper Pipe and Tube from Vietnam

This new case appears to target Vietnamese companies that were set up after the AD order was imposed on seamless refined copper pipe and tube from China in 2010.  The petition specifically notes that several of the Vietnamese producers had shifted production from China to Vietnam and now were shipping significant volumes that were depressing prices and injuring the domestic industry.  It is somewhat unusual that the sequel case took so long (ten years) to be filed, as usually the shift from Chinese producers moving to Vietnam results in a spike in US imports from Vietnam that triggers a new petition within a few years of the Chinese AD order.  The story line from this sequel case against Vietnam will likely be similar to that of the original case against China, but it will be interesting to see what kind of differences develop in this case.

Scope – See here for the proposed scope definition from the petition.

Named Exporters/ Producers – See attached list here for a list of companies that Petitioner believes are producers and exporters of the subject merchandise.

Named U.S. Importers – See attached list here for a list of companies that Petitioner believes are U.S. importers of the subject merchandise.

 

These cases will play out over the next year before two U.S. agencies, the U.S. Department of Commerce (“DOC”) and U.S. International Trade Commission (“ITC”).  The ITC will collect testimony and data from U.S. producers, foreign producers/ exporters, U.S. importers, and U.S. purchasers to determine if a domestic industry is injured by reason of the subject imports.  The DOC will focus primarily on the foreign exporters/ producers in their investigation of whether the named subject imports are being sold to the United States at less than fair value (“dumping”) or benefit from unfair government subsidies, and determine the amount of AD/CVD duties to impose.

 

Estimated Schedule of Investigations.

June 30, 2020 – Petitions filed

July 20, 2020 – DOC initiates investigation

July 21, 2020 – ITC Staff Conference

August 14, 2020 – ITC preliminary determination

November 27, 2020 – DOC CVD preliminary determination (assuming extended deadline) (9/23/20 – unextended)

January 26, 2021 – DOC AD preliminary determination (assuming extended deadline) (12/7/20 – unextended)

June 10, 2021 – DOC final determination (extended and AD/CVD aligned)

July 25, 2021 – ITC final determination (extended)

August 1, 2021 – DOC AD/CVD orders issued (extended)

Listen above or stream on SpotifyApple PodcastsGoogle Play or Stitcher!

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

In Episode #12, we discuss Iran with World Trade Center Utah’s President & CEO, Miles Hansen. We cover:

  • How Utah, a modestly populated landlocked state, punches above its weight in international business activity.
  • Significant developments in Iran’s recent history.
  • How Iran is perceived by the Saudis and its other neighbors in the Middle East and Asia.
  • Iran’s interactions with China and other state actors that affect global business and security.
  • What the West should know about the Iranian people as compared to the Iranian government.
  • Reading, listening, and watching recommendations from:

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

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

We’ll see you next week for another discussion on the global business environment, this time discussing working for the Chinese government as an American with guest James Moore.

A few weeks ago, in Hong Kong’s Saddest Day, we echoed legislator Tanya Chan’s sentiment after China’s rubber-stamp National People’s Congress announced it would enact national security legislation for the city.  As sad as that fateful May 21 was, we warned “the days ahead could be much sadder” for Hong Kong. Unfortunately, that prediction has come to pass. On June 30, the Law of the People’s Republic of China on Safeguarding National Security in the Hong Kong Special Administrative Region came into force, and every aspect of its enactment is confirming Hongkongers’ worst fears.

The new law was “kept secret from the public until 11pm local time, when the law officially went into effect.” And it wasn’t just the public that was kept in the dark: Hong Kong’s top official, Chief Executive Carrie Lam, “acknowledged in a press conference shortly after the passage that she had not seen a full draft.” This, however, did not prevent Lam (and a host of pro-Beijing toadies) from welcoming the new law, sight unseen.

This is a fitting start to Hong Kong’s new era of opaqueness, in which a new Office for Safeguarding National Security run by Beijing will handle offenses “endangering national security” (Art. 49(4)), while enjoying immunity from Hong Kong laws (Art. 60). Hongkongers accused of breaking the law could be sent to juryless Hong Kong courts (Art. 46), if they’re lucky. If they’re not, and their case is handled directly by the new national security office, they’ll be tried by prosecutors and courts designated by Beijing, in unspecified venues (Art. 56). As the Central Government’s man in Hong Kong helpfully clarified, the new office “abides by Chinese law and . . . Hong Kong’s legal system cannot be expected to implement the laws of the mainland.”

For some time now, it has been clear that the end was nigh for Hong Kong’s One Country, Two Systems arrangement. On June 30, the death certificate was issued in the form of the new law. It is simply impossible to look at the new law and claim with a straight face that Hong Kong retains any meaningful autonomy. In addition to the frightening prospects mentioned in the preceding paragraph, the new law directs the Hong Kong Government to establish a new Committee for Safeguarding National Security, which “shall be under the supervision of and accountable to the Central People’s Government” (Art. 12). This committee will have a National Security Advisor (NSA), “who shall be designated by the Central People’s Government” and who will “sit in” on Committee meetings (Art. 15).

For its part, the Hong Kong Police Force (HKPF) is required by the new law to “establish a department for safeguarding national security with law enforcement capacity” (Art. 16). The appointment of this new department’s head shall be approved by Beijing’s new national security office. Meanwhile, the Hong Kong Department of Justice must set up a “specialized prosecution division,” the line members of which must be approved by the new Committee (with its Beijing-appointed NSA) (Art. 18). The appointment of this division’s head must be approved by the national security office. Last but not least, Hong Kong’s Financial Secretary shall “appropriate from the general revenue a special fund to meet the expenditure for safeguarding national security” without regard to any relevant restrictions in Hong Kong laws (Art. 19).

In other words, Beijing will now vet police and prosecutorial appointments in Hong Kong, while telling the Hong Kong Government how to spend its money. Meanwhile, the stage is set to end Hong Kong’s long tradition of jury trials, in the cases where it matters most. To top it all off, a legal mechanism has been established to have Hong Kong offenses tried by Mainland Chinese courts, potentially at locations deep within China.

This is devastating. The nightmarish future that Hongkongers feared when Britain sold them down the river in 1984 (hmm) is here. (To be fair to the UK, it is very belatedly making some amends, by offering some Hongkongers a path to British citizenship.)

In the run-up to the enactment of the new law, there were many attempts to downplay its practical consequences, raising the possibility that the law would more than anything be held over Hong Kong’s head. Chief Executive Lam’s deputy said “only terrorists and separatists would be targeted by the law.” Even the Global Times, a Chinese Communist Party (CCP) mouthpiece, suggested the law would be used sparingly, only in cases involving collusion with foreign forces.

Well, the HKPF clearly didn’t get the memo. On the day after the law was passed, the force tweeted that “around 370 arrests, including 10 (6M&4F) for breaching #NationalSecurityLaw, have been made today.” Another tweet boasted,

A man was arrested for holding a #HKIndependence flag in #CausewayBay, Hong Kong, violating the #NationalSecurityLaw. This is the first arrest made since the law has come into force.

The photos that accompany the tweet show a simple black banner with 香港獨立 HONG KONG INDEPENDENCE emblazoned across it in white. This will get you arrested in the new dystopian Hong Kong, making a mockery of the Basic Law‘s promise of freedom of expression. Adding insult to injury, the CCP’s local goons will broadcast this obscenity to the world (helpfully adding hashtags to make sure the right people get the message).

No doubt, some in Hong Kong’s international business community will continue to put on a brave face. And for companies that are in China for China, Hong Kong might still be a better bet than, say, Shenzhen. But savvy companies and businesspersons will be looking very carefully at their Hong Kong exposure. Risks of all sorts have to be evaluated in a new light. To take just one example, the choice of Hong Kong as a venue for dispute resolution will be subject to increasing concerns, as I discussed in Hong Kong’s National Security Law Has Left Lawyers Uneasy (Law360). If litigation against a Chinese party, especially a well-connected and/or state-owned one, is a possibility, how secure will your company’s assets be in a Hong Kong bank? How impartial will a Hong Kong judge gunning for an appointment to the national security bench (Art. 44) be when hearing such cases?

The new Hong Kong will be fraught with serious dangers for international businesses. While Hong Kong will not turn into a barren rock, the city’s new reality is simply inconsistent with a role as Asia’s world city. And to be fair, the city’s decline began long before the national security law and the unrest that led to it. Hong Kong has been steadily losing out to Singapore and Mainland cities for many years, due to a variety of factors.

But the demise of One Country, Two Systems is not just killing off a world-class business center. Hong Kong’s very spirit has also suffered a lethal blow. As the imposition of the new law approached, Yuen Chan poignantly tweeted:

Do you remember that feeling of lightness when crossing from the Mainland into Hong Kong – knowing you could speak freely, publish freely, didn’t need to look over your shoulder, interviewees didn’t need pseudonyms, you could conduct interviews with a microphone out in the open?

“Feeling of lightness” perfectly captures the experience of returning to Hong Kong from the Mainland (at least in the good old days), even for non-journalists. That feeling of lightness for me was seeing my phone come to life with all the WhatsApp, LINE and Gmail messages that couldn’t get through while I was in China. It was being able to access news sources without censorship and find books that were not sold across the border. It was attending June 4 vigils, engaging in critical discussions about government policies at lectures, and visiting places of worship free of government interference. It was the care with which customs officers preserved chain of custody and recorded witness statements when I examined seized counterfeits at their warehouse . . . because rule of law mattered. It was a police force that could be trusted.

All of that is now at risk. The wonderful example of a Chinese society reaching the pinnacles of development is fast eroding. As in a reverse takeover transaction, the CCP is hollowing out the soul of Hong Kong, leaving only the thinnest of shells to give cover to those who naively or self-servingly claim it’s business as usual. Yes, the barristers may continue to wear wigs, the government’s pronouncements may pay lip service to civil liberties, and the street signs (and police tweets) may be in English. But behind that ornamentation, the reality is that from Beijing to Xinjiang to Tibet to Hong Kong there is now one system of repression.

What’s more, the turn of events in Hong Kong makes it clear that the CCP has no intention of making China look more like Hong Kong, but the opposite, giving yet more reason for despair.

China employment law Q & A

In China Employment Law Webinar: Questions Answered, Part 1, I provided short answers to a number of questions I was not able to get to before the end of my recent webinar on China employment Law: What Your Company Needs to Know. Below is Part 2 of that additional Q & A. I got so many questions there will be a Part 3 soon as well.

 

Question: I would like to better understand IP requirements for Chinese employees or contractors we hire: do work-for-hire copyright laws apply?

Answer: China does have laws on this, but they are not particularly clear nor well understood by China courts. It therefore is pretty much always much better for you to get this protection by entering into contracts with your employees that make clear your company will own the IP and set out your company’s requirements and expectations regarding the company’s IP. China’s courts understand and enforce well-crafted China-specific contracts. You mentioned contractors in your question and whenever I hear that I feel compelled to mention that there is virtually no such thing as independent contractors in China and believing otherwise is dangerous.

Question: Are there mandatory insurance rules to follow for the employer and the employee?

Answer: Yes. Each locale has different mandatory benefits which include mandatory social insurance. The common types of social insurance include maternity, unemployment, work-related injury, pension and medical insurances. China has recently stepped up its efforts to make sure all foreign companies are paying out all they owe in social insurance, so you do want to be sure you are doing this correctly.

Question: Is there any way to avoid the employer status by contracting the employees’ service? Would a recurring temporary contract work?

Answer: China puts people in jail and fines them a lot of money for treating someone as an independent contractor and for using temporary contracts to avoid China employee and/or tax requirements. China has also gotten incredibly effective at rooting out these violations. So I guess my answer is that you avoid these things unless you get an experienced China employment lawyer to confirm that you can retain someone as a temporary employee.

Question: Labor is a sticky wicket in China. We’ve taken the first step to reduce hours/salary for 90 days. Not without negotiation with each. The employee seems to rule. We may have to go again. How much can we count on FESCO for good information?

Answer: Just to be clear to everyone, FESCO is a well-known third-party hiring agency. They also provide HR-related services. My law firm’s employment lawyers work constantly with FESCO (and with various other third-party hiring agencies) and overall they tend to be fairly good, but this definitely varies by region and even by city. Many of the people at FESCO with whom we interact speak English well, but we sometimes need to “bridge the gap” between our clients and FESCO due to language barriers. Despite what I just said, you should not trust FESCO or any other third-party hiring agency because their only real goal is to do what is favorable for them and often that is harmful for you. I am not surprised that you would say employees seem to rule in China because the government does definitely favor them, but most of the time when employers have problems with their employees in China it is because they failed to lay the proper groundwork in their employment contracts or in their employer’s rules and regulations.

Question: Should employees in China be required to sign an acknowledgment form for Employee Handbook and company policies? What are the best practice suggestions for multinational employers to deal with anti-discrimination and anti-harassment in China?

Answer: As I noted during my talk, you should require your employees in China sign an acknowledgment form (in English/your native language and in Chinese — with Chinese being the controlling language) for your employee handbook and your company policies and potentially various other documents as well. In terms of suggestions to for a strong anti-discrimination and anti-harassment program in China, there is no one-size-fits-all. At minimum, your company policies on anti-discrimination and anti-harassment should both conform to all applicable Chinese national and local laws and also reflect your company’s culture and core values. In our experience, foreign companies usually get in trouble with their employees and with the Chinese government when all they do is translate their non-China-centric company policies into Chinese without modifying them to actually work for China.

Question: We are seeing many Belt and Road Initiative projects delayed due to COVID-19. Will this have long-term impacts on the future development of BRI and Chinese overseas workers?

Answer: I am not really qualified to answer this, but I do not see how it would not.

Question: What happens if an employer does not start the employee contract renewal process within the 6 months before the contract expires? Is there any risk for the employer? Is there any difference if the employment contract has been signed with a foreigner?

Answer: Generally speaking, an employer does not need to start the contract renewal process so far (6 months) in advance, although it usually does not hurt to start early. Normally, an employer just needs to start the contract renewal process a little more than a month before the contract is set to expire, unless there is a clause in the contract requiring the employer start the renewal process earlier. Specific requirements vary by location though and it is important you know what the requirements are for where you and your employee are located. An employer that continues to employ an employee under an expired contract can be subject to all sorts of problems and penalties, including a double wage penalty payable to the employee. There is not much difference if the employment contract is with a foreigner, except generally the foreign employee is not legally entitled to an open-term contract.

Please “stick around” for the final part of this series — Part 3.

twist tie China trade case

On June 26, 2020, Bedford Industries Inc. (Petitioner) filed antidumping (AD) and countervailing duty (CVD) petitions against Twist Ties from China.

Yes – twist ties – the thin bendable ties used to close garbage bags, bundle broccoli and other vegetables, and tie up all sorts of other stuff.  The petition does not publicly disclose the volume or value of the U.S. market for twist ties, but it’s gotta be small.  It probably rivals other cases such as Metal Calendar Slides from Japan and Commodity Matchbooks from India for the smallest industries to seek the U.S. government’s help for protection from import competition.

Twist ties account for such a tiny portion of the overall cost of any of the product that uses them.  Consumers likely would not notice if the cost of imported Chinese twist ties increased by 67.92%, the dumping margin alleged by the petitioner; hell, they probably wouldn’t notice if the price of twist ties doubled or even tripled.  But the twist tie producers and distributors who are selling to garbage bag producers, or to growers who need twist ties for their veggies, any significant increase caused by AD/ CVD duties could wipe out their razor thin profit margins on their sales of twist ties.  So although the size of the U.S. market for twist ties may be really small in the big scheme of things, for the small handful of players in this market, this case becomes a critical case to test whether they can continue to survive in this industry.

This case will play out before two U.S. agencies, the U.S. Department of Commerce (“DOC”) and U.S. International Trade Commission (“ITC”).  The ITC will determine if a domestic industry is injured by reason of the subject imports. The DOC will investigate whether the named subject imports are being sold to the United States at less than fair value (“dumping”) or benefit from unfair government subsidies, and determine the amount of AD/CVD duties to impose.

Below is a summary of what products are covered by the petition, who is affected by this petition and the schedule for the AD/CVD investigations.

Scope

The petition identifies the merchandise to be covered by this AD/CVD investigation as twist ties, which are thin, bendable ties for closing containers, such as bags, bundle items, or identifying objects.  A twist tie is comprised of one or more metal wires encased n a covering material (e.g., paper, plastic), which allows the tie to retain its shape and bind against itself.  Twist ties have a wide range of widths and thicknesses and can be sold as singles, or in spools, or in perforated sheets of spooled or single twist ties.

The scope includes ties used for television cable, computer cords, and other appliances and household ties.  Twist ties without metal wire also are covered in the scope, such as all plastic tie that contains a plastic core and plastic covering (wing) over the core.

The scope does not include products with wire and plastic material (e.g., pipe cleaners used in craft activities, wire bristle brushes) or plastic “zip” ties.

Twist ties are imported into the United States under Harmonized Tariff System of the United States (“HTSUS”) subheadings 8309.90.0000 and 5609.00.3000. Subject merchandise may also enter under HTSUS subheadings 3906.90.2000, 3920.51.5000, 3923.90.0080, 3926.90.9990, 4811.59.6000, 4821.10.4000, 4821.90.2000, and 4823.90.8600. These HTSUS subheadings are provided for reference only. The written description of the scope of the investigations is dispositive.

See here for the proposed scope definition from the petition.

Alleged AD/CVD Margins.

Petitioner calculated estimated dumping margins of 67.92%.

Petitioner did not provide any specific Chinese subsidy margin calculations.

Named Exporters/ Producers

Petitioner included a list of companies that it believes are producers and exporters of the subject merchandise.  See attached list here.

Named U.S. Importers

Petitioner included a list of companies that it believes are U.S. importers of the subject merchandise.  See attached list here.

 

Estimated Schedule of Investigations.

June 26, 2020 – Petitions filed

July 16, 2020 – DOC initiates investigation

July 17, 2020 – ITC Staff Conference

August 10, 2020 – ITC preliminary determination

November 23, 2020 – DOC CVD preliminary determination (assuming extended deadline) (9/19/20 – unextended)

January 22, 2021 – DOC AD preliminary determination (assuming extended deadline) (12/3/20 – unextended)

June 6, 2021 – DOC final determination (extended and AD/CVD aligned)

July 21, 2021 – ITC final determination (extended)

July 28, 2021 – DOC AD/CVD orders issued (extended)

China copyright movies and TV

China’s copyright law, in its present form, has been in place since 2010 and numerous proposals for amendments have been floated since that time. The National People’s Congress recently released another draft amendment and solicited public comment. As far as I can tell, this would be the 5th draft since 2010.

In a recent post I looked at proposed copyright law changes that would impact the music business. In this post I’ll be discussing changes that would impact the film and TV industries. To understand these changes, we need to revisit the current law.

 

Extant cinematographic works

China’s current copyright law recognizes a class of works that covers both cinematographic works and works created by a process analogous to cinematography. I’ll refer to all of them here as cinematographic works.  The law also makes an important distinction between cinematographic works and video recordings.

The implementing regulations of the present law defined cinematographic works as those consisting of a series of related images which, when shown in succession, impart an impression of motion with the aid of suitable devices, whether together with accompanying sounds or not. Cinematographic works are protected by copyright.

In the implementing regulations of the present copyright law, video recordings are defined as “recordations” of a series of related images, with or without accompanying sounds, that are not cinematographic works. Video recordings are not considered to have reached the high but fairly vague standard of originality applicable to copyright works in China. They are not given the same level of protection as cinematographic works and are protected only by certain neighboring rights.

Incidentally, one of the ongoing difficulties with Chinese copyright law is that although it enumerates the rights comprising copyright it does not clearly state which of these rights apply to which copyright works or other subject matter.  An indeterminate class of rights — such as the rights of “consent” or “remuneration” — is often the only link. These rights apply at times to both copyright works and non-copyright works, making the distinction between copyright protection and neighboring rights protection hard to follow.

 

Proposed new audiovisual works

Under the 2020 draft amendment to the copyright law, audiovisual works would replace cinematographic works. Audiovisual works would be treated in substantially the same way as cinematographic works are presently treated. For instance, copyright in an audiovisual work would still be owned by the producer; with the writer, director, cinematographer and others having a right of authorship.

The treatment given to video recordings would not change substantially and it may be inferred that the definition would also remain unchanged.

It may also be inferred that an audiovisual work would be more than just a cinematographic work — otherwise why have the new term at all? The trouble is that the draft law does not define what an audiovisual work is.

Perhaps some further amendments will be proposed or maybe a definition will be provided in the implementing regulations if the latest draft is enacted. At present, the only guidance as to the definition is to be found in the 2014 draft amendment, which, of course, was never enacted. It provided that an audiovisual work is a work composed of a series of continuous pictures, with or without sound, that can be perceived with the help of technical equipment. Cinematographic works and TV series were expressly included but TV programs or parts of TV series were expressly excluded. The definition is obviously unsatisfactory as it relates to TV. The intention may have been to exclude certain recordings, such as those of sporting events, on the basis that they lack sufficient originality.

 

The distinction between audiovisual works and video recordings?

As the proposed definition of audiovisual work is unclear, the distinction between an audiovisual work and a video recording is unclear too.

In 2014 it seemed that the problem might have been solved by simply removing video recordings from the equation. An explanatory memorandum to the 2014 draft proposed that the category be abolished entirely. The reason for the enduring distinction remains unclear.  Perhaps certain stakeholders or interest groups don’t want the added burden that would result if royalties become payable on a broader class of subject matter.

What is fairly clear is that originality will probably continue as the underlying criterion by which the distinction is made. Like the present category of cinematographic work, the new audiovisual work would be for things that have originality, but a mere video recording would continue for something without originality.

Though they aren’t dispositive, some of the Chinese court guidelines issued in connection with copyright infringement claims assist in understanding the thinking behind the distinction. Video recordings — the reasoning goes — capture events or productions with no storyline or only a simple storyline. They are not to be regarded as the personal creation of a director and there is no role, or only a limited role, for a cinematographer or an editor. It’s this same reasoning, by the way, that has prevented the protection of sports broadcasts as copyright subject matter in China. It’s a blunt instrument. I’ve  called it the stranglehold of originality.

Let’s hope the necessary definitions and distinctions become clearer if the new version of the copyright law comes into effect.

At present, supplementary contractual provisions can assist when a party wants a recording of borderline originality treated as a copyright work in a China contract. The need for provisions of this kind will likely continue if the new law is enacted in its present form.