China Entertainment Lawyer

The Hollywood Reporter recently did a story, entitled, “China’s Looming Entertainment Problem: Not Enough Lawyers,” discussing, among other things, intellectual property in China. Our own Beijing-based China entertainment lawyer, Mathew Alderson, was interviewed for that story and The Hollywood Reporter has kindly agreed to allow us to run a post based on the original interview.


Hollywood Reporter:  We’d like to first give a general overview of the state of entertainment and IP law in China.

Alderson:  There is no separate body of entertainment law as such, but it helps to understand how China generally views foreign investment. China limits the industries in which it accepts foreign investment or foreign business operations.  Foreign involvement in Chinese industries is categorized as “encouraged,” “permitted,” “restricted” or “prohibited”. Industries move between, or appear within, the various categories from time to time depending on the changing requirements of the Chinese authorities and the economy they oversee. An awareness of these categories not only assists foreigners to avoid illegal or unwise investments, it allows us also to understand the level of regulation to be expected in a particular industry as well as the business entity prescribed for that industry. Foreign involvement in the entertainment business in general, and the business of operating cinemas in particular, is “restricted” in China. It follows that there are substantial barriers to entry into the cinema business and the China film production business. These businesses are heavily regulated. Foreigners cannot operate in these areas independently of Chinese partners, so a co-production is required to make a film and a joint venture is required to set up a movie theatre.

As far as intellectual property is concerned, at first glance China’s legislative framework is world-class. This is largely because such a framework is a requirement of China’s WTO membership. The trouble is that this framework has been grafted onto a society with little frame of reference for its underlying concepts and the level of protection of intellectual property rights in China is often less than satisfactory despite the generally good quality of the laws themselves. I give some examples of current problems below.

In China, authority to adjudicate infringement and damages is vested in the courts and administrative agencies. So you have a situation in which the Chinese Patent Office, for instance, can make its own infringement determinations, award damages and issue injunctions without the need for a complaint filed in court.

One of the big issues at present is that foreign technology transfer is sometimes a pre-condition for market access. Trademark piracy remains a persistent and serious problem. Local businesses routinely register enterprise names that use famous US trademarks in misleading ways, often in conjunction with goods or services for which the US brand is famous. What we Westerners would see as Bad faith filings and trademark “squatting” are commonplace. And, as everyone is aware, DVD and online piracy are rampant. The Chinese government itself reckons that 15-20% of all products made in China are counterfeits accounting for around 8% of gross domestic product.


Hollywood Reporter:  Is this field developing fast enough to serve the booming Chinese film industry (expected to eclipse North America as the world’s largest film market in 5-10 years, as I’m sure you’re aware — the impressive growth numbers abound)?

Alderson:  I think it is developing steadily, but whether it serves any particular industry is another question.


Hollywood Reporter:  Is it reasonable to assume that more legal disputes will arise in the film and entertainment sector as the stakes rise and the value of the business grows?

Alderson:  Yes. That is a straightforward outcome of the sort of growth we are seeing. More business means more disputes in any market.


Hollywood Reporter:  This piece covering the “Lost in Thailand” suit quotes a consultant who suggests many studios are ill-equipped to handle IP protection issues (“Practitioners in the film industry have relatively weak awareness of intellectual property rights protection and very few companies would equip themselves with a complete team of lawyers in a film project or seek professional legal advice in advance.”) Do you agree with that assessment?

Alderson:  That may be the case with certain purely Chinese studios but I do not think it applies to everyone else.


Hollywood Reporter:  What kind of legal issues/problems/complaints do you think Hollywood parties are most likely to encounter/make in China?

Alderson:  It is generally assumed that China’s quota on foreign films is the biggest challenge but the quota has no application to domestic Chinese films or to official co-productions because these are regarded as domestic films. The biggest challenges are getting films approved by the Chinese censors and then getting paid a full share of box office. Foreign films must be cleared by the censors before they can be considered for the quota. Censorship comes first. China’s lack of any age rating system provides it with a useful and additional justification for censorship decisions. Censorship is a key issue because during the first 30 years or so of the PRC, foreign films were entirely banned and the film medium was seen mostly as a means of achieving “social enlightenment”. The government remains determined to subordinate the growth of the film industry to outcomes such as social stability and morality.


Hollywood Reporter:  What legal and other protections could and should a Hollywood studio seek when doing business in China?

Alderson:  There is a tendency to assume that US law and jurisdiction should apply to all contracts in all circumstances.  US law and jurisdiction are of little value unless the Chinese party has assets in the US. Just getting this jurisdiction piece right can be a critical form of protection.


Hollywood Reporter:   Are legal protections likely to be weaker for foreign parties than local counterparts in Chinese courts?

Alderson:   These days, foreign companies seeking to enforce contracts can often obtain good results in Chinese courts if the contract was written with the Chinese courts in mind and if the other party is a private company of a similar size. Having said that, it certainly is more difficult when you are suing a State Owned Enterprise (SOE) or a Government Agency.


Hollywood Reporter: Given that foreign (Hollywood) investment into China’s film industry, and partnership with local players, is continually increasing in scale, is it realistic to hope that new IP protection regulations might soon be passed and enforced in China?

Alderson:  Yes. Improvements are occurring all the time.  But at this point, the problem is not so much the laws and regulations, but rather, their enforcement.


This post was co-written by Mathew Alderson (my law firm’s lead China entertainment lawyer) and Tyler Cohen.  Tyler is fluent in Chinese and he worked with Mathew on China film matters this past summer before beginning law school at the University of Toronto.

Three factors are driving international interest in Sino-foreign movie co-productions: (1) China has the world’s second largest box office, (2) official co-productions are outside China’s quota for foreign films, and (3) co-productions are entitled to a higher share of box office than quota films.

The problem is that box office is about the only source of distribution income in China and getting paid your fair share is difficult. It is difficult whether you are a domestic Chinese producer or whether you are a Hollywood producer. This difficulty is a reality that must be confronted in production investment agreements for all films that will have Chinese elements or will require Chinese production investment. It must also be confronted when accounting occurs under collection agent management agreements for Sino-foreign co-productions that do well, or appear to do well, in cinemas here. We have several clients having to deal with this latter issue at present and they are not very happy with the situation.

A dispute currently underway between a Chinese production company and China Film Group indicates just how difficult getting funds due from box office receipts can be. This case is significant for a number of reasons. Most importantly, it demonstrates that Chinese companies too are experiencing difficulties in getting “their” money out of China film co-productions. Moreover, the very fact that a Chinese court accepted a case against a China State Owned Entity (SOE) indicates that the authorities here regard the issue of box office revenue sharing as important and want it sorted out.

Let’s look at that case.

At the outset, we should make it clear that litigation against China Film Group would normally not be considered a great move if you want to work in this town again. We should also make clear that we are not taking anyone’s side on this case, nor are we involved in it in any way.  And again, this is a China company versus China company dispute.

United Film Investment is suing China Film Group for what United Film alleges to be multiple violations of contract, including what it calls “severe falsification” of box office receipts, for the co-produced film “My Own Swordsman.” Publicly available numbers put the total box office take at roughly 220 million RMB (USD$35 million), though some reports place the total closer to 300 million RMB (USD$47.5 million). United Film alleges it repeatedly requested financial statements from China Film Group, who remained “evasive.” United Film Chairman Mr Hao Yaning stated that it has received only 5 million RMB ($800,000) from China Film Group thus far under an agreement entitling them to 30% of box office totals. United Film is currently suing for 100 million RMB ($16,000 million) in unpaid box office totals, plus interest. Anonymous industry insiders cited by one source claim that the actual amount due to United is far less, but another source asserts that even under the least favorable calculations, United is due more than four times what they allege to have received.

United alleges that China Film Group reported only one month’s receipts out of 90 days total screenings and that the total “promotional fees” China Film Group claims to have paid are inflated and include inappropriate items. United also has suggested that China Film Group did not perform all of the promotional work required of it and that it may not have invested as much money as required.

In response to the suit and numerous public statements by Hao Yaning, China Film Group lawyers released the following statement:

Before the courts have determined the relevant facts and passed judgment, United Film Investment has repeatedly publicized remarks on CFGC not giving the sufficient percentage to United Film as well as other [arguments] inconsistent with the facts. This has led to a serious misleading of the public, and has severely harmed the legal(/legitimate) rights and  interests of CFGC. CFGC [thus] retains the right to investigate legal liability on the part of United Film for severe infringement of CFGC’s reputation.

This warning may also be seen as applying to foreign studios. And given the central role China Film Group plays in distributing foreign films in China, it reinforces the idea that public airing of grievances may have unwanted effects.

Perhaps further complicating the situation is that China Film Group is in the process of doing an IPO for a subsidiary company. Industry insiders note that the current dispute may impact the IPO, especially if the court rules for United Film.

Foreign film companies involved in China co-productions are watching this case with interest and we will report back when warranted. No matter what, this case highlights the difficulties in getting money out of China’s box office.

For more on China co-productions and the China movie business, check out the following:

Our lead China entertainment lawyer (and regular CLB contributor), Mathew Alderson, was just named by Variety Magazine as one of 50 “Game-Changing Attorneys” who “rock the [entertainment law] biz.”  And, hey, we couldn’t be prouder.  The list consists of those “attorneys whose recent deals and court battles have changed the shape of entertainment.” Mathew and Yu Rong, from the Hylands Law Firm, are the only China-based attorneys to have made the list.

Variety had this to say about Mathew:

Mathew Alderson
Harris Bricken, Beijing
University of Queensland, Australia, 1989
Over the past 18 months Alderson has advised on various ventures between Chinese and foreign partners, including feature co-productions, theatrical joint ventures and post-production alliances. The latter have included a number of 3D initiatives — a hot area in China. This work has put him at the point of convergence between China’s production, post and exhibition businesses. “Here in China there are no ancillaries, there’s very little legitimate income stream other than box office, so people are very focused on box office,” Alderson says. “The only way to fully access box office is to co-produce, because co-productions are entitled to a higher box office share than foreign imports.”

We like it.

If you are interested in China movie law, check out the following posts Mathew has written for us: