Law schools want money. Law schools make money off their tuition. This means law schools want as many qualified students to enroll (within limits, of course) and this also means that they do not want their enrolled students to drop out. Law schools oftentimes try to entice students to enroll in their schools and to stay in their schools by touting what law students find sexy. Law students often find international law sexy. Law schools often tout their international law courses/programs and tout an international law career path so as to appear sexy to their students.

The above poses problems, mostly centered on the fact that there are incredibly few international law jobs for recent law school graduates. Incredibly few.

Let me explain, using the Seattle lawyer job market as the example.

First though, let me give you a greatly oversimplified primer on American law firms. There are the mega firms that do high level business work and there are the boutiques that do high level business work. The boutiques tend to be made up largely of lawyers who once worked at the mega firms. For the most part, only these firms do international business work. Even in a very international city like Seattle, there are really only a handful of firms that truly do much international legal work.

Now let me give you a greatly oversimplified primer on the hiring practices of the mega firms and the high level boutiques. These firms are obsessed with hiring people with high grades from highly rated law schools. Why? Because those “numbers” are the easiest way to “grade” potential lawyer applicants. Is this the best way to grade potential applicants? No, but it is the fastest and the easiest and if you are looking at a stack of 500 resumes and 250 of the people behind them have done amazing things with their lives and seem like truly stand-up people, you need to do additional filtering. This means that these law firms filter down to the ten or twenty they will interview by taking only really good students from the top law schools and maybe only the top 5-10% from a mid-ranked law school.

Here is where the problem arises. Since nearly all international legal work is done by the mega firms and the high end boutiques and many mega firms do not do much (if any) international law and hardly any boutique law firms do any international work, this means that law firm international law jobs are going to be limited only to the best students at the best schools.  On top of this, many (most) big law firms do not have recent law school graduates work on many (or any) international law matters. The feeling is that young lawyers must first become good at corporate law or tax law or dispute resolution or labor law or IP law or whatever before they get tasked with the additional layer of complexity of working on an international matter.

What the above means in real life for law students seeking an international law job with a law firm is that their class rank/school rank is going to be absolutely critical in determining their chance of getting an international law jobs and that even top ranked students from top ranked law schools with fluency in an important language for business are not likely to get an international lawyer job at a law firm right out of law school.

Now to the real point of this post. Too many law schools either intentionally or negligently put into the heads of their students that getting an international law job is no more difficult than getting any other law job.

From my perspective, I feel as though the law schools prefer to leave it up to people like me to burst their students’ bubbles and I have done that more than once. And though I do not enjoy it, I take a certain pride in it, because I believe that by doing so I am helping young lawyer wannabes, not hurting them.

One example highlights my myth busting work. Many years ago, I gave an informational interview to a middle of the class student from a law school ranked in the mid 100s about international law jobs at law firms in Seattle. I met with this student because I am friends with one of her professors and he really wanted me to speak with her. At our meeting I learned that she was fluent in French and was looking for a job in Seattle doing international law involving France. I was blunt, and I told her the following (note that I was less blunt than appears below, but the below has any niceties removed):

  • If we added up all the Seattle-France legal work done by all of the law firms in town I doubt there would be enough work to keep one lawyer busy full time.
  • I do not believe there is a single law firm in town that will view your fluency in French as a plus factor in deciding whether to hire you. In fact, if you emphasize your desire to do France work, I think most firms will consider that to be a negative because they will think that you are more interested in dreaming about France than in doing the nitty gritty legal work the firm generates.
  • What law firms in town do international law? I mean really do international law, not just mention it on their website?

We then talked about the three or four law firms in Seattle that actually do a decent amount of international law and all but my own law firm were mega firms. We then talked about how these firms virtually never hire middle of the class students from middle to lower tier law schools. Sorry, but they just don’t.

By this time, she was convinced that writing Seattle law firms for an international law job was not going to work (I also learned that she had been doing that for six months and getting nowhere) and so we then started talking about her real world options.

And on that, I had this to say:

What you need to do is get the best job you can. Forget about international. Focus on getting a job that will teach you how to be a good lawyer and that will put food on your table. Then after you have been in that job for a year or two, start figuring out how to “make it your own.” And by making it your own, I mean how you can mold it to suit what you really want to do. If you don’t actively mold your work, it will get molded for you and then one day you will wake up as so many lawyers do and really hate your job.

If you find yourself doing dispute resolution and you are enjoying it but you still want to be involved with France you do whatever you can to try to get dispute resolution work that involves France. How do you do that? You do that by educating yourself on French business, French law, French disputes, French anything. And you do that by getting to know every single French person in whatever city you are in and you get to know the French Consul and you get to know French lawyers in France and elsewhere and you write about dispute resolution involving France, etc.

So long as you are doing a good job with your law firm’s core work, they will likely be fine with your making efforts to bring in France related work. Small firms generally are happy to bring in whatever good work they can, but do not expect anyone there to help you much in bringing in the French work because they both won’t know how to do that and they won’t have time to do that and they won’t really care about it the way you do. And if you are doing corporate work, the same thing holds, but for corporate work.

A year later she wrote me a thank you email that said she was in a job she very much liked in a good-sized city doing corporate work for small businesses and that once she was more comfortable with the legal and client aspects of that work, she was going to start working on trying to position herself as the French expert in her city.

Because that is usually what it takes.

For more on what it takes to become a China lawyer/international lawyer, check out the following:

What do you think?

Got an email the other day from Dirk Chilcote.  Dirk did a guest post for us back in March, entitled, An Inside Look At China’s Ghost Cities. Dirk is now a third-year law student at Washington and Lee University.  Before that, (from 2008 to 2011) he worked as an English and international studies teacher in Zhengzhou, China and in 2012 he was a Kathryn Davis Peace Fellow at Middlebury College where he studied advanced Mandarin. He currently focuses on international law, specifically US-China policy.

Dirk’s email included a piece he had written on the Shanghai Cooperation Organization and he asked that I let him know what I think.  I responded with the following:

Dirk,

I like it.  It’s well written and it stakes out a strong and interesting opinion.

Frankly, I think you are 100% wrong, so if you don’t mind me taking a torch to your argument (and you shouldn’t if you are going to become a real lawyer someday), then I would love to run it.

Dirk responded by telling me to “torch away.”

So here goes.  First will come Dirk’s portion and then mine:

DIRK’S PORTION:

It’s no secret that one of the biggest obstacles to doing business in China is the ever-present fear foreigners possess about the lack of Chinese adherence to formal law. The blogosphere is replete with posts about some businessperson losing his/her shirt in some deal at the hands of the unscrupulous judge. While many of these stories are no doubt true, often these posts start with the assumption that the foreigner’s claim was legally flawless and only failed because of a complete lack rule of law in China.

Though China is still a developing country with a developing legal system, there are trends in China’s legal world worthy of note. For example, last month the Chinese government announced the first meeting of the heads the Ministries of Justice of the Shanghai Cooperation Organization member nations. In a joint declaration, the six full-fledged member countries (China, Russia, Tajikistan, Kyrgyzstan, Kazakhstan, and Uzbekistan) declared that in line with the general Shanghai Cooperation Charter, they would begin to coordinate on various legal matters. Granted, despite its growing significance, the SCO is still a relatively unknown international body. And the US – who itself applied for membership and was rejected in 2005 – continues to criticize it for its anti-Western stance (not unlike Johnny sticking his tongue out at the kids in the tree house after they post the “no Johnnies” sign on the door).

Nonetheless this unprecedented move toward cooperation in regional rule-making should not be overlooked. Though the organization may not want any Western members just yet, rumor has it that India and Pakistan – already observers in the organization — may become full members within the next few years. This kind of regional organization could not only serve as a positive institution for maintaining security and communication but, with the announcement that it will begin to formally coordinate lawmaking, contribute to the creation and adherence of stabilizing laws inside and outside of China.

The SCO has a long way to go before it reaches the level of coordination and stabilizing effect of the European Union, but it is a start. Whether or not you buy the argument that the SCO is more like an Asian version of NATO meant only as a military counterweight to the United States, the fact is that the organization is looking more and more like a comprehensive attempt to foster economic stability for Chinese government and business. If the byproduct of China pursing its economic interests is cultivation of stronger legal norms, then from a business perspective, the SCO in its current trajectory is all upside.

 

MY PORTION:

Dirk, Sorry.  As much as I would like to believe that China is heading more towards a rule of law regime, and as much as I actually do think it is doing so, but ever so slowly, I think this whole Shanghai Cooperation Organization is irrelevant for the following reasons:

1.  I’m a cynic.  I have been practicing law for a long time and dealing with places like China for much of that time. I even went to high school in Turkey back when people thought that it would seamlessly become a part of Europe and become just like France.  I’m a cynic when it comes to country groups really effecting change.  I still have bets outstanding (and on which I believe I will collect) that there will be no EU come 2018 — I made these bets in 2008.  Country groupings are fine for reducing tariffs but they do not do much to reduce nationalism and they do even less to effect rule of law change within individual countries.  Something like rule of law comes from within, not without.

2.  Even if country groupings do help bring about rule of law changes, why in the world would anyone think that this country grouping would have that sort of impact?  I mean, let’s get real here Dirk. Does Uzbekistan have anything to teach anyone about rule of law?  And maybe it is just me, but when I cannot remember ever having put rule of law and Tajikistan in the same sentence either.  And Kyrgyzstan, Kazakhstan, and Russia are not exactly its poster children either.  If joining a country grouping is going to impact an individual country’s progression towards rule of law, isn’t it more likely that China will be negatively influenced by these countries, as opposed to positively influenced?

No Dirk, this Shanghai Cooperation Organization — to the extent it is or becomes anything at all — is going to have zero impact on rule of law in China.  Zero. Zero. Zero.

Who’s with me?

I must receive at least twenty emails every single week (no exaggeration) from law students (mostly), potential law students, and even lawyers asking me what they should be doing to become a China lawyer or an international lawyer.  In most cases I respond by telling them that they should go to the best law school they can (if they are not already in one), get the highest grades that they can and master as many foreign languages as they can.  I then refer them to this blog and the following posts I have written on this topic:

Though nothing has really changed on this front since I last wrote on this issue in 2008, it is probably time for a new post.  I thought about that today when a law student emailed me a link to a Quora question and answer session regarding what it takes for someone to succeed in working for a company in China as a foreigner. The law student specifically referred to answers given by David Wolf and asked whether those things apply to lawyers as well.  Yes, Virginia, they do. They really do.
The specific question on Quora was “What are the key skills needed to succeed working for a company in China as a foreigner?” David Wolf’s excellent answer shows as number one because the highest number (including a number of prominent China bloggers) voted it number one.  Wolf’s answer is as follows:
As someone who has hired on behalf of large and small companies here in China, I can tell you the kind of young foreigner who gets hired has most or all of the following.

1. Chinese language skills: Language is the key to culture, and if you don’t understand the culture here, you aren’t going to add much value, and you’ll be gone within 2-3 years. Sure, a lot of people speak English, and it is easy to operate in an English bubble in larger companies. But the better your Chinese and the better your appreciation for the culture, the better you’ll fit in.

2. Communications skills: industry specific knowledge and skills can be learned. You need to come in with the clear ability to express yourself in both written and spoken form.

3. An ability to roll with the punches: operating in a cross-cultural environment is trying at the best of times, and at the worst of times would test the patience of a saint. If you are high-strung or expect things to work the way they’re supposed to all the time, don’t even get on the plane to come here.

4. A very clear idea of what you offer that is hard to find or is unobtainable from among your Chinese peers, and the ability to express that well. If you can’t tell me in 50 words or less what you have that I need but I can’t get from a fresh Tsinghua University graduate, you are wasting your time and mine.

5. Passion for the business that is so real that others can feel it walking into the room.

6. Integrity: Like few other places on the planet, China will test your character and your ethics. If you do not know when or how to stick to your principles when the chips are down, you’re part of the problem.

7. Excellent project management skills: This is something in fairly short supply among people coming out of school in China, and it is expected from expats.

8. Creativity: I don’t mean Pixar-style creativity, but the ability to come up with new ideas, to not only think outside of the box but burn the box altogether.

9. Last and by no means least, a demonstrated commitment to China: Most hiring decisions for China and Asia positions — even for multinational companies — are made on the ground here in the region. If anything, this is more the case now than it was a decade ago, as most firms have so expanded their operations in the region that the Asia HR function is managed separately.

 

I will go through the above one by one and analyze how they apply to international law.

  1. Chinese language skills.  For lawyers, being able to read and write a language are more important than being able to speak it and law students need to realize this.  Being able to order a beer in Chinese is great, but being able to read and analyze Section 308 of such and such code and being able to read a ten page contract in Chinese in the same amount of time it would take you to read it in English is what law firms really need.
  2. Communication skills.  Absolutely.  Want to piss off a client?  Send them a long email giving them six options without making any recommendation.  Want to make a client happy?  Send them an email ranking three options.
  3. Ability to roll with the punches.  Absolutely.  This is particularly true at smaller law firms and companies and this is a crucial element in how we hire at all levels. One of our lawyers began with us as a legal assistant and we hired her because she had great marks as a cocktail waitress at a Vegas casino — we figured if she could keep her cool while dealing with a bunch of drunk losers, she could keep her cool in a fast-paced office. We just hired a new receptionist who used to be the interface between a private school and the students’ parents.  I love asking potential hires about their travels and I do so because I want to know if they like going to the same ski resort every year or prefer to go to remote villages in Guatemala.  I figure that the person who treks to Guatemala in her spare time has learned to roll with the punches.
  4. A very clear idea of what you offer.  Sure.  If a potential hire cannot pitch me on his or her skill-set, it is unlikely they will be able to instill confidence in others.
  5. Passion for the business.  If you interview with me and I think you have not spent hours poring over our website or that you are doing so just because you want a job (as opposed to this job), you have no chance. I stretch this even further by wanting to see passion in other things as well.  I want someone who shows passion for something and I do not care what it is.  Passion translates.  The last kind of person I want to hire (for a million reasons) is the person who just doesn’t seem to care about anything.
  6. Integrity. This is in many respects everything. The lawyer-client relationship is based on trust and it cannot work without it.
  7. Excellent project management skills.  This is very important, but generally there is (at least in law) a fairly high correlation between high grades and the ability to develop these skills.
  8. Creativity.  Far more important for the law than most law students realize.
  9. A demonstrated commitment to China.  See number 5 above.
What do you think?  What else?

Today I am going to be speaking at Grinnell College, my undergraduate alma mater. I am going to be talking to students about what it takes to practice international law. I know this sounds geeky, but I love speaking before students because I enjoy talking with people who are excited/energized about what they will be doing. I also love their willingness to ask the tough questions.

I also enjoy how these talks force me to examine what I do and how that differs from other legal areas. When you get right down to it though, practicing international law is not so different from practicing domestic law and the attributes of a good lawyer in both arenas are pretty much the same: hard work, a competetive nature, good analytical skills, and an ability to connect with people. In both domestic and international matters, the goal is usually to analyze and structure a matter to best serve your client’s interests. International law is in many respects domestic law with additional issues that happen to be international.

I see the greatest differences between international lawyering and domestic lawyering on the psychological level. If you are going to practice international law well, it is absolutely crucial that you keep an open mind and not get too wedded to doing things “the American way.” When I was just starting out as a lawyer, I wrote an article on the basics of doing business in emerging market countries. In that article, I talked about how important it is to keep an open mind:

Doing business in an emerging market means taking nothing for granted. I have a mantra for my own legal work in these countries that translates well to the business world: “Assume nothing, but assume that you are assuming things without even realizing you are doing so.”

Things will be different. Very different. Things you take for granted in your home country might not exist in the emerging market country. Things you take for granted in your home country might be the exact opposite in the emerging market country. Things you think will be totally different in the emerging market country may be exactly the same. Things you thought you knew about emerging market countries based on what you know from another emerging market country may be completely different in a neighboring country, or even in another region within the same country.

Though it sounds like a cliché, I think keeping an open mind is maybe the biggest difference between the practice of international law and the practice of domestic law. Though keeping an open mind is obviously important in a domestic context, it is absolutely essential when operating internationally.

What do you think?

As we are always saying, you can win all the cases you want against Chinese companies in United States courts, but getting them to pay is another thing. Yet the march of Chinese companies to US stock market listings may be changing that ever so slightly. For small-time Chinese firms used to doing business on their own terms, often with little regard for contracts, this can be a radical realization.

This is what makes the spectacle of publicly traded Vision China Media’s (VISN) battles in the New York courts such a great test case.

Let me explain.

VisionChina’s business is those television screens playing advertisements in just about every elevator, bus and subway in China. This is an industry that has had some amazing revelations recently. Most notably, China MediaExpress (CCME) is facing so many fraud allegations, NASDAQ has halted trading in its stock (this is a fascinating story in its own right). Meanwhile, most every reputable company working for them has walked away. Fraud in Chinese reverse-listed companies has become almost expected, but VisionChina looks a bit different. It secured its NASDAQ listing by going the traditional IPO route and it is now being accused of simply refusing to pay for an acquisition.

In 2009, VisionChina agreed to buy DMG, an industry rival with a foothold in the subway sector. DMG was particularly appealing because it had just won the contracts for the Shanghai subway systems ahead of the 2010 Expo. The deal was structured so DMG’s investors would get $100 million in cash and stock at or about when the deal closed, along with two subsequent $30 million cash installments on each of the first two anniversaries of the closing date. In “Fear The China Joint Venture And Front-Load Your China Licensing Agreements,” we talked of the importance of front-loading payments in your China deals.

The public documents on the case go into too much detail to cover here, but the gist is that VisionChina put the first $100 million payment into escrow to be released a few months after closing and a large portion of that money was released as planned, with several more million of those escrow funds released a few months later.

After that though, things started getting sticky. VisionChina turned in a couple of very bad financial quarters and then it decided it wanted to re-negotiate its DMG deal. Not surprisingly, DMG had little interest in revisiting its already done deal with VisionChina. Then in August, 2010, VisionChina’s CFO, Scott Chen, resigned and VisionChina’s founder and CEO, Li Limin, had this to say in a press release:

Mr. Chen has made significant contributions to VisionChina Media’s financial management and investor relations. Additionally, he led our successful acquisition of Digital Media Group Limited in 2009 as well as the integration of the two companies. We are saddened by Mr. Chen’s decision to resign, but respect his wish to further pursue his career in investment banking. We are grateful to Mr. Chen for his service to the Company and wish him well in his future endeavors

Not exactly the words of a CEO firing his CFO in a fit of rage.

Now let’s fast forward to December 2010. VisionChina is already late on its second installment payment to DMG and it then pre-emptively(?) sues DMG’s investors claiming fraud. The fact that a Chinese company doing business exclusively in China chose to sue in New York is a testament in itself to the new calculation for US-listed companies.

VisionChina’s complaint sets out the following:

On December 24, 2009, just over a month after the Closing Date, VisionChina received Unaudited Interim Condensed Consolidated Financial Statements for the eight months from January 1, 2009 through August 31, 2009, which had been prepared by Ernst & Young (the “E&Y Report”). The E&Y Report revealed for the first time that DMG’s total revenue for the first eight months of 2009 – the period covered by the Management Accounts – was not RMB 104.7 millions, as represented.

*  *  *  *

[DMG’s investors] must have known that they were giving VisionChina false financial information during due diligence in order to induce VisionChina to enter into the Merger Agreement.

In other words, DMG’s investors misrepresented DMG’s financials. Well, maybe.

VisionChina apparently released tens of millions of dollars from escrow on January 2, 2010, more than a week after it said it received the E&Y Report. Then five months later, VisionChina released millions more. VisionChina apparently waited more than a year after reading the E&Y Report to bring its case against the DMG investors. I know nothing more about this case than what I have read in the public documents, but in my experience companies do not usually wait so long to sue in these sorts of circumstances; there is a saying in the legal business that debts do not get better with age.

In his affidavit, VisionChina’s former CFO, Scott Chen states:

I did not think at the time [of closing that DMG’s] revenue report was particularly impressive…I was primarily concerned  with verifying DMG’s subway contracts because of the strategic nature of the acquisition and DMG’s revenue stream was not the primary reason for the acquisition.

*  *  *  *

The [Ernst and Young] SAS 100 Report did not reveal any issues with the 2009 preliminary management accounts that would have prevented the closing of the acquisition of DMG.

At no time in the period between the signing the Merger Agreement and my departure in August 2010 did I participate in any discussions concerning any alleged fraud in DMG’s unaudited financial statements, nor was I aware of any such discussions.

Remember when Mr. Chen resigned in August 2010, VisionChina’s CEO, Li Limin, said he was “saddened” to see him go.

I’m looking forward to watching this case play out for three reasons:

  1. VisionChina is a Chinese company that listed on NASDAQ by way of a standard IPO. The prevailing wisdom says a company is more likely to be on the up and up if it goes through the more rigorous process involved with this type of listing.
  2. As a U.S. listed company, VisionChina has reasons to be concerned about an adverse New York court ruling and would likely face real consequences if it chooses not to abide by any decisions by that court.
  3. Given ChinaMedia Express’s recent near total collapse, I wonder what another market player taking a major hit will do to the Chinese media sector. I should stress, however, that unlike with ChinaMedia Express, I have seen no allegations that VisionChina is not a legitimate functioning company — merely that it is reneging on its contracts.

Perhaps, most interestingly, unlike many disputes between Chinese and foreign companies, this drama is going to play out in full public view. It should be interesting and I will be watching. No doubt there will be more lessons to be learned from this case.

What do you think?

Last week, I gave an hour long talk before the Pacific Northwest Chapter of the International Association of Outsourcing Professionals (IAOP). My talk was entitled, “The Legal Myths, Realities, Traps and Benefits to Outsourcing to an Emerging Market,” but I should have called it everything you need to know about the law of outsourcing, crammed into an hour.

The following is the written version of the speech I gave. Please realize this was a speech and not a paper and read it accordingly. I would ordinarily break something like this up into a series of posts, but there really was no logical way to do that with this and so I am giving you the whole (very long) thing in one fell swoop.

INTRODUCTION

I am going to start by telling you a little bit more about me so you can better understand where I am coming from when I talk about international outsourcing and, more particularly, outsourcing to an emerging market.

I am an international lawyer and what that means is that I focus on legal matters involving multiple countries.

In the last ten years, about 50% of my work has involved China, about 10% has involved Russia, 10% Korea and 10% Vietnam, with the remaining 20% percent involving mostly India, Turkey, Thailand, Indonesia, Malaysia, and various countries in Eastern Europe and in Latin America.

So as you can tell, the bulk of my work has been with emerging market countries.

My clients have been a fairly even mix of tech, service and manufacturing companies and I have written and reviewed countless international outsourcing agreements for all three types of business. I have represented both companies that were contracting for outsourcing and companies that were contracting to provide outsourcing. I have been at this long enough to have taken part in what I see as the evolution of outsourcing from the United States. This means I started out mostly dealing with contract manufacturing of goods and then started working on the contracting of technology services and BPO outsourcing. In the last few years, I have been handling an increasing number of outsourcing contracts involving medical clinical trials and professional services.

For the last five years, I have also written a blog on China, which has put me in touch with hundreds of companies involved in doing business internationally, many involving international outsourcing to emerging market countries, especially China. This has given me a much wider perspective than I would have received from my law practice alone.

My talk today is going to be based in large measure on my experiences and on what I have learned from talking with clients and other businesses that are engaged in international outsourcing with emerging market countries.

I am going to focus more on how things really are than on what the law says about how things should be. The distinction between what a country’s laws say and how those laws are actually enforced in the real world is a very important one, particularly when dealing with an emerging market country where the laws are often very good, but the enforcement of them is often very poor.

My goals will be to highlight the legal issues related to outsourcing to an emerging market country and to provide approaches and methods for dealing with those issues.

 DEFINITIONS/SCOPE

What exactly is international outsourcing?

For purposes of my talk today, I will be defining it as using another company to provide your company with a service or a product. I am intentionally being very broad and simplistic here because the legal issues involved in international outsourcing typically apply across the board to most “outsourcing” situations and I do not want to get bogged down in making fine distinctions between the various types of outsourcing.

The “international” part of “International outsourcing” simply means that at least two of the companies involved in the outsourcing be from different countries. International outsourcing does not include a contract between a US company and the US arm of a foreign company when all of the outsourcing work will be done in the United States, because in that situation, no international law issues are likely to be implicated.

I am going to give my own intentionally broad definition of what constitutes an emerging market country because I tend to disagree with most lists and definitions of emerging market countries, both because they so often include what I see as developed countries, like South Korea, Poland, and Chile, and because they so often fail to include a country like Viet Nam, which has been one of the fastest growing countries over the last five years and will, I am convinced, be one of the fastest growing countries over the next five years as well.

In broad and simple terms, my definition of an emerging market country is any country that is growing fast, is able to feed its people, and is not yet highly developed.

Now, I fully realize that all or nearly all of you here today are primarily or exclusively involved in technology outsourcing, so when possible, I will focus on international technology outsourcing. However, from a legal perspective, the big picture issues involved in outsourcing the manufacturing of a shirt button in China are surprisingly similar to the legal issues involved in outsourcing the writing of complex software code to India.

 

In both cases, the primary issues usually revolve around:

 RISKS/BENEFITS

In choosing whether or not to outsource, U.S. companies typically weigh the perceived benefits of outsourcing versus the perceived risks.

The perceived benefits typically are one or more of the following:

  • Reduced Costs
  • Having an outside company handle the non-core aspects of the business
  • Better quality/operational performance
  • Around the clock work force

All of these benefits can be realized by outsourcing to an emerging market country, particularly the lower costs and the 24/7 work force.

But of course, there are risks to outsourcing as well, including the following:

  • Your vendor will do a bad job
  • Your vendor will do a bad job, yet still expect full payment
  • Your vendor will steal your data
  • Your vendor will steal your Intellectual Property
  • Your vendor will steal your trade secrets
  • Your vendor will sell your data or IP or trade secrets to one of your competitors
  • Your vendor will use your data or IP or trade secrets to compete with you
  • Your vendor will cost more than expected in the short term due to transition costs
  • Your vendor will cost more than expected in the long term
  • Your company will lose its innovation edge because someone else is doing its key work
  • Your vendor’s personnel tomorrow will be different from your vendor’s personnel today
  • Your company’s morale will be negatively impacted by your outsourcing
  • Suing and collecting meaningful damages from your vendor may be difficult
  • Politics will impair the project
  • The price will change due to currency fluctuation
  • An inability to secure visas will impair the project
  • Crime will impair the project
  • You might face export control issues
  • You might face Foreign Corrupt Practices Act issues (FCPA)
  • You might get snared in your vendor’s labor/employment law issues
  • You might get snared in your vendor’s bankruptcy

Nearly all of the above risks are present even when you outsource domestically, but nearly all of these risks will be greater when you outsource overseas and nearly all of these risks will be even greater still when you outsource to an emerging market country.

Let’s look at a few of these risks and how going to an emerging market country makes them even greater.

Let’s take the first one: your vendor doing a bad job. If you are outsourcing to a country with a really different language and culture, the chance of a miscommunication is greatly increased and bad communication can cause your vendor to do a bad job.

I can give you a very real example of how this can easily happen, even if your company has strong language skills. A few years ago, my firm was handling a lawsuit in China. We were representing a United States company owed money by a Russian company and we knew the Russian company would be shipping its product to Dalian, China. My firm has two U.S. trained lawyers who are completely fluent in spoken and written Chinese (one here in Seattle and one in China) and a Chinese lawyer who speaks pretty good English, so we were pretty much covered.

We put our lead China lawyer on the case and he and I were handling the matter together. His Chinese is so good that he at one time taught law at China’s best law school — in Chinese. We then brought in a really good Dalian lawyer to assist us on the case and we asked her, both in English and in Chinese, whether we would need to post a bond to seize the Russian company’s product when it hit China and she said “no.” I passed this information on to my client and we thought we were done with that issue. Then, a few weeks later and only a few days before we were to file our complaint, the Chinese lawyer told us that our client would need to come up with around $200,000 for “counter-security.” We simply had not realized that our Dalian lawyer would consider a bond to be different than a counter-security because the word “bond” is usually used to cover all sorts of required payments in this sort of situation. And on the flip side, our Chinese lawyer just assumed we knew all along that we would need to post a “counter-security” because she just assumed that those were required everywhere.

So even though both parties spoke the language of the other quite well and even though both parties were international lawyers, a miscommunication occurred.

Can miscommunications occur domestically? Of course they can…. But they are more likely when the language and the culture are very different.

Let’s talk a bit about the fourth one on this list: theft of Intellectual Property (IP). Emerging market countries do not respect IP as much as developed countries. There is no getting away from that.

In the 1800s, the United States, which could be said to have been an emerging market country at that time, was notorious for its IP infringement. IP enforcement tends to correlate very closely with income because countries do not tend to enforce IP laws until their own native companies have started building up their own IP and pushing hard for IP enforcement.

Each year, the U.S. Trade Department comes out with a list of countries it believes to be the worst IP scofflaws and the following countries made its Priority Watch List and its Regular Watch List:

PRIORITY WATCH LIST

  • Argentina
  • Canada
  • Chile
  • China
  • Costa Rica
  • India
  • Indonesia
  • Mexico
  • Philippines
  • Russia

WATCH LIST

  • Poland
  • Ukraine
  • Vietnam

As you can see, China, India, Indonesia, Mexico, the Philippines and Russia are all on the priority list. IP protection in Vietnam is no better than any of the countries on the priority list and I think the only reason it didn’t make the priority list is because it is newer to the international marketplace and because it is not as economically developed as some of the countries on the Priority Watch List. Canada is obviously a very interesting one. It is on there because it is such a developed country and it is our neighbor, and it has a few really strange IP laws, including, I believe, that it is not a crime to import clearly counterfeit goods. The point of my showing you these lists is to highlight how virtually all of the outsourcing powerhouse countries are on these lists; and if they are not, they should be.

So turning over your IP to an outsourcing company in an emerging market country means you will likely be taking on risks that you would not be taking on if you were turning that IP over to a company in Fargo, North Dakota.

REDUCING THE RISKS

How then can you protect your company from the risks of doing business with a company in an emerging market country?

There are three main ways and all are critically important.

  • Due Diligence on the company you are thinking of using
  • A good contract with the company you end up using
  • Quality Control monitoring every step of the way

Note how only the second of these three is explicitly legal. I am going to talk about the first two. I am not going to talk about Quality Control (QC) because I figure you all are much more knowledgeable about that than I am.

Let’s first talk a bit about Due Diligence.

It is absolutely critical.

I have already done a fair amount of talking about various countries, but to a large extent it is not the country that matters, but the company with which you are doing business.

First off, countries do not tend to be monolithic. Take China, for example. Shanghai is in most respects more like New York than it is like a tiny city in a remote Chinese province. If you have to sue a Chinese company in China, you will be far better off suing in Shanghai where your judge will likely have a law degree from a top university and view his task as ruling fairly. If you sue a Chinese company in a remote province, your judge’s “legal” credentials might consist of a fourth grade education and a prestigious war medal.

The same is true of Russia, where Moscow is more like New York than it is like Magadan. I was once stranded in Magadan in January when the city had no heating oil, so you are going to have to trust me on this.

Second, and even more importantly, the reputation of the particular company with whom you do business should trump the reputation of the country in which that company is based. I am always telling my clients that no matter how good a contract I write and no matter how good the court system is of whatever country is going to enforce that contract, if you enter into a contract with a crook, you are all but guaranteed to face major problems. Conversely, if you enter into a contract with a company that wants more than anything to do a good job for you so as to build up its reputation worldwide, things will almost certainly go well for you, no matter in what country that company is based.

So what due diligence should you do?

The quick, pat answer is whatever is appropriate in terms of the value of the contract. Your due diligence on a 30 thousand dollar outsourcing deal should be very different from your due diligence on a 30 million dollar deal.

You have to be serious about your due diligence, or don’t even bother. For example, if your potential outsourcing company says it did good work for some other company, don’t just believe it. Check it out.

A few years ago, an American company came to me wanting to sue a Chinese company for having provided bad product. When I asked this American company why it had gone with this particular Chinese company in the first place, the American company told me that it had picked this Chinese company because “so and so” had used them. The funny thing was that “so and so” had come to me maybe six months earlier wanting to sue this same Chinese company for bad product as well.

So I then asked the American company if it had ever checked with the first American company regarding its satisfaction with the Chinese company and they told me “no.” They had just assumed that the first American company was happy with the Chinese company simply because they were using them. The second American company lost about a million dollars because of this assumption.

I always recommend going over and visiting the company with whom you are contemplating doing business. Business is business and many of my clients have told me how surprised they were at how easy it was for them to distinguish good companies from bad companies by going and visiting them, even in countries where they did not speak a word of the language.

And don’t be afraid to push for the information you think will be helpful to you. American companies are oftentimes reluctant to be seen as pushing too hard for fear of indicating mistrust. In my experience, the legitimate foreign company actually welcomes the opportunity to prove it is bona fide and it will usually bend over backwards to get you the information you seek. On the other hand, the illegitimate foreign company will usually claim that what you are seeking is “never done” in their particular country.

This means that the way the foreign company reacts to your requests for information can be one of the best and cheapest indicators of the kind of company it really is.

The same is true of Non-Disclosure Agreements (NDA), which you should pretty much always require your foreign counterparty to sign before you reveal anything to them of any real importance. How your prospective outsourcing company handles your request for them to sign an NDA can tell you volumes about who they really are.

My law firm has done hundreds of non-disclosure agreements for China and we know what is acceptable to companies there. So when we draft one for our clients and their Chinese counterpart claims “this is not how we do things in China,” we tell our clients that this is how things are done in China and the only reason we can think of for why the Chinese company would be claiming otherwise is that it does not want to be tied down by a non-disclosure agreement because it plans to steal some of your information.

In fact, for every 100 non-disclosure Agreements we have done for China, I would say that around 50 of them are accepted without any changes, 45 are accepted with reasonable changes and 5 are rejected as not the “Chinese way.”  We actually like it best when the Chinese company comes back with suggested changes because we view that to mean that it is very concerned about not signing a contract that it cannot fulfill. When a company like this does sign a contract it does so with every intention of abiding by it.

The best way to protect yourself against many of the risks I enumerated earlier is to deal with those risks in your contract. The differences between a foreign and a domestic outsourcing contract lie more in the way the contract should be written than in the issues that need to be resolved. In other words, the issues are mostly going to be the same, whether you are outsourcing domestically or internationally, but the big differences in the laws will usually necessitate that your international contract be written very differently from your domestic one.

What is the benefit of having a written contract with another company?

The most common reason given for having a contract is so you have something you can use to sue on if something goes wrong.

In most instances, if you get into a lawsuit over a contract or over someone having taken your IP, you have already lost. This is particularly true of litigation involving outsourcing agreements.

The second reason for having a contract is so you have a mutually agreed-upon blueprint setting out what is expected of the parties. This means that a well-written contract not only positions you to prevail in the lawsuit you hope never happens, it also helps you avoid problems with your foreign outsourcing company. The contract therefore helps the project go smoothly and that works to decrease the chances of a dispute requiring litigation.

So what should you be looking at in terms of your international outsourcing contract?

The first thing you should do is to make sure that what you are planning to do is legal. I am not kidding. What is legal here may not be legal there and you need to know that. We had a very sophisticated American company come to us after having spent half a million dollars on a market research firm that had told them the Chinese market was ripe for exactly what this American company planned to do in China. This American company was now coming to us to help them with their outsourcing agreement with a Chinese company that would be setting up and hosting their Chinese website and also to have us form their company in China.

They were very unhappy when we told them that China forbids foreign companies from operating on their own in the very business they were planning to start.

When it comes to the contract itself, I am always stressing how international contracts almost always require much greater specificity than domestic contracts. Courts in emerging market countries tend to be good at enforcing simple, clear contracts where the standards for default are objective and where the penalty requires little analysis. They tend not to be good at making contracts for the parties, as is common in the U.S. legal system. In the United States, suing on an oral contract or a contract written on a napkin can work out just fine. Don’t think that will be the case in an emerging market country where your not having your contract sealed may preclude you from suing on it.

It is therefore essential that you draft your contract with an emerging market company in such a way that it will produce a good result for you in whatever court you may find yourself. You do not want to base your court case in an emerging market country on a complex set of emails, oral communications and practice over time.

Not only does greater specificity in your contract make sense for foreign courts, it also makes sense for your outsourcing project itself. The cultural and linguistic differences between you and your foreign outsourcing company only increase the likelihood that the two of you will have different understandings about what is implicit in your deal.

For these same reasons, I usually try to avoid words like “reasonable” or “best efforts” in the contracts I draft for foreign countries. What is “reasonable” in Saigon might be very different from what is “reasonable” in Seattle. This is particularly true when it comes to quality. In China, you can pay 25 cents for a t-shirt that will be ruined when washed once. That being the case, it is pretty clear that what constitutes reasonable quality for a t-shirt differs between China and the United States, and there is no reason to think there will not be similar differences with other products and services.

Many years ago, I heard a story of an American who was renting an apartment in Shanghai. Whether this story is true or apocryphal, it is such a good illustration of how Chinese judges and arbitrators view contracts that it really doesn’t matter whether it happened or not. And, by extension, it is also a good story to illustrate how emerging market judges and arbitrators might view your contract.

The apartment this American was renting was a really nice apartment and it had a really nice expensive office chair — high-end apartments in China are virtually always rented out fully furnished. One day, the really nice office chair broke and became unusable and the American tenant kept asking his Chinese landlord to replace it. But that wasn’t happening.

The lease on the apartment eventually came up for renewal and the American refused to renew it unless the landlord put in writing that he would replace the really nice office chair. The landlord agreed and after the new lease was signed, he came by and put in a $2 metal folding chair.

What would happen in the United States if this tenant were to sue the landlord over the landlord’s failure to replace the office chair with something pretty comparable?

The tenant would almost certainly win because the court would essentially write into the lease contract the provision that the replacement chair had to be a good office chair like the one it was replacing. What would happen if the tenant sued the landlord in a Chinese court?

The Landlord would almost certainly win because if you want something in your contract in China, you had better put it in there.

Why is this chair story relevant? It’s relevant because American companies too often fail to put enough into their contracts with foreign companies. Instead, they just assume that the courts or arbitrators will know what the parties intended and re-write their contracts accordingly. But it doesn’t work that way in China. And it doesn’t work that way in Russia or Vietnam or Korea or Turkey or just about every emerging market country of which I am aware.

Not so long ago, an American company came to me after having received a large shipment of laptop bags that weren’t strong enough to hold a laptop. We called the Chinese company to ask about getting a refund, and they told us that if our client had wanted a bag strong enough to hold a laptop, they should have paid 50 cents more per bag for one that could actually do that. The American company should have specified in its contract that they wanted a bag that could hold x number of kilograms.

Damages are another difference between the United States and the typical emerging market country and, therefore, another matter you should consider addressing in your contract.

My eldest daughter is studying in Saigon right now and when she takes a taxi, she makes it a point to talk with the taxi drivers so as to improve her Vietnamese. The taxi drivers always talk of their desire to go to Los Angeles where they will make $2000 a month instead of the $200 or so a month they are making in Saigon. When my daughter explains to them that a studio apartment in Los Angeles will cost them $1000 a month and lunch out costs $10, they literally don’t believe her. They just can’t grasp those numbers.

When my daughter goes to the Ben Than market in Saigon to buy a purse, the vendor typically starts out asking $100 for a purse my daughter ends up buying for 5 or 6 dollars. Why does the vendor ask for $100? Because every once in a while a Western tourist will buy it for $50.

If you go to court in Vietnam or in a typical emerging market country, you will be dealing with something very similar when it comes to your damage numbers.

Let’s say you are a bank and you hired a Vietnamese company to write some software for you. You paid that Vietnamese company $500,000 and the software comes back three months late and it works, but is buggy. So you sue the company in Vietnam and you seek $3 million in lost profits and in the time your company had to spend fixing the software to make it work perfectly.

What is likely to happen to your case in a Vietnamese court?

The judge is almost certainly not going to award you the $3 million you seek. He or she will view that number as the equivalent of the $100 purse, and why not? On top of that, the judge is going to think you have already having saved a fortune by having done the work in Vietnam, so it is unlikely that he or she is going to have much sympathy for you. But the judge is likely to have sympathy for the Vietnamese company if he or she believes it tried its best but is just learning how to handle such big projects. The judge is likely to have sympathy for the Vietnamese company because he or she will likely think that you have not sought hard enough to resolve your issues with the Vietnamese company before suing. And working it out with the Vietnamese company would entail giving the Vietnamese company a lot more time to fix the problems.

In the United States we are always saying “time is money.” They don’t think that way in places like Vietnam and China where time is just an opportunity to throw more really cheap workers at the problem.

So your $3 million dollar case in Vietnam might be worth maybe only $30,000 when and if you win it.

So what can you put in your contract to help you get more in damages?

How about putting in your contract that you can sue your Vietnamese vendor in the United States? You’d get your $3 million from them easy if you could sue here, right? Wrong. If you sue here, you might very well get a U.S. judgment for $3 million, but will you ever collect on it? Vietnam, China, Russia, even Japan: none of those countries will just take a U.S. judgment and turn it into a domestic judgment in those countries such that you will be able to enforce it against your vendor there.

My firm constantly gets calls from American lawyers wanting to retain us to collect on a U.S. judgments they have received against Chinese or Russian companies. The American lawyers have usually charged their clients a pretty fair sum and they think all that is left for them to do is to take that judgment to a Chinese or Russian court. There, they think, they will get their U.S. judgment automatically converted into a Chinese or a Russian judgment and then they will get their money.

But it doesn’t work that way. Your United States judgment pretty much has zero value in either China or Russia, and in most other places in the world as well.

In fact, Chinese and Russian companies love it when you put a United States litigation requirement in your contract with them because they know that their own courts won’t enforce against them whatever judgment you may get. And even if you later realize that suing in the United States is not the way to go and you choose to sue the Chinese or Russian company in its home country, the court there will almost certainly toss your case out for being in the wrong jurisdiction because you signed a contract agreeing to sue in the United States.

So you have to be very careful not to write a contract that essentially blocks you from ever suing on it. And of course, on the flip side, if you put the United States in your contract as the jurisdiction for disputes, the foreign company can easily sue you right here.

Arbitration is oftentimes your best option and should in many cases go into your contract. Almost every country is a signatory to the New York Convention on Arbitration Awards, which means it will enforce U.S. and other foreign arbitration awards.

But arbitration has its shortcomings and sometimes you are better off putting a foreign court as your venue for resolving disputes. For example, if your biggest fear is your outsourcing company running off with your IP or your trade secrets, the fastest and best way to stop that is usually through the courts in the country in which your outsourcing company is based. Choosing the venue oftentimes comes down to figuring out the worst thing that could happen to you and then choosing the best venue for dealing with that.

Another possible solution to the bank software problem I described above is to put a liquidated damages provision in your contract, specifying exactly what the damages will be if the software is late and also what the damages will be if it is buggy – though you will need to define what late and buggy mean. But don’t put three million dollars as the liquidated damages amount; if you do, the court will probably bend over backwards to avoid having to issue a judgment in that amount. Put in $300,000 and you just might get it. Better yet, if your foreign outsourcing company believes you just might get $300,000, you will have positioned yourself well to get the software on time and bug free.

It oftentimes makes sense to put personnel requirements into your overseas outsourcing contract. Emerging market countries have rapid growth and with that growth it is common to see rapid job changing, which likely will not be good for your outsourcing project. One way to try to deal with this is to put in the contract a percentage retention rate that your foreign outsourcing company must meet to avoid a penalty or to get a bonus. You can get even more specific by listing out maybe the ten key people and setting a penalty if some number of those ten leave.

You should also consider the possibility of future currency fluctuations and think about what you should put into your outsourcing contract to protect you from that.

In 1995, a very sophisticated American client of mine sold a very expensive product to a Korean company for three yearly payments of “3.5 million dollars/2.7 Billion Korean Won.” By the time the Korean company was to make its final payment in 1998, its 2.7 billion Korean Won payment was worth only around about 1.7 million dollars, not the $3.5 million dollars the American company had expected. The American company (who had used its in-house counsel, not my firm to draft this contract) came to me to see if it could assert a claim against the Korean company for the approximately $2 million dollar shortfall it had experienced due strictly to the devaluation of the Korean Won, mostly during the Asian crisis of 1997. Since the contract was silent on whether the payments had to be in dollars or in Won, and since it seemed to provide for the Korean company paying in either currency, we determined that the best course of action for this American company would be to chalk this deal up to experience.

One common way to handle currency issues in international outsourcing agreements is for the outsourcing fee to be raised or lowered by half of the percentage change in the currency. In other words, the two parties split the fluctuation down the middle. But if you are going to do this, you need to have clear benchmarks in terms of what the currencies are worth and in terms of when their worth will be measured.

The key here though is that you think about the currency issues before you draft your contract and that you put something in the contract to provide for that – or not, depending on what is most likely to work in your favor.

Protecting your Intellectual Property is always important, particularly when your IP is either going overseas or will be created there. Every country has its own laws governing intellectual property rights within its borders and those laws can run the gamut both as between countries and as between patents, trademarks and copyrights.

Every type of IP asset — trade secrets, trademarks, industrial designs, patents, copyrights — may be involved in your outsourcing relationship and the best to protect those assets is to keep them right here in the United States.

But that isn’t always practical and that doesn’t always make business sense.

If you are going to “loan” your IP to a foreign company you should make it clear in the contract what belongs to you. It is not going to work for you to claim a few years from now that “everyone knew it belonged to us.” You should also think about registering that IP in the country to which you are sending it. Registering it here in the United States is not registering it “there”, particularly when it comes to patents and trademarks.

You are going to have to know and understand the IP laws of the country with which you are dealing. Putting in your contract that IP developed by your foreign outsourcing company belongs to you is not going to help you much if under the laws of the country with which you are dealing, the developed IP actually will belong to the employees or independent contractors who worked on it, rather than the company with which you have a contract.

International IP issues are almost always very complicated and it does not help that they can vary so considerably from country to country.

What if you do end up needing to sue your outsourcing provider in its home country? Is all lost? Maybe not.

Earlier this year, The World Bank came out with its 2010 Country Rankings regarding handling of Commercial Disputes, based on “procedures, time and cost to resolve a commercial dispute”:

  • China 15
  • Russia 18
  • Vietnam 31
  • Ukraine 43
  • Poland 77
  • Philippines 118
  • India 182

How can China have done so well? Because cases there move much faster and cost far less to bring than in most other countries. The same is true for Russia and Vietnam. Whereas US courts grant extensive time for information-gathering, or discovery, almost all emerging market countries pretty much forgo discovery altogether. It bears mentioning that these rankings did weigh corruption.

Corruption is a much bigger factor in emerging market countries than in the U.S. and is something your company is going to have to address, particularly since the U.S. government has really stepped up its enforcement of the Foreign Corrupt Practices Act (FCPA) in the last few years.

You will need to be particularly careful in dealing with companies in Communist countries. The United States’ Foreign Corrupt Practices Act applies to payments to government officials and there are a lot of government officials embedded in companies in China and Vietnam and Cambodia due to the nature of their economic systems. Paying off a non-governmental employee could also land your company in hot water — or you in jail — because most countries have their own laws forbidding this sort of thing.

I am not aware of any country in the world that has a “but everybody else was doing it too” defense.

I often hear people say that contracts in such-and-such a country are not worth the paper they are printed on due to corruption. This is pretty much always wrong.

Take Russia for example. Among the countries with which I frequently deal, I see Russia’s judges as being the most corrupt. But even there, corruption has very definite limits. I have a lawyer friend in Russia who tells me that about half of the judges in his city are corrupt (and he knows exactly which ones are and are not). So is it worth having a good contract if your odds of getting someone who will enforce it are only 50%? Yes, and here’s why.

First off, I am going to assume that you are not going to want to get into the business of paying bribes. And on that, my only advice is never ever do that.

My friend’s Russian city is probably more corrupt than most other Russian cities with strong outsourcing and even if your chances of getting a fair hearing on your case in Russia are only 50%, that is high enough to warrant having a real contract.

But even if you do end up with a corrupt judge, you will still be far better off with a good contract on your side. Let me explain.

Let’s say you are suing your Russian counterparty for a million dollars. Should you go forward with the case if you get assigned one of the corrupt judges? Absolutely yes. If you have a great contract and you should clearly prevail, it is going to cost your Russian counterparty a lot of money to pay off the judge for a ruling in its favor. Even corrupt judges in a country with endemic corruption do not want to be seen as corrupt. If you clearly should have won the case, the lower court judge will be very worried about appearing to the appellate court to have been bought and paid for.

So now you are probably saying, “well that’s great, he is telling me to sue so that the Russian company will have to pay some Russian judge a lot of money, but I am still going to be out my $1 million.” Not so fast. If the Russian company is going to have to pay the judge $300,000 to avoid paying you $1 million, and if the Russian company is going to have to risk going to jail for bribery on top of having made the payment, and perhaps most importantly, if the Russian company is going to have to risk losing the case at the Court of Appeals level (and that court is usually made up of at least 3 judges and is usually in another city), don’t you think it would rather pay you $500,000 than pay $300,000 to a judge and risk paying the million on top of that if it loses on appeal?

And I know $500,000 is not the million you were owed, but it is a lot better than zero. In other words, even where corruption is rampant, you are better off having a good contract.

Here is how some of the more prominent countries for outsourcing fared on the most widely cited and probably most highly regarded corruption index, Transparency International:

  • Poland 41
  • China 78
  • India 87
  • Indonesia 110
  • Vietnam 116
  • Ukraine 134
  • Philippines 134
  • Russia 154

I hope I haven’t scared you too much.

I often write on how American companies should not rush into suing Chinese companies in the United States because such lawsuits are usually of no value at all. See my posts on this here and here.

Brendan Carr over at the Korea Law Blog [site no longer exists] just did a post, entitled, “Enforcement of Foreign Judgments in Korea — Tips and Traps.” The post is on enforcing foreign judgments in Korea, but it contains good advice for handling international litigation anywhere.

Brendan begins his post by referring to our posts on the phone calls we get from American companies who believe it easy to enforce U.S. judgments in China. Not surprisingly, Brendan often receives similar phone calls from American companies seeking his help in  enforcing essentially worthless US judgments in Korea:

For some reason, they [American companies] often think it’s a great idea to sue in the United States (American courts are better, after all) and are egged on by US lawyers to plow through to a default judgment when the Chinese defendant doesn’t turn up. I’m sure they think Aha! Gotcha, you bastards! when that default judgment is in their hands.

But the default judgment is basically worthless, as Dan Harris explains:

Caller: I have a two million dollar judgment against Chinese company X in China, can you help me enforce it?

Me: Is it a default judgment here in the United States?

Caller: Yes.

Me: The Chinese courts don’t enforce United States’ judgments and though they often at least look at the basis for a United States judgment on the merits, they don’t give any credence whatsoever to United States default judgments. Did you discuss this possibility with your US lawyer before you sued here [in the U.S.]?

Caller: [long silence] …. Yes. He told me getting a judgment here couldn’t hurt?

Me: Did he charge you to get it?

Caller: Yeah. I had to pay him and I had to pay all sorts of people to get that company served in China.

Me: Sorry.

I have had this exact same conversation dozens of times from my vantage point here in Seoul, including cases where the client’s US lawyer in Bakersfield or somewhere like that has persisted in US litigation despite the existence of an arbitration clause in the agreement.

Carr then explains how US judgments can have value in Korea, but service in those cases must be done pursuant to the Hague Convention, which convention both Carr and I have seen ignored far too many times:

In my experience, reciprocity between US courts and Korean courts is not a problem, and in commercial disputes public-policy considerations rarely are raised. That leaves jurisdiction (check the clauses of your agreements, and get an opinion on Korea’s Private International Law Act), and service of process. By far, the most common and tragic mistakes I see involve the US lawyer’s ignorance of the Hague Service Convention, or (worse) unwillingness to let the time required for proper service delay the commencement of proceedings.

Carr then notes there is no point in suing a company without assets and before giving the Korean company the chance to empty its corporate coffers by threatening to sue them, you should first bring a pre-judgment writ of attachment to tie up its assets. I know from experience that Korea is a particularly good jurisdiction for such actions as the courts there typically require a very low bond and the attorneys there describe these actions by saying “easy to arrest, hard to release.” Carr’s proposed solution is to “Always, always, always take reliable security in advance.”

Problem is that in China, such security is still rarely given, which makes due diligence on any Chinese company with which you plan to do business all that more important.

I would love to hear from readers regarding their experience in convincing the Chinese companies to provide any real security (letter of credit, performance bond, etc.).

For all the many posts we have done on how Chinese companies are expanding worldwide (this is, after all, part 15 of the series), I still doubt there are more than a handful of Chinese companies capable of breaking into Western consumer or high end business markets.

Fairly recently, my international law firm worked with a U.S. home supply manufacturer/wholesaler that had been brought on by a Chinese home supply manufacturer to bring the Chinese manufacturer’s products into the United States. The Chinese company, quite wisely, wanted to use the U.S. company to market and sell its products in the U.S. Amazingly enough however, the Chinese company insisted on retaining its three word, difficult to pronounce, intensely Chinese name as the brand to be marketed here in the United States. The Chinese company simply refused to believe their name would be a huge disadvantage in the United States, where China’s reputation is more for taking American jobs than for quality home products.

It is not just that one instance. How many Chinese companies are admired worldwide for their marketing prowess?  How many Chinese companies possess one of the top 500 brand names? How many Chinese companies are known worldwide for their quality?

Yet the lure/threat of China’s companies going international certainly remains and India’s Financial Express newspaper, in an article, entitled, New MNCs Changing the World Order, discusses Chinese companies succeeding worldwide by paying for outside expertise to do so.

The article sees “a new wave of foreign competitive pressure” “rippling through the U.S. economy, from companies in emerging markets like Brazil, Russia, India and China.” Companies from these countries are seeking to become “world-spanning multinationals — just as Samsung Electronics emerged from South Korea and Toyota sprang from Japan in earlier phases of globalization.”  Brazilian aircraft manufacturer, Embraer, Russian companies like Gazprom and Lukoil, and Indian tech companies like Wipro and Infosys Technologies have already made huge inroads into the U.S. market and more will follow.

According to the article, China will be the largest single source of these new multinationals. It sees Lenovo, Haier, Huawei Technologies, and the Pearl River Piano Group as proof of what Chinese companies can do.

Antoine van Agtmael, author of a new book, The Emerging Markets Century: How a New Breed of World-Class Companies Is Overtaking the World, is quoted as seeing the emergence of these new multinationals as part of “the biggest shift in the global economy since the Industrial Revolution of the 18th century.” According to van Agtmael, the ascendancy of China and India is “a re-balancing of the global economy back to where it was before the Industrial Revolution, when China and India were major powers in the world.”

Chinese and Indian multinationals are able to rapidly gain the expertise necessary to manage complex multinational operations by paying for outside expertise. Peter J. Williamson, a professor at Insead and author of the book, Winning in Asia,  says these multinationals from emerging market countries are “engaging Ogilvy & Mather to do their advertising. They’re using McKinsey for their strategy. There’s been a very big shift in the ability to obtain knowledge that once would have been very slow to build up.”

I think the expectations are too high. Look how long it took Samsung and Korea. And Where is Samsung II?Chinese companies will continue to improve but these things take time. In the short term, I see it a lot more likely foreign companies will succeed in greater numbers at doing business in China than the opposite.

What do you think?

Major apologies to John Lennon.

Arbitration provisions fascinate me. They are the Rodney Dangerfield of the legal world in that they get no respect, not even among international lawyers.  This is a mistake.

I can nearly always judge the legal thought that went into an agreement through its arbitration/litigation provision alone. I usually can instantly tell from just the dispute resolution provision whether an international contract was drafted by a lawyer or not, and if it was drafted by a lawyer, whether that lawyer knows international law. Mistakes in this critical provision are rampant. Huge mistakes.

Some examples:

  • Company wants us to sue on a contract that calls for Arbitration before the International Court in Geneva Switzerland. Problem is there is no such court in Geneva. At a cost of at least ten times what it would have cost this company to have retained a qualified international lawyer to draft this contract, we successfully convince the Chamber of Commerce and Industry of Geneva that the parties intended for it to arbitrate their dispute before that body.
  • Denver lawyer contacts us about suing a large Chinese company on behalf of their client. Contract calls for litigation in Denver.  We tell the Denver lawyer this is probably the worst provision possible and he is shocked, asking why it does not benefit his client to be able to sue in its local court. We explain this provision means we will have to sue the client in Denver, spend months serving the opposing party in China (under the Hague Convention for service rules), spend another month or so getting a default judgment in the Denver Court against the Chinese company, and then take that judgment to China, where the Chinese court will almost certainly ignore it.
  • U.S. Company comes to us complaining of a company in China making its product with its molds and requesting we help it get a Chinese court to put a stop to this. We learn the Chinese company was until recently manufacturing this same product for our client under an OEM (Original Equipment Manufacturing) contract that provides for arbitration in New York. We tell the US  company we will probably first need to arbitrate this case in New York and even if we could get an order from the New York arbitration panel requiring the Chinese manufacturer cease production, no Chinese court will enforce it. We also tell the client we can go to court in China, but the chances are the court will refuse to do anything until the case is arbitrated first, if ever.

All of these situations could have been easily prevented with the right arbitration or litigation provision.

The first problem could have been avoided simply by naming a real arbitration panel. The second problem would not have occurred had the contract simply called for arbitration, not litigation. Had the contract called for arbitration in Denver (not litigation), we could have taken an arbitration judgment to China where the courts would have been required to enforce it pursuant to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (usually called the “New York Convention”), of which China is a signatory. Not that China is great at enforcing foreign arbitration awards, but at least the law would have been on our side.

The third situation could have been avoided had the contract explicitly carved out a litigation exception for injunctive relief or called for litigation in China.

What got me to thinking about arbitration today was a very nicely done article by the Patton Boggs law firm (no individual lawyers were listed), entitled, “Seven key points when considering an arbitration provision” [link no longer exists]. Though this article is geared towards all contracts (not just international ones), the advice it gives is both concise and thoughtful. I particularly like how it explains the importance of arbitration provisions:

To the untrained negotiator, an arbitration provision may be legal “boilerplate,” which means typical clauses that require little or no negotiation — a throw-in type provision. The reality is that parties should carefully weigh the benefits and disadvantages of arbitration in every transaction . . . .

The decision to use or write an arbitration provision in commercial transactions should not be made with a mechanical “one-size-fits-all” approach. It is critical that transaction parties consult with their litigation lawyers, not just their transactional counsel, and take the long view of the business relationship at hand and how the parties are going to resolve disputes. To neglect to tailor a dispute resolution provision to your needs at the outset of a transaction may lead to unnecessary disadvantage, expense and distraction down the road.

Amen to that.

Update: One of my firm’s China lawyers just got called in to assist an American company with their CIETAC Arbitration. Boy were they shocked when I told them that arbitration would be conducted in Chinese because the arbitration does not explicitly state otherwise.

Nearly every week, I get a couple e-mails and/or calls from earnest law students seeking pearls of wisdom regarding how to break into international law or China law.  I usually talk about the need to learn as many languages as possible and about the benefits of having lived overseas.  A couple years ago, I gave a speech on international law careers at Indiana University School of Law and I am scheduled to be on a international law career panel at Seattle University Law School later this month.  I am an expert on these issues only to the extent that I am in the international lawyer business and I have very definite ideas as to what it takes.

I have no idea if my ideas on this would hold up to analysis, but I at least now know my views are part of the mainstream.  Chris Carr over at the CalPolyMBA Blog just did a post, entitled “Critical Success Qualities for Expat Managers in China,” summarizing what CEOs look for in choosing their China managers.  This list comes from the book China CEO: Voices of Experience from 20 International Business Leaders (of which I have heard many good things and I have just started it). Interestingly (but not surprisingly, the traits these CEOs seek in their ex-pat managers for China are pretty much the exact same traits I find necessary to be a good international lawyer.   Here is the list, with my comments in italics.

1. Technical and Corporate Expertise: Select people with a rock-solid professional background and an excellent knowledge of the company.   

Yes. In the legal arena, this means get smart people. 

2. International Expertise: A posting in China becomes vastly more manageable after an assignment either in an Asian location or another developing market, or both.

Absolutely.  The key here is that the person who has spent time in another country tends to be better equipped to deal with other countries, including those countries to which he or she has never been.  I have seen this time and again with both lawyers and clients.  We have many clients who when their business dried up in one country moved nearly effortlessly to another country.  We also see domestic companies that simply cannot make the leap to go international at all, when they really should. What you learn in one country (but obviously not everything) does help you in another.

3. Multicultural Mindset: When selecting an executive for an overseas posting, look for someone with an adventurous spirit, a sense of humor, and an open mind.

I completely agree and this applies to lawyers as much as to anyone else.  In an article I wrote a long long time ago on doing business in emerging market countries, I stressed (and stressed again …. so I was repetitive back then):

Doing business in an emerging market means taking nothing for granted. I have a mantra for my own legal work in these countries that translates well to the business world: “Assume nothing, but assume that you are assuming things without even realizing you are doing so.”

Things will be different. Very different. Things you take for granted in your home country might not exist in the emerging market country. Things you take for granted in your home country might be the exact opposite in the emerging market country. Things you think will be totally different in the emerging market country may be exactly the same. Things you thought you knew about emerging market countries based on what you know from another emerging market country may be completely different in a neighboring country, or even in another region within the same country.

The principle, one more time: Keep an open mind, and assume nothing.

4. Commitment to Learn: Learn from those around you. Listen to your employees, JV partners, clients, and customers.

Of course.

5. Humility:  Be humble and avoid using an authoritarian style. Influencing and coaching is the way to get the best out of your Chinese employees.

Yes. This is also the way to get the best out of the lawyers in other countries with whom you will be working.

6. Strength:  Be unyielding in defending core corporate values and culture.

Yes.  And in the legal context this means doing things by the law, even if you see others around you not doing so.

7. Patience:  Be patient; use a step-by-step approach in China, not a Big Bang approach.

I will borrow again from my emerging markets article:

Exercise Extreme Patience.  This principle stems from the maxim that everything takes twice as long as you think it will. If it takes twice as long in the West, triple that in emerging market countries. You’ll go in both as a businessperson and a teacher — and in both roles, the learning curve of your partner will almost certainly take way more time to deal with than you think.

For example, many emerging market countries have a history where “bad business” meant “thinking long-term.” A year or two after the fall of Soviet communism, I was involved in a matter where an investor put $250,000 into a Russian joint venture. The business very quickly was making good money and all indicators pointed towards steadily increasing profitability. But, quite quickly, the Russian company stole the $250,000. Was it so irrational for him to think so short term in a country where the government and tax systems had such a history of unpredictability?

8. Speed: Be flexible and quick. Stay well informed; the business environment in China is in a constant and rapid flux, probably much more so than in other markets.

This is true of international law as well, and if one is going to practice in this area, one has to enjoy and thrive on constant change and even constant uncertainty.  I was talking the other day with my friend, Dan Hull, lawyer extraordinaire at Hull McGuire, and he was telling me how he has abandoned all pretext of what he calls “PCness” and he now just tells potential hires there that they had better be prepared to work tirelessly just to keep up.  I can certainly vouch for Dan being right when it comes to practicing international law.   

9. Guanxi-building: Build your guanxi not only internally (with subordinates, peers and superiors) but also externally with clients, suppliers and government officials). A strong guanxi network is a fundamental element of your success in China.

As a lawyer, both you and your practice will benefit by your doing more than just staying in your office poring over law books.  Get to know your clients, your fellow lawyers, good people in the industries in which you are working, and treat them with respect.  I see this as basic good business for anyone.

So you want to be an international lawyer/China lawyer?  Conform to this list.