Many years ago, a company that manufactured outdoor products that it sold in hardware stores across America came to us with the following problem:

Its Chinese manufacturer had (through a straw person) registered in China about a dozen trademarks that our new client used on its outdoor products.  More importantly, the Chinese manufacturer had just informed our new client that it would no longer be manufacturing these outdoor products for our client because it was now going to be selling them directly to the same hardware stores to which our client had been selling the products.

WRONG.

The Chinese company never sold even one single product to anyone in the United States and in the end it lost tens of millions of dollars a year in revenue by having so unceremoniously cut-off our client.  The Chinese company failed to sell any products to US hardware stores because it had zero clue what it takes to sell its products in the United States.  The Chinese company went to the various hardware stores in the United States that had been selling “its” products and told them that it would now be able to sell them the exact same products for around 50% less.  But when the US hardware store chains asked the Chinese company about the systems it had in place to make sure that each and every one of its stores would always have the right number of outdoor products in stock (i.e., what inventorying system it would be using) the Chinese company had no real reply.  And when the US hardware store chains asked the Chinese manufacturer how it would handle product repairs and returns it had no answer for that either.

We worked with our client and figured out how to get around the Chinese trademarks the Chinese manufacturer had filed. To make a long story short, it had failed to trademark all of any one product and we were able to secure China trademark registrations for parts of the whole and it was on those parts that our client prominently put its trade name, after registering those trade names in China.

I thought of that Chinese outdoor products manufacturer today when I read a ZDNet article entitled, Big CES push from Chinese phonemakers, but tough sell in US. The gist of the article is that China is making excellent cellphones and smart phones these days but it has yet to sell anything but a handful of its phones in the United States and the big reason for much the same reasons why the Chinese outdoor products manufacturer failed to sell its own branded products:

“It’s one thing to have the product. It’s another thing to have all the relationships, build the distribution channels and do the marketing,” Frank Gillett, an analyst with Forrester Research, told the newswire. A partnership is particularly important in the U.S. where the majority of users buy heavily subsidized devices through carriers.

I have seen this same sort of thing in other industries in the United States where my law firm has represented Chinese companies unwilling to do what it takes to sell their China branded products in the United States.  These companies have been unwilling to spend the kind of money required to market or distribute their products in the United States and, perhaps most importantly, they have been unwilling to hire top-tier people in the United States who know how to market to US consumers.  I have heard countless similar stories from other service companies that work with Chinese companies trying to mark into the US market.

Succeeding at selling consumer products (really most products) in the United States virtually always requires more than just having the lowest price.  Unless and until Chinese companies truly understand this (rather than paying it mere lip service), the threat of Chinese companies taking over the US consumer market is minimal at best.

Just saying….

What do you think?

 

I’m like a kid in a candy shop when I learn of some new source for China business or law information and I just got a new one.  The new source is Tony Alexander, the Chief Economist at the Bank of New Zealand. A long-time New Zealand client of mine sent me a newsletter from Mr. Alexander and when I responded with raves, he sent me another.  And now I am hooked on his down to earth/common sense China writings.

One of the writings my client sent me was an piece called “Opening Doors to China.”  This article though is not actually written by Alexnder, but rather by Patrick English, New Zealand’s Consul-General out of Guangzhou.  Nothing earth shatteringly new in the article, but it is an excellently put together reality check on what foreign companies should be thinking about in formulating their strategies in planning out whether and how to do business in China. In other words, it makes for very solid China business advice.

I summarize Mr. English’s key points below and then, in italics, toss in my own two cents.

  • When developing a China strategy, companies focus on the China “Window of Opportunity.” They are not wrong to do so, but they should first “look in the mirror and ask whether they “have the people, the resources, the time, the funds, the commitment, the product or service?”  The question companies really need to ask themselves is; does my company have what it takes to meet the China challenge?  This is great advice.  Yes, China has great opportunities, but is YOUR company really ready to do what it will take to seize them. As a business owner myself, trust me when I say that I understand how easy it can be to spread a company too thin out of an excitement for growth and opportunity.  But on the flip side, if you only commit to China half-way, you would be better off not even bothering.  
  • The home office has to commit to being involved in China. “The business will be positively impacted by the support the China-based team gets from senior New Zealand-based management and specialists through regular visits or, even better, by posting senior management to China. All the board and/or senior management must agree on the strategy and operational plan.” Or as one of my law firm’s China based lawyers is always saying, “we are the advance troops and when the home office fails to respond to us, we feel like we are out here on the front lines without any air cover.”  
  • Companies need to work out approximately what their China strategy is going to cost, how much time they’re going to put into it and over what period of time – then triple it.”  Absolutely, but I would actually say it should be multiplied by five.  I say this because after starting a law firm in the United States, I always tell people that estimating start-up costs and time, they need to triple whatever number they end up on.  If you are going to triple those things in the United States, you need to multiple it for five in China, where things are far more complicated and where there will be even less familiarity. 
  • “One of the myths is that (professional) Chinese labour is cheap and that it’s a cheap place to do business. It’s not. The regulatory environment is more complex than I’ve seen in over 23 years It’s also more time consuming and more expensive. So companies need to do their homework to make sure they’re not making mistakes.” Get expert advice on tax, customs and the law, including on contracts and intellectual property.  I agree 110 percent.
  • “Many companies take the approach that “my product or service is world class” and they’re probably right….in New Zealand. However, what do your Chinese customers think of your product or service? If you’re asking them to pay a premium, a discerning Chinese consumer is going to ask for their preferences to be taken into consideration.”  I absolutely love this advice as I cannot tell you how many times companies have told me that they will succeed in China because they are known for having the best such and such.  So what?  If you are not known for that in China, that won’t help you in China.  And even if you are known for that in China, that just means you have a chance if you can, among other things, handle the distribution and succeed in convincing buyers of your product’s value proposition.  You are not in Kansas anymore.  
  • “They will want supporting material in Chinese. If you have a software or engineering product, are the manuals in Chinese? How are you going to support it in China? Do your support staff speak Chinese or do you have a help desk in China? Customising colours is also important. Kiwis love black (and rightly so), but Chinese sometimes look at our branding and packaging and think it’s too dark. They want to see gold and red, with vibrant greens (although not green hats!) and piercing blues. New Zealand packaging can be fairly austere and this should be expected in relation to the environmental impact, but is there a point ofadaptation where standards can be maintained and consumer expectations met?”  Absolutely.  In other words, you must adapt to China.  
  • Preserve your core business, but customise the parts you need to in order to be successful in China. Absolutely.  Adapt to China, but realize that you will never be Chinese, nor must you be to succeed in China.  
 What do you think?

The New York Times, in its inimitable style, is shocked (shocked, I tell you) and appalled (appalled, I tell you) about China’s recent detention of a German (and his “Chinese associate”) on charges that they undervalued imported art to avoid USD$1.6 million in customs duties.

I have a very different take on the whole thing.

First off, let me state right off the bat that I have no facts regarding the guilt or the innocence of these two individuals.  None.  Zero. Zilch. Nada.  So this post is not so much about them.  It is instead, about the countless companies that have come to my international law firm with plans to undervalue their imports with Chinese customs, based on the belief that “this is what everyone is doing.”

Before I talk about what we see on this front, let me give some of the background regarding this particular fine arts customs case, and what better way to do so than to let the New York Times set the stage:

Gallery openings are a bit more subdued, anxious art dealers have been keeping a low profile, and several wealthy collectors have been barred from leaving China while the investigation continues. Auction house giants like Sotheby’s and Christie’s have been asked to cooperate with the authorities in what has become a wide-ranging investigation.

“Lots of people here are not going into work, or they are only using junior staff at their offices and galleries,” said a Beijing gallery director who spoke on condition of anonymity because of the tension surrounding the issue. “They can’t arrest everybody, but everyone is still nervous.”

In the meantime Nils Jennrich and Lydia Chu, employees of the art-handling company Integrated Fine Art Solutions, languish in a Beijing jail on suspicion of smuggling, a crime normally associated with the illegal importation of drugs or arms. The charges carry a maximum of a life sentence.

Needless to say, this experience has not been pleasant for Mr. Jennrich, as the New York Times makes all too clear:

Mr. Jennrich, 31, the company’s general manager and a German citizen, was taken away on the evening of March 30 during a raid of the business’s Beijing offices; hours later Ms. Chu, 29, its operations manager, was summoned for questioning. Mr. Jennrich’s family and colleagues have expressed concern for his health, saying he has been forced to share a cell with 11 others. During the first days of his detention, they added, he was interrogated for 36 hours straight, a violation of Chinese law.

“It’s a living nightmare,” said Mr. Jennrich’s fiancée, Jenny Dam, who said the couple had planned to marry in May.

And the New York Times blames China because, apparently:

The detentions have put a spotlight on the mercurial Chinese legal system and raised questions among collectors and industry executives about the potential pitfalls of China’s fast-growing art and antiques market, which last year surpassed the United States to become the world’s largest, according to the European Fine Art Foundation. The crackdown, industry professionals have warned, could dissuade Chinese collectors from bringing home art purchased abroad.

*   *   *   *

“China is supposed to be a lot more integrated with the world economy,” said Jonathan Schwartz, chief executive of Atelier 4, an art logistics company based in New York. “The decision to throw someone in jail tells you that China is not really playing by similar rules as the other large nations that are dealing with culture and transit.”

The CEO of Jennrich’s company had this to say:

“We forward, store and install artwork, that is all,” said Mr. Hendricks, who was also questioned in Beijing by the authorities but was later allowed to leave the mainland. “Determination of value, the statement of this value, is not our responsibility.”

According to “legal experts,” “art handling firms simply work with the values provided by their clients, but that Chinese law is murky on whether individuals employed by shipping companies can be held liable for undervaluing a work.”

The New York Times then quotes from Jennrich’s lawyer and the Chinese associate’s fiancé:

Nancy M. Murphy, a lawyer at the Beijing firm Jincheng, Tongda & Neal, who is advising Mr. Jennrich’s family, said she hoped that the authorities would take into consideration whether the accused personally profited from undervaluing the work in question.

Ms. Chu’s fiancé, Benoit Granier, said he found the accusations hard to fathom, given Ms. Chu’s modest life, including sharing an apartment with five others. “She’s just trying to find a way in her life,” he said.

The New York Times then seems to justify whatever wrongdoing may have occurred:

Setting aside questions of Mr. Jennrich’s and Ms. Chu’s culpability, several industry experts say the practice of undervaluing art and antiques on Chinese customs forms is widespread. The International Convention of Exhibition and Fine Art Transporters, a trade organization, noted the problem last year in a newsletter and suggested that the practice was harmful to all involved. “There is no way around these regulations without breaking the law,” it wrote.

In China imported art is often levied with duties that can reach 35 percent of an object’s value. Many industry veterans complain of a customs process that is notoriously onerous.

International art experts acknowledge the difficulty of valuing contemporary art, noting that a wild jump in price at auction after a piece passes through customs does not necessarily suggest undervaluing at the border.

Ms. Murphy, the lawyer, said it took an experienced appraiser to know the difference between fraud and the vagaries of a white-hot art market.

As much as I feel for those arrested, I cannot help but have a different take on things.

Let me explain some of my beefs with the New York Times’ article and then I will discuss why this case could very well matter for YOU.

I doubt very much that many jails are particularly nice places to stay and we do not need the New York Times reminding us of that. I mean, how often does the New York Times mention jail conditions in its other stories, and in a way designed to evoke sympathy for the person detained?

And I just love how the Times mentions how these two defendants are “languishing” in prison on a smuggling charge, “a crime normally associated with the illegal importation of drugs or arms.”  Really?  I have always thought of “smuggling” as importing or exporting something contrary to customs laws and, hey, guess what, Meriam Webster agrees with me on that. It defines it as importing or exporting “secretly contrary to the law and especially without paying duties imposed by law.”

And the bit about this arrest putting “a spotlight on the mercurial Chinese legal system” and harming China’s lack of integration with the world economy is a bit over the top (O.T.T.).  I really get the sense from this (and from much of the rest of the article) that the New York Times is essentially saying, “hey, these people love art and so even if they did violate the law, we should let them go because that is how we here in the West would handle this sort of thing.”

But where the article really falls short is when discussing the core question.  If these two defendants did undervalue the art, did they do anything wrong?  They say legal experts find the law “murky” but then, Ms. Murphy, a lawyer involved in this case on the side of Mr. Jennrich (and a very fine lawyer, I might add) seems to say that his defense plan is not going to be that he did nothing wrong, but instead to seek mercy from the court because he didn’t make much money on the deal.  Mr. Chu’s fiancé hints at the same thing. It would have been good if the article had given us more insight into their possible defenses.

The article then talks about how difficult it is to stay within the law because the paperwork can be onerous and because so many cultured and sophisticated art buyers just really don’t like paying up to 35% duties on fine art.  Come on.

Now let’s talk about the more quotidian world in which my law firm deals. A few years ago, we were approached by someone wanting to import art who was essentially seeking our imprimatur for them to undervalue their incoming art shipments. We wanted nothing to do with this client, who kept trying to assure us “that this is what everyone in China does” and that “you have to do this if you are going to import art into China.”  I do not remember our exact response in this instance, but I am going to assume that it was the same as the one we always give to people in similar circumstances, which is something along the following:

Look, it’s illegal and our advice to you is that if this is really what is required to survive in this business, you should find another business.  And just because “everyone” else is doing it and not getting caught doesn’t mean you won’t get caught. In any event, we want no part of this because we know it to be illegal and it just isn’t worth it to us — for a whole host of reasons — to be associated with it.  And, if you are going to be doing something illegal, why do you even want an attorney anyway?  Our job is to help you do things legally.

We have received a number of similar requests outside the art world as well.

I apologize for the lawyer related digression here, but I cannot resist mentioning a great China Hearsay post from a few months ago on the lawyer’s role in when confronted with a client who intends to violate the law. The post is entitled, Should You Fire Your Corrupt Client, and the conclusion is that lawyers should, for their own benefit:

My students at this point often ask what happens if, after the lawyer carefully explains that the company may be in violation of the law, the client refuses to stop? Is that the time to go to the police? No, you still don’t report on your own client. Your response, however, will depend on your role as outside counsel (i.e., what you were hired to do).

For example, if I was hired to review a commercial contract, I do my job, briefly mention the FCPA issue to my client, and then get out. I’ve given proper legal advice to my client, even venturing briefly into a topic unrelated to the matter I was hired to handle. After that, it’s the client’s responsibility to clean up its act.

As a side note, exactly who you send this advice to is often a difficult question, one that trips up my students on occasion. If you don’t understand how large companies operate and who the different constituencies may be at a multinational, your life as outside counsel can be rough. Just to use one hypothetical, what if you were hired by a local manager, and then you discover bribery? Do you report this to the regional HQ? Corporate HQ? Or do you keep that local manager who hired you happy and just talk to him? (Most lawyers I know would do the latter, but in some cases, it isn’t possible and you have to go over that person’s head.)

Let’s change the facts slightly. What if this is a long-term client for which you are acting as general outside counsel for corporate matters? Now it’s a little more complicated. If, after counseling the client on the bribery issue, they decide to continue violating the law, I would probably try to drop that client as soon as possible.

Are lawyers ethically obligated to “fire” their clients who engage in such activities? In many jurisdictions, the answer is no. I always figured, however, that it isn’t worth the risk to associate oneself with a client like that. While I sympathize with clients who tell me that all of their competitors engage in bribery, and if they do not do so as well, they will not be able to survive, at the end of the day, that’s not my concern. I’m going to discharge my obligation to my client, but once that’s done, I’m going to look out for my own liability and professional reputation.

Back to our regular programming and to how all of this relates to you, the company doing business in or with China.  Here are the basics you need to know:

  1. China has laws.
  2. China enforces those laws.
  3. We can argue all we want about whether those laws are enforced equally as between foreigners and Chinese citizens, but the bottom line is that they are sometimes/oftentimes/always enforced against foreigners.
  4. If you violate the law in China you could very well face criminal action.
  5. If you are facing criminal action in China, your embassy/consulate are of very little help. They can help you find the right lawyer and bring you food and magazines in your own language, every few weeks, but not much more than that.

In The Sentencing Of Matthew Ng. A Very Long “No Comment,” we spoke of the risks of criminal activity and the almost blithe attitude too many foreigners have about it:

We have many times written of the risks foreigners face of being found on the wrong side of China’s criminal laws. I cannot emphasize enough the need for foreigners to take China’s criminal laws seriously. My firm has helped oversee a number of criminal cases in China involving foreigners in China and I cannot tell you how tired I am of hearing our clients confidently (at least initially) seek to assure us that they will be fine because what they were doing helped bring jobs and money to China.

We are always emphasizing that China will, with little or no compunction, jail foreigners who violate China’s criminal laws, even if the offending action is not a crime back in the home country.  And forget about getting much help from your embassy beyond maybe some help in finding your lawyers and seeking to monitor your case for procedural fairness.

Similarly, in Avoiding Chinese Jails. I’m Talkin’ To You, we had this to say about the need to follow the laws in China:

Aimee Barnes highlights how important it is for foreigners to follow the law in China. All of the laws. All of the time. No matter how much you may disagree with them, no matter how silly you may find them, and no matter how different they may be from those to which you are accustomed. Most importantly, you must strive to follow the law no matter how much you may see those around you disobeying them, particularly if those you see are not foreigners.

And when it comes to customs in China, we are seeing a huge increase in customs people trying to turn even honest mistakes into criminal matters. We have successfully handled a number of these cases and we have done so by responding to the problem immediately, by taking the problem very seriously, and by getting as much information to Chinese customs as quickly as possible and in as helpful and proper a form as possible. By proper, I mean that customs wants everything apostilled and consularized, so that is how we do it. We have found that customs initial assumption is that there has been criminal activity, but that if you work with them, they absolutely can be convinced that it was really just an honest mistake (presuming that you have real proof that it was just an honest mistake). When it comes to customs, we have found that the key is to deal with any problems early and head-on.  I have absolutely no idea whether that would have even been possible in the art case discussed above (I doubt that it would have been), but it usually is.

Overall, in the last six months we have seen an absolutely unprecedented increase in China’s tightening down on its laws as they apply to foreigners. (It is possible that China is cracking down on its laws with respect to everyone, but because my law firm just represents foreigners in China or doing business with China, as opposed to Chinese citizens in China, we do not know if that too is the case.) China is shutting down improperly formed WFOEs like never before. Beijing is left and right shutting down WFOEs that do not have the proper facilities or are operating outside their scope of business. And we hardly need to tell you about the recent crackdown on foreigners in China without proper visas. There is an easy explanation for all of this and we have seen it before (though never to such an extent). It’s the economy, stupid.

Bottom Line:  Again, I have absolutely no independent information regarding this case and this post is not meant to opine on the guilt (or the innocence) of anyone involved.  It is meant only to highlight how easy it can be to find yourself on the wrong side of the law and to emphasize the need to know the laws of the country in which you are doing business and to not violate those laws. I hate to sound so trite, but the key for you if you are doing business in China is simple: follow the law no matter what.

What do you think? What are you seeing?

 

The United States (and many other countries) have export control laws forbidding the export of certain things to certain countries, including China. Violating U.S. export control laws is serious business, and yet I find that many companies either are not aware of such laws or just do not seem to take them seriously when exporting to China.

I was reminded of that today after reading of how a subsidiary of United Technologies was just fined more than USD$75 million by the U.S. Justice Department for having exported software to China ” knowing it would be used in the development of a military attack helicopter in violation of the U.S. arms embargo with China.” A few years ago, a company came to me with a large deal to sell something (I have to be really vague here) to China.  The item had me worried about U.S. export control laws so I asked the company whether they had analyzed whether their product might violate any export control laws.  The company pooh-poohed my concerns and so I called a lawyer friend of mine whose practice focuses in large part on export control laws to see whether I was out of bounds for being so worried. This lawyer confirmed my concerns at this company diffidence.  The company persisted in refusing to research and analyze this issue and so we turned down the legal work.  I have no idea whether that company went forward with the deal or not.

Countless other times, clients have the research done, but only after we bring to their attention the need to do so. This is one of those areas of law where you are better off conducting the research, saving it, and being able to produce it to your government if it raises any concerns.  Assuming your research showed the export was legal, the mere act of your having tried to comply should assist in proving that your violation was unintentional.

Anyway, be mindful that the United States (and many other countries) do not give carte blanche to selling anything and everything to China.  On the flip side, China does not accept everything either.

Just thought you should know….

I have been reading and enjoying the China Business Leadership Blog for the last few months and I wanted to bring it to our readers’ attention. The blog is authored by the SHI Group, whose slogan is “serving to make the strength of your company culture come to life in China.” I like the slogan because we have many clients who have tried to do this in China, but very few who succeed. In a recent post, entitled, “China Manufacturing: “We’re Bringing It Back Home,” I wrote of a client whose China business we are in the process of shutting down because the client “never felt our Chinese employees were on board with our organization” and would rather run everything from outside China.

One only needs to read the categories in which this blog puts its posts to know on what it is focusing:

  • Being the Right Person
  • Change Management
  • China
  • Culture Development
  • Getting Good People
  • Leadership
  • Motivating Workers

I like the blog both because it is relevant to China and because it is relevant to running my own law firm business. I urge you to check out the China Business Leadership Blog.

A few weeks ago, a reader e-mailed me with an article regarding the jailing in Shanghai of California businessman Brian Horowitz over a debt he (his company?) allegedly owed a Chinese company. I have been assiduously following the case in the press for many reasons. First, cases like this could prove very important to my firm’s clients. Second, I am convinced my law firm has handled as many (or more) of these cases (around the world) as any other firm. Third, the “facts” in this case, at least as conveyed by the media, have remained very sketchy and I am not fully prepared to believe them.

Let me explain.

According to yesterday’s Los Angeles Times article on the case, the story goes as follows:

An Orange County businessman who was prohibited from leaving China for nearly two weeks because of a contract dispute with a Chinese supplier has negotiated a settlement and returned to the United States.

Brian Horowitz, 46, of Mission Viejo, said Chinese government officials refused to let him leave the country until he paid the Chinese firm $250,000 to resolve a civil lawsuit the company had filed against him. He said he arrived home Jan. 18 after his wife wired the funds to China.

Horowitz said he was stopped at Shanghai Pudong International Airport on Jan. 6 and told that he couldn’t board an American Airlines flight to the United States until the case was resolved. Chinese law permits its immigration officials to deny exit to foreigners with pending lawsuits.

The supplier, Fuzhou Trading Co., was seeking payment for a shipment of blenders that Horowitz’s company, On the Edge Marketing Inc., sold briefly in the U.S., Horowitz said. The Chinese firm’s owner demanded $250,000 to settle the contract dispute before he would direct the judge to let him leave, Horowitz said.

The dispute involved Horowitz’s 2007 purchase of 3,000 gasoline-powered blenders, which were marketed to tailgaters and others who wanted to blend icy drinks without a power source. Horowitz said the blenders did not meet U.S. air quality standards, as the contract required. As a result, the California Air Resources Board fined Horowitz’s company $240,000 in 2009 and ordered him to pull the blenders from stores.

Horowitz said the Chinese company agreed to write off Horowitz’s balance of more than $300,000 because of the fine and recall. But the company alleged in a lawsuit filed in China that Horowitz had failed to make good on his debt. Officials with Fuzhou Trading could not be reached for comment.

Horowitz said he did not learn of the lawsuit until he was stopped at the airport. But experts in Chinese law said it would be highly unusual for the country to enforce a lawsuit without proof that it had been served on all parties.

Horowitz’s take on the case is as follows:

“I’m very relieved to be home,” Horowitz said. “I’m hoping my ordeal helps other businessmen who do business in China to be educated about how to protect yourself.”

Okay, but how? And what really happened here?

We have written on this topic countless times. In “China Hostage Situation. Now IS A Good Time To Pay Your Debts,” we wrote of a U.S. company that had sent one of its executives to China to announce that it would be closing down its China entity, declaring bankruptcy, and not paying its debts. The company’s Chinese suppliers then held this executive hostage.

I wrote of how I could have seen this coming a mile away and of measures to take to avoid this sort of thing:

But if we had been retained, our advice would have been so different that I would like to think things would have never reached this point. We would have told this company to get ALL of its personnel out of the country before letting suppliers know (from far far away) that you had just filed for bankruptcy and that payment would be slow, at best.

We did have a client quite recently in a similar situation, which we wrote about in our post, “China, We Have A Problem. A Mostly True Story.” The key takeaway from that post is that the very first thing we emphasized was the need to get everyone out of town.

Many years ago, I had a similar situation where our client was alleged to owe money to a Vietnamese company. The Vietnamese company had shipped product to our client which we contended was defective and for which my client refused to pay. My client absolutely had to go to Vietnam to meet with other clients and he and I were both very concerned about what might happen to him there. My advice was that he not go, but he insisted that he had too. That being the case, we decided the best approach would be for my client to sue the Vietnamese company in a US court, alleging the Vietnamese company owed my client money for defective product. Our thinking was this might help insulate the client from problems in Vietnam. If the Vietnamese company tried to have my client imprisoned for his company’s alleged debt, we would at least be able to point out that there was an ongoing dispute between the two companies and that the Vietnamese company was seeking to act against my client in Vietnam not to collect on an unpaid debt, but in retaliation for my client having sued. My client went to Vietnam without incident and a few months later we were able to settle all claims. We heard through the grapevine that the Vietnamese company had actually been intimidated into inaction by our lawsuit.

Not so long ago, I wrote a post, entitled, “How Not To Get Kidnapped In China.” In that post, I talked of a recent “hostage” case we had resolved through negotiations:

Ten years ago, it was not at all uncommon for Chinese authorities to seize passports of foreigners involved in civil disputes there, but when Beijing made clear it did not approve of such actions, those incidents pretty much ceased. Kidnappings are, in some ways, more difficult to stop in that the act is sometimes less clear cut. Not that long ago, we had a client who was taken to a decent hotel, put in a room, and told that he would not be able to leave unless and until his company paid a contested (by us anyway) $60,000 debt. Negotiations reduced the debt, our client paid it, and left the country, never to return.

I then set out the lessons to be learned:

1. If you are in a debt dispute with a Chinese company, think about not going to China at all.

2. If you must go to China, think about using a bodyguard or two and think very carefully about where you stay and where you go. Most importantly, be very careful with whom you meet.

3. Consider preemptively suing the alleged creditor somewhere so that you can very plausibly claim that you have been seized not because you owe a debt, but out of retaliation for having sued someone. If you are going to sue, carry proof of your lawsuit with you at all times while you are in China.

So where did Horowitz appear to have gone so wrong? First, he says that he reached an agreement with the Chinese company: “Horowitz said the Chinese company agreed to write off Horowitz’s balance of more than $300,000 because of the fine and recall.”  If Horowitz did reach such an agreement, he should have memorialized it in writing, preferably in Chinese, and he should have had a copy of that agreement readily accessible each time he got on a plane to China. Oral (and to a large extent, e-mail) agreements in China are not worth the paper they are not printed on.

Second, I too really do not understand how it is that Horowitz (or his company) could have been sued in China, could have had a judgment entered, and never received any notice of the lawsuit? I am NOT saying this is what happened to Mr. Horowitz, because I do not know what happened to Mr. Horowitz, but I have to wonder if maybe the lawsuit and the judgment were against one of his companies with which he no longer had any concerns and it just never occurred to him that the company debt might be taken so “personally.”

I say this because we have been involved in at least two cases where this was the case. U.S. company owes money to Chinese company. U.S. company ceases to do business and so its key figures assume the issue is resolved in that the company has no assets to pay any debt.  They then get on a plane to a foreign country (one was a China case, the other was a Russia case) and they both get seized and “held hostage” until we negotiate out their release. They wanted us to argue that they personally did not owe the debt; their companies did. Our response was to tell them “that would be an excellent argument if we had the luxury of filing court briefs and waiting months for a judge’s decision, but our goal here is to get you released as quickly as possible.”

We deal with this issue in its nascent stages all the time when we work with our clients to shut down their Chinese entities (which for some reason has been happening like crazy of late). We always instruct our clients never to reveal that they will be shutting down their China operations while anyone from the home office is in China. We also tell them that if they or their company ever wish to return to China, they should pay off all their debts and usually the best way to do that is to announce from outside of China the plan to gradually shut down the China office and then, using that as leverage, negotiate down all of the debts. We always stress that once a reduced debt is agreed upon, there should be a written agreement on that and there should be proof of payment on that agreement as well.

All of this is necessary if you want to formally close your China entity, which is, in turn, necessary, if you want to be able to return.

What are you seeing out there?

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Had a nice meeting last week with one of my firm’s few Chinese clients.

Though the bulk of my law firm’s work involves helping mostly US companies go overseas, we also sometimes help foreign companies enter into and conduct business in the United States. Our language and cultural capabilities mean most of that work should be done for Russian, Korean, Spanish/Latin American, and Chinese companies, but we have done disproportionally little for Chinese companies. There are many reasons for this, but the two chief reasons are money and culture.

Let me first digress by describing our history with Russian and Korean companies and then I will explain where we are with Chinese companies. The purpose of this history is to try to put Chinese companies in context as to where they are in becoming sophisticated consumers of legal services, which, in turn, directly reflects on their international sophistication writ large. For other service providers who have worked with Russian, Korean, or Chinese companies, this history will only be interesting because it will almost certainly be exactly the same as theirs.

Many years ago, my firm started out representing American companies doing business in Russia and Korea and/or with Russian and Korean companies. Fairly soon after that, we started representing Korean-American and Russian-American businesses as well, mostly relating to their transactions with Russia and/or Korea. These Korean-American and Russian American businesses were, for the most part, run by Russians and Koreans who had been in the United States for at least five years. They had a good understanding of how business is conducted in the United States and their knowledge of how to use lawyers pretty much matched that of a comparable wholly domestic business.

Then the lawyers with whom we worked in Russia and Korea and the U.S.-based Russian and Korean companies started referring Russia-based and Korea-based companies to us. These Russian and Korean companies knew little of how the world operated outside their own countries and even less about the nature of US lawyer-client relationships.

Most of the time our fees precluded our representing these Russian and Korean companies at all. I cannot tell you how many times we would quote our hourly fee, get a long pause, and then a response along the lines of, “that’s for the entire project, right?”

Two main factors were leading to this disconnect on fees. One, our fees, denominated in dollars, were way high in relation to what things cost in Russia and in Korea, including lawyers. Two, these companies were shocked by the hours we were estimating to give them the answers or the resolution they sought. They would often insist to us that our finding the answer should consist of our simply reading the applicable code section and there was just no way doing that should take more than twenty minutes. They would stress that they would be more than willing to pay us a “reasonable” fee for us to answer their questions off the top of our heads, but our having to research it indicated to them that we did not know what we were doing. On top of this, the Korean and (even more so) Russian lawyers were charging a flat fee per project, not by the hour.

To try to solve the fee problem, we started quoting flat fees and we did start getting some business, mostly confined to those situations where the Russian or Korean company had virtually no choice but to retain an attorney outside their home country. It was only then that we realized the fee problems would prove to be the least of our issues.

Once we started representing these companies we had to deal with cultural disconnects. Some of the (now) funnier stories from those days:

1.   I am in a packed courtroom representing one of Russia’s largest companies. Opposing counsel stands up and cites how my client had used the Russian Coast Guard and the threat of arms to seize his client’s ships while they were out fishing and then forced them at gunpoint to come to port in Russia so my client could seize them, all this in violation of the bankruptcy court’s stay order.

As the opposing lawyer is talking, I very quietly ask my client out of the side of my mouth whether what he is saying is true. My client says it is, to which I ask him why he had never told me, especially since I had asked a number of questions which by all rights should have elicited all of this information. My client’s response was that he was worried that if I had known of this, I would not have represented his company as zealously.

2.   Having to deal with clients who ask me what the federal judge on their case earns per year from salary and from “other arrangements.” I would always respond to this by saying that United States federal judges earn a very good salary and that if “other arrangements” means bribes, the amount is unequivocally zero. They would then make me out to be a naif, to which I would usually unload on them by saying something like the following:

You were referred to me by Oleg (made up name). He is your lawyer in Russia. He is also who we use when our American clients have matters in Russia. We both use him because he is an excellent lawyer, right? He has referred you to me because he thinks I am an excellent lawyer, right? Why do you think your Russian lawyer tells you to use us in the United States and we tell our clients to use him in Russia? Because he knows that we are better equipped and better positioned to navigate the US court system than he ever will be. And I am telling you that American federal court judges do not take bribes and I am telling you that I have never bribed anyone in my life and I sure as hell am not going to do it now on your case. I’m just not.  And if you are going to persist in believing that bribing a judge is the way to go (which, by the way is crazy here because we can win this case on its merits) then you should go back to ____ and tell him you want to “do things the way they are done in Russia,” as you put it, and you want him to represent you here.

3. With the Korean companies, one of our biggest problems was how much they relied on us. Lawyers in Korea are hugely respected (think doctors in America in the 1950’s) and they would too often want us to make business decisions for them.

Our Korean and Russian clients eventually gained enough familiarity with the US legal system and with lawyer-client relationships that our relationships with them are now, in all important respects, pretty much no different than our relationships with our American clients.

Now let’s talk about the current state of Chinese companies, generally:

  • My law firm’s hourly rates compare with the average monthly salary in China. Chinese companies have in-house lawyers who are paid less per week than we charge by the hour.
  • Chinese companies expect my law firm to be able to give them answers off the top of our heads to virtually all of their legal questions.
  • Chinese companies generally hire us only when they are facing a problem there is absolutely no way they can resolve without qualified legal assistance. We have tried to explain how they would actually reduce their legal fees if they paid us to assist them on a proactive basis, but they just are not interested.
  • Many of the Chinese companies that seek to hire us for one thing (let’s say, forming a US company) really have another goal in mind (let’s say getting visas for their families and getting their kids into U.S. schools). They do not tell us of their real goals until we are way into the project. This sometimes can make achieving their real goal more difficult and this oftentimes leads to us having to do more work.
  • Once Chinese companies hire us, they want to tell us exactly how we should be doing our jobs. We were retained for a Chinese company once to sue an American company which owed the Chinese company millions of dollars. Upon our hiring, we sent a memo to our Chinese client, explaining in detail our proposed course of action. After we had completed a few of the initial steps outlined in our memo, we received an e-mail from the Chinese non-lawyer client, setting forth the steps we should now follow, which steps made absolutely no sense at all in an American context. We told the client that it either had to trust our competency as lawyers or they should let us go and we would return all that they had already paid us. They let us go.

The above is typical, yet something else is starting to happen as well. We are getting hired by Chinese companies that have been doing business in the United States for a few years and who have seen how attorneys have helped some of the companies with whom they have done business. These companies are reticent to use American lawyers for cost reasons, but they do not have crazy cost expectations either. Like every smart company, they simply do not want to get involved in a situation where their costs might spin out of control. We understand this and we have been working with them to explain how things go in the United States and, when appropriate, we have been doing their work on a flat fee basis or with a dollar cap.  We emphasize how important it is that we stay in constant contact and to stress this, we oftentimes tell them we will not bill for client-attorney communications.

Slowly but surely, these Chinese companies, who have been in the United States long enough to realize how different we are than China, are starting to want to learn how to better operate here and are starting to gain enough confidence to realize that their U.S. operations can handle a U.S. based cost structure.

What happened with Russian and Korean companies on the legal front was always being mirrored in other business arenas. And what is happening with Chinese companies on the legal front is no different from what is happening with Chinese companies on all fronts as they begin to expand into developed economies worldwide.

If you are a service provider looking to work with Chinese incoming clients, you will need to understand where your Chinese clients and potential clients are coming from and where they are going and you will need to show patience and an educator’s spirit to help them get there. It is going to take time, but my law firm’s experience with Russian and Korean companies tells me there is light at the end of the tunnel.

U.S. service providers, what are you seeing out there? Any light in your business?

Had a nice conversation with a potential client last week. Company has a great new product it wants made in China. Like many companies starting out in China, this one is in the process of shopping for its China lawyers and my firm was one of four suggested to it by its regular corporate counsel.

Our conversation was interesting because we were the fourth law firm with whom she had spoken. This gave me an opportunity to ask how we differed from the other three firms and, not surprisingly, we really differed, both in how we bill for these things and, more importantly, how we typically handle these contracts.

I told this company that we would almost certainly do their OEM contract in Chinese and I quoted them a flat fee for doing that, along with an English language translation. They told me that the other law firms were saying that the contract would be in English and they would “need to” charge by the hour and it would even be impossible to estimate how long it would take due to the negotiations that would take place between this company and its Chinese manufacturer.
I think one big reason so many US law firms do not write their OEM agreements in Chinese is simply because they do not have any lawyers who can read and write Mandarin fluently. My firm has four lawyers (and various others) who can read and write (and speak) Mandarin fluently and we usually favor putting our clients’ OEM contracts in Chinese for the following reasons.

Because international contracts are so often between parties from different countries, they commonly are written in two or more languages. Nearly all of the contracts we draft for our Western clients doing business in China are in English and Chinese (though about ten percent of the time, we also translate them into German, Spanish, Korean, or French as well). This duality of language can, if not handled properly, pose big problems.

When we do a contract in both English and Chinese, we always call for the contract to specify ONE official language to control if there is a dispute. We do not advise drafting a contract that is silent on the official language, nor do we advise drafting contracts that call for both English and Chinese to apply. Having two official languages pretty much doubles the chances for ambiguity and pretty much doubles the attorney time (and fees) that will be incurred in fighting over the meaning of the two contracts. It is expensive enough litigating on one contract; there is no benefit litigating on two.

So the question for us comes down to whether English or Chinese should be the official language of the contract and the answer to that question requires we first decide where we would most like to see disputes resolved. If we go for arbitration in English (and if the Chinese manufacturer actually agrees to this, which is quite rare), then we almost certainly will want English as the official language. But if we decide the Chinese courts will be the best place to resolve conflicts, then we want Chinese to be the official language.

Now I know most of you think the obvious answer here is to do anything possible to avoid Chinese courts, but you would be wrong. Let me explain.

In determining where best to resolve conflicts on an OEM contract, the analysis has to begin with first trying to determine the most likely and the potentially most damaging disputes and then analyzing where best to handle each sort of dispute. Disputes between foreign companies and Chinese manufacturers most often involve the following:

1. The Chinese company provides poor quality product. To say this is common would be an understatement. The best way to deal with a dispute involving the Chinese company providing poor product is usually to seek to work it out with the Chinese manufacturer. If that proves impossible AND there is enough at stake to warrant suing, arbitration is likely going to be the best course of action. Not to minimize the importance of these cases, but they usually involve only one shipment and they usually involve a finite amount of money.

Litigation outside China against a China based manufacturer usually does not make sense. Because most Chinese companies do not have any meaningful assets outside China and because China does not enforce foreign judgments, getting a judgment outside China against the Chinese company will likely have virtually no value. Therefore, there is no point in having a contract that calls for jurisdiction in a court outside China. For more on the difficulty/impossibility of enforcing foreign judgments in China, check out “Taking Judgments To China (And Korea), Let’s Not Sue Twice.

2. The Chinese company manufactures the foreign company’s product without the foreign company’s permission and in direct violation of the OEM agreement. You have a great product and you have taken it to China for manufacturing there. You are currently selling in just a few countries, but your plans call for you to eventually sell into China and India and maybe even Africa some day. All of a sudden, you learn that your Chinese manufacturer is not making just the 100,000 units you ordered, but, in fact, is making 500,000 units and shipping the extra 400,000 to India, Africa and the rest of Asia, where it is selling them for 1/5 of what you are charging.

If your agreement calls for arbitration in Hong Kong or New York, or even Beijing . . . good luck. What you need, and what you need fast, in these situations, is a court order requiring the Chinese manufacturer to stop making your product and to stop NOW. And guess what, pretty much the only way you are going to get that badly needed court order is from a Chinese court, not that that will be easy. If you did everything right with your contract, it will have liquidated damages provisions that will also allow you to relatively quickly secure a judgment from a Chinese court for damages and will also, in the meantime, give the Chinese court a strong basis for freezing the assets of the Chinese manufacturer before you even secure your judgment. The threat of all of this is oftentimes enough to convince the Chinese manufacturer to cease and desist.

If your contract calls for arbitration and you sue in a Chinese court to get an injunction to stop your manufacturer from breaching your contract by manufacturing and selling your product, you almost certainly will not succeed. The Chinese manufacturer will show the court your arbitration clause and request it decline the case in favor of resolving the dispute in arbitration. Once you are in arbitration, you pretty much will not be able to get an injunction or an asset freeze.

It is possible to write your OEM contract to call for arbitration with a Chinese court “carve out” for injunctive relief or an asset freeze, but many Chinese courts do not to enforce these sorts of provisions.

For these reasons, we usually favor our OEM contracts calling for dispute resolution in the Chinese courts. And if you are going to be in a Chinese court, you do want your contract to be in Chinese. The reason for this is simple. If your contract is in English, the Chinese courts will use their own translator to translate it. Translations can be easily manipulated and it is virtually always better to have your contract translated by your own law firm in advance so you know exactly what it says before you sign it, than to have it translated into Chinese by an unknown translator only after you have sued on it.

3. The Chinese manufacturer refuses to return the foreign company’s molds after the foreign company seeks to terminate its relationship with the Chinese manufacturer. This often happens when the foreign company terminates its relationship with the Chinese supplier. Not surprisingly, the key here is to have a contract in Chinese that makes clear that the mold belongs to you and that there will be hell to pay (in legal terms) if the Chinese manufacturer does not return these to you pronto. But what if the manufacturer does not return your molds? Damages are usually not what is needed. You need the molds immediately because without them you cannot manufacture your products. Again, the best positioned foreign company is the one with a contract in Chinese who can go to a Chinese court for an injunction mandating the manufacturer return the molds. Or at least a large enough asset freeze to convince the Chinese manufacturer to back down.

Lastly, and perhaps most importantly, we have become convinced that most (yes most) problems that arising between foreign companies and their Chinese manufacturers stem from a lack of clarity between them regarding the manufacturing terms. The best way we know to resolve those sort of communication issues upfront is to resolve them before the first widget is made and then to memorialize those agreements in a written form that both parties cannot fail to understand. The best written form for the Chinese manufacturer is obviously going to be a Chinese language document.

We have also learned that we differ from virtually all the other law firms in our pricing structure. We gave this client a flat fee price based on the complexity of what we anticipated doing for it. This price was to draft an OEM agreement in Chinese, with an English language translation for the client.

None of the other law firms were willing to give a similar fee, even when the company went back to them (at my suggestion) and suggested they do so. They all begged out, claiming they had no way of knowing how long it would take and so they would “have to” charge by the hour. This is, of course, complete malarkey. (I wanted to use a much stronger word here, but since I long ago committed to writing a blog that I would not mind my now 11 year old kid reading….). If law firms do not know how long these OEM agreements typically take, who does? Seriously.

My law firm has done enough OEM Agreements that we know, within around 3-4 hours, how long 90 percent of them will take, and we are willing to take the risk on the remaining 10%. The real answer is that law firms are simply resistant to change and resistant to taking on any risk on behalf of their clients. For more on how law firms are so incredibly resistant to changing their billing paradigm, check out this recent study resoundingly confirming this.

What do you think?

Last year, I wrote an article for the Complete Lawyer, entitled, “Working with Korean and Chinese Lawyers.” I was originally asked to write on working with Asian lawyers in general, but persuaded the magazine to allow me to focus on just China and Korea. I asked for this limitation because I did not believe myself experienced enough in working with lawyers from other Asian countries to write about working with them and, more importantly, because I did not see enough similarities to talk of Asia as a whole.

An article like this has to generalize a bit and there are certainly exceptions to everything I say. But having worked with dozens of law firms in Korea and China, I have noticed the following four problems in dealing with lawyers from those two countries, respectively:

KOREA

  • Non-responsiveness is the norm. American lawyers generally see their role as helping clients achieve their goals and keeping their clients informed. Korean lawyers operate far more independently. They consider themselves the legal experts and they often get offended when questioned. According to their perspective, a client should trust them, not ask questions, and not expect updates. This obviously does not work well for American clients. Two excellent Korean law firms have admitted to me they “always get fired” when they work directly with American companies or with American lawyers inexperienced with Korea. If a Korean lawyer has a hearing scheduled in a case, I email him (it is virtually always a he) the day before to urge him to provide me with a full report by the next day, at the latest. I usually send another email reminder after the hearing concludes and if I do not have a timely report, I call.
  • Your matter is not important. Most Korean lawyers have plenty of work and any one matter from an overseas client is not likely to be of great importance to them. This may mean your Korean lawyer will not fight hard on a particular motion where the chances of winning are low; he or she would rather stay in the good graces of a judge or fellow lawyer than challenge the status quo. I try to get around this by hiring “outsider” lawyers if my case is going to be particularly difficult or contentious, or by attending the hearing if it is particularly important. I also always make clear, upfront, that a good result for this client will lead to more work from my law firm’s other clients.
  • The Korean lawyer’s role is different. Korean lawyers tend to view themselves as “above it all.” I learned this when, trying to settle a case, we offered $900,000 and the Korean company on the other side offered to pay us $700,000. I asked the Korean lawyer to go back at $850,000 and I could feel his reluctance. I say “feel” because while he was telling me he would go back at $850,000, he was also asking me questions to let me know he did not think he should go back at $850,000. Weeks then passed with no updates and vague responses to my emails. Then, out of the blue, a US-educated paralegal from the firm called me to say the $850,000 offer had never been passed on because the Korean lawyer considered it beneath him to negotiate “as though at a flea market.” I do not know if that paralegal was put up to the call by the attorney or if he called me on his own, but I have since learned to control negotiations myself. It is not just in negotiations that the Korean lawyer sees himself as above the fray. If you do not put pressure on your Korean lawyer, you can pretty much assume that numerous time extensions will delay your case for years.
  • Confidentiality? What’s that? Korean lawyers simply do not respect the attorney-client privilege the same way American lawyers do. I try to handle confidentiality problems by using the same few lawyers in Korea for all of my firm’s clients. Because I provide so much work to these attorneys, I have a personal relationship with them, which makes it less likely that they will hurt me by hurting my client. It also decreases the incentive for the Korean lawyer to hurt my client because doing so will cut off the regular stream of work my firm provides.

CHINA

There are many lawyers in China scrambling for work, but most of them have neither the experience nor the language skills to handle international clients. The problem is that most either do not know this or will not admit it. The four most common problems I see in retaining Chinese lawyers are:

  • Chinese law firms often are not “firms” as we understand the term. There are very few really good Chinese international law firms in China and many of them are not really firms at all; they are a collection of solo practitioners. Many American companies think they are using the best lawyer in a firm for a particular matter when in fact that lawyer has the case not because of his skill set, but because he or she is the one who brought in the case.
  • Chinese lawyers are rarely power brokers. The importance of connections is not as strong as it once was, though it is still a factor in certain industries and certain parts of the country. Chinese lawyers are usually not well connected (even if they are reluctant to admit it) so hiring a lawyer as a power play is rarely recommended. China’s good lawyers are very smart and very well educated, but if they were truly well connected, they would most likely have a top position in the government or with a big company, and they would never have attended law school in the first place.
  • The Chinese lawyer’s role is different. Chinese lawyers far too often see their role as doing what the client tells them to do, rather than telling the client what should be done. If a client calls me and says she wants to do A, my knee-jerk response is to ask why. The typical Chinese lawyer’s response is to say “yes.”
  • Chinese lawyers do things the Chinese way. Chinese companies can get away with all sorts of things in China that American-owned companies cannot. Chinese lawyers tend not to account for this. Chinese lawyers also almost never know the various US law strictures under which American companies must operate. The Foreign Corrupt Practices Act is a classic example. There are also many things American companies can do legally in China that would be a public relations disaster back home. This is particularly true regarding labor relations and environmental stewardship

As always, I would love to hear what you think. I particularly welcome comments from those who have worked with (or for) Korean or Chinese lawyers and from Korean and Chinese lawyers. Have at it people…

In the movie, Ace Ventura: When Nature Calls, Ace Ventura (Jim Carrey) gets stabbed countless times by massive spears, knifed a few times, flipped completely over a couple times, and stepped and trampled upon.  He takes all of this with amazing equanimity.  But when his hair gets ruffled, he becomes furious and yells, “NOBODY MESSES WITH THE [hair] DO.”

Somebody is MESSING WITH MY DO.

Counterfeit drugs, money, razor blades, cigarettes, food, shoes, music, auto parts, software, purses, even fake Playboy bunnies.  None of that shocks anymore.

But today I just learned that there are those who take money to file trademarks in China and then simply run away.  A new client told me he had sent about $750 to what he thought was a legitimate China law firm to have his company’s brand name registered.  As soon as the first $750 hit Shanghai, he was asked to send an additional $600 to “cover the filing fees,” which he did.

A week later the website was down and the Shanghai “firm” was gone, “leaving no solid clues, nor trace, only a space in the lives of their friends.

Caveat emptor.

First time I had heard of anything like this.  Anyone else heard of such a thing?

UPDATE:  It turns out this scam is actually pretty common and it also turns out that in every case of which I am aware the scammers were neither licensed Chinese lawyers nor licensed Chinese trademark agents.  In other words, they are just people who run China trademark registration scams.