Just read a great post on China ODM manufacturing at the always super-helpful Quality Inspection Blog. The post is entitled The Danger of Developing your Custom Product with an ODM Factory and it is on how going to an ODM factory for a custom product is both a sourcing and a legal mistake.

The post notes how foreign companies looking to have a custom product made in China are “tempted to go for a shortcut: working with a manufacturer that has been making very similar products (an Original Design Manufacturer, or ODM)” and on why that is so often a really bad idea. Per the post, the pros for using an ODM manufacturer to make your custom product are speed and starting costs, both because the ODM manufacturer is already making something close to what you want for your custom product. The cons are the following:

• Changing your supplier will be difficult because it owns the design.
• You are taking a risk because your supplier may have stolen its design from another company and your product may get sued for IP infringement and banned from key online marketplaces.
• If your sales are high your supplier will tempted to compete with you.
• You will have a tough time getting favorable terms.
• Your design improvements/innovations will “feed” your supplier to be better able to compete with you.

The post then comments on how common it is for the Chinese ODM factory to get valuable design input from the foreign buyer and then go off and make the product for themselves. To help avoid this the post recommends getting the Chinese ODM factory to sign an enforceable non-disclosure, non-use, and non-circumvention agreement.

The above is all true and it leads the author to conclude that if you are going to have large quantities of your product made, you are better off using a contract manufacturer, not an ODM manufacturer.

From a legal perspective I cannot resist making one more suggestion. If you are working with any sort of manufacturer in China (or Vietnam or Thailand or Taiwan or Turkey or Spain or anywhere else) on together developing a product, you should have a Product Development Agreement with that manufacturer that is clear on who does what, who pays for what and, most importantly, who will own what in the end. And that contract must be written with your specific goals and product and country of manufacture in mind. In other words, a Product Development Agreement written for Spain is not going to work in China and a Product Development Agreement written for China is not going to work in Vietnam.

For more on how to protect yourself when manufacturing overseas, check out Overseas Manufacturing Contracts (OEM, CM and ODM).

Oh, and one more thing I feel I must drill home. As a result of the US-China trade war and the rapidly declining economic state of so many Chinese factories our China manufacturing lawyers are seeing more IP theft and more quality problems early from Chinese factories than we have in at least a decade. Along these same lines, check out China Trademark Theft. It’s Baaaaaack in a Big Way.

Be careful out there. More than ever!

Because of this blog, our China lawyers get a fairly steady stream of China law questions from readers, mostly via emails but occasionally via blog comments or phone calls as well. If we were to conduct research on all the questions we get asked and then comprehensively answer them, we would become overwhelmed. So what we usually do is provide a quick general answer and, when it is easy to do so, a link or two to a blog post that provides some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.

One of our China employment lawyers sent me an email from the head of HR (based in the United States) of a potential client regarding an employer audit. In these audits our China employment lawyers start by reviewing all of the client’s employment documents, mostly consisting of their various contracts with their employees. After our employment lawyer explained the basics of what we do in our employer audits, the potential client mumbled — to the extent you can mumble in an email — how, “in the end, does any of this really make sense when everyone knows employees in China always win.”

That’s actually a good question because in employee-employer lawsuits the employee does pretty much always win. See China Employment Arbitration: Good Luck With That Battle. So why even bother?

The Western world — particularly the Anglo-Saxon/common law world — is used to ultra-long contracts for everything. A contract to buy $6,000 worth of rubber duckies will include all sorts of boilerplate provisions, making clear that by one party buying the rubber duckies from the other the two parties are not forming a partnership or a joint venture. The below is fairly typical for this sort of provision:

No Partnership. No Joint Venture. No Agency. Nothing contained in this contract nor anything involving the relationship between the two parties shall constitute a partnership between or joint venture by the parties or make any party the agent of the other. No party shall hold itself out contrary to the terms of this provision and no party shall become liable by any representation, act or omission of the other that is contrary to this provision. This Agreement is not for the benefit of any third party and shall not be deemed to give any right or remedy to any such party whether referred to in this contract or not.

The below are just some of the boilerplate provisions you typically will see in Western contracts, no matter how little may be at stake:

Representations and Warranties. Each of the Parties to this Agreement represents, warrants, and agrees as follows:

Each Party has been given the opportunity to seek legal advice from an attorney regarding the rights, obligations, and advisability of entering into this Agreement and regarding the rights, obligations, and advisability of executing the same. Each Party declares that it fully reviewed and understood this Agreement prior to signing it, knew and understood the contents of the same, and executed the same voluntarily.

Each Party to this Agreement has made such investigation of the facts pertaining to this Agreement and of all the matters pertaining thereto as it deems necessary.

Each Party acknowledges that no other person, and no attorney of any other person, has made any promise, representation or warranty whatsoever, expressed or implied, not contained herein, concerning the subject matter hereof, to induce the Parties to execute or authorize the execution of this Agreement, and acknowledges that it has not executed or authorized the execution of this Agreement in reliance upon any such promise, representation or warranty not contained herein. No Party relies on any statement of any other Party in executing this Agreement, except as expressly stated herein.

If either Party is a corporation, trust, partnership, or other entity, each individual executing this Agreement on behalf of such Party hereby represents and warrants that such Party has full right and authority to execute and deliver this Agreement and that each person signing on behalf of such Party is authorized to do so.

Then there is the provision to make sure the agreement applies to pretty much everyone possible:

This Agreement is binding on the Parties hereto and on their respective agents, attorneys, insurers, heirs, executors, administrators, affiliates, employees, members, shareholders, principals, officers, directors, predecessors, successors, and assigns.

And then there is the true boilerplate — that which goes into just about every contract:

Effective Date. This Agreement, once fully executed by all Parties, will be deemed effective as of the Effective Date, December 31, 2018.

Counterparts. This Agreement may be executed in counterparts. When each Party has signed and delivered at least one such counterpart, each counterpart shall be deemed an original, and when taken together with other signed counterparts, shall constitute one Agreement, which shall be binding upon and effective as to all Parties. Non-original signatures will have the same force and effect as an original.

Complete Agreement. This Agreement is the complete and entire agreement by and among the Parties with respect to the subject matter hereof and supersedes all prior and contemporaneous oral and written agreement(s), representation(s), negotiation(s), and/or discussion(s).

No Oral Modifications. This Agreement shall not be modified by any Party by any oral representation(s) made before or after the effective date of this Agreement. This Agreement may be amended or modified only by an agreement in writing signed by the affected Parties. Any amendment(s) or modification(s) must be in writing and signed by the Party or a duly authorized representative of the Party against whom such amendment(s) or modification(s) is/are sought to be enforced.

Good Faith Cooperation. The Parties agree, for their respective selves, agents, attorneys, members, shareholders, principals, officers, directors, insurers, heirs, relatives, representatives, affiliates, employees, attorneys, successors and assigns, that they will abide by the terms of this Agreement, which terms are meant to be contractual, and further agree that they will do such acts and prepare, execute, file, and/or deliver such documents as may be required to carry out the purposes and intent of this Agreement. Each Party hereto agrees to cooperate in good faith and to do all things necessary to effectuate this Agreement.

Headings and Titles. The headings or titles of the Sections contained herein are for guidance purposes only and have no force or effect, and they do not in any way alter the terms or meaning of this Agreement.

No Third Party Beneficiaries. This agreement does not create and shall not be construed as creating any rights enforceable by any person who is not a Party to this Agreement.

Severability. Should any provision in this Agreement be declared or determined to be illegal or invalid, the validity of the remaining parts, terms, or provisions shall not be affected thereby, and the illegal or invalid part, term, or provision shall be deemed not to be part of this Agreement, and all remaining provisions shall remain valid and enforceable.

Some or all of the above are not generally used outside common law countries like the United States (on a state level excluding Louisiana), Ireland, Northern Ireland, Australia, New Zealand, Bangladesh, India (excluding Goa), Pakistan, South Africa, Canada (excluding Quebec), and Hong Kong.

And yet, our international lawyers are often pushed by our clients from common law countries (even more often by their in-house lawyers) to include these provisions even in countries where they make no sense. These people/lawyers are simply uncomfortable with contracts that do not include such terms. When we tell them that such provisions are not needed, their response is often, “well, it can’t hurt.”  But it can hurt.

Including terms in a contract that are strange and unfamiliar and unnecessary in a particular country can hurt in many ways. First off, it can increase the legal costs in drafting the contract. If we were to include all of the above terms in a contract we draft for, let’s say Vietnam, we would likely increase our billable hours on that contract by 1-10 hours. How?

Well, first off, we would need to figure out exactly what to say in each provision in English. Sure it is boilerplate but even boilerplate often needs to be adjusted for the particular situation. Also, some boilerplate makes sense in some contracts and not others. I pulled the above boilerplate from a U.S. settlement agreement my law firm drafted as between a Spanish company and an American company. That agreement contained boilerplate involving a foreign company and two ultra-long boilerplate provisions regarding the settlement of claims, neither of which would make sense in most contracts that did not involve a settlement and release.

Second, once we draft the boilerplate in English we would need to translate it into Vietnamese. That would add more time and fees for the client.

Third, and usually most importantly, if this contract gets sent to a Vietnamese company it may very well come back with all sorts of changes to the boilerplate provisions and all sorts of questions about it. Our lawyers would then need to draft responses to the Vietnamese company’s concerns, while at the same time, explaining to our client why the proposed changes from the other side do or do not make sense or should or should not be accepted.

Finally, once the new boilerplate terms have been agreed upon, we would need to re-draft them in both English and in Vietnamese, generating more time and more fees.

No suppose there is a contract dispute three years down the road and litigation ensues in Vietnam. The lawyers on that case will probably need to spend substantial time figuring out the meaning of the boilerplate provisions and then explaining them to the tribunal. I can remember well a case in Korea where I was called in to help Korean counsel understand a whole host of U.S. style contract provisions. I believe I billed about 20 hours on that alone.

But boilerplate provisions can hurt you — and deeply — in other ways too. Our international manufacturing lawyers are often given really long English language contracts by small companies that include a provision providing that the small company will conduct quarterly inspections of its overseas manufacturer and another provision calling for penalties to be paid for things like the overseas manufacturer failing to provide quarterly reports on x, y or z.

When our client then admits to never having once conducted a factory inspection or ever having received a quarterly report on x, y, or z and never once raising this failure as an issue with its foreign manufacturer, we recommend removing these provisions from their future contracts. Our client will often then say something to the effect of how these provisions come from the supply agreements used by the massive company at which they used to work and then they will mention their desire to keep these provisions in their contract because doing so “can’t hurt.” But it can.

If your contract requires your foreign counter-party to do six things and you completely let two of those things slide by without being done by your . foreign counter-party you are sending a message that you do not really care about what is in your contract. You are sending a message that you don’t really care about the other four things, even though you do. Or as one of our international lawyers often tells clients: “When an agreement contains this kind of provision that is not actually enforced, this weakens the entire agreement. The other side will believe that if you are not serious about this, you will not be serious about that either.” Not to mention all of the added legal fees and potential for confusion mentioned above.

Bottom Line: Deciding what should not go into your international contract can be as important as deciding what should go into your international contract. See Will You Translate My Crappy English/Spanish Language Contract Into Chinese to Make it Legal in China?

No vale la pena. It is not worth the pain.

It has been a tough year, what with the US-China trade war and all and with all that has been happening with China and Canada and China and the EU. Most of our law firm’s clients are looking at China in a new light and many have moved some or all of their business elsewhere. Relations between the people of China on the one hand and the people of the United States and Canada and the EU have to varying degrees become frayed.

But let us for at least just this week strive to move past all that and join in welcoming in the New Year. May this New Year bring all of you health and joy and success and peace. We wish all of you well.

Got a great email the other day from a veteran China lawyer. This is someone who has spent about half his life living and working in China. He certainly does raise some interesting issues, so here goes:

I read your posts on not getting arrested in China and I wanted to give you a few of my thoughts on that.

1. It is pretty strange to have to write a post that says: you as a foreigner are required to comply with Chinese law. But I understand that as there are still a few “old China hands” who will tell you to just ignore Chinese law. So your statement is required. You and I both know though that even most of these people no longer believe it. I had someone tell me the other day that he always encourages his clients to avoid lawyers “because the more they spend on lawyers the less they have to spend on me.”

2. Here is an important point that I find I often have to drill into people’s heads here. In the U.S or the EU or pretty much any country with a well developed legal system, if you are hired by a properly registered company, you can assume that company will follow the various laws. You can assume that because the penalties for not doing so are so extreme it is only the shiftiest of companies that do not. In China, it is truly the opposite, at least when it comes to hiring foreigners as employees. Here you should assume the company will not follow Chinese law. Paradoxically, it is the foreigner (not their Chinese employer) who usually gets in trouble over this. Any foreigner who comes to China to work without making double-sure that what they are doing is 100% kosher is asking for trouble.

3. In the U.S. or the EU if you hire an accountant or a bookkeeper, you can assume that professional will instruct you on how to pay all of your taxes and how to follow all applicable laws. In China, if you hire a local professional (including many local lawyers as well), you cannot assume that person will advise you to follow Chinese law. Often they will instead advise you on how to violate Chinese law by telling you that “no one actually follows this law or pays those taxes.”

It is no wonder so many foreigners get into criminal trouble in China. The problem is that until around ten years ago, the “don’t worry about the laws” statements were pretty much true and those statements are still in many cases true for Chinese companies and for Chinese nationals, But foreigners are in a different category and they have to take a different attitude.

Despite the recent number of high profile arrests, you and I both know that when it comes right down to it, 99+ percent of the time when a foreigner gets arrested in China it is for actually violating the law. I mention this because the last thing I want people to believe is that they following the law does not matter in China either because doing so is not necessary or because they will get arrested anyway because China has gotten so out of control of late. As I believe you wrote somewhere, the important thing is not to act in such a way as to make it easy for the Chinese authorities to arrest and convict you. It is still the case that if you do that, you will almost certainly be fine.

HAPPY NEW YEAR, one and all.

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

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

You know how when you buy a new car you all of a sudden see a ton of those cars on the road? I feel like I’m experiencing something similar with Michael Pillsbury. Starting about a week ago, a number of my firm’s lawyers (from both our international trade and international law groups) started mentioning “the importance” of Michael Pillsbury in determining how President Trump will negotiate with China and what terms he will accept from China in return for a trade deal.

Then all of a sudden I start seeing Michael Pillsbury everywhere, with the media pronouncing that he has President Trump’s ear on China and so what he thinks will be key. In The China hawk who captured Trump’s ‘very, very large brain, Politico highlighted Pillsbury’s crucial role and the New York Times did the same in A China Hawk Gains Prominence as Trump Confronts Xi on Trade.  Many articles on the G20 meeting highlight Pillsbury’s influence on the U.S.’s path with China.

Who then is Michael Pillsbury and what is his position on China? Pillsbury has a long and foreign policy record, with a long history of dealing with China. He played a large role in the United States’ initiating military and intelligence ties with China in the early 1980s. But it’s his 2016 book, The Hundred-Year Marathon: China’s Secret Strategy to Replace America as the Global Superpower, that catapulted him to the attention of China Hawks (whose ranks have soared in the last few years). In that book (which I just ordered but have not yet read), Pillsbury posits the following:

For more than forty years, the United States has played an indispensable role helping the Chinese government build a booming economy, develop its scientific and military capabilities, and take its place on the world stage, in the belief that China’s rise will bring us cooperation, diplomacy, and free trade. But what if the “China Dream” is to replace us, just as America replaced the British Empire, without firing a shot?

Based on interviews with Chinese defectors and newly declassified, previously undisclosed national security documents, The Hundred-Year Marathon reveals China’s secret strategy to supplant the United States as the world’s dominant power, and to do so by 2049, the one-hundredth anniversary of the founding of the People’s Republic. Michael Pillsbury, a fluent Mandarin speaker who has served in senior national security positions in the U.S. government since the days of Richard Nixon and Henry Kissinger, draws on his decades of contact with the “hawks” in China’s military and intelligence agencies and translates their documents, speeches, and books to show how the teachings of traditional Chinese statecraft underpin their actions. He offers an inside look at how the Chinese really view America and its leaders – as barbarians who will be the architects of their own demise.

Pillsbury also explains how the U.S. government has helped – sometimes unwittingly and sometimes deliberately – to make this “China Dream” come true, and he calls for the United States to implement a new, more competitive strategy toward China as it really is, and not as we might wish it to be. The Hundred-Year Marathon is a wake-up call as we face the greatest national security challenge of the twenty-first century.

Is Pillsbury right? If so, what does this mean for US-China trade negotiations and for the future of US-China relations? Or maybe the better question isn’t so much whether Pillsbury is right or wrong, but whether his views are now the views of the US government. And if that is the case, how will those views influence US-China foreign and trade policy (to the extent those two things have not become one and the same) going forward?