Doing business in ChinaGot a great email today from a China lawyer friend. The email noted how a blog post we did more than ten years ago, entitled, China’s Five Surprises, was so incredibly prescient in predicting China business today. It truly was, but as I noted in my response to my friend, the credit should go to Dr. Edward Tse, the person who observed and wrote about China’s five surprises. We merely reprised them and agreed with them.

It is though amazing to me how accurate Dr. Tse was with his observations/predictions.

Here is what we wrote about the five China surprises way back in 2006:

This paper does an excellent job discussing where China business is today and where we can expect it to be in the future. Its five main themes are as follows:

1.  Many Chinese companies are already more than simply low cost competitors and even more of them will compete on quality in the future.

2.  We should expect Chinese companies to become more innovative over time.

3.  China has been able to draw top people from around the world, accelerating business competence.

4.  “Out from Guanxi.” Guanxi is overrated and rapidly declining. “High-quality management and transparent governance structures count more.”

5.  Chinese companies are going overseas.

Our own experiences cause us to agree with all five of these themes and we have already discussed some of these on our blog, here, here, here and here.  No controversial stand here, but we also agree with Dr. Tse that neither the “China will take over the world” nor the “China will crash and burn” scenarios reflect the reality on the ground in China.

I hardly need mention that all five of these things came true.

  1.  Chinese companies are today fierce competitors and not just because of cost. See Your China Factory as your Toughest Competitor. 
  2. Many Chinese companies have become more innovative. See Can China Innovate?
  3. China has been able to draw top people from around the world.
  4. Guinxi has become far far less important today in China (in most industries) than ten years ago. As one indicator, we mentioned guanxi an average of ten times a year from 2006 to 2014, but only four times a year since then.
  5. Chinese companies are going overseas. True, but. This has definitely happened but not without its starts and stops.

What are you seeing out there that is telling you what China business will be like ten years from today?

China AttorneysOne of the things my firm’s China lawyers are always saying and seeing is how China is constantly getting more legalistic, especially with foreign companies doing business in China. I used to believe this would lead foreign companies to become more careful, but this has not happened. Too many foreign companies — for all sorts of different reasons — remain far too nonchalant and increasing legalization only increases the likelihood this attitude will eventually harm them. In this series of posts (of which this is the first), I will write about the most common incidents our China attorneys see involving foreign companies that get into trouble in China for being careless or sloppy or just too trusting.

As for the title of this post, I have been studying Spanish for the last six months or so and oftentimes when I give a wrong answer my teacher will ask “¿Estás Seguro?” which means “are you sure?” I always respond by saying, “no, porque….” because I know she would not be asking this question if my answer were 100 percent accurate. I am asking the same question regarding China company formations because we far too often see instances where a foreign company believes one thing but the reality is something else entirely.

Forming a China company is a prime example of this, both with WFOEs and Joint Ventures. What usually causes the problem to bubble to the surface is different as between a WFOE and a Joint Venture, but what caused the problem in the first place is nearly always the same: the foreign company trusted without verifying.

The WFOE Problem. The WFOE problem is a somewhat simple one. The foreign company believes it has formed a WFOE in China (oftentimes long ago) and that it is now operating completely legally there. The foreign company typically then has a problem with its most important China “employee” and it wants to terminate that employee. The first thing our China employment lawyers usually do in this situation is to look at the official Chinese government corporate records for the WFO so as to get a better handle on the employee’s authority at the company. Sometimes we discover there is no WFOE.

At this point, the legal issue is no longer terminating an employee of a WFOE; it’s figuring out what makes sense in light of a messed-up China situation and a company’s present-day China goals. You cannot terminate an employee from a company that does not exist.

How does a company get to this point? What leads a company to believe it had a China WFOE when it didn’t? Ninety percent of the time the fatal mistake was trusting the person the company now wishes to terminate. That person claimed to have formed a WFOE for the foreign company but never did. Maybe he or she (though in my recollection it’s always been a he) formed a Chinese domestic corporation he owns. Or maybe this person never formed any Chinese entity at all. In any event, the foreign company  paid money to this person believing this money would be used to form a WFOE. Virtually always, the company then paid more money to this person believing this money would go to pay rent and personnel and taxes and other business expenses. Probably some of the money went to these things, but it is likely a good chunk of it went straight into the pockets of the person who lied about having formed the WFOE. Not sure why, the companies in this circumstance seem to be disproportionately Northern European. Just putting that out there.

The Joint Venture Problem. This is really two different problems. One, the non-existent Joint Venture, which is very similar to the WFOE problem, but usually a bit more complicated. The putative JV partner is put in charge of forming a China Joint Venture and it either does never forms any company at all or it forms a company in Hong Kong (or even in the United States, believe it or not!) that the foreign company believes to be a China Joint Venture. The foreign company thinks that the Hong Kong or US company owns a company in China and it thinks this corporate structure is itself a China Joint Venture. It isn’t and the China entity into which the foreign company ends up pouring time and money and technology is not in any respect owned by the foreign company. The foreign company then at some point becomes concerned about never having received any money from its Joint Venture and now the Joint Venture has gone completely silent and is not even responding to emails or the Joint Venture is now successfully competing directly with the foreign company. See China Scam Week, Part 6: The Fake Joint Venture.

Two, the foreign company trusted its Chinese Joint Venture partner and the lawyer its Chinese Joint Venture partner chose to prepare the necessary Joint Venture documents. Now there is a problem and those documents were written in such a way as to favor the Chinese side so completely there is nothing the foreign company can do to resolve it. See China Joint Ventures: The Tide is Out.

Do you have a Chinese company? ¿Estás Seguro?  Maybe you should double-check.

 

 

 

China IP protectionsOn the evening of April 25, I will be speaking live in Barcelona at a Red Points event on international and China IP protection. The event will be on the eve of World International IP Day and it will be to celebrate Red Points’ launching its online brand and trademark platform offering free lessons on detecting, validating and enforcing intellectual property rights across the internet.

This event will be live-streamed on April 25th as well, at 9:00 AM PST, 12:00 PM EST, 6:00 PM CEST. For more information, go here and to register (it’s all FREE), go here to register.

 

Protect your IP from China with an NNN Agreement
Protect your IP from China with an NNN Agreement

United States companies all too often make the mistake of trying to protect their intellectual property from China by using a U.S. style non-disclosure agreement (NDA). These agreements do not work for China. Chinese companies know this and so they willingly sign them.

U.S. style NDAs focus on preventing disclosure of trade secrets to the public and they are written in English, subject to U.S. law, and exclusively enforceable in a U.S. city. These things all make complete sense if you are looking to stop an American company from revealing your trade secret, but this kind of NDA is of no value when dealing with your typical Chinese company based in China.

None.  

First off, the fundamental issue when dealing with a Chinese company is not protecting your trade secret from being disclosed to the general public. The Chinese company that wants to steal your idea does not want to do so to reveal it to the general public; it steals your idea to use for its own benefit. This means your non disclosure contract with your Chinese counter-party must make clear that whether the information you provide is a trade secret or not, the Chinese company cannot use that information in competition with you.

The other fundamental problem with U.S.-style NDA agreements is that it they are not enforceable in China. Chinese law allows for protecting trade secrets and for contracts that provide NNN protections. But for such a contract to be effective and enforceable in China it should be written in Chinese, governed by Chinese law, and exclusively enforceable in a Chinese court. See China Contracts That Work.
Do not use a U.S. style non-disclosure agreement. Instead, use an NNN (non-disclosure, non-use, non-circumvention) agreement written to be enforceable in China. For all that entails, check out China NNN Agreements.

China trademark lawyersYour brand name and your product name and your logo are almost certainly some of your company’s most valuable assets. Most companies realize this. Yet most companies do not realize how they put these things at extreme risk by exploring doing business with China without FIRST applying for a China trademark. And in the past year or so this risk has greatly escalated.

Let me explain.

China is what is called a first to file country.Companies need to know that China is a “first to file” country. See China Trademarks and the Real Meaning of First to File. This is by far the most important thing you need to know about China trademarks. First to file means that (with very few exceptions) whoever files for a particular trademark in a particular category gets it. Three examples of what this means and how horrendous this can be for your company will hopefully nail home this point

  1. If your company’s name is “Nuvealass” and you make widgets and you been manufacturing your widgets in China for the last two years and selling Nuvealass widgets in Europe, Canada and the United States for the last ten years and someone registers the “Nuveulass” trademark in China for widgets, that someone now owns the “Nuvealass” trademark. And what this means is that someone can stop your widgets from leaving China because your widgets violate its trademark. This is not a hypothetical example as this sort of thing happens all the time.
  2. If your company’s name is EFGH and you have a really great SaaS business and you are looking to go into China with that business and another company registers the EFGH name as its own trademark in the class for SaaS before you do so, the odds are overwhelming that you will never be able to use the EFGH name for your SaaS business in China. This is not a hypothetical example as this sort of thing happens all the time.
  3. If your company’s name is XYZ and you have a really great consulting company and you are contemplating having your business work for Chinese companies and another company registers the XYZ name as its own trademark in the class for consulting businesses the odds are overwhelming that you will never be able to use the XY name for your consulting business in China. This means that if you try to use the XYZ name for your business in China or even if you stay in the United States and market your XYZ business in China, your company is at risk of being sued for trademark infringement by the company that owns the XYZ trademark in China. This is not a hypothetical example as these sort of things happen all the time.

If you are thinking you are safe from all of this because you are a small company and hardly anyone knows who you are, you are simply wrong. Five years ago, maybe, but today, absolutely not.

Let me explain.

Because of this blog our China lawyers are always getting contacted by companies with China trademark problems, most of which we simply cannot solve. From these contacts I have determined the following:

1. A company that sends anyone to China is at real risk of having someone register its trademark in China. Why does this increase the risk? Somehow or other (and you can draw your own conclusions here) trademark trolls will learn of your business. How do I know this? Because in the past year or so it has become commonplace for American and European companies to get an email a few weeks after their China visit (just enough time for someone to file a trademark application) saying that “someone just sought to register your company name as a trademark in China.” These emails then suggest hiring the sender to prevent that trademark registration from going through. And here is where it gets interesting. Sometimes no trademark has been sought and the sender merely seeks to profit from the threat. Other times though, the sender (who almost certainly is connected with the company or person that has filed for the trademark) will then offer to help you purchase your company or brand name from the person or entity now in line for getting it in China. This situation gives rise to Rule Number 1: Apply for your China trademarks BEFORE anyone from your company sets foot on China soil.

2. A company that communicates with any company in China is at risk of losing out on securing necessary trademarks in China. Why does merely communicating with any company in China increase your risk? Because your communication is a tip-off that you are interested in doing business in China and that alone makes it valuable for someone to run off and file a trademark application to secure your company or brand name as their own China trademark. When a company in the midst of discussions with a China company calls me about those discussions, I always ask whether they have registered their company and/or brand name in China, and if they have not, I strongly encourage them to do so immediately.

Many times though their response is to provide me with one or more of the following reasons why they have nothing to fear:

a. “But the company we are dealing with in China is a really big, really reputable American company and surely that company would not damage its own name by running off and filing to secure a trademark in our own company’s name.” My response to that is that they are absolutely correct. Giant American company is not going to file for the trademark, but what about a poorly paid employee who hears about the deal? Do you really believe there is no risk of that employee having his or her cousin go off and seek to register your company name as his or her own trademark in China? If you think this is impossible, you have not done much business with China and you are not a regular reader of this blog. See Bad Faith Trademark Registration In China. Good Luck With That.

b. But the company we are dealing with would not run off and register my company’s name as a trademark in China because it knows if it does that it would damage its relationship with our company. Not true. First, an errant employee of the company could go off and have a cousin or friend register the trademark, totally outside what either company wants. Second, one would think this would be true, but we have seen too many instances where it is not. In fact, we have seen many instances where the Chinese company applies for the trademark and then when negotiations or the relationship with the foreign company are not tilting in the Chinese company’s failure, it pulls out the trademark registration as a negotiating ploy. What if things are going well and the foreign company learns of how the Chinese company filed for a China trademark in the foreign company’s own name? In that situation, the Chinese company will say it “did that to protect you” and then offer to give it to you for the mere filing fee.

Rule Number 2: Apply for your China trademark before anyone in China (or ideally, anywhere else as well) has any clue that your company is looking to do anything in or with China. 

Got it?