9:23 PM China Law Blog | China Law for Business | Harris Moure Law Firm | ||||
In cleaning out my computer this weekend, I came across this memo from one of our China lawyers (who does a substantial amount of China employment law work) to a client from nearly two years ago. I gave it a quick read and near as I can tell most of it is current. The only things I would note are that the rules can and do vary from province to province and from city to city and that in some cities it is relatively easy to secure permission to have your employee work without having to pay overtime. I am writing in response to your recent email regarding ______ s China employment matters. The basic response to your questions on PRC employment law are as follows. As you can see, the regulations are quite complex. Please contact me if you would like more detail on these matters, or if you have other related questions. 1. In general terms, Chinese law does not allow for “comp time.” Calculation of work time and payment is regulated under the PRC Labor Law???. Article 36 of the China s Labor Law provides for an 8-hour workday and a 44-hour workweek. Article 44 of the Labor Law provides that any labor performed in excess of the statutory amount must be compensated at 150% of the base salary. If the employee works on a normal rest day (Saturday afternoon or Sunday), then pay is 200% of base. If the employee works on a national holiday, pay is 300% of base. It is not permitted to make up for excess time worked by providing time off in the following week. The statute is silent about adjusting work hours within the same week and many companies will say that if an employee worked 12 hours on day one, that employee can then work 4 hours on day two. Though this is a somewhat common practice, particularly among Chinese companies, this system violates the rules. Under the strict interpretation of the rules, if an employee works 12 hours, 8 hours is at base pay and 4 hours must be paid as overtime. For these reasons, most WFOEs have a very strict rule limiting overtime work. That is, no employee is permitted to work overtime without specific written permission. “Comp time” systems are generally not used in China by foreign companies because they violate the rules and we do not recommend our clients use such a system. 2. Chinese labor law recognizes that for certain times of employment, a regular, 44-hour workweek, 8-hour day simply is not practical. For example, employees who work in transportation (on trains for example) and employees who work as travel guides will never work a standard week or day. For such employees, permission can be fairly easily obtained from the local labor bureau to establish a system of flexible work hours and accumulation of hours system. This permission system is regulated by the Labor Bureau Method for Enterprise Application for Non-Specified Work Hours and Gross Accumulation of Hours??????????????????????????????. Under this system, a company can work with its employees to design a system where hours are accumulated within a week or month in a flexible way that fits with the actual demands of the job. However, the basic rule of this system is that the final result must be as close as practical to a 44-hour workweek and an 8-hour workday. This system cannot be used to impose a non-hourly work system where the employee is paid a monthly salary and is required to work as many hours as are required to get the job done. That is, this system cannot be used to impose a salaried employee system as an hourly employee system. There is no concept of salaried employee under the Chinese labor law system. There is only the method described here where the hourly system is adjusted in a way to accommodate employees who have irregular work hours as an inherent part of their jobs. Consider the application of the above to your employees. Many of your sales employees will travel. You have two choices that comply with the law. First, absent special permission, you are required to pay overtime for every hour in excess of 8 hours that the employee works, even in cases where the excess hours are caused by travel that cannot be avoided. Second, if this is an excessive burden, you can request permission from your local labor bureau to implement a flexible system to allow for excess time on certain days to be made up as soon as possible by time off on other days, provided that the result is as close to an 8 hour day, 44 day work week as possible. In general, the employees must agree to this system: it cannot simply be imposed by the employer. 3. You have asked about the system for paying your general manager. This question applies to management employees in general. What you are really asking is whether or not you can pay your management people using the standard U.S. salaried employee approach. As noted above, the legal regime in China does not recognize the salaried employee concept. This means that for you to avoid paying overtime to your management personnel, you will need to obtain approval from the local labor bureau for an alternative payment system for these employees. However, as I have stated, the rules do not allow for an open-ended, salaried employee approach. Rather, the rules are designed to deal with workers whose jobs require an irregular hourly pattern of work. The rules quite specifically exclude the concept of open-ended, work as long as it takes to get the job done systems of compensation. For this reason, applications to impose this kind of salaried employee system are generally not granted by the local labor bureaus, but this does very much depend on the specific local labor bureau. This whole approach is, of course, not consistent with the way modern companies are managed. The Chinese labor law system does not make any distinction between the factory line worker and the president of the company that owns the factory. By law, and absent approval, both the line worker and the president must be paid using the same rigid hourly wage system. The fact that this is entirely unrealistic means that most companies in China simply ignore the rule for management employees and for sales and other employees who inherently work irregular hours. However, simply ignoring the law is not a sound strategy for foreign owned companies. When the law is ignored, the result is that the company is subject to large overtime claims from disaffected management and sales employees, and we see this happen all the time after an employee has left the company or is terminated. This issue arises quite consistently when foreign companies terminate a management-level employee. It is an unpleasant shock when the company learns that the manager it just terminated has been carefully accounting for unpaid overtime all along and insists on getting paid all back overtime wages, plus interest on those wages, plus penalties, all in addition to a claim for an already large settlement payment. 4. The Chinese labor law system for vacation time is regulated by the Regulations for Employee Vacation with Pay?????????. Article 3 of these rules provides that vacation with pay is mandatory, in accord with the number of years of employment, according to the following schedule: 1 year to 10 years employment: 5 days vacation. 10 years to 20 years employment: 10 days vacation. Over 20 years employment: 15 days vacation. Article 5 provides that vacation must be taken in the year accrued. That is, vacation cannot be accumulated and rolled into subsequent years. If the company cannot provide vacation due to the needs of the company, then the company must pay 300% of base salary for every vacation day denied. Most foreign owned companies have a vacation policy more generous than required by Chinese statute. It is permissible to impose any vacation policy more generous than the Chinese required system, but not one that is less generous. The most contentious area is accrual of vacation. In general, it is considered permissible to allow for accrual and roll over of vacation time if this is the specific desire of the employee. You should note, however, that the regulation is silent on this issue. The Chinese government is concerned that employers will pressure their employees not to take vacation and to accrue the time when this is not really the intent of the employee. Therefore, the regulation favors payment of the 300% of salary as a way to control the actions of the employer. Most employers simply use whatever U.S. vacation policy they have in place as their policy for China, though this is not always the best plan. It is better to adopt a vacation policy that complies with the Chinese system, with additional benefits on top of the Chinese system if that is considered desirable. Note also that the vacation policy should apply to all employees. Some companies will apply the policy only to management personnel. This is not acceptable under Chinese law. 5. Many Chinese-owned companies ignore the requirements of the Employment Law and the associated regulations. It is therefore common for Chinese staff of foreign owned companies to recommend that you too ignore the rules. However, this is not a good strategy for foreign companies. When a complaint is raised, the local labor bureaus are quite aggressive in enforcing the strict requirements of the labor system against foreign owned companies. and this type of enforcement is becoming more common, not less. Accordingly, even when the rules are difficult to deal with, you must be sure to follow them as closely as possible. Also, the employee who told you not to follow the rules will not hesitate to sue you for not following the rules, when doing so suits his or her purpose later on down the road. Was it George Santayana or Bill Paxton who said: “Those who cannot remember the past are condemned to repeat it”? Although the line was not about Chinese trademark law, it might as well have been. We have been beating the drum for years about registering trademarks in China (see here. here. and here for a representative sample), but every time I start to think that the subject has gone stale, a bunch of new matters come in that prove me wrong. When people run into problems with China trademarks, it can often be traced to one of three related misconceptions. Don t Wait to Register Your Trademarks in China The first misconception is that a trademark registration in the U.S. or EU or some other jurisdiction will provide some protection in China. There is no such thing as a worldwide trademark; every country has its own trademark system, and your US trademark has no bearing on your trademark rights in China. (The one exception in China is for well-known brands, but this exception is so limited as to be meaningless. Starbucks had to litigate for years to prove that it was a well-known brand, and even that was not a slam dunk.) The second misconception is that if a third party registers “your” trademark in China, you will be able to get it back by showing that you used it first in China. China employs a “first to file” system for trademark registration, with virtually no protection for unregistered trademarks. In this respect, China’s trademark system is the opposite of America’s, where you gain some trademark rights by usage alone. In China, anyone can register “your” trademark and prevent you from using it, even if they are not even using the trademark. This happens all the time and it is legal under Chinese law. If someone else registers “your” trademark first, that makes them (not you) the rightful owner of that trademark in China—and if you attempt to sell goods in China bearing that trademark, then your goods could be seized because you are the one violating China’s trademark law. It’s not a bug, it’s a feature. The third misconception is that if one of your Chinese competitors registers “your” trademark, you will be able to invalidate the registration on the basis of bad faith. Although last year’s revisions to the Trademark Law theoretically strengthened the requirement that trademark applications be made in good faith, the Chinese Trademark Office still has a narrow conception of what constitutes bad faith. In the vast majority of situations, your only hope of successfully challenging an existing registration on a bad faith claim is to show that the owner of “your” trademark is (1) a business partner or (2) a serial trademark squatter. And even those two methods are far from foolproof. To show that someone is a business partner you need to prove that you had a business relationship before they submitted the trademark application — and without any possibility of court-ordered discovery, such proof can be elusive. It is equally difficult to prove that someone is a serial trademark squatter. If they have registered several hundred trademarks and do not appear to conduct any business related to the goods and services covered by those trademarks, then you have about a 50/50 chance. If the owner of “your” trademark is just a Chinese competitor — which happens all the time, because who else knows the business better? — then your options are highly unappealing: (1) buy the trademark from the competitor at a usurious price; (2) go into business with the competitor on unfavorable terms; (3) pick a new trademark and rebrand; or (4) stop doing business in China. The competitor has no incentive to do anything that would actually help you. We recently handled a matter in which a Chinese company had registered the names of its three largest non-Chinese competitors, effectively taking those companies out of the market in China for a few years, at least under their own names. If you care about what happens to your IP in China, then you need to register your trademarks in China now. The Chinese trademark system only helps those who help themselves. The Wall Street Journal just published an article on the threat of the proposed PRC foreign investment law on major companies in China that have used the VIE structure to enter into prohibited business sectors. Among the companies in the cross hairs are a number of major foreign businesses such as Amazon, Pearson and CBS. Add to that the Chinese Internet giants Sina, Weibo, Alibaba, Baidu, Tencent and Youku and you pretty much have the entire Chinese Internet sector lined up on the firing line. The Journal seems to be treating this as a shocking new development. But none of this is new. In fact, I told you so, as the below posts (which are just a sampling) reveal. In the post, I vehemently set forth the proposition that VIEs are to be avoided as illegal: None of this is actually new. These risks have long been known. However, the clarity of the Regulations means it is now nearly impossible to claim that Chinese law on these issues is ambiguous or unclear. Where Chinese law says that ownership by foreigners is restricted or prohibited, the law means what it says. Foreigners who invest in violation of the law are making a bet that the violation will be ignored. This is extremely unlikely in today’s China. Such bets are sucker’s bets and should be avoided at all costs. We have been speaking out against VIEs for years and just about every time we do so, someone says that if they are illegal, why have so many large law firms, large accounting firms, and large companies gone along with them? The answer is simple. Money. Big money. Really big money. Now, some of these same law firms and accounting firms and companies are denying that anything has changed. And why is that? Again, money. Only this time they are taking positions not so much to make more money going forward, but to avoid losing through lawsuits the money they have already made. The big time business press is now picking up on what I have been saying for years: the VIE structure is illegal, its underlying contracts are void, and the VIE companies will now be required to either restructure or shut down. Foreign investors will lose a lot of money and the Chinese side will come out on top. This all makes me wonder why it was that so many kept insisting that China would permit foreign companies to operate illegally in China for an extended time period It is important to understand how this will all come down. Over the years analysts have said that there is no real risk with VIEs because the Chinese government will not want to shut down these major players in the Internet and e-commerce sector. The Journal article above repeats this. The problem with this proposition is that it misses the real threat. First we need to consider the background. The fact that the Internet/e-commerce companies are big and profitable is not relevant. The Chinese government does not care about this. What the Chinese government cares about is that its Internet and e-commerce sector is right now dominated by foreign investors and it does not consider that to be a good thing. At all. To understand this basic attitude, check out my recent posts on China File . On the other hand, the Chinese government understands that China requires a powerful and well run Internet as this is a prerequisite for a modern and powerful state. Thus, the Chinese government has no desire to shut down the foreign controlled internet; but it does wish to regain control over it. The Chinese government likely will accomplish this in two stages: First, the truly foreign owned and controlled VIEs such as the Amazon and Pearson ventures will be required either to shut down or transfer their assets to Chinese entities. Second, the majority of VIEs formed by Chinese entities will be required to restructure by buying out their foreign investors at what will likely be fire sale prices. The goal here will be to put Chinese citizens permanently in control of what are nominally public entities. This is apparently the path currently being forged by Alibaba and Baidu. In either case, the foreign investors will be squeezed out of VIEs and those VIES will then come under the control of Chinese persons and entities. The result of this mandatory sale will be a destruction in value for the foreign investors. In other words, the money invested by the foreign investors will essentially be gifted to the Chinese people. Sorry. Way back in 2006, I wrote about fake China law firms in China Where Even The “Law Firms” Are Fake. In that post I talked about fake Chinese lawyers taking money from American companies for trademark registrations: 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.” * * * * 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. We should have written more about fake legal providers in the interim because since 2006 I have heard multiple accounts of U.S. companies that paid for trademarks and employment contracts and company registrations and various other things that China lawyers typically do for their clients, only to receive nothing in return and only to learn that the law firm or the lawyer to which they paid the funds never even existed. How many U.S. companies believe that their trademarks are registered in China when in fact they never were? Then in 2007, in NEWS FLASH — Mongolian Law Firm Clones Famous China Lawyer. we wrote about a Mongolian firm that claimed that Steve Dickinson. who heads up our China law practice in China, was an attorney at a Mongolian law firm. Our blog post shamed the firm into removing Steve s picture and bio (taken straight from our own website). Well now we are learning that fake law firms and stolen bios and photos have become an international phenomenon. The ABA (American Bar Association) Journal just did an article on this, entitled, Fake law firm websites use real firms’ photos and info, but alter contact details. It begins with this: A smiling man in a business suit pictured on the Dovernor Chambers website in a wood-paneled office looks like a seasoned legal practitioner, and is. However, he actually is a U.S. lawyer practicing in Kansas. The Dovernor Chambers firm—which purports to operate in the United Kingdom—is fake, and its website contains photos lifted from other law firm websites to create a convincing online presence to scam would-be legal clients, the Mirror reports. Such schemes are common and increasing. The Solicitors Regulation Authority says it is identifying a new fake law firm on an almost daily basis. Some scammers reportedly are stealing a law firm’s entire Web page, then changing the contact information to redirect traffic elsewhere. I want to emphasize that we have absolutely no reason to believe that any licensed China licensed or U.S. licensed lawyer has had any part in these schemes. So how can you avoid this happening to you? Check to confirm that the lawyer(s) you are using actually has a law license. That alone ought to solve all of your problems. I believe that every U.S. state lists its licensed practitioners online and avvo.com also lists all or nearly all licensed lawyers. Here is my proof on Avvo that I am a real lawyer, licensed in Alaska. Illinois. and Washington. Do some due diligence before you pay/hire a China lawyer, especially if you will be paying upfront for something like a China trademark or a China company registration where it may take you years to realize that you have been had. Finding a China product supplier has never seemed easier. We now have a whole host of both foreign and Chinese online services to speed up this process for you, the buyer. It s almost like speed dating. However, as with beginning any serious relationship, you should take it slow. Qualifying your China product supplier We have warned you before (here and here ) about the danger of buyers being seduced by the ease of finding Chinese suppliers online to the point of not conducting sufficient or any due diligence. What exactly do these online product matching services do to verify suppliers and to what extent can you rely them? Though there is assuredly a variety to the process the various online companies use to to promote top suppliers to you, it is important to know what that process is:
For all but the smallest purchases, we encourage companies that are outsourcing manufacturing to China-based suppliers to do the following:
Moving too fast results in only the Chinese partner being rewarded. It’s never the other way around. China s recently stepped up efforts to root out unregistered foreign businesses in China has caused a rash of China consultants to retain the China lawyers in my firm. From our work in forming China WFOEs (wholly foreign owned entities) for these consultants, we have discovered that many China consultants are falling dangerously short in various other legal aspects of their business as well. Indeed, if we were to single out the foreign businesses in China most often guilty of underestimating their legal risks, it would be China consultants. China consultants seem to have been in China so long that they seem to have forgotten that when push comes to shove (or as lawyers like to say, when a deep and easy pocket needs to be found) they are the American/British/Canadian company that is will to need to answer for what happened. These China hands also seem not to realize just how much China has changed in the last decade and that doing business in China today is not the same as it was five years ago. Not even close. If you are a Western consultant hired by a Western company to assist in China, you must realize that if something goes wrong for your client you will be your client s first choice for legal redress. You will be the one that they sue. What can go wrong? And what can you as a China Consultant do to prevent or ameliorate it? Overall corporate planning to protect your personal assets is an absolutely necessary first step. Beyond that however, and more specifically to China, you can do a lot to protect your client and thereby protect yourself. We have seen the biggest problems with sourcing consultants that assist in finding Chinese manufacturers. A typical sourcing project, might go like this:
By this point, I am guessing the sourcing consultants out there are saying, yes, while the China attorneys out there are apoplectic. Let s deconstruct this hypothetical project and note where the consultant has potentially harmed its client and needlessly taken on huge liabilities. 1. The sourcing consultant agreed to find the best widget manufacturer. Is that the best in China or the best in the world? What if the widget manufacturer charges one hundred dollars a widget for the 100 million widgets, but your client s competitor finds another widget manufacturer who makes equivalent quality widgets for ninety dollars each. Are you liable for the difference? Even worse, what if your client s competitor gets the same Chinese widget manufacturer to do his 100 million widgets for ten dollars less? Do you really think a US jury is going to believe you were doing your best when your fee was a percentage of the final costs? Are you responsible for the Chinese manufacturer s late deliveries? For the Chinese manufacturer s bad product? Is it clear exactly on what your percentage is going to be based and have you set things up so that your client cannot just go around you? The Solution: Make clear by way of a well-crafted written contract exactly what you are doing and not doing. Put in a non-circumvention provision to make sure you get paid and that your client cannot go around you. 2. If you take a sample to China and start showing it to potential manufacturers without FIRST having put in place various safeguards, you are courting disaster. Your client s sample could be used for counterfeiting and the trademark on the sample (or your client s name) could also be stolen. Do not think this cannot happen to you as this sort of thing happens all the time. On many occasions we have had sourcing consultants call one of our China lawyers after having learned that one of the manufacturers to which it had shown a sample was now manufacturing the product for someone else using the sourcing consultant s client s trademark. The Solution: You should never show a sample or product plan to anyone in China (or probably anywhere else for that matter) without first making the manufacturer sign a non-disclosure agreement (NDA) or, better yet, an NNN Agreement (non-compete, non-circumvent, non-disclosure). You also must make sure not either not to reveal any trademark information at this point, or register the trademark in China BEFORE you hit the ground in China. The same holds true if patent or copyright protection is necessary. 3. You as the consultant must do more than simply negotiate the price and delivery dates or at least make very clear in writing that these are your only tasks. Typically, product sourcing consultants oversee the OEM contract with the manufacturer and by doing so, they face major liability issues if that contract is not up to snuff. You are the China guy and your client is counting on you to guide it through China s business minefields. You are the one who is supposed to know anything and everything about what it takes to do business in China and nine times out of ten, you sold yourself to your client as a China expert and that is exactly how your client views you. Your client probably thinks that its existing patents, trademarks and copyrights will protect it in China, but a court will expect you as the China expert to know better. The Solution. Put in writing with your client that you will not be providing it with legal advice and that it will need to retain its own China lawyer to draft the OEM agreement with the Chinese manufacturer and to register its IP in China so as to protect it. Just remember that your client sees you as the expert at doing business in China and it is looking to you for help in all areas and if you fall short in any way, you are at risk for a lawsuit. So China consultant, protect yourself. In November , China’s Ministry of Human Resources and Social Security (“MHRSS”), Ministry of Foreign Affairs, Ministry of Public Security, and Ministry of Culture jointly published the Circular on the Issuance of Interim Processing Procedures Regarding Foreigners Who Enter China to Complete Short-Term Tasks (????????? ??? ??? ????????????????????????????(??)????), effective January 1, 2015. In this post, I highlight a few key aspects of those Processing Procedures. According to the Processing Procedures, if a foreigner comes to China to complete a short-term work task and stays no more than 90 days, he or she must get a work visa (a/k/a a Z visa). The Processing Procedures define a “short-term work task” as one of the following:
The Processing Procedures specifically exclude the following as short-term tasks: 1. Providing services such as maintenance, installation, commissioning, disassembly, guidance or training associated with the purchase of machines and equipment 2. Guiding, supervising and inspecting a China project won in a bid 3. Being seconded to work short-term at a China branch, subsidiary or representative office established by a foreign company 4. Participating in most sports competitions 5. Working as a volunteer for free or even though paid, payment is received from a foreign entity 6. Participating in commercial performances not noted as “foreign-related commercial performances” by the relevant cultural authorities in the approval letter A foreigner coming to China for no more than 90 days to complete tasks in categories 1-4 (directly above) needs an M visa (visas issued to those invited to China for commercial and trade activities) and those coming for no more than 90 days to complete tasks in categories 5-6 needs an F visa (visas issued to those invited to China for exchanges, visits, study tours and other activities). Before a foreigner can come to China to perform one of the short-term tasks stated above, the foreigner must take the following steps. First, the China partner (the entity/institution/etc. that invites the foreigner to China) must apply for an employment license and a work certificate, which generally requires submission of the following documents: the China partner’s business registration certificate and organization code, a cooperation agreement/project contract between the parties, the resume of the foreigner who is applying for the work visa, the foreigner’s passport or other valid travel document. If the task to be completed involves technology, a certificate that proves the foreigner’s academic degrees or skills is also required. The second step is for the China partner to apply for a work visa invitation letter. Next, the foreigner needs to apply for a work visa at a Chinese embassy or consulate, usually by submitting the employment license approval letter and work certificate, the work visa invitation letter, and the foreigner’s passport or other valid travel document. If the foreigner is staying in China for over 30 days (but no more than 90 days), he or she must also obtain an alien residence permit. Bottom line: If what you are planning on doing in China falls under the above-mentioned definition of “short-term work tasks,” a business visa is probably no longer sufficient and you would need to obtain a work visa. Shut the barn door before the horses or IP have left. I was quoted as follows in today s Financial Times in a Lucy Hornby (a truly terrific China journalist, BTW) article entitled, US warns China over IP risks : Dan Harris, a lawyer specializing in Chinese business at Seattle-based HarrisMoure, says that in most cases, the foreign company s IP is stolen by an insider. * * * * “Hack attacks are usually not even necessary,” says Mr Harris. “Why go to all the trouble of trying to bust in a barn door when so many American companies still just leave it open. How do American companies leave their barn doors open and how can they shut them? This post cannot explain all of the ways each company can and should be shutting its own barn doors both because that would take a book and also because each company is different. So I will instead focus on what I see as the biggest area of slippage: the initial meetings when the US company is euphoric about its China opportunities. I am focusing on this because that is where my firm s China lawyers most often see IP go out the window. In How To Protect Trade Secrets when Meeting Potential Partners. the China IPR SME Helpdesk does a nice job providing a short explanation on the basics of what foreign companies need to be doing when discussing deals with Chinese companies that involve trade secrets. The SME Helpdesk starts out by recommending that the foreign company be careful regarding the information it provides to the Chinese company before there are any written legal protections in place:
The article then recommends securing non-disclosure agreements (NDA) so that the duty to maintain confidentiality is made clear. It notes that NDA Agreements are widely used in China and well-accepted by Chinese courts, so a Chinese third party that is unwilling to sign an NDA is not likely to be a trustworthy potential business partner and should be treated with caution. This is completely true. It then states that sometimes an NDA on its own is insufficient to protect your IPR, especially for companies in the manufacturing industry or companies sourcing their products from China. Under these circumstances, a non-disclosure/non-use/non-circumvention agreement (NNN) may be used. This is true more than sometimes; this is true nearly all the time. A couple years ago, in Your China NDA is DOA. Again. I explained how American companies consistently and continually get themselves in trouble in China by using off the shelf American-style Non Disclosure Agreements (NDAs): Just fired off the same email I ve probably sent at least two dozen times. It was in response to someone who just realized that their Chinese manufacturer or potential manufacturer had used confidential or trade secret information. Here s the email to me (changed to get rid of any identifiers): I had my Chinese factory sign a non disclosure agreement and I just learned that they copied my product and are selling it to two of my competitors. I am still buying product from them. What should I do? I want to sue them. Here s my pretty much standard response: I suggest you send me a copy of the NDA that your factory signed. If it is in Chinese and provides for litigation in China and was sealed/chopped than you are likely in quite good shape. If it contains a provision making crystal clear what the exact dollar/RMB penalty is for a violation, all the better. But if you just used an off the shelf American version of an NDA, than doing anything on this would almost certainly be a waste of time. If your NDA provides for suing in the United States, that will be even more true. I should also note that if it just provides for the manufacturer not revealing trade secrets (as opposed to selling your product to others) your likelihood of winning a case will be reduced. In the meantime, I suggest you read the following about China NDA/NNN Agreements: Almost without exception, we hear nothing further, which is fine since it is always easier to deliver bad news by email as opposed to by phone. I sent out two of these emails in just this last week, including one to a company that called me before it went to China and to whom I was very clear that it needed an appropriate Chinese language NNN Agreement before it went. After their return from China, they sent me an American style NDA that their very local lawyer wrote for them before they left, along with an explanation along the lines that we know this is not exactly what you would have wanted for China but we figured it would be better than nothing. I wrote back and explained that it was, if anything, worse than nothing because it requires any lawsuit to take place in the United States which is a clear tip-off to most Chinese companies that they can do whatever they want with impunity. For why this is the case, check out If You Could Have Only Two Clauses in Your China Contract, What Would They Be? Part II. This company is from deep in farm country and it was this company that I had in mind when I used the barn door analogy. By China Law Blog on April 21st, 2015 Posted in China Film Industry Mathew Alderson. who leads our China entertainment group from Beijing, just moderated a panel at the 5th Beijing International Film Festival. The panel was about sino-foreign co-productions. Mathew s panel was preceded by a keynote address given by Miao Xiaotian, General Manager, China Film Co-production Corporation (CFCC). The panelists were:
Below is part of the speech Mathew gave before introducing the panelists. For Hollywood, the international film market has become more important than the domestic US market. The emerging giant in that international market is China. Although China s film market has grown explosively over the past five years, it remains far short of eclipsing the US market. Consider that China s box office was 4.8 billion USD while North America s was 10.3 billion. Now consider that China s box office comprises the substantial majority of the film market, with ancillaries comprising a tiny minority. In the US and Australia the reverse applies: box office is the lesser piece and ancillary revenue is the greater. By rough extrapolation from last year s box office figures you could say that the Chinese film market was worth about 6 billion USD last year and North America was worth around 50 billion USD. On that basis, China s market would need to grow 8-9 times to eclipse the US. Still, the growth so far has been staggering, as is the fact that this growth is driven by a vibrant Chinese private sector that was unimaginable as recently as ten years ago. Foreign access to China s film market remains tightly restricted. Foreign producers are prohibited from independently producing in China. 44 China-foreign co-productions were made in . 77 China-foreign co-productions were approved in . Most of these were Hong-Kong-China co-pros because Hong Kong is regarded as a separate country in this context. There are few examples of true sino-foreign co-productions (not being Hong Kong China co-productions) that have enjoyed box office success. The only true Sino-foreign co-production that has made the top 20 most financially successful films during the last few years was the Village Roadshow Pictures Asia-invested Journey to the West. Official Co-productions are regarded as domestic films in China and are therefore exempt from the various quotas imposed in China, including the 34-film quota applying to imports on a revenue share basis. Copyright owners of official co-productions are also entitled to a higher share of box office 42% as against that applicable to revenue share imports 25%. Censorship is an ever-present factor and limits are imposed on the theatrical exhibition and online dissemination of foreign content. Theatrical windows are managed in an effort to keep foreign content at roughly 50% and foreign content available through online streaming is now to be kept at 30%. Cultural differences are often underestimated or misunderstood by Chinese and foreigner alike. They include diverging sensibilities, narrative styles, business practices and legal systems. Despite these challenges, the allure of China is irresistible to foreign interests and China itself is seeking greater opportunities in foreign markets. China now has a middle class of roughly half a billion people. There are roughly 700 million people online in China, most of them using only handheld devices. China has an undeniable desire to consume foreign and Chinese content, to acquire foreign knowhow, to work with foreign filmmakers and to pursue opportunities presented by new technologies. I can tell you that I feel privileged to be witnessing and participating in these developments while living and working in Beijing, China s cultural heart. Contracts in China are more formal than contracts here. This is particularly true with how they should be signed. When we draft a contract between an American client and a Chinese company, we instruct our client on what it should do to ensure a proper signing by its Chinese counterpart. This instruction is usually along the lines set forth below. You must ensure that your contract is properly executed by the Chinese company with which you are contracting. It should be with a duly formed Chinese company and signed by the legal representative of that Chinese company. The name and address of the Chinese company should accord with the information registered for this company and the Chinese company’s chop should be used to seal the contract. To verify the Chinese company’s information, you or someone you trust should do the following:
If anything about the contract is inconsistent with the information you receive, do not execute the contract. Even a simple mistake in the address can render the contract invalid. When the contract is for a relatively small amount, the signing requirements become somewhat less stringent — not because the risk declines, but because the amount at stake is less. When the amount at stake is relatively low, our China lawyer tell our clients it is “less necessary” to make sure that the Chinese company’s legal representative signs their contract. Though it is always preferable (and safer) to have the Chinese company’s legal representative sign your contract, if the contract is sealed with the company chop, it will likely be enforceable even if signed by some other company representative. But no matter how small the contract, we always like to see the business license of the Chinese company with which our clients are contracting. The business license provides an easy method to verify the name and registered address of the Chinese company and the identity of its legal representative. Most importantly, it is extremely easy for the Chinese party to provide its business license and any unwillingness to do so is a major warning sign.
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