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Problems in China stem from making assumptions

By: David Hutton

March 13, 2014

WESLEY CHAPEL, FLA. — Intellectual property issues are a growing concern for North American plastics companies doing business in China.

According to attorney Dan Harris, companies should assume nothing when doing business in China.

“I have seen countless instances where American companies have encountered problems in China because they just assumed that China’s legal system is just like ours,” he said. “That is not the case. It is very difficult to do business there, particularly if you make these assumptions.”

Harris is the founder and managing partner of Harris & Moure PLLC, a Seattle-based international law firm. The majority of his clients are companies doing business in emerging market countries. He also is co-author of the China Law Blog. During the Plastics News Executive Forum, his presentation was titled “Protecting Intellectual Property in China.”

According to Harris, American companies consistently get into trouble when they form a joint venture with a Chinese company.

“Too often, American companies assume that if they own 51 percent of a joint venture, they will control it,” he said. “If you own 60 percent, even better.”

That assumption often sends many joint ventures into a tailspin.

The problem is, the company that owns a majority of the joint venture in China doesn’t necessarily control it. In China, it is not ownership that matters, but who has the right to appoint the joint venture’s representative director and general manager and controls the company seal.

Joint ventures are difficult in China and must be closely monitored to minimize the potential for failure.

Harris noted that American companies also should protect themselves in hiring in a joint venture and not leave it to their Chinese partner, which can take advantage of the situation.

Another area where American companies often make incorrect assumptions is which nation’s laws apply to a contract.

When there is a dispute in China with a Chinese company, Chinese law applies, Harris explained, adding that a key to a good contract in China is specificity. The more detail a contract can include, the more protection that will be afforded to the company doing business in the country.

A web of employment issues in China can easily snare an American company in a tangle of labor disputes. In this area, Chinese law is nothing like American law.

“In America, employers can fire non-union employees for good reason, bad reason or no reason at all,” Harris explained. “In China, you can’t fire anyone for anything unless it is in the employee manual.”

Firing a Chinese employee for theft can be nearly impossible if it isn’t spelled out in the employee manual that theft is against company policy.

“A company could end up getting sued if it fires an employee for theft and the employee manual doesn’t indicate that theft is against company policy,” Harris said. “You have to spell out everything in excruciating detail, right down to coming to work on time.”

Companies also can get into trouble by assuming that Chinese laws are nothing like American laws.

For example, companies with a chemical approved by the U.S. Environmental Protection Agency might assume that it would be OK to take that product into China. However, that is not the case. A chemical has to have Chinese approval, even if it already had U.S. approval.

One way to protect yourself is to prove value to your Chinese counterparts.

“The difference between those deals that work in China and those deals that don’t work is to structure the deal to have your Chinese partner believe they will make more money with you than they would make without you.” Harris explained.

There are good reasons for contracts, beyond legal issues. One is clarity.

“It makes a lot of sense to get things in writing with your Chinese company,” he pointed out. “A lot of times, they won’t understand you.”

Deadlines and penalty provisions will spur the Chinese companies into action.

Good contracts in China are specific and are written in one language.

Detailing liquidated damages and other issues that you want to happen if the contract is not adhered to also will help you should you need to pursue legal action in China.

“Chinese courts don’t really understand business,” Harris said. “You will never get $5 million in damages and lost profits, you are never going to get it. If you put in there that you are to get $400,000 if the product is late, you will probably get it, so put it in.”

It also is important to detail where you are going to solve your problems.

“If you are going to scare a Chinese company, have a specific dispute resolution provision,” he said.

Contracts also should be sealed. If they are not sealed, you open yourself up to the Chinese company being able to claim their representatives noted in the contract didn’t have the authority to enter into the pact.

Intellectual property in China, according to Harris, often gets a bad reputation.

“China is slowly getting better in the area of intellectual property,” he said.

Non-disclosure agreements are becoming a more accepted practice between Chinese companies and their American partners.

“If you have a Chinese partner sign a good NDA, it will work because the company doesn’t want to get sued,” he said. “They also don’t want to gain a reputation as a company that violated a non-disclosure agreement.”

Chinese law is improving in areas of copyrights and trade secret protections.

Trademarks and patents can be another issue.  China is a “first-to-file” country, which means whoever files first gets the trademark or patent. The U.S. is a “first-to-use” country and companies often get that wrong.

Tech companies often maintain secret software on servers in the United States to protect the intellectual property. Keeping key aspects of your business on U.S. shores can add additional protection from potential intellectual property issues.

Lastly, simply adding a line that indicates American law applies to a contract with a Chinese company is virtually worthless, particularly in labor issues, which are always local.