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China and US Agree: Let’s Kill All the Lawyers.

William Shakespeare

“Let’s kill all the lawyers.”
William Shakespeare.

Okay, so we lawyers are not the most loved people in the world, though US surveys consistently show that though the overwhelming majority of people dislike lawyers, they overwhelmingly like their own lawyers.

I do not know how whether Chinese companies dislike lawyers, but my law firm’s own experience tells me they are oftentimes unwilling to pay US legal fees. And since right now US legal rates (at least those at my firm) are laughably low as compared to European and Japanese and Korean legal rates (in large part because the US dollar is so weak right now), I think it fair for me to generalize in saying that Chinese companies do not value lawyers very much at all.

Paul Denlinger has a great post on why this might be so. The post is entitled, Why Many Chinese Entrepreneurs Don’t Like Lawyers, and I find his analysis sound. The post begins with Paul noting that “Chinese entrepreneurs don’t like to work not just with American lawyers, but lawyers of any nationality. . . .even when using them the right way, and intelligently, will help them to greatly expand their businesses.”

Paul’s answer lies in the differing legal structures of China and the United States and the the face of China law for Chinese companies:

For many Chinese, “the law” is whatever the Chinese government says it is. Just because some new kind of business is done in China, does not mean it is legal, it is just tolerated. It usually means that it is so new to the slow-moving bureaucracy that it hasn’t figured out whether it should be legal or illegal, so it’s “tolerated”.

Your business may be tolerated, then the Chinese government says it is “illegal”, or it may be tolerated, then the government says it is “legal”. Then it might switch from “legal” to “illegal” and told to shutdown almost overnight. This happens, and continues to happen all the time.

This is part of the price of doing business in China.

Here’s another example.

The Chinese government says that new businesses in China have to list their “business categories” and the business they are in. Think about it; does this make sense? From a business point of view, it makes little if any sense. Let’s say a consulting business needs to do a marketing survey. They may run afoul of the law because this is not allowed; they registered as a consulting business but need to do a marketing survey for a client who wants to enter the Chinese market. So while it makes perfect business sense to do this sort of survey, the bureaucrats and regulators prevent it from doing so, because from their POV (the government regulators), categorizing businesses makes more sense.

Among Chinese business people, there is a large degree of frustration at these sudden changes which come out in the morning, and may change before the sun goes down. For Chinese entrepreneurs, this is the face of the law.

So, in order to succeed, they spend a huge amount of their time avoiding the regulators and getting warned, or even shut down. If the regulation comes from Beijing and they are in Hangzhou, they will go talk with Hangzhou city government officials to avoid getting crushed because local Chinese officials have the power to “interpret” the law. Sometimes this means ignoring what Beijing says, without openly confronting Beijing. Not a lot of need for lawyers in these scenarios.

For Chinese entrepreneurs then, the law is random and to be avoided. Then when these Chinese entrepreneurs go overseas, their views and actions do not change. They fail to realize that the law can actually help them and so they see no point in using lawyers unless and until they are in big trouble.

Believe me, I have seen this many times. Chinese clients have sought help from our FDI lawyers in the US or in Spain and for a very small amount of money, we could have saved them considerable risk, hassle and/or penalties, but the Chinese companies will not pay it. They view US law as something to be ignored or avoided. The idea of confronting it and dealing with it as a means of laying a strong foundation for the future seems almost alien to them. Lawyers are to be used when in big trouble, but not before. At least a half dozen times we have had Chinese companies walk away from an under $5,000 bill and then have to pay us $25,000+ when they get in big trouble that our lawyers 100% could have prevented.

Paul also attributes Chinese aversion to lawyers to their aversion to a cost structure different from what they are accustomed to in China:

Moreover, they know that the advantage of Chinese businesses lie in their cost structure, and fear losing it if they go overseas. This means they act very cheap when they go overseas, and acquire reputations for being cheap and micro-managing their foreign employees, trying to extract every little bit of time and value out of them. The idea of spending large sums on international lawyers is anathema to them.

In the long-term, this hurts the reputation of Chinese companies as a whole.

In fact, company cost structures evolve and adapt to the market and society they are a part of.  No country can have the same cost structure as China, just as no country can have the same values as America does.

Again, Paul is dead on. I have tried getting past these cost hurdles with Chinese companies by telling them about US companies with more than a thousand (1000+) lawyers in their in house legal departments and of how my law firm has clients who expect to spend around 2% of their gross revenues in legal fees each year. The Chinese companies tend to remain resolute.

But things do change and they will change. Our best corporate clients are those who have been through litigation and once Chinese companies start getting sued in the United States they will come to realize the importance of preventative lawyering. I have seen this with our Russian and Mexican and Spanish and Korean and Malaysian clients and I expect it will eventually happen with Chinese companies as well.
They will probably still hate us, but at least they will pay us.

8 responses to “China and US Agree: Let’s Kill All the Lawyers.”

  1. Good post. I sometimes tell the Chinese that the four most important figures in an American company are usually the CEO, COO, CFO and General Counsel to remind them of the importance of lawyers outside of China. Lawyers (the corporate variety) are indeed not needed when everybody is poor and there is no money to either gain or lose. But now that the Chinese have money, sooner or later they will realize the importance of lawyers.

  2. Chinese companies are more apt to pay for a legal services when there is a specific benefit. Large number of firms in China are registering patents in the United States, for example. That is likely done through a law firm. Specific result for a specific expense?

  3. Might have something to do with the long held practice of bribing your way into or out of any situation and dealing directly with the person with the power. Instead you have to pay some person alot of money per hour and you don’t even know if they are working during that time and the outcome is far from guaranteed.

  4. Hi Dan,
    Would the reluctance to pay legal fees change if you offer to charge on a contingency basis, no win no pay, then it is not a cost out of pocket? Not sure whether Chinese legal system allows this though.

  5. @Paul – Actually most of the patenting work is done in-house, and anyway, if you want a patent you should go to a patent agent, not a lawyer.
    You are, of course, quite right that this is an example of people spending money to acheive a specific result – using patent applications as a way of showing results from R&D. The problem is that these patents very often have little value and are simply being made to reach a numerical target set by management – they are not a real measure of the quality of R&D being done by the company. Income from patent licensing is a far better measure, but some companies prefer not to license their technology. Even the patents which might be of value are very often extremely poorly drafted, and companies are unwilling to spend the money to have the quality of their US patents improved through re-issuing.
    In fact, the vast volume of patent aplications being made by Chinese companies in the US is much more a measure of how easy it is to gain a patent in the United States nowadays. I know companies with global interests which make upwards of two-three thousand applications per year to the US but less than two hundred in Europe, Korea and Japan put together. It is when you examine the extrememly un-novel and obvious nature of the applications being made, and how very few of the claims survive examination at the USPTO (even given the rather lax standards applied there) that you understand that these applications are much more a PR exercise aimed at potential investors than anything else.

  6. “In fact, the vast volume of patent aplications being made by Chinese companies in the US is much more a measure of how easy it is to gain a patent in the United States nowadays.”
    And how many of these “innovations” were lifted from foreign companies in China.

  7. @NHYRC – Only as many as foreign companies are willing to gift them by making incomplete claims for their inventions when making applications to the USPTO.
    All companies engage in ‘writing around’ their competitor’s patents, this does not mean they automatically have the right to use the invention, as the invention may incorporate technology that has already been patented by a competitor.
    Most licensing agreements leave order-export manufacturers free to patent any improvements they might make on the technology which is licensed to them – and so they do, there is nothing wrong with this.

  8. The worst part about this article and all of these comments is that it encourages the mentality of needing a lawyer for anything. I think the title of this piece offers better advice than the meat of this article.

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