China Law As Guessing Game

China lawyer Stan Abrams just did a great post detailing the difficulties of uncertainty in dealing with Chinese law. The post is entitled, The Law and New Tech in China [link no longer exists], but the issue it raises regarding gaps in China’s commercial laws goes well beyond just new technologies.

Stan starts out with the following fact pattern:

Company A makes nano-widgets in the U.S. and sells them in the U.S., EU and parts of Asia. They now wish to sell in China and would like to know if China permits foreign companies to sell nano-widgets in the PRC.

Company A calls me up and asks me to check this out. First, we take a look at the relevant laws and regulations. No surprise, there is no law in China regulating nano-widgets because the technology is so new.

Second, one of my associates calls over to the Ministry of Mysterious Technology (MMT) to find out what their policy is on this. The official at MMT says that he is aware of nano-widgets, and although the Ministry has yet to take a formal position on the issue via publishing a regulation, their internal policy is that foreigners may not sell nano-widgets in China.

Further research shows two foreign companies are selling these products, one in Tianjin and the other in Shenzhen. I ask the MMT about the likelihood of administrative enforcement, and the official says MMT will not take any action and is aware of what these companies are doing.

Stan than asks, “What do you tell Company A?” He then posits the following:

1. There is no law that says you cannot sell nano-widgets in China. Go for it.

2. China has no licensing scheme at the present time for the sale of nano-widgets, therefore Company A cannot secure a license to sell these products.

3. It is illegal for Company A to sell these products because the MMT says that it is prohibited.

4. Company A should go ahead with sales in China because even though there is an internal policy against it, the lack of enforcement implies a tacit acceptance by MMT in the absence of regulation.

5. Company A should sell more traditional products.

Stan has absolutely nailed it. The international lawyers at my law firm gets these issues all the time as well, and not just in the area of new technologies. Media and financial services are also areas of Chinese law ripe with gaps. So how do we usually handle these things?

These situations make for the classic lawyer letter setting out all the applicable facts and then stating that the law is silent on the issue. The letter concludes by stating that because the law is silent, one cannot predict what will happen (or when) if the client goes forward with its plan.

We have had to write a whole score of these letters, but because this is China, most of the time, our clients have gone forward despite the risks and unresolved issues our letters set forth. This is particularly true of our clients that are not publicly traded. The publicly traded ones more often back down, simply because they do not want to have to put something in their disclosure statements along the lines of, “our China operations may or may not be legal and therefore, they may be closed down at any time.”

Our job as lawyers is to present the client with the facts on the ground and with the laws in China that apply to those facts — if there are any such laws. In the end, it is the client who must then incorporate those facts and law and make its own business decision on how to proceed. Indeed, we have a number of clients who have gone forward with businesses even after we have made clear they are either illegal (an example might be an office building in a building that is required to be used as a hospital) or illegal for foreigners.

That is their decision to make, not ours. Again, our job as lawyers is to educate them to the risks.

It all comes down to that old business calculation of risk versus reward.

Step right up. . . .