Chinese Company Litigation Rising: Follow the Money

I hate when I have to be vague for attorney-client reasons, but at the same time, I also hate not writing on something pressing and important. The problem is that the times I have to get vague often correspond with the times when I have important and current information. This is one of those times.

There has in the last year or so, been a big uptick in the number of lawsuits in the United States against Chinese companies. I do not have hard numbers to back this up, beyond the numbers of my own law firm, but I have no reason to believe these are unrepresentative. This is happening for the following reasons, among others:

  •  There has been an increase in business between U.S. and Chinese companies;
  •  Lawsuits do not usually happen immediately after business relationships have been  established. They usually happen years after that, when business has reached a level  worth suing over, when the relationship has soured, and when it has become clear there  will be no resolution without court intervention.
  •  Economic downturns increase the likelihood of relationships souring and litigation  ensuing.
  •  More Chinese companies are doing sufficient business in the United States so as to  make collection of a United States judgment far more likely.

Many of these lawsuits involve trade secrets and/or intellectual property. A good example is a lawsuit recently brought by Motorola against Huawei Technologies Co., “alleging a plot to steal the U.S. company’s trade secrets.” In, Motorola’s Suit Poses Challenge for Huawei’s Success, the Wall Street Journal talks of how this case “could complicate years of largely successful efforts by the Chinese telecommunications-equipment giant to demonstrate itself as an innovator in the industry.”  Of course it could.

A Virginia Federal Court appointed my firm (really, one of my partners, Steve Dickinson, who lives and works in Qingdao) as a sort of special counsel to assist a Shandong, China, company with its document production. I just learned today that the Virginia Court ended up finding that Chinese company liable for USD $26 million in damages, based on a finding of copyright infringement. For more on that case, go here.

In one way or another, my firm is also involved in a number of similar cases involving Chinese companies being sued for breach of contract or IP infringement. Just last week, we filed a U.S. federal court case against a Chinese company, asking the court to recognize and enforce a Chinese court judgment here. That’s right, we filed a case in the United States asking a U.S. court to enforce a Chinese court judgment against a Chinese company.

Our judgment enforcement case probably best crystallizes why there has been (and will continue to be) such an increase in cases against Chinese companies in the United States. We brought this case in United States because we deemed the likelihood of success to be more favorable here than in China because the Chinese company against whom our client has the judgment ships millions of dollars of product into the United States every month.

In many respects, the United States is a great place to bring a lawsuit. Though cases here can be expensive, our federal court system usually works very well and reasonably quickly. Many years ago, the Yomiuri Shimbum interviewed me for their story on the “Americanization of International Law,” [link no longer exists] and I had this to say about the popularity of American courts:

The Americanization of Global law is also leading to a huge increase in foreign companies seeking to have their disputes resolved by using American lawyers or even bringing lawsuits in American courts. Dan Harris, a Seattle, Washington, based international lawyer told us about a case he recently successfully handled on behalf of a Russian Far East helicopter company. This Sakhalin Island helicopter company retained Mr. Harris to bring a lawsuit on its behalf in a Seattle Federal court to recover three helicopters taken from the Russian company in Malaysia.

“I am constantly contacted by foreign companies wanting to pursue their lawsuits in the United States,” says Mr. Harris. I think the reason for this is that the American courts (along with those in England) are probably the most respected in the world. People know American lawyers are well trained and they know the American justice system is fair.” Mr. Harris, whose firm’s work is about 90% international (Russia, Korea, Japan, China, Vietnam, etc.) says he is most frequently asked by companies in emerging market countries to bring their lawsuits in the United States. Mr. Harris attributes this to the belief that they will be treated more fairly and get a quicker resolution in the United States than they would in either their home countries or in the countries of their adversaries.

Chinese companies have become relatively easy marks in United States litigation because they typically have no clue how to handle a United States litigation matter. Just as these companies so often run their businesses outside of China just as though they are in China, so too do they tend to handle their U.S. litigation.

American litigation is nothing like litigation in China and here are some of the salient differences:

  • Litigation moves fast in China. Really fast. It is not uncommon to file a lawsuit and have the trial and verdict within three months. In the United States, it is more like three years.
  • Generally speaking, in the United States, everything hinges on the witnesses. Documents are, of course, critical also, but you generally need a witness to get a document into evidence. In China, documents pretty much completely trump witness testimony.
  • In the United States, one often files a lawsuit and then garners evidence through discovery from the other side to help prove it. In China, you are to a large extent stuck with the hand you have before you file your lawsuit.
  • Forget about trying to bribe a U.S. federal court judge. Forget about it. In China, one always has to at least consider the “influence” of a particular party.
  • In China, collecting on a judgment can be very difficult and once the court issues its decision, it does not have a lot of power to aid in collection. China Hearsay just this week did a nice post on this, entitled, “Enforcing China Court Decisions, Help Is On The Way?” This is not true of United States courts, who do not take at all kindly to defendants they believe are skirting their obligation to pay. United States courts have all sorts of powers to enforce their judgments and they do not hesitate to use them.

All of these things tend to cause Chinese companies to throw up their hands and treat U.S. litigation as they treat Chinese litigation, which means they tend to engage in the following conduct, which can be detrimental to their cases here:

  •  Failing to understand the time and money needed to engage in litigation in the United  States.
  •  Failing to understand the importance of complying with the discovery rules.
  •  Failing to understand that just because you have a well-known lawyer, you are not  necessarily guaranteed to prevail.
  •  Failing to understand that U.S courts enforce their judgments and that engaging in    convoluted efforts to avoid paying on a judgment is a great way to bring down the wrath  of the court against you.

The bottom line is that if Chinese companies are going to be doing business internationally, they are going to have to get used to the idea of being sued outside of China and they are going to have to start realizing they are not in Canton (I know Canton is now Guangzhou but I wanted to pick a place that sounded as much like “Kansas” as possible) any more.

What more can I say….