As lawyers, we almost cannot help but have a wary view towards just about everything we do, China included.
There are two main reasons for this. First, we have been trained to look at everything with a critical eye. Companies do not pay lawyers to have them cheerfully proclaim, “this all looks great. I love it.” No, we are retained to figure out the potential risks and problems and then provide contractual or structural solutions to minimize or eliminate them for our clients. Second, and probably most importantly here, clients and potential clients rarely (it does sometimes happen) write or call their lawyers just to let them know everything is going great and the weather (is delightful. Our clients contact us to avoid problems or to fix problems and for this reason, problems are our focus.
1. Legal Problems Cost a Lot More Than Prevention
For every matter our China lawyers handle that stem from a problem, we handle probably fifty matters that do not involve an existing problem. Why then does this blog focus so much on the problems with doing business in China and so seldom talk about how great it can be? This question is actually an almost direct quote from an irritated China consultant friend of mine who recently complained to me about how our blog has become “too downbeat” on China.
Let me explain by answering my China consultant friend.
First, we would not be very helpful to our readers if all we did was say China has 1.5 billion people to whom you can sell your wares and all is great. Stop.
Second, and as I mentioned above, our job as lawyers and as China lawyers is to point out the potential problems and risks in doing business in China or with China. I see our job as bloggers roughly the same.
Third, though we handle fifty China legal matters that do not involve existing problems for every one that does involve a problem, other ratios regarding such things are much smaller.
2. The Problems We See
When I say “other ratios regarding such things are much smaller,” I am referring to money, time and angst, and the below are some fairly common examples of this:
A. China Intellectual property Issues
Our international IP lawyers work with our clients to help protect their IP, using various mechanisms, such as NNN Agreements, Manufacturing Agreements, Licensing Agreements, Product Ownership Agreements, Mold Ownership Agreements, Non-Compete Agreements, China trademark registrations, China copyright registrations, China patent registrations and regular IP audits. But if we were to add up the time and fees we spend on all these things (and most clients really only need 1-4 of these things), they would equal less time and money typically incurred when companies come to us with a massive IP problem. We once represented a US company with a massive IP problem. That representation involved multiple lawsuits against a Chinese company: a trademark action in Beijing, a trademark lawsuit in one US state, two patent litigation lawsuits in another US state and two trademark/patent lawsuits in yet a third US state. In other words, six lawsuits in two different countries and three different states. This litigation was incredibly time-consuming and expensive and none of it would have occurred if the US company had used appropriate China contracts and secured appropriate IP registrations in the first place.
B. China Employment Law Issues
Our typical China employment law package consists of China Employment Contracts, China Employer Rules and Regulations, and all sorts of supplementary agreements, like China Employee Non-Compete Agreements, China Employee Trade Secret Agreements, etc. In addition to these things, our China employment lawyers regularly provide clients employment law counseling and yearly China Employment Audits, all to prevent future problems and lawsuits. If you were to add up the time and money incurred on all this “preventative” employment work it would be less than one typical contentious employment lawsuit. Years ago, a Chinese company doing business in the United States asked me what my firm would charge for an employee termination agreement in California and I told them. Maybe two months later this same company called to reveal it had used an “off the shelf” employee termination agreement with the employee it terminated and that employee was now suing them in California because the agreement they had used did not comply with California law. The Chinese company ended up having to pay roughly 10 times the attorneys fees to quickly wrap up the litigation as it would have paid for the employee termination agreement and it had to pay the employee double the severance to which it had initially agreed.
C. China Company Formations
We are always talking about how important it is to register your WFOE in China if you are doing business in China. See Doing Business in China Without a WFOE: Will the Defendant Please Rise. There are many reasons for this. We had a company come to us about forming a China WFOE and then decide (against our advice) to delay so those WFOE formation costs could go into its next year’s budget. Unfortunately, the Chinese government did not wait until the next year and this company ended up having to pay about double in attorneys fees (as compared to just forming the WFOE) to negotiate a resolution with the Chinese government that also included their having to pay a hefty (though reduced) amount in tax penalties. And then it had to pay for a WFOE formation on top of all this.
So yes, the problems foreign companies face when doing business in China and with China are what consume us, both in terms of preventing them and in terms of dealing with them when they happen. But we fully realize China is a lot more than just a mass of problems and we will write as much as we can about the positives of doing business in and with China and the great business opportunities that remain there.
If anyone has any positive business stories they wish to share about China, please let us know and we will work to include them.
It’s all good….