Spoke with a new client the other day and learned how they had recently purchased an American company with a WFOE in China. I suggested they have one of our China lawyers confirm there really was such a company in China and told them a horror story to convince them of the need.
The story I told was of how a well known U.S. company sought our help in figuring out what to do with its China general manager who had stolen millions of dollars from the company. Our investigation of this employee quickly morphed into an investigation of the China company itself and that led us to realize there was no China company. The China WFOE that was doing tens of millions of dollars in manufacturing a year with nearly one hundred employees simply did not exist; no WFOE had ever been formed. We spent months working with local Chinese government officials getting this company legal and seeing to its paying of back taxes. This happened many years ago; today, it would be far more likely that the Chinese government would have discovered it and fined it or even shut it down. See Doing Business in China Without a WFOE: Will the Defendant Please Rise.
But to make a long story short regarding the new client, everything was just fine with this client’s WFOE and so it was a total false alarm on my part.
But having just gone through this I am reminded of how often our research has revealed that what a client thought they had in China, they did not. In addition to the above company that thought it had a thriving WFOE, we have seen the following:
— A U.S. company contacted us because its China Joint Venture company had been successfully selling its product in the United States for years and yet the U.S. company had yet to receive a single penny from the venture. The Chinese language “joint venture papers” the client provided us turned out to be an agreement with a Chinese national to have him go off and start a joint venture. Our further research revealed that here were no real “joint venture papers” and there was no real joint venture. This was not even close to the first time we have seen something like this involving a joint venture. Oftentimes, this has come about because (believe it or not) the American company goes along with using one (always local Chinese lawyer) for both parties (the Chinese and the American) in the “joint venture.”
— A U.S. company came to us to complain about how its former China distributor was now manufacturing and selling the American company’s product in China, “in violation of our trademark.” The American company told us how its former distributor had years ago registered the American company’s brand name for it in China and the American company even had a well done fake trademark certificate to prove this. Problem was that the distributor had never registered the trademark for this American company at all; it appears that the distributer had in fact registered it in the name of a Chinese citizen (probably a relative of the distributor) and that person now owned it. We told the American company that it had a pretty good claim to the trademark in China, but it was so frustrated with China that it chose to just walk away. We see offshoots of this non-existent trademark example at least yearly, oftentimes involving either the distributor or the sourcing agent.
In the above examples, the companies were fooled by people they thought they knew. Equally common though is the situation where a company gets fooled by fake or wholly dishonest companies that have been paid to register a company or a trademark and then find it cheaper and easier not to do so. There are even fake law firms (not even necessarily in China) that focus on collecting money from American companies to register their trademarks in China. Of course, once the money is paid, nothing happens. We wrote on this years ago in China: Where Even The “Law Firms” Are Fake. These are the service company equivalents of the manufacturing companies that take money and never provide any product.
More recently, we had a company come to us after its products were seized at the Chinese border for infringing on someone’s trademark. The company asked us how it could possibly be violating someone’s trademark for XYZ when it had registered XYZ two years ago and it had an email from its Chinese lawyer to prove it. To make a long story short, this company had used a ridiculously cheap online trademark service that no longer existed (these services tend to shut down every year or so and then re-form as a new online trademark service) and its “Chinese lawyer” was almost certainly not a lawyer at all. Most importantly, this online China trademark service had taken money from this company and claimed to have secured it the trademark they sought, but had simply pocketed the payment and done absolutely nothing. I told this company what would be involved with trying to salvage its China manufacturing and in trying to get its seized product released and of how the odds for success were not all that high. The company made the (not unwise) decision to not throw more good money after bad and it shut down its operations.
Bottom Line: If you have reason to doubt whether your China registration(s) are valid, it would behoove you to check them out now because they very well might not be. Most importantly, conduct at least minimal due diligence on your service providers and your China partners. See Due Diligence: Always Important, but Critical in Times of COVID.
And be sure to stay tuned because early next week we will write about the rapidly growing incidence of companies and individuals on online service marketplaces (not lawyers, near as I can tell) who are drafting contracts at ridiculously low rates and then getting paid more money by the Chinese company on the other side to draft the contract to essentially tank the foreign company in favor of the Chinese company that paid the kickback.