You Need an Enforceable China Contract No Matter How Much You are Feeling the Love

china attorneys

Love is a many splintered thing.

Our China attorneys often hear something like the following from our clients:

“I am not worried about this deal/contract/transaction with this Chinese company because” [choose one or more]:

  • The owner and I are great friends.
  • I trust the owner implicitly.
  • There is no way they [the Chinese company] would do this because it would destroy their business.

I start one of my “how to protect your IP from China” speeches with the following:

“Big companies in China want to steal your IP. Small companies in China want to steal your IP. Private companies in China want to steal your IP. Public companies (and SOEs) s in China want to steal your IP. Oh, and that company whose owner you like so much and whose son’s or daughter’s wedding you attended, that company also wants to steal your IP.”

So how then do our international IP lawyers respond to the client who insists “it’s all good” with their China counter-party and there’s no need for protection?

  1. You are wrong about your friendship with the owner. He is a liar and a thief.
  2. You are wrong to trust the owner. He is a liar and a thief.
  3. You are wrong about the economics. They will steal from you because they only think short term.
  4. None of the above.

None of the above is the correct answer because our lawyers do not have any special knowledge about the Chinese counter-party or its owner(s) and so we have no way to refute what our clients are telling us about them. On top of this, we have seen plenty of instances where an American or a European company has had a fantastic relationship with its Chinese counter-party for decades.

What we do say is that even if all they are saying about their Chinese counter-party is true, there are still substantial risks. And then we tell them about the countless instances where we have seen things go horribly wrong even when the American or European company was entirely right in trusting their Chinese counter-party or believing in the economics of their situation.

But how can that be?

Because the foreign company that believes trust or economics solves all when doing business with a Chinese company none of these reasons to trust apply to 1) the company’s employees, 2) the company’s vendors/suppliers; 3) the company’s subsequent owners, or to a 4) changed economic situation.

A few months ago, we had a specific situation we had with a Mexican company that had a 20+ year “great” relationship with its Chinese factory before it learned this factory was selling the Mexican company’s products around the world for just over half what the Mexican company was charging. And when the Mexican company confronted the Chinese company about this, the Chinese company lectured the Mexican company about how it had every moral and legal right to do what it was doing and how sick it was of Chinese companies being exploited by foreign companies and that it barely made any money at all from this Mexican company.

The Chinese company then proceeded to tell the Mexican company that it would not only continue making and selling the Mexican company’s product wherever it could do so, it would stop making anything for the Mexican company, including the product the Mexican company had already paid for and not yet received. Oh, and just to top it off, it turns out that the Chinese company registered all of the Mexican company’s trademarks in China seven years earlier and it warned the Mexican company that if it made its own products in China under the Mexican company’s own name, the Chinese company would have those products seized for violating the Chinese company’s trademarks. The Mexican company ended up shifting its production back to Mexico both because it pretty much had to do so and because it pretty much wanted to do so.

As stark as it is, this story about the Mexican company is not the usual way problems with “trusted” Chinese companies ordinarily arise.

The risk is often not the owner of the company, but everyone else who gets access to your IP or your trade secrets. These are the sort of things our China lawyers see all the time:

1. Everything is going great with the Chinese company and then the son or someone else takes over for and everything completely changes. Our China lawyers must have dealt with this at least a dozen times.

2. Everything is going great with the Chinese company and then the General Manager of the Chinese company or someone else goes off and starts a competitor of the Chinese company and this new competitor steals our client’s IP or trade secrets and starts competing with our client. Our China lawyers must have seen this at least two dozen times. See Inside a Heist of American Chip Designs, as China Bids for Tech Power.

3. Everything is going great with the Chinese company and then a vendor or a supplier of the Chinese company starts competing with the Chinese company by using our client’s IP or trade secret.

4. Everything is going great with the Chinese company but then the economics of the industry change and the Chinese company can now make a lot more money by stealing our client’s IP or trade secrets and so it does.

It is for these reasons (and more) that my firm’s China lawyers (and pretty much every other China attorney we know) constantly stress the benefit of having an enforceable contract that covers ownership changes and employees and vendors and suppliers and changing economic situations. For more on what is needed to have an enforceable China contract, check out China Contracts: Make Them Enforceable Or Don’t Bother and China Contracts That Work.

Beyond the contract, you need the registrations required to protect your product/technology/IP. This often means registering your trademark in China in English and in Chinese, registering the copyright in your software and anything else that applies in the PRC and maybe Taiwan elsewhere and registering a design patent in China. These will give you protection against those beyond just the Chinese company with which you are doing business.

And of course there is more. Beyond the contract, you need the registrations required to protect your product/technology/IP. This often means registering your trademark in China in English and in Chinese, registering the copyright in your software and anything else that applies in the PRC and maybe Taiwan also and registering a design patent in China. These will give you protection against those beyond just the Chinese company.

Your thoughts?

Leave a Reply

Your email address will not be published. Required fields are marked *