Dan Harris, attorney and co-author of China Law Blog, discusses the evolution of China’s legal landscape
There are few, if any, aspects of doing business as a foreigner in China that are easy, but understanding local law can be the most difficult. Beyond the challenge of legal compliance, one must also understand local regulations well enough to proactively protect operations and assets—for example, through effective use of copyrights. Dan Harris, an attorney at his Seattle-based law firm Harris Bricken, has been helping clients navigate China’s legal landscape for almost 15 years. Since 2006, he has co-authored the China Law Blog, which delivers practical knowledge of Chinese law as it impacts on business. In this interview, Harris discusses legal issues important to companies doing business in China, including compliance, corruption and IP protection.
There are important changes occurring in China’s legal landscape, both in terms of the laws and in enforcement. There is increased anti-corruption oversight, stricter employment laws, the new cyber security law and so on. What is the main theme you see?
If you go back to when we first started the blog, we have been calling the same trend every single year: China is moving more and more towards enforcing its laws. There are a few things to be aware of. One area where you really see increased enforcement is in laws that generate revenue—tax laws and customs laws, which have been very sophisticated for years now. The word is not going out enough that you do not mess with China on customs, that you do not mess with China on taxes and you do not mess with China on employment law. These are being vigorously enforced. And when I say employment law, I’m not talking about if you don’t pay overtime the government will come and fine you. No—if you don’t pay overtime, then the person affected will sue you. As the rules have become more numerous and strict, I am sometimes asked, “Has China gotten so difficult for foreigners that they shouldn’t go there?” For a lot of firms, the answer is “yes.” Year after year we seem to grow about 20% in revenue, but we probably shrink in the number of clients by 10% or 20%. We have fewer clients, but each client is paying more. The reason is because you need to be bigger than you used to be to survive in China, and there are many more laws you need to be on top of.
The foreign business community sometimes complains that laws are not fairly enforced in China. What is your view?
If you’re a foreign company, you need to comply with China’s laws. That you see some Chinese company down the street getting away with something, you should not for a minute think that you can also get away with it. China always tests out its laws and enforcement on foreign companies and, to be fair, the United States tends to do that as well. But there are certain things that are troubling about China when it comes to how foreign firms get treated.
We had a client that wanted to buy a factory and asked us to do an analysis. We told them that, although the factory is making $1 million a year, if you buy it, it’s going to lose $2 million a year. Of course, they asked us how that could be. The factory was illegally located, half their employees were not on the grid and a foreign owner is not going to be able to get away with these things. When you get into compliance, the costs for the foreign company will usually go way up as compared to your typical Chinese company. But for a high-profile company like Alibaba or Tencent, enforcement is pretty similar as for foreigners.
IP law covers everything from counterfeit bags to theft of trade secrets. Considering that diversity, how has IP protection and enforcement progressed in China in the past few years?
I speak on China IP about 25 times a year. What I can speak to best is what I call “private IP law,” meaning registering trademarks, copyrights, patents and trying to enforce those things with the appropriate authorities. This is 99% of what our law firm does when it comes to China IP. I would say that it has always been better in China than the media makes it out to be and it has gotten better every single year. Often when you read about a problem, it’s because the foreign company messed up, not because China is a bad place to do business.
There are many things you can do to protect your IP, but unfortunately foreign companies often don’t. Companies will hire a factory to manufacture their widgets and won’t do a thing to try to protect themselves. Six months later they’ve learned that their factory is selling their widgets all around the world. Then they call us up and say, “Stop these people. They’re counterfeiting!” But legally speaking, they are not because you don’t have any contract with them saying they can’t do that, you haven’t registered your trademark in China and you haven’t registered your trademark in any of the countries where they’re selling your widgets. There is nothing you can do. If you had a good contract from the beginning, there is a good chance your Chinese factory wouldn’t have done that.
So counterfeit goods are no longer a problem?
No, there are still huge amounts of counterfeit goods coming out of China and it’s hard to stop. The problem is not with the law itself. Say someone is putting your registered trademark on basketball hoops, we could sue them in China and the odds are overwhelming that we will win. But then the question becomes whether there is a company that we can go after or is this just somebody in a small town making basketball hoops? If it is the latter and you do shut them down, they can just open somewhere else. That is a tough issue.
But things are getting better. China, like every other country, is going to start caring about intellectual property when it makes sense from a domestic perspective to do so. That occurs when there are companies with money and power who want a good IP system.
China has pretty much reached this point. There is proof of that in the number of trademark filings, copyright filings and patent filings, which are increasing every year in China. The number of IP lawsuits keeps increasing as well. Why would Chinese companies spend their money on these things if there were no benefits? They’re not just throwing money away—companies don’t do that—so those numbers are evidence of improvement.
The new cybersecurity law appears to have important IP implications and some multinationals have voiced concerns. What is the relationship between IP law and the new cybersecurity law?
People love to say, “China’s laws are vague.” In fact, a lot of times the laws are clear and that’s their excuse for having messed up. In this case, the laws are vague and I think the government wants to be vague as they test them out. I’m not sure how it’s going to impact IP, but one aspect of the law is that it requires data storage to be in China and the issue is that the Chinese government potentially has access to that. People are afraid of this, but I think only a small percentage of all companies should be really afraid. Is China going to go in, steal the secret for Nike’s new shoe sole and give it to some Chinese sneaker company? Probably not. But if some company has computer technology that could make China’s missiles go faster, then yeah, they just might. But if your company makes next-generation rubber duckies, I don’t think it is a big risk.
What about IP protection as it relates to partnerships with Chinese companies and technology transfer?
What we do for our clients is to look out for “fake deals,” meaning a Chinese company proposes a joint venture (JV), but in reality wants to learn about your capabilities, then boot you out and steal your technology. We have a test to see if they want to do a joint venture with you for the long term. If the Chinese partner asks to do the JV and have ownership of the intellectual property, we say, no, we are going to license the intellectual property to the joint venture.
That’s a good way to tell whether they want to steal your technology or just use it and make money off it. If it was the former they would likely reject the deal. Interestingly, the past few times this has happened, we thought the Chinese partners were up to stealing and we were proven wrong.
I have a friend who is a technology consultant in China and he has noticed that Chinese companies are much more focused now on the finances and the money of the deal, rather than just the technology.
The difference is that these companies are starting to be run by more sophisticated business people with MBAs and finance degrees, instead of by engineers. Their goal is not just to grab the technology and figure out what to do with it. Their goal is to make money by building up a relationship with the other company. Yes, they want to do business with our clients because our clients have technology, but they want to exploit the technology together to make money.
Another significant change has been increased enforcement of anti-corruption laws. What is there to look out for in this area?
China is stepping up enforcement, but is it based on the heinousness or the level of the crime, or is it based on who’s committing it and where they are politically? That’s the big question. In terms of foreign companies, we tell our clients: you need to think not only about the US anti-corruption laws, but also China’s anti-corruption laws. And we have always told our clients this: do not bribe anybody. It’s a bad idea on about 100 different levels.
To put things in perspective, China’s about in the middle in the world in terms of corruption. It’s not that bad. My law firm has filed thousands of trademarks and copyrights in China and we’ve formed hundreds of companies and nobody has ever once hinted at a bribe. We used to do a lot of work in Russia. We would file a trademark and an official would ask, “Do you want us to expedite this?” and then point to the dusty pile of paperwork from 1959 that had not been expedited. That does not happen in China. One change we have seen is increased enforcement of tax laws. We received three phone calls last Christmas from people who said they were outside China, that their taxes were being audited in China and the Chinese government had discovered all sorts of irregularities. All these people said things like, “My accountant told me that everybody’s doing this in China.” I have no sympathy. What they are saying is that they knew that what they were doing was illegal, but they thought they would get away with it.
What should companies do to keep up with changes in the law in China?
Let’s say you are a real estate developer in the United States, you’ve got to keep up on all the local construction laws. How do you do that? You join associations and you make sure your own employees do whatever they can to keep up. You can’t pay your lawyers to do that because it would cost way too much money. China is the same. We know the big picture laws and, if you want, you can pay us to figure out what it’s going to take to bring your specific electronics widget through customs. But you probably have people who know electronics better than we do, and so I would urge you to go talk to the government, to go find the right association. This is not easy. But the good news is, a lot of times those are smaller laws and if you mess up it’s not as big a deal as, say, not having contracts with your employees.
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