Cracking Down On Illegal Land Use In China. Do You Really Still Feel Lucky, Foreign Punk?

The following is an amalgamation of a number (maybe 5 or 6) of conversations I have had over the years with people wanting to register a WFOE (Wholly Foreign Owned Entity) in China fast:

Potential Client: Can you help me register a WFOE in China.

Me: Yes. Not a problem. Do you have a lease yet? Do you know that a legitimate lease is required for the approval of a WFOE?

Potential Client: I know that but we are in a real hurry here.

Me:  Okay. But do you have a lease.

Potential Client: We have a lease but I don’t think it technically will qualify.

Me: What do you mean?

Potential Client: The land is zoned agricultural but my Chinese partner has secured all the okays to allow us to use it for our factory.

Me: Not a good idea. Trust me on that.

Potential Client: The factory has been there for two years without a problem and my Chinese partner assures me that the local government is fine with it.

Me: Don’t do it. Right now, the local government is okay with it. But what if the current mayor is pushed out next week on corruption grounds. Do you really want to be in a situation where you have spent a large amount of money on a space that gets shut down?

Potential Client: I am in a hurry and this is the only space that works.

Me: Are you sure? You are in a hurry, but is it really going to be worth the few months if you get shut down?

Potential Client: I am not going to get shut down. My Chinese partner is incredibly connected.

Me: Incredibly connected to the current local administration, MAYBE, but as I said, that administration could be out the door next week. Beijing checks on these things too and if they see that your facility is illegal, Beijing could see to its shut-down. I just don’t think it a good idea to go into a WFOE illegally and my firm cannot be a part of that.

Potential Client: That’s ridiculous. This is how business is done in China. Are you really saying you won’t take us.

Me: Yes. We won’t take you because we do not want our reputation damaged when you get shut down and we won’t take you because we do not want to be blamed when you get shut down. On top of that, I know that the Chinese law firm in _________ with which we work on these matters will not do it either because they don’t want to be viewed badly by Beijing. 

Potential Client: Well I am sure I will have no trouble finding someone to help me on this. Good-by.

I know that at least one of these companies did end up getting shut down (within about a year) because someone at the company who had sided with me on the company not going forward emailed me to tell me of this. 

I thought of the above today after reading “Cracking Down On Illegal Land Use: The BYD Case” over at the consistently excellent China Bystander blog. The post is on BYD, “the fast-growing compact automaker in which American investor Warren Buffett has a 10% stake.” Seems BYD has seven factories on land zoned for agriculture and China’s Ministry of Land and Resources is going to be ruling by September 30 on what to do about that: 

China Bystander nails it in describing these situations:

It is not unknown for local officials to turn a blind eye to such zoning violations in the drive for economic growth. Companies want to bring new production capacity on stream without waiting for all the red tape to be dealt with, while officials themselves are judged on their promotion of local economic growth and local governments have become hooked on land sales for their revenue.

The ministry has said that 7,800 hectares of land had been used illegally in the first half of this year, a 14% increase over the same period last year. That reversed the trend of the figures of the past three years. They had shown the issue was shrinking, but that may just have reflected lax enforcement and reporting. The country’s farmland has continued to be eaten up by industrialization and urbanization. It has shrunk by 6% over the past decade to 122 million hectares, barely above the minimum arable land the ministry reckons China needs to be self-sufficient in food. The summer’s floods and the drought earlier in the year in some parts of the country have reduced that margin further.

China has been cracking down hard on facilities operating outside China’s zoning laws:

The ministry has hit five companies so far this year for illegal land use, following a tougher inspection regime launched in February that found examples of illegal land use in more than half the 13 cities examined in an initial spot check and officials cooking the books in four. In those cases buildings were ordered to be demolished, land taken back, executives imprisoned and official reprimanded.

China Bystander ends its post by noting that none of the companies previously sanctioned were as high profile as BYD and then wonders” how tough the ministry will be this time” and what sort of signal will it want its ruling to send? 

Bottom Line:  If China is going after Chinese companies for putting manufacturing facilities on agricultural land, what in the world makes you as a foreign company think you will be able to get away with doing the same thing? And it is not just agricultural land. I am aware of a big China city office building that was shut down because it was zoned for a hospital. 

What are you seeing out there?

http://www.chinalawblog.com/

Shanzhai Saturday: Inside a Putian Shoe Factory

Shanzhai (山寨): Chinese imitation and pirated brands and goods, particularly electronics.

This week’s column will be slightly less fun and entertaining and a bit more on the serious side of IP infringement and enforcement. For anyone interested in the world of China IP, instead of reading about the latest outrageous fake product, your time will be better spent simply reading “Inside the Knockoff-Tennis-Shoe Factory” by Nicholas Schmidle in the New York Times Magazine. The article does not particularly break any new ground or anything; it is not news, but a lengthy summary of the China IP situation. It’s one of those things that people tell you to read if you don’t have the time or inclination to read anything else on the topic, and I mean that as a compliment.

Schmidle takes a shoe factory in Putian as his concrete example and then uses that as a platform to discuss the IP problem in China generally, using quotes from several of the heavy hitters on the China IP scene, including Mark Cohen (used to be head of IP with the U.S. embassy in Beijing, now with the U.S. law firm Jones Day) and Joe Simon (Baker & Mackenzie law firm). Again, nothing startling in what Mark or Joe have to say, but the fact that Schmidle found his way to them tells me that he talked to the right (foreign) people while he was doing his research.

One thing you will not find in the article is advice on how to fix the problem. This is actually a point in its favor, since the only people that have a quick “solution” to the IP problem are charlatans and hucksters (i.e. lawyers, investigators and consultants) looking to drum up business. Schmidle instead explains what some of the problems are, letting his readers understand that solutions will be difficult and long-term.

For example, Schmidle uses a quote from the Putian factory owner, named Lin, who explains that years ago, it was relatively easy to get prototypes and new product information from legitimate factories, allowing shanzhai manufacturers to produce even more quickly sometimes than the IP owners. These days, security measures have put an end to that sort of thing:

“There’s no way to get inside anymore,” Lin told me, describing the enhanced security measures at the licensed factories: guards, cameras and secondary outer walls. “Now we just go to a shop that sells the real shoes, buy a pair from the store and duplicate them.”

Good news/bad news, though. Maybe they’re not as fast as before, but reverse engineering a shoe purchased legally is not only easy, but the practice is impossible to stop. The point here is that even with pretty good IP laws (seriously) and a lot of enforcement activities, it is still extremely difficult for China to put an end to this sort of thing.

In his description of the business model of the Putian factory, Schmidle also educates his reader on just how difficult it can be to catch some of these producers. Consider that many of them now manufacture fakes on a per order basis, shipping product out immediately as opposed to leaving counterfeits sitting around in their warehouse and subject to raids by the Administration of Industry and Commerce. Moreover, even when sting operations result in catching them with shanzhai product, lots of other factories are waiting in the wings to pick up the slack on the supply side.

I have a feeling that Schmidle’s article will be widely read and perhaps even used by the usual industry folks in their perpetual mau-mau lobbying campaign in places like Washington, D.C. for more vigorous bilateral negotiations with China. I know it’s asking too much of them, but it would be nice for those folks to pick up on a couple of subtle points:

1. The NYT article is to some extent limited in scope and should not be used to generalize about all kinds of IP infringement and enforcement in China. Consider these statistics:

In the last fiscal year, U.S. Customs and Border Protection seized more than $260 million worth of counterfeit goods. The goods included counterfeit Snuggies, DVDs, brake pads, computer parts and baby formula. But for four years, counterfeit footwear has topped the seizure list of the customs service; in the last fiscal year it accounted for nearly 40 percent of total seizures. (Electronics made up the second-largest share in that year, with about 12 percent of the total.)

Yes, you can find a dizzying variety of fake stuff here, but the big numbers are from big brand consumer items like shoes as well as electronics (add those together, and you have over 50% share of fakes seized by the U.S.). I wonder what those numbers would look like if you also added in digital media piracy?

The point is that you have a few industries that are being hit the hardest, and while almost everyone has IP issues with China these days, not everyone is having their market share savaged by Chinese pirates. There’s a reason why Schmidle went to a shoe factory.

2. This is really a story about global counterfeiting, not about China IP problems. It’s easy to look at China as the source of the IP infringement epidemic. After all, the products are being made here. Consider, though, that everything is produced in China these days; why should fakes be any different?

In other words, if I’m an international distributor of counterfeit products, where am I going to go to find experienced factories capable of making quality fakes? Of course the answer is China. These transactions involve China producers, and distributors and purchasers from all over the world – they all use the Net of course to handle purchase and sale details.

This explains why the FBI, and others, have stepped up international cooperation strategies in recent years. It also suggests that in ten years, after a lot of the low-end manufacturers have completed their moves from China to Vietnam, Bangladesh, and Alabama, we will start to see ramped up counterfeiting from those areas.

Just a guess. Maybe 20 years from now, you will have investigative reporters from China Daily writing stories about corrupt government officials from towns in Mississippi who protect the local shanzhai shoe factories. I imagine the quotes will include “But the factory is the town’s largest employer and taxpayer. And besides, the fakes are just being exported to China anyway. No harm, no foul.”

http://www.chinahearsay.com/

PRC Animation Industry and Industrial Policy: Sometimes You Lose Some

Whether you like it or not, China has an industrial policy, which means it has a stated development goal organized, in part, on a sectoral basis. Critics state that any system that has the government picking winners and losers is bound to fail since the market is much better suited to that task. Supporters say that the government has a vital role to play since it is in a unique position to direct capital toward basic scientific research, infrastructure, and projects that may not be able to attract private investment in order to get off the ground and become profitable.

I guess I’m a lukewarm supporter of industrial policy, but only to the extent that a government can provide reasonable incentives to certain industries, allow those to take root, and then discontinue or modify those programs if development does not occur after a reasonable period of time. The government cannot have a perfect track record of picking winners and losers, and sometimes you can’t force these things.

Excellent example of the latter is China’s young animation industry, which has been identified as a key industry by the government, showered with subsidies, and is struggling mightily:

Chinese studios produced a combined total of 170,000 minutes of footage last year and has already surged past that figure this year.

Even with billions of yuan in government subsidies and policies designed to boost the animation industry, analysts say the country is still short on talent and creativity, as well as a business model that can sustain the sector’s growth.

During the first five months of this year, 221 Chinese-made cartoons (more than 270,000 minutes) were produced for domestic television channels, according to the State Administration of Radio, Film and Television (SARFT).

However, the output was met with apprehension by studio bosses, some of whom feel such mass production could erode quality.

So you have this infant industry that is incentivized to put out as much volume as possible (in contrast, Japan produced 80,000 minutes last year, with France at 40,000), but the talent is simply not there yet. Consequently the quality leaves a lot to be desired. In some cases, this would be acceptable; leave the crap on the cutting-room floor and chalk it up to an investment while the industry learns from the more experienced foreign producers.

There are also extremely generous regulatory gifts:

Within the domestic industry, 2004 is referred to as “year one”, as it was when the SARFT limited the use of foreign-made cartoons by television stations. New rules stated that Chinese-made animations should make up at least 60 percent of all cartoons broadcast.

Two years later, the authority banned foreign-made cartoons from being aired between 5 pm and 8 pm, and extended it to 9 pm in 2008.

There’s not much else the government can do to help these guys out. It’s a question of experience, and this industry is just too young at the moment. At this rate, the industry is going to limp along for quite a while. The question is whether this is the best way to protect and develop these companies or if there is a better way to turn this thing around in the short/medium term. China might consider the following:

1. This is all about talent and creativity, and that’s hard to force. You can throw money at it, but money doesn’t inspire people (well, maybe some people). To ensure that young potential designers and artists are exposed to top quality animation as early as possible, the government should remove those programming bans and allow foreign shows on China television.

2. Knowledge spillover is key to developing a new industry. That can sometimes to facilitated via an industry-intensive geographic area (think Silicon Valley). China has already done this for animation, but simply putting a bunch of inexperienced firms together, whose only exposure to foreign shows is outsourcing work, doesn’t count. Incentives for foreign producers, including a loosening of regulatory constraints by SARFT, would be a good first step.

3. Pricing is now completely nuts. With subsidies, local animation firms are literally giving their shows to television stations for free. Even if import bans on foreign programming were lifted, that’s quite a competition hurdle to overcome. If the government wants to continue making sure that local firms are profitable via subsidies, and yet would like the industry to benefit from the experience and quality of foreign producers, it might need to step in with price controls.1

I don’t think China’s animation industry is clearly indicative of the failures of industrial policy in general. Sometimes you win some (cleantech?) and sometimes you lose some, and maybe that’s acceptable. However, once a loser is identified, the government should be willing to alter policy and try to turn that lemon into lemonade.
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1.Not my first choice to fix one market distortion with another, but it might be necessary in the short run.[↩]
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http://www.chinahearsay.com/

China “Laws” Are Local And Don’t You Forget It.

By Steve Dickinson, from “neighboring”Qingdao

On August 4, 2010, the Dalian Labor and Social Security Bureau (大连人力资源和社会保障局) posted on its website a new list of requirements for foreign nationals seeking employment in Chinese companies based in Dalian. The new requirements mandate that foreign individuals must prove that the registered capital of their employer is greater than 3.0 million RMB (about USD $440,000). This new requirement applies without distinction between foreign owned (WFOE) and Chinese owned companies. By the strict reading, even the founder of a WFOE would not be permitted to hire himself if the registered capital of his WFOE is less than the minimum. In the same way, a small Chinese research and development lab in Dalian would be prohibited from hiring foreign workers under this new requirement. It was this latter example that caused me to become aware of this new requirement.

When we contacted the staff at the Dalian Human Resources Bureau, they told us there is no supporting policy, rule or regulation for this new requirement; it is based merely on the oral instructions of the bureau chief and the only documentation is what the Bureau has posted on its website. When we asked about the requirement’s application to employment by an owner of a WFOE or employment by a small research and development company, the staff indicated that they fully intend to follow the requirements strictly and will refuse to allow any foreign employment in any company that does not meet the minimum capital requirement, regardless of the status of the company. When we commented on how this policy goes counter to Dalian’s stated goal to become a business outsourcing and software development center, the staff indicated that they don’t think about such things; they just do what their supervisor tells them to do.

Clearly this new rule is contrary to Chinese law. If enforced in the manner proposed by the staff of the Labor Bureau, it will have a negative impact on many small technology businesses in Dalian, both domestic and foreign owned, many of whom my firm represents due to Dalian’s closeness to my base in Qingdao. Frankly, this requirement seems so irrational I cannot even guess at the reason behind it. It is clearly bad for all Chinese companies, WFOE and domestic. No one is being protected, and everyone involved is being hurt.

Though I believe that this requirement will not be imitated by other cities, the issue is uncertain. Dalian has previously been considered to be a very open city to foreign workers. If Dalian does this, there is no reason to expect other cities will not follow suit. However, since the requirement is completely irrational, it is impossible say what will happen elsewhere.

The imposition of a threshold based on minimum capital does, however, illustrate that Chinese government authorities still do not understand the requirements of high tech companies operating in the research and consulting sector. We continually face the problem that Chinese offiicials judge companies solely on the size of their capital investment. Consulting and research companies often have very low capitalization since their resource is their staff and not their physical assets. Government officials often delay or even refuse to approve a consulting/research WFOE because the capital is low. This recent requirement by Dalian seems to be in that line. A manufacturing company with 3 million RMB in registered capital is a rather small operation. A consulting/research company with the same capitalization would be quite large.

However, none of the above explains why foreign workers are being targeted with this requirement (I do not call it a rule since it has no legal basis), so I still cannot think of any basis. No Chinese lawyer or official with whom I have discussed this matter has been able to provide any explanation either. The attitude here in Qingdao is: The requirement is clearly illegal. Good. Perhaps it will convince more people to invest in Qingdao. “We don’t behave that way down here.”

Other people have asked me: will the Dalian bureau really be able to get away with this? The answer is: yes. The Labor Bureau can pretty much do whatever it wants in their regulation of foreign workers and it is not unusual at all for local labor bureaus to have their own special requirements. Foreign workers have no power, so protests from the foreign workers have no impact. It is only in the case where an organized protest by Chinese companies is made that there would be changes. To date, this has not happened, since small Chinese companies do not make extensive use of foreign workers. Small WFOEs are more likely to make such use, but they have little power and are usually ignored by the labor bureau. This sort of arbitrary change in long established rules is a fact of life in China and adds to the uncertainty of doing business here.

The key takeaway from this is that now, more than ever, one has to be ever mindful of the differing requirements and even “attitude” of China’s cities before determining where to try to locate one’s business.

Qingdao anyone?

http://www.chinalawblog.com/

Sending Your Employee To China Again And Again. What If The Well Runs Dry?

Mega law-firm Mayer-Brown (f/k/a Mayer, Brown and Platt) just did what it calls a “bite-size” article on foreigners working in China for the home office. The article asks and then answers the following question:

If a foreigner will not be employed by any PRC company, and will frequently travel to the PRC as an employee of a foreign company to deal with business in the PRC, does he/she need to obtain a work permit from the PRC authority?

The answer given is that, generally, foreigners who enter the PRC for business can enter with a business visa and do not need a work permit so long as they stay three months or less. A work permit and work visa are, however, required if the foreigner “will work in the PRC for three months (not stated to be continuously, but generally considered as being cumulatively) or more, unless he/she will act as an engineer or other professional under a sino-foreign technology transfer agreement.”

The article then talks about how a PRC entity is required to employ the foreigner if the foreigner is going to stay in China for more than three months. If the foreign company has no legal entity in the PRC and needs to have its foreign employee frequently travel to the PRC for business development purpose, the article suggests the foreign company “consider having a [China-based] business partner fulfil the relevant application and filing obligations.

This is all good advice. I see this problem most often with foreign businesses that get a big contract in China requiring it send a bunch of its employees to China for 6 to 12 months. This company essentially has three options. It can convince its China partner to hire its employees and get them their work visa and work permit that way. It can form a WFOE in China to employ these people. Or it can try for multiple entry visas and hope the Chinese government looks the other way at someone spending too much time in China without a work visa or a work permit.

I have had clients do all three of these things. I usually recommend my client try to get its China-based partner to hire on its employees, but the China-based partner usually will not. I have to confess that when our clients ask us about hiring on temporary employees for others, they seldom do so after we tell them of all the risks involved in hiring anyone in China.

The big problem with forming a WFOE just to hire a few people for a temporary job is that it is time consuming and expensive. The big problem with shuttling employees back and forth into and out of China on 1-3 month business visas is the chance some or all of them will not be allowed back in. China does have its periodic visa crackdowns and visa tightenings and a whole host of our clients encountered major problems when China really cracked down hard before the Olympics. We had one very profitable client who literally had to close down because it was denied entry visas for so many of its key people.

The question I pose to my clients thinking of taking the 1-3 month business visa risk is, how big a disaster would it be for your company if you had to pull out of the contract half way through it because you can no longer get your people into China?  I estimate around half take the risk and around half form the WFOE. 

http://www.chinalawblog.com/

OEM Agreements With Your China Supplier. Not Just For The Big Boys.

A good portion of my law firm’s work comes from China outsourcing consultants. The smart ones are sure to tell their clients they need to register their trade names in China and have a China lawyer draft their OEM agreements with their China suppliers.  I say the smart ones do this because those who don’t run the very real risk of later being sued for not having made these suggestions.

Once the consultant makes this recommendation though, he or she has to a large extent freed themselves of future legal liability and need not worry all that much about whether their client goes forward with registering their trademark in China or using an OEM agreement or not. 

A consultant from an emerging market country wrote me the other day saying he thought it would be good if his clients were to have well-crafted OEM agreements with their Chinese suppliers, but when I told him what we typically charge to do these agreements in Chinese and in English, he said he questioned the value of such an agreement since most of his clients would not have enough money to sue anyway. 

I then told him that a good OEM agreement is particularly valuable for those sorts of clients:

Ninety percent of the value of a good OEM contract is that it prevents the need to sue. Having one of these in place means the Chinese company KNOWS not to mess around because it will get sued and lose, so it chooses to follow the contract. Not only that, but lawsuits on a strong OEM Agreement don’t really cost all that much in China and if you have properly written into the agreement that the prevailing party gets its attorneys’ fees, such a lawsuit can end up costing next to nothing. If anything, such an agreement is more important for the small company than for the large one because it acts so well to prevent the one bad shipment that puts the small company under.

We have probably written at least 100 of these and I am not aware of a single time where the client has had to come back to us wanting to sue its Chinese supplier. And if it did, I can tell you that having a really good contract in place (in Chinese) would make going after the Chinese supplier a whole lot easier and cheaper than not having an OEM contract at all.

http://www.chinalawblog.com/

Six Ways To Protect Your China IP. No Lawyer Required.

A client (who my firm has been representing on its international intellectual property matters for a long long time) sent me an article today and asked for my thoughts. The article is entitled, Enforcing Intellectual Property Rights in Weak Appropriability Regimes: The Case of de Facto Protection Strategies in China, written by Marcus M. Keupp, Angela Beckenbauer, and Oliver Gassmann, all of whom are professors at the University of St. Gallen, in Switzerland.

I am always being asked if registering a trademark, or getting a manufacturer to sign a non-disclosure agreement, or getting an employee to sign a non compete or trade secret agreement works in China My answer is always that doing these things, while also employing “non-legal” strategies as well, will greatly increase your chances of protecting your IP in China. Companies that combine legal and non-legal strategies to protect their IP have a much better record of IP protection in China than those who do nothing.

The article focuses on the following non-legal methods for protecting IP in China:

• Technological Specialization. This strategy attempts to make imitation impossible by making the product so complex that imitation would take so long or be so costly as to render it uneconomic for someone to copy.

• De Facto Secrecy. The authors define this as secrecy “not enforced by legal means, such as nondisclosure agreements.” This strategy involves stopping “the outflow of sensitive IPR from the unauthorized appropriation of documents, blueprints and technical description by local employees. The basic idea is simple: Do not document any important information in writing.”

• Internal Guanxi. Win over your China employees by building trusting relationships with them by good pay, long-term education and training and constant reminders of the importance of keeping company IP a secret.

• External Guanxi. This strategy focuses on “establishing good relationships with firm-external official bodies and institutions” on whom you can call to help you ”pursue IPR infringements.”

• Educate the Customer. “Most counterfeits offer poor quality, so the customer learns over time that the more expensive but high-quality original product will better fulfill demand than the low-cost, low-quality counterfeit. Help the customer learn how true this is by providing quality and service counterfeiters do not match.

• Product Structure and Know-how Intensity. Hang on to some “key” to using your product.

All of the above strategies, alone or in combination, can work to increase IP protection in China (or elsewhere).  The strategy you employ should depend on your product and on the way you do business.

We have a client that sells expensive technology equipment that requires password protected internet access to achieve all of its capabilities. The internet access is the “key” to full functionality and so duplicated hardware will never be as valuable as the original. We have another client who pays a little more to have two Chinese manufacturers make the two main components for its product, and then has the product assembled in the United States, so no Chinese manufacture ever gets the whole product. A large number of our clients rely on trademarking their brand in China and constantly coming out with new and better product so they will always be “one step ahead” of their competitors.

(http://www.chinalawblog.com/2010/07/how_to_protect_your_china_ip_without_a_lawyer.html)

Baidu Is First Victim of New Tort Liability Law

Since I just got back from an interview on the subject of the tort liability law, I thought I should run through this Baidu case (h/t @davesgonechina), which is sort of the first one decided under the new law, even though technically it just became effective today.1 It seems like Pacific Epoch had the English-language scoop on this story, so let’s start with what they had:

Shanghai Jing’an District People’s Court has ruled against Baidu (Nasdaq:BIDU) Thursday in the defamation case of a young woman who charged the company with offering private photos and information in its search results and other products, China Youth Daily reported July 1. The court ordered the domestic search giant to pay a RMB 22,000 remuneration and display an open apology on its homepage for three consecutive days, according to the report.

OK, first off, the damages are not a big deal to a company like Baidu, nor I think is the apology, considering that search engines are engaged in litigation on an ongoing basis.

The important issue here is liability. What exactly went on in this case, why was a search engine found liable, and is this result likely to be replicated by other courts?

In reading the news reports (here is a link to one of the longer articles – Chinese only), it is not clear to me whether the information posted online, and indexed by Baidu, was considered to be a violation of the right to privacy or reputation. Seeing as the former was only formally recognized under the new Tort Liability Law, and that the information posted online included some indecent photographs, I’m thinking that we’re dealing with a reputation right in this case.2

Regardless, the court found that Baidu’s indexing (i.e. providing search results) of the pages that included this information was a violation. Some of the news out there includes quite a lot of information about the type of content that was posted about this woman. From a legal perspective, I don’t really care about the content, I care about the issue of liability for third-party content. For the purposes of this discussion, let’s stipulate that the online information was definitely a violation of this woman’s reputation right.

The question is whether Baidu should be liable for indexing these pages, and for allowing this information to be posted on Baidu Baike (sort of a Wikipedia type platform). In the case of Baike, the defamatory information was being hosted on Baidu’s servers.

For several years now, Chinese courts have trended in the direction of allowing Net platforms, and search engines, a certain amount of flexibility when it comes to taking down information that is an infringement of individual rights or intellectual property rights. Understanding that some of these sites are deluged with traffic, and whose systems are to a major extent automatic (i.e. information is gathered by bots and not people), it is unreasonable to hold these firms responsible for all of their data, all of the time. We’re already talking about devoting a large number of staff to deal with these kinds of issues, and there has to be a limit.

The legal construct that China has borrowed from U.S. copyright law is the “safe harbor” provision. As long as a site maintains an adequate “notice and takedown” system, whereby IP owners (for example) can notify the site that infringing material has been uploaded, then as long as the site owner takes the material down in a reasonable amount of time, they will not be liable.

I consider this to be a fairly settled concept under China IP law. It has not, however, been entirely clear that this provision will be applied across the board to all types of online torts, such as defamation. I cannot say, therefore, that this is an obvious poor decision by the Jing’An court.

On the other hand, if the facts show that Baidu took reasonable measures to take down the defamatory material given the notice it received, then this judgment looks suspect and may be reversed by the Intermediate Court on appeal.

Did Baidu receive adequate notice? Again, the facts in the news are quite incomplete. There is mention of some kind of publication by the plaintiff in a local newspaper of an “Attorney statement” signed by “YH 小姐”. Well, this is hardly adequate notice in my opinion, and certainly not something that Baidu should have necessarily known about.

Another issue involves Baidu’s responsibility with respect to links to third party content. Apparently in this case, links were removed at some point, but new material was constantly being updated and then automatically indexed as search results. Again, I wish I had more information, but if the above is accurate, then again we have a problem.

Just what exactly is a search engine supposed to do if such information keeps being re-posted? Apparently the judge performed an in-court search on Baidu during the case and found links to some of this content that were active; yeah, that looks bad, but it also kind of smacks of a stunt that could have ultimately been unfairly prejudicial to Baidu, particularly if the judge had inadequate knowledge of the underlying technology. If the links were to fresh pages/posts, then I’m still sympathetic to the search engine.

Finally, the judge apparently thought that a lot of this could have been fixed via keyword filtering, since a lot of the photos and other material were posted using the terms “海运女” and the plaintiff’s name. Again, this seems quite problematic from an operational standpoint. Does the court really think it’s reasonable that a search engine should institute keyword blocking every time something like this happens? That could add up to a lot of blocked words very quickly! Moreover, depending on the keyword, a lot of non-infringing material might be blocked at the same time.

To close this out, I want to first reiterate that I have limited knowledge of the facts here. However, based on what I do know, I think Baidu should go all out on appeal. While the material in question certainly seems defamatory, and the law does say that operators like Baidu may be held liable for hosting and linking to such material, there are limits. This is a great case for Baidu to argue that the same limits that have been instituted in IP cases (i.e. safe harbor for sites that have adequate notice and takedown systems) should be followed in cases of infringement to the rights of privacy and reputation. Same issues of reasonability, so we should expect the same legal results.
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1.Specifically, the law did not apply, but the judge did reference the government’s legislative intent in the judgment.[↩]
2.The specific differences between the right of reputation and the new right of privacy is one area of the new law that will require clarification.[↩]

http://www.chinahearsay.com/

That’s Hot: China Distribution Contracts

We recently did a post, entitled, “That’s Hot: Made In China For China. By Foreigners” in which we talked about seeing a massive increase in licensing agreements for foreign companies licensing products to Chinese manufacturers. We have also been seeing a correspondingly massive increase in work for foreign companies entering into distribution contracts with Chinese distributers. Both of these increases are no doubt due to China’s rising status as a consumer/buyer nation.

Many of the companies that come to us to draft their distribution contracts with Chinese distributers are already experienced with distributer relationships and already have a “standard” distribution contract. Though China distribution agreements can have much in common with US and European distribution agreements, they also have stark and interesting differences.

Our clients’ standard distribution agreements (usually with a United States or a European company) typically make for an excellent starting point in our drafting of the Chinese distribution agreement. These standard distribution contracts have usually been honed and customized over the years to match what our client wants and needs from its relationships with its distributers.

But we always need to modify them to make them work for China. 

One reason for this is that the United States/Europe generally provide distributers with all sorts of legal protections. These countries often make it difficult or expensive to terminate a distributer and it is not at all unusual for distributers in these countries to sue or threaten to sue when a distribution relationship sours.  

Chinese law has no special protections for distributors. In particular, there is no legal requirement in China for payment of any special compensation to a distributor upon termination of the distribution agreement. For these reasons our China distribution agreements call for applying Chinese law.  For these same reasons, we usually also delete those provisions in US or European standard distribution contracts devoted to trying to work around distributer protections. 

We add in what we call a ”no registration” provisiont to further protect our clients’ China trademarks. In this provision, the distributer agrees our client has exclusive ownership of all trademarks, that the distributer gains no rights to those trademarks, and that the distributer will not register any trademarks in any way related to our client’s trademarks. I use the words “further protect” because the first line of protection for your trademarks in China is to register them properly in China. 

One other difference between a Chinese distribution agreement and that for the United States or Europe is that the signature line in a Chinese distribution contract should provide a place for the distributer to affix its company seal; unsealed distribution contracts are arguably not valid under Chinese law.

http://www.chinalawblog.com/

Outsourcing To China. The Less You Have The Better It Gets?

James Fallows did a post today comparing Barnes & Noble’s Nook againstAmazon’s Kindle (with a nod to the iPad as well), both of which had their prices greatly reduced today. Within that post Fallows had a fascinating post from an unnamed “person with deep experience in the Chinese manufacturing industry.”  The quote is essentially a less is more paradox on how the less you already have by way of a manufacturing operation the better off you will be when it comes to outsourcing your manufacturing to China:

“The nook was no ordinary development. Remember, B&N is not an electronics company. They’re not Amazon nor Sony. But what they were able to do was remarkable. Sources in China are reporting that they assembled a small focused team, and brought the product from a concept sketch into production in about a year. Compare that to Amazon and Sony that took three and four years, respectively.

This is probably the best example of what’s becoming the trend for successful consumer electronics product development. Those companies with nothing have everything and those with everything have nothing. This apparent paradox simply means companies with the urge and need to develop products are often better off without an entrenched engineering organization that slows things down and is resistant to doing things in new ways. Those that are free and unencumbered can assemble the best small teams and work with the best ODMs in China and do a better, quicker job.”

My immediate instinct was to call BS and recount the dozens of times my firm’s clients have essentially told us that they have been shocked at how little help they have received from their Chinese factories on how to manufacture their products. But then I realized that I had not heard one of those complaints for a while and that we are working with a number of companies that really are doing nothing more than putting their US brand names on near generic products, with a few small revisions, coming out of Chinese factories. And some of these products actually are quite sophisticated consumer and even industrial devices.

So this is all causing me to do a re-think and as part of that a re-ask. Have Chinese factories improved to such an extent that they are now manufacturing partners as opposed to just manufacturing flunkies?

(http://www.chinalawblog.com/2010/06/outsourcing_to_china_the_less_you_have_the_better_it_gets.html)