China M&A: Never Make Assumptions, Because, Well, You Know

(Beijing Today website’s blog section does not represent any view of Beijing Today or its reporter. Anyone interested about the story can find the original text from the link above the article. The site’s blog section aims to introducing expat blogs in China to more Chinese readers as 50 percent of Beijing Today readership remain young Chinese who have experience of living abroad, white colors or school students. Blogger who does not want his or her story linked at Beijing Today’s website, please email to info@beijingtoday.com.cn to take down the stories.)

http://www.chinahearsay.com/china-ma-never-make-assumptions-because-well-you-know/

I usually don’t fisk a news article when someone merely gets a single fact wrong or makes one stupid observation. No one’s perfect, and I’m sure that I screw up my facts on a regular basis. That being said, I’d like to think that journalists spend a lot more time writing their stuff than I do, since it’s their job and all.

Anyway, I have to make an exception for Isabel Hilton at the Guardian, who the other day wrote an otherwise acceptable article on Chinese overseas direct investment. This included the usual talk about the China Investment Corporation (CIC) and Huawei’s attempts to get into both the U.S. and UK markets.

The point of the article is that the U.S. isn’t open to all types of Chinese investment (e.g. Huawei), and the UK should take heed. Moreover, the Chinese block a lot of incoming deals as well, so perhaps the Brits should reciprocate.

Fine so far, although I don’t necessarily agree with everything. But at the end of the article, in support of the notion that the Chinese are tough on inward investment, we have this stunner:

China itself bans foreign investment in any military or national security sector and restricts it in other key areas: this has killed off some steel and construction sector deals and, bizarrely, Coca-Cola’s bid for China’s biggest juice maker. In February China set up its own mechanism for scrutinising foreign bids under national security rules. Britain has no similar mechanism. Perhaps it should learn from the Chinese.

This is what got me. You can say all you want about protectionism in general — and China has certainly engaged in protectionism in the past — but making simple declaratory statements about specific deals that are completely without foundation, using links to stories that don’t even support your position . . . well, we can’t have that, can we?

All right. The problem here is that comment about Coca-Cola, specifically the reference to its failed takeover bid of Chinese juice company Huiyuan a few years ago. The deal was reviewed by the Ministry of Commerce (MOFCOM) as part of the then-new Anti-monopoly Law (AML).

Contrary to the author’s suggestion, the Coca-Cola case had nothing to do with either the military or national security, nor was it in a “key sector.” It did perhaps involve a famous local brand, but Ms. Hilton doesn’t mention this; in any event the MOFCOM decision did not hinge on the trademark anyway.

Why was the deal ultimately scuttled? Officially, because MOFCOM had concerns about abuse of a dominant market position. That’s competition law jargon meaning that after the deal, Coke would be too big in that sector, giving it the ability to raise prices and engage in other anti-competitive behavior.

As I’ve said before, I’ve read the opinions of expert lawyers on both sides of that case, and while they might disagree on the outcome, very few of them thought that the case was prima facie protectionism. In other words, MOFCOM’s concerns about the deal under the AML were not crazy.

So to blithely assume that the Coke deal was obviously protectionist is really an egregious error, in my opinion. But wait a second, she did link to a source here, didn’t she? Let’s take a look at that.

The link goes to an Agence France-Presse article on the Coke deal, a rather straightforward news piece. At the very top, in the article’s blurb, we have this: “Coca-Cola’s acquisition of Huiyuan would have a ‘negative influence on competition’.”

Got that? Before we even read the AFP piece, we know that this is all about competition law, not a national security review or military issue. The entire article, save one paragraph, is a straightforward account of the deal, and the AML case, and it certainly is not something I would cite to when arguing that MOFCOM was acting in a protectionist fashion.

And what about that one paragraph in the AFP piece? Here it is:

“The juice industry is not a sensitive industry for the Chinese government, but it still doesn’t want a foreign brand to own a major Chinese brand,” said Renee Tai, a Hong Kong-based analyst with CIMB-GK Securities.

This is just a comment on the political context of the deal. Of course everyone discussed the politics and speculated about what the Chinese government did/didn’t want, what their ‘real motives’ were, and so on. However, such idle chatter is not evidence of protectionism one way or another. We might think we know what the regulators were thinking when they made their decision, but we don’t know for sure, and therefore have to go with the evidence that has been made public.

So the AFP article is no real help, and therefore we are just left with the original language in the Guardian saying, contrary to most legal scholars, that the Coke decision was “bizarre,” assuming for no reason that MOFCOM was acting on political marching orders. When your thesis is that the British government should get into the protectionism game, this is a very weak attempt to bolster your argument.

China Fines Unilever For Merely Discussing Price Hikes. No, Seriously.

(Beijing Today website’s blog section does not represent any view of Beijing Today or its reporter. Anyone interested about the story can find the original text from the link above the article. The site’s blog section aims to introducing expat blogs in China to more Chinese readers as 50 percent of Beijing Today readership remain young Chinese who have experience of living abroad, white colors or school students. Blogger who does not want his or her story linked at Beijing Today’s website, please email to info@beijingtoday.com.cn to take down the stories. )

http://www.chinahearsay.com/china-fines-unilever-for-merely-discussing-price-hikes-no-seriously/

This is funky, and I’ve been scratching my head ever since reading the news earlier today.

The facts:

China’s pricing authority has fined consumer product giant Unilever Plc 2 million yuan ($308,000) for saying it might increase prices of some for products in China.

The National Development and Reform Commission (NDRC), a powerful central planning agency, said in a statement on Friday that comments by Unilever officials about possible price rises had “intensified inflationary expectations among consumers” and “seriously distorted market order”.

Whoa. That’s a hefty fine for a China government body. Usually we’re talking about several thousand RMB for an administrative fine, and only when disgorgement of profits is involved do the numbers rise into the millions. Seems like this is wholly on the administrative side too, since it only involves statements made in anticipation of price rises.

The background on all of this is straightforward. China has been freaking out over inflation for quite a while now, which is not surprising in the least once you remember the key role that inflationary pressures played in events back in 1989, not to mention the late 1940s. High inflation leads to scary things in modern China.

That being said, when economists talk about inflationary expectations (like the NDRC is doing with the Unilever situation), the context is usually consumers and businesses taking cues from central bankers or finance ministers. I don’t know about you, but back when I studied macroeconomics in grad school, I seem to recall that rational expectations theory involved central bank actions and not corporations making public statements about future price hikes.

What about the legal side of this? Well, if you’ll notice, that above quote also references a distortion of the market order. This is Price Law and Unfair Competition Law territory, and in fact, the former was cited as the grounds for Unilever’s fine.

What does the Price Law say about public speculation of future price rises by companies? Well, this is not exactly my area of expertise (I’m much more comfortable with the Anti-Unfair Competition Law or Anti-Monopoly Law than I am with the Price Law), but at least with the Price Law itself, I can’t find anything specifically on point.

Yes, the law does prohibit business operators from spreading price information. But this is not about inflation. The purpose of that provision, stated clearly, is to stop companies from pushing prices up to excessively high levels for no other reason but to make additional profits.

That’s not what happened here of course. China is experiencing a clear inflationary trend, and I’m sure that Unilever’s raw material costs have indeed gone up, as they said at the time. No fraudulent manipulation there, no price gouging. And remember, we’re talking about speculation of price rises, not any actual rise in price! The government’s worry is not about illegal gains by Unilevel, but the effect of their statements on consumers.

The Price Law, as with almost all other Chinese laws, also contains some catch-all provisions that give the administrative authority the ability to deign certain kinds of pricing behaviors illicit. By way of a disclaimer, it is quite possible that there are regulations out there on public disclosures by companies that are relevant to this case, and I simply do not have enough specific knowledge of the price law system.

The only other thing I can think of in the Price Law itself involves emergency measures. The government does enjoy some rather sweeping authority when it comes to price setting and implementation in emergency situations. Sudden sharp price increases can be emergencies, although I’m not sure if what we have been experiencing in the last year qualifies.

Putting the legal justification aside, I’m feeling rather sympathetic to Unilever, at least based on the limited information reported in the press. I know how sensitive inflation is in China, and I’m sure that the statements made by Unilever did in reality alter pricing behavior of other businesses as well as consumers — we’ve seen specific incidents of panic buying in recent months, for example. But retailers were in a tough spot, and it seems as though they pretty much did as they were told by the NDRC:

Personal care producers such as Unilever, Procter & Gamble, Zhejiang-based Nice, and Guangdong-based Liby informed retailers to increase prices by 5 to 15 percent in late March. But plans were suspended after the National Development and Reform Commission talked with companies to stabilize prices under heavy pressure of inflation.

So they wanted to raise prices, the NDRC said no, and they didn’t do it. And now subsequently Unilever is being slammed for merely talking about the price hikes? That’s harsh.

Chinese Commercial Law Books In English. The Good Ones.

(Beijing Today website’s blog section does not represent any view of Beijing Today or its reporter. Anyone interested about the story can find the original text from the link above the article. The site’s blog section aims to introducing expat blogs in China to more Chinese readers as 50 percent of Beijing Today readership remain young Chinese who have experience of living abroad, white colors or school students. Blogger who does not want his or her story linked at Beijing Today’s website, please email to info@beijingtoday.com.cn to take down the stories. )

http://www.chinalawblog.com/2011/04/chinese_commercial_law_books_there_are_some_good_ones.html

Clients (particularly those involved with Human Resources) and law students are always asking me what English language books I recommend for learning about Chinese law. Many years ago, I would tell them there were none. Now I usually respond with the following four:

1.  The Legal System of the People’s Republic of China in a Nutshell. Yes, this is part of West’s Nutshell series, but before you law students and lawyers start keeling over in laughter, let me explain. I am always telling law students that they should read “the nutshell” of their course before they go to their first class in any given subject. I suggest they read the nutshell book from cover to cover as though they are reading a novel. In other words, they should not stress too much over the points they do not understand and they should not worry about retaining anything.

I advocate reading nutshell books because they are a superb and fast and relatively painless way to get a big picture view of a topic. Getting the big picture view first then allows you to put the pieces you learn later into their proper place.

The China nutshell (I read a previous edition a long long time ago) does a great job of giving its readers a feel for Chinese law and a quick read of it will help you immeasurably in thinking like a Chinese lawyer. Will it tell you what you need to do to get from point A to point E in forming a China WFOE? No, but that should not be why you read it. You should read it because it is a very good first introduction to Chinese law.

It is written by Daniel C.K. Chow, a law professor at Ohio State University who is eminently capable of publishing more weighty works on Chinese law as well.

2.   Chinese Commercial Law: A Practical Guide. This book was written by Martin Roos, a Holland trained lawyer who practices in Shanghai. I find this book very useful as a good first source on Chinese legal issues. It does a good job touching on the major legal issues foreign investors typically face in China. Its Amazon page accurately describes it as follows:

He clearly describes the opportunities and pitfalls exposed as a foreign investor engages with such elements of business in China as the following:

•negotiating a detailed written contract;
•performing a legal and commercial due diligence on a prospective partner;
•resolving disputes through negotiation, arbitration or litigation;
•establishing and enforcing trademarks, patents and other intellectual property rights;
•investing in China;
•considering the joint venture structure;
•expanding through a merger or acquisition;
•restructuring or liquidating an operation;
•designing and implementing effective corporate governance;
•retaining, managing and terminating employees;
•arranging funds into and out of China;
•ensuring both tax efficiency and tax compliance; and
•avoiding criminal liabilities in the course of doing business.

I agree and I think this book makes for a great nuts and bolts introduction to the various topics it covers and it also serves as a great initial legal reference as well.

3.  Understanding Labor and Employment Law in China. I gave a very favorable review of this book when it first came out and my appreciation for it has only grown. This is what i said then:

I am three-quarters of the way through the book, Understanding Labor and Employment Law in China, by Ronald C. Brown. Brown is a Professor of Law and the Chair of the Pacific-Asian Legal Studies Committee at University of Hawaii Law School and can confidently state that it is a great book.

But it is not for those seeking merely a light dusting on Chinese labor and employment law. Not at all.

It is 332 page exposition on the current state of China’s labor laws. It was just published so it is quite current. Its appendix consists of translations of the key Chinese laws relating to labor and employment.

Who should read this book?

– Academics interested in China labor laws? Check.

– Private practice lawyers seeking a deeper understanding of China’s labor laws? Check.

– In-house lawyers wanting to better understand China’s labor laws? Check.

– HR personnel with businesses operating in China? Probably check.

– Lawyers who actually practice labor law in China? Maybe check.

– The general businessperson doing business in China? Maybe check.

Let me explain my maybes.

Any lawyer actually doing employment law in China must be able to speak and read Mandarin fluently and so that lawyer probably does not have much need for a book like this, written in English. If you are going to be writing employee manuals and employment contracts in China or giving advice regarding China’s labor laws, you absolutely must know how to read and write Mandarin. You have to know how to read it because so many of the employment laws are local, rather than national, and because there is no substitute for reading a law in its original language. You have to know how to write in Mandarin because your employee manuals and your employment contracts pretty much have to be in Chinese if you have any Chinese employees.

This book is probably too intense, too thorough, too long, too deep, and too complicated for the typical businessperson seeking a general background on Chinese employment law and I do not think it was ever intended for that purpose.

If you are looking for an English language book that really details China’s labor and employment laws, this is the book.

I am now of the view that HR personnel should buy this book, so long as they realize that it is just a first step towards deciding what to do in each individual instance. I have come to this view after having recommended it to a number of HR people with whom my firm works and seeing how they use the book. I have come to believe this book is a great resource for HR people because they are using it to help determine whether they might have a legal issue in doing such things as firing someone who is pregnant, reducing vacation time, asking someone to work a weekend out of town, etc., rather than using it for the definitive answer to their very specific situation.

4. China Law Deskbook, A Legal Guide for Foreign-invested Enterprises. This book is by James Zimmerman, a very respected China lawyer. I do not own and I have not read this book. I nonetheless list it here because many lawyers and clients tell me how much they like it and how helpful they have found it to be and many consider this to be the definitive practical guidebook for Chinese law.

Youku Takes the IP High Road

(Beijing Today website’s blog section does not represent any view of Beijing Today or its reporter. Anyone interested about the story can find the original text from the link above the article. The site’s blog section aims to introducing expat blogs in China to more Chinese readers as 50 percent of Beijing Today readership remain young Chinese who have experience of living abroad, white colors or school students. Blogger who does not want his or her story linked at Beijing Today’s website, please email to info@beijingtoday.com.cn to take down the stories. )

http://www.chinahearsay.com/youku-takes-the-ip-high-road/

Nice to see the mainstream media running a positive story about China IP. Not something you see too often. This one is in Businessweek and it describes video file sharing site Youku’s efforts to go legit by: taking down unauthorized copyrighted works; making distribution deals with content owners; and getting into the sponsored webisode (short content) biz.

FYI, Youku is not the only Chinese site that is cleaning up the IP infringement; although there have been bumps in the road (e.g. Baidu and its ongoing fight with Chinese writers), a great deal of progress is being made. As I’ve written before, a combination of factors has pushed these sites to become better IP citizens.

For the video file sharing sites, an offshore listing (or anticipated listings) is probably the most significant factor. These days, you can’t be a public company in the US while basing your business strategy on infringement-motivated web traffic.

ZTE vs. Ericsson: Let the Patent Games Begin

(Beijing Today website’s blog section does not represent any view of Beijing
Today or its reporter. Anyone interested about the story can find the original
text from the link above the article. The site’s blog section aims to introducing
expat blogs in China to more Chinese readers as 50 percent of Beijing Today
readership remain young Chinese who have experience of living abroad, white colors
or school students. Blogger who does not want his or her story linked at Beijing
Today’s website, please email to info@beijingtoday.com.cn to take down the
stories. )

http://www.chinahearsay.com/zte-vs-ericsson-let-the-patent-games-begin/

Gotta love a good, old fashioned multi-jurisdictional, multi-year patent fight between two tech giants, particularly when one is a well established European firm while the other is a relative newcomer from China.

The two companies have been involved in protracted patent licensing negotiations for years. This is pretty normal stuff for the tech sphere. The established company, Ericsson, has patents in a wide range of mobile/wireless technology worldwide. When new companies in the sector expand overseas, they run into that patent wall and have two options: infringe and get smacked down or negotiate a license agreement and pay.

This is assuming that there is indeed patent infringement going on in the first place of course, but industry watchers that I’ve read for a while now seem to take that for granted in this case. Anyway, why would ZTE have even bothered negotiating for this long if they thought that Ericsson had a weak infringement case?

But when the negotiation drags on too long and the numbers remain too far apart, you know what happens next. Right, the lawsuits come out.

Ericsson, the world’s largest mobile network equipment maker, is suing ZTE, a Chinese rival, over alleged infringements of the Swedish group’s technology patents.

Ericsson has accused ZTE of refusing to sign a patent licensing agreement under which the Chinese telecoms equipment maker would pay royalties to the Swedish group.

That’s what I’m talking about. What’s Ericsson’s plan here? Well, most of the time when you have lawsuits filed after negotiations break down, the patent holder is looking to use the suit(s) as a stick with which to beat up the infringer a bit and force him back to the negotiating table.

Seems to be the obvious tactic here as well. So if you’re Ericsson, where do you strike? Where it hurts the most, which in this case means the places in Europe where ZTE, a mobile handset maker, is looking to pump up its export volume.

On Friday, Ericsson said it had filed lawsuits against ZTE in the UK, Italy and Germany.

Those are some pretty nice export markets right there, hmm?

OK, so what are ZTE’s options now? First, they can go back and negotiate again. Second, they can hunker down and fight these patent infringement cases. Third, they can go on the offensive in several ways, including filing their own infringement cases against Ericsson or trying to get Ericsson’s patents invalidated. These options are not exclusive, of course.

Ball’s in your court now, ZTE:

ZTE’s intellectual property director Wang Haibo responded by saying Ericsson infringes certain ZTE patents and the Chinese company will consider suing Ericsson, though he couldn’t immediately name specific ZTE patents being infringed. Wang, speaking to Dow Jones Newswires, said ZTE could file a suit in China, Western Europe or another region.

I don’t know about you, but that’s a pretty weak statement, merely asserting that “they do it too” without being specific. Almost sounds petulant.

And then there’s this:

ZTE, the Chinese telecoms equipment maker, has vowed to retaliate after it was sued by Ericsson of Sweden for alleged patent infringement.

The state-controlled company said it would launch “patent invalidation procedures” against Ericsson in China in response to its rival’s legal action.

Hmm. I’ve seen an article or two that suggests they filed already, which would surprise me. Ericsson filed its cases Friday, so that would mean ZTE slapped together a case within hours and filed it with the State Intellectual Property Office (SIPO) on Saturday. We’re currently on holiday here (Qingming), and most people in China worked on Saturday so that they would get a Sunday, Monday, Tuesday three-day holiday. So could ZTE have filed a new case with SIPO on Saturday? Seems highly unlikely.

Anyway, let’s assume they’ll do so sometime after the holiday is over. What’s going on here? Does a successful China invalidation action against the patents at issue in the European infringement suits help ZTE in Europe? I’m not a patent litigator, so I may be missing something here, but while a China invalidation might be interesting evidence in a European infringement suit, it certainly wouldn’t be given a great deal of weight.

So why did ZTE file an invalidation action in China instead of Europe? Two answers. First, they’re going on offense, and anything’s better than nothing — they could always file in Europe later as well. Second, and this is total speculation now, perhaps they thought that of any jurisdiction, they had the best chance of succeeding on their “home turf.” ZTE is a big player over here, and while I’m not accusing anyone at SIPO of local protectionism (the action hasn’t even been filed yet), the idea that ZTE might think that way wouldn’t surprise me in the least.

If they don’t negotiate a license in the near future, this fight could go on for a long time. Stay tuned, should be fun.

China Service of Process and Social Media

(Beijing Today website’s blog section does not represent any view of Beijing
Today or its reporter. Anyone interested about the story can find the original
text from the link above the article. The site’s blog section aims to introducing
expat blogs in China to more Chinese readers as 50 percent of Beijing Today
readership remain young Chinese who have experience of living abroad, white colors
or school students. Blogger who does not want his or her story linked at Beijing
Today’s website, please email to info@beijingtoday.com.cn to take down the
stories. )

http://www.chinahearsay.com/china-service-of-process-and-social-media/

Just saw a very cool client report put out by law firm Mayer Brown on Service of Process and social media. The report poses the question whether, in light of the following, this type of service of process might work in Hong Kong:

In light of the proliferation of social networking sites, courts in different commonwealth countries have begun to allow service of legal process online via Facebook and Twitter.

I’m not a litigator, so I never really thought about this before, but how radical is this idea, and aside from Hong Kong, is it likely to be accepted by Chinese judges in the future?

First of all, the Mayer Brown note explains that service by social media has already been adopted in some jurisdictions. Courts in the UK, Canada and New Zealand have accepted Facebook messages as substituted service. Additionally, the UK High Court, back in 2009, allowed a plaintiff:

. . . to serve an injunction against an anonymous Twitter user by sending a Twitter direct message containing a link to the injunction, which ordered the defendant to refrain from impersonating the plaintiff on Twitter and to reveal his identity and Twitter account information.

Nifty, eh?

In the United States, courts are getting creative as well with Net capabilities, and not just with social media. In a recent botnet case where the defendants had only been identified via IP address, Microsoft certainly was thinking outside of the box:

On February 24, 2010, Microsoft provided notice and service of the Complaint, Summons and related materials in English and Chinese through the publicly available website http://bit.ly/fZ5y4w (www.noticeofpleadings.com) Microsoft has updated the website throughout this case.

The Mayer Brown note suggests that Hong Kong will follow the lead of the Commonwealth courts (no surprise there, of course) in allowing such Net-based substituted service. The benefits are obvious:

This new method of substituted service makes it much easier for plaintiffs to effect service and correspondingly more difficult for defendants to evade service or hide behind the cloak of the Internet. If adopted by the Hong Kong courts, such service is likely to become popular in discrimination, harassment, defamation and intellectual property infringement cases that occur online. Service on a defendant via social networking sites is timely and cost efficient[.]

Not only would use of social media be fast and cheap, but Net-based notification often makes a great deal of sense when the underlying action (those referred to in the above quote) is also related to Net-based activities.

In the future, perhaps it will be common to receive service via Twitter for Twitter restraining order cases. And if you bad mouth your company in Facebook, don’t be surprised if that message you get is service for a defamation suit.

So what about China? Well, service of process here is governed by China’s Civil Procedure Law (CPL), which provides several options:

The CPL provides six methods of service, which include: (1) personal service upon defendant (also called direct service); (2) service left at the defendant’s residence; (3) entrusted service through the court of the place where defendant resides; (4) service by mail; (5) service forwarded to defendant by defendant’s work unit or authority; and (6) service by public notice. Under the CPL, a receipt of service signed by the receiving person is required except for service made by pubic notice.

Judges are the ones that have to handle service of process, and while they are notoriously conservative here, they will take advantage of some of the above options if traditional direct service is not possible.

One could certainly argue that if the CPL allows for service by mail or by publication, then using social media isn’t that far a stretch, not to mention useful in cases where there are no other options. Makes sense to me — putting a notice in a newspaper where a defendant may/may not see it seems just as hit or miss as posting a message on a few popular social networks that defendant has previously used on a regular basis, maintains active accounts, etc.

Sounds good in an emergency. Even so, I still don’t see this catching on like wildfire with individual judges. Seems a bit too risky without a nod from on high, most likely via a Judicial Interpretation by the Supreme People’s Court.

Perhaps future CPL reform or court commentary will open the door to more flexible service, but I wouldn’t expect wholesale reform anytime soon.

Taking the IP High Road: Baidu Faces the Music

(Beijing Today website’s blog section does not represent any view of Beijing Today or its reporter. Anyone interested about the story can find the original text from the link above the article. The site’s blog section aims to introducing expat blogs in China to more Chinese readers as 50 percent of Beijing Today readership remain young Chinese who have experience of living abroad, white colors or school students. Blogger who does not want his or her story linked at Beijing Today’s website, please email to info@beijingtoday.com.cn to take down the stories. )

http://www.chinahearsay.com/taking-the-ip-high-road-baidu-faces-the-music/

Yesterday I mentioned that Youku is finally getting some credit for cleaning up its IP act, so it’s fair that I bring Baidu into the discussion, particularly since they made an important announcement today.

From Reuters:

Baidu will launch Baidu Ting sometime in May, said Kaiser Kuo, a Baidu spokesman told Reuters on Wednesday. The service will allow users to stream, download, create libraries of licenced music and will have a social-networking aspect.

This is a very big deal and dovetails nicely with yesterday’s post, particularly two trends that are now common with some of the larger Chinese media sites: getting tougher on copyright infringement and making deals with content owners.

Before we get into the MP3 morass, recall that Baidu has been negotiating with Chinese writers recently concerning unauthorized distribution of their works via Baidu Wenku. Talks ultimately broke down between the parties, and subsequently Baidu announced that the infringing material would be taken down as a good faith gesture. Stay tuned for developments on that story.

With respect to MP3 files and copyright infringement, Baidu has a long and troubled history. No need to rehash all the old complaints, but suffice it to say that some measure of the search engine’s success (i.e. web traffic) was due to its music search capabilities, which included links to infringing MP3 files.

I’ve personally been following this story for several years. The twists and turns of the IP litigation has been interesting, and at times puzzling. I wrote about the latest lawsuit Baidu faced from the music industry on this subject a little over a year ago, a case that I expected the search engine to lose — I turned out to be wrong, and I still don’t know why.

At the time, I included a brief summary of some relevant legal milestones, which are useful to this discussion:

1.January 1, 2006 — China’s Internet regulations dealing with online copyright infringement are passed. This establishes a framework for dealing with these types of cases and adopts a “Notice and Takedown” approach for assessing ISP/search engine liability.
2.November 2006 — Baidu wins first infringement case filed against it by the music industry. Beijing 1st Intermediate Court does not rule on copyright issue under new law, as the case was filed before the new law took effect (relates to acts that occurred prior to the new law).
3.December 2007 — Yahoo loses MP3 deep linking case similar to the one filed against Baidu. The two cases are distinguished by timing, as the new Internet regulations were applied under this second litigation. The music industry expects to win a refiled case against Baidu under the new law.
4.February 2008 — music industry files new case against Baidu et al.
5.January 2010 — Beijing 1st Intermediate Court again rules in favor of Baidu.
Therefore, to my knowledge Baidu was basically free and clear on this issue as of a year ago. So why did they even bother with the new Baidu Ting?

Well, globalization sure is a strange beast. We live in a world right now where even companies that rely primarily on single domestic markets like China can go abroad and tap into foreign capital markets. I’ve talked about Tudou, Youku, Sohu and others in the past, and Baidu is certainly part of that group, albeit much larger.

One of the dominant themes that has come out of my scribblings on the subject of Chinese listed companies and IP infringement over the past year or so is this: these two things are simply not compatible any more. And therefore ultimately it didn’t matter whether Baidu got a pass from the First Intermediate Court. The music industry was howling, investors were no doubt becoming anxious, and something had to be done.

This is all well and good, and the new Baidu Ting service sounds like exactly what the IP doctor ordered:

Baidu said it reached an agreement with the Music Copyright Society of China (MCSC) to pay fees to MCSC for every song downloaded using Baidu Ting. The licenced music service will be supported by advertising.

The agreement covers publishing rights and Baidu will compensates lyricists and composers through MCSC. The firm is still working toward a more comprehensive agreement that will cover performance rights as well.

FYI, they are also talking to foreign content owners, so expect to hear similar announcements with the big boys in the near future.

Finally, what about the past? Whenever I write about this topic, I invariably get an email or two saying that Baidu (or Youku, or Tudou, etc.) wouldn’t be where they are today without copyright infringement. They see this as a permanent taint that cannot be washed away no matter how many Baidu Ting types of platforms are put into place.

Well, OK. That’s not really a legal question but more of a moral one. Baidu was sued and won, and if they can successfully clean themselves up with respect to MP3 files, then there’s no going backwards on that issue. But for copyright purists who insist on only doing business with lily-white enterprises, you may want to add some companies to your Bad Guy list, like YouTube and eBay. And hey, there aren’t any statutes of limitation on morality, and we shouldn’t limit ourselves to IP, so let’s not buy anything from ThyssenKrupp, Chiquita Brands or Dow Chemical either.

Oops, went off on a tangent there. My point is simply this: let’s be positive about what Baidu, Youku and Taobao are doing and hope others follow suit. Online piracy is so pervasive these days, I find it difficult not to emphasize the victories.

On The State Of Intellectual Property In China.

(Beijing Today website’s blog section does not represent any view of Beijing
Today or its reporter. Anyone interested about the story can find the original
text from the link above the article. The site’s blog section aims to introducing
expat blogs in China to more Chinese readers as 50 percent of Beijing Today
readership remain young Chinese who have experience of living abroad, white colors
or school students. Blogger who does not want his or her story linked at Beijing
Today’s website, please email to info@beijingtoday.com.cn to take down the
stories. )

http://www.chinalawblog.com/2011/03/on_the_state_of_intellectual_property_in_china.html

China policy guru Benjamin Shobert has written an excellent article for the Asia Times on IP in China. The article is entitled, “China’s IPR thorn still needles West,” and it says what we have been saying: IP protection in China is getting better, but it is not there yet. 

Shobert quotes from a recently released US-China Business Council report to back up this position:

Perhaps with this question in mind, the US-China Business Council (USCBC) released a report in mid-February on the question of IPR enforcement in China. The report acknowledged that China deserves to be recognized for the advancements it has made in this area: “The IPR legal framework … has become less of an issue over time … because of China’s efforts to build an increasingly comprehensive regulatory framework for IPR … many – but not all – companies report that the overall IPR picture has shown steady improvement, though at a slow pace.”

He also quotes me:

Not only does the USCBC see positive adjustments in this realm, but so do American lawyers who specialize in these matters. Dan Harris, a partner at Harris Moure and blogger at the award winning China Law Blog, agrees: “IP protection in China is very slowly improving and that has been true over the last 18-24 months as well.”

What I really like about the article though is how Shobert distinguishes between the effectiveness of IP enforcement by region and by industry. He notes that IP enforcement remains “highly uneven across cities and provinces” and how IP protection for software, movies, and music, is particularly problematic.

Shobert concludes the article with advice from Mike Bellamy and from me that foreign companies doing business in China must consider non-legal methods of protecting their IP:

For Mike Bellamy, China operations director at PassageMaker, the answer is to compartmentalize key technologies from one another, and utilize a third party for final assembly.

According to Bellamy, “We call this our ‘black box’. Put simply, the black box concept is designed to protect the intellectual property of our clients by having semi-finished or finished products delivered to our facility and then, behind closed doors … do the final branding, final assembly, packaging and inspection.” But even this model has its limitations, which Bellamy is quick to point out: “Once the product is in the market place then it is much harder to control who sees the product. But forcing your competition to reverse engineer and wait for your product launch is much better than having your ideas floating around among suppliers and competitors from day one.”

Harris, no stranger to IP issues in China, echoes this advice: “As a lawyer, we always do what we can to protect our clients on the legal front, but there is always more that can be done to add IP protection to the operations side.”

What are you seeing out there? Is IP protection really getting better in China?

Do You Want To Do China Trademarks Right Or On The Cheap

(Beijing Today website’s blog section does not represent any view of Beijing Today or its reporter. Anyone interested about the story can find the original text from the link above the article. The Blogger column aims to introducing foreign media’s interesting stories and expat blogs in China to more Chinese readers, as 50 percent of Beijing Today readership remain young Chinese who have experience of living abroad, white colors or school students. Authors who does not want his or her story linked at Beijing Today’s website, please email to info@beijingtoday.com.cn to take down the stories.)

http://www.chinalawblog.com/2011/03/do_you_want_to_do_china_trademarks_right_or_on_the_cheap.html

I constantly get emails from people asking what my law firm charges for registering trademarks in China and I always respond by quoting our rate for a trademark analysis and stating that we will not “just” register their trademark in the category they tell us. If they want that, they need to retain someone else.

I did that the other day and the person emailed me back to say that our rates were considerably higher than those of a Chinese firm they were putting in competition with us. My response to that was as follows:

We are talking apples and oranges. If all we did was just file the trademark that you told us to file, we would charge the same. That’s not at all what we do and much of the time we save our clients considerable money in the process. What we do is consult with our clients regarding their product, their business and their intellectual property (IP). After we do that, we then we formulate a trademark protection plan that will maximize protection while minimizing costs. In the last three months alone we have been contacted on the following matters by companies who had used trademark filers who did nothing more than just file the trademark their client told them to file.

1.  American company used a quick filer who filed one China trademark for them. Turns out that the American company should have filed at least two China trademarks because a Chinese company filed the same trademark for the same product and now there is pretty much nothing the American company can do to stop the Chinese company from using “their” trademark to compete with them. We get about five of these calls a year. You have a clock radio. Do you register the clock or the radio or both? It depends mostly on what you are going to be doing with the clock radio and where you are going to be doing it. Here’s a less obvious example: you trademark your lawnmower but not the engine. Someone else trademarks the engine and puts their name in big letters on the engine and starts selling lawnmowers with it. You should have trademarked the engine and the lawnmower. I can go on and on.

2.  Should your trademark be in both English and Mandarin? That really depends again on what you will be doing and where you will be doing it. But if you do not register the Mandarin name, you do not get it. And what about Cantonese? And what will you choose for your Chinese name anyway?

3.  Should you register your logo separately or with your name or not at all. Again, that really depends. Many times you can do the name and logo together and thereby save money. Other times you cannot.

4.  Are you certain the class you have chosen makes sense in China? Do you know what categories you want within that class?

4.  What if your trademark is not accepted by the Trademark office?  What exactly does your fee with the Chinese firm cover? I assume they will come back to you and just say “too bad.”  We work with the trademark office to get them to say yes and if they still do not, then we work with you on what to do and if that involves trying again with a new trademark, we do that too.

In other words, when it comes to registering a trademark in China, just like with everything else, you get what you pay for.

When To Bring In Your China Lawyer. There Should Be Lag Time.

(Beijing Today website’s blog section does not represent any view of Beijing Today or its reporter. Anyone interested about the story can find the original text from the link above the article. The Blogger column aims to introducing foreign media’s interesting stories and expat blogs in China to more Chinese readers, as 50 percent of Beijing Today readership remain young Chinese who have experience of living abroad, white colors or school students. Authors who does not want his or her story linked at Beijing Today’s website, please email to info@beijingtoday.com.cn to take down the stories.)

http://www.chinalawblog.com/2011/03/when_to_bring_in_your_china_lawyer_there_should_be_lag_time.html

Clients are always asking when I should be brought into a matter and my response is nearly always “the sooner the better.” Many times when clients are talking about doing a deal in China I tell them to keep me posted on their initial negotiations, but that we will not “turn on the clock” until it has become pretty clear that a deal will be happening. I am always saying that blind carbon copying me on an email will let me steer the client to where it should be going and will allow us to move faster once it comes time for contract drafting.

But, I also tell our clients not to mention my involvement to their Chinese counter-party. My thinking on this is simple. Nobody likes lawyers and Chinese businesses are no exception. It’s a cliche for good reason that Chinese companies want to establish a relationship with those with whom they do business. Bringing in your lawyer too early screams of your not trusting your Chinese counterpart and of your not caring at all about the business to business relationship. The solution that melds both the need for you to keep your China lawyer apprised of what you are doing while also not tipping off your Chinese counter-party that you do not think the “relationship” alone will be enough is for you to hire your China lawyer early, but keep him or her under wraps until such time as their exposure to your Chinese counter-party becomes absolutely necessary.

Agreed?