2007 Review: A Year of Hard Hitting Legislations

As 2007 winds down to its last hours, Chinese lawmakers have made this year one of hard hitting legislations. Within this year, multiple pieces of significant laws and regulations came into being, impacting many facets of the Chinese society. This post aims to highlight a few legislations with huge influence on foreign investments.

1. Regulations on the Administration of Commercial Franchise (商业特许经营管理条例)
Promulgated and adopted by the State Council on February 6, 2007, the Regulations modified and improved upon its predecessor, rendering commercial franchising a registration-only commercial activity (instead of an “approval” activity). And as a result of the Regulations, off-shore direct commercial franchising to China is now allowed as long as the franchisor has two units in operation for more than one year. Pursuant to the Regulations, the Information Disclosure Measures and the Registration Measures were adopted to provide detailed directions on franchising in China. For more, read my three-part comments on franchising in China here, here, and here.

2. Property Law of the People’s Republic of China (中华人民共和国物权法)
After more than a decade of discussions and political compromises, the National People’s Congress finally adopted the Property Law on March 16, 2007, making it one of the most significant pieces of laws in modern China’s history (if not the most significant). Regardless of its differences from the western concept of private property law, the Chinese Property Law is a landmark legislation in that it defines for first time the rights and obligations of private property ownership. China Law Blog has an excellent series on this topic, and I posted a piece on a dispute involving this law.

3. Corporate Taxation Law (中华人民共和国企业所得税)
For better or worse (depending on your perspective), the National People’s Congress adopted this law on March 16, 2007, thus ending years of a bifurcated taxation practice where foreign and domestic corporations were taxed at different rates. This law provides a uniform base tax rate of 25% for all corporations, while giving significant tax incentives to high-tech and environmentally-friendly projects. Fearing a backlash of foreign taxpayers, the drafters included a five-year phase-in provision. For more, read this.

4. Labor Contract Law (中华人民共和国劳动合同法)
Employment Enhancement Law (中华人民共和国就业促进法)
Labor Dispute Mediation & Arbitration Act (中华人民共和国劳动争议调解仲裁法)

The Chinese legislators, in the National People’s Congress and its Standing Committee, went on a coordinated and lasting mission to tackle labor/employment relations in China in 2007. They came up with three pieces of legislation, of which the Labor Contract Law garnered the most attention and interest. The New York Times characterized the Labor Contract Law as “sweeping.” Sweeping indeed! It redefines the employment relationship by imposing the restrictive terms, among others, that an employer can stipulate in a labor contract. As far as commentators go, nobody has been as diligent and thorough on this law than our Dan Harris at China Law Blog.

5. Anti-Monopoly Law (中华人民共和国反垄断法)
On August 30, 2007, the Standing Committee of the National People’s Congress put an end to ad hoc anti-competition regulations in China. It adopted China’s first ever comprehensive competition law—the Anti-Monopoly Law (to be effective on August 1, 2008). As China’s economy continues to expand, as foreign investors keep pumping capital into certain sectors into China, and as Chinese companies grow larger in scale and influence, the Anti-Monopoly Law came at a very good time. Referred to as the “economic constitution”, will the Anti-Monopoly Law be a bliss or a curse to interested parties? Will it end (to a certain degree) local protectionism? Keep your eyes peeled on new developments on this law.

6. Law on Lawyers (Amendments) (中华人民共和国律师法)
Amendments were adopted by the Standing Committee on August 30 to address growing concerns on the legal profession. Since the promulgation of the Lawyer’s Law in 1996, the legal profession has experienced exponential growth, in terms of the importance of the profession and lawyers in the society. These amendments were meant to make lawyers’ lives better, especially criminal lawyers by giving them access to gov’t documents, access to clients without interference, and immunity for arguments and comments made in courtrooms while representing clients. Legal ethics is one of my favorite topics in law school, and read my posts on this topic here.

7. Civil Procedure Law (Amendments) (全国人大常委会关于修改《民事诉讼法》的决定)
These amendments mainly address some persistent issues in civil litigation in China—enforcement of civil judgments. By virtue of the amendments, those who refuse to execute a civil court ruling -- fines climb from 1,000 yuan to 10,000 yuan (1300 U.S. dollars) for individual offenders, and from 30,000 yuan to 300,000 yuan (39,000 U.S. dollars) for companies. The law also provides that those who refuse to cooperate with civil courts in making sure a ruling is executed may be detained.

8. National Holidays Schedule Modified (国务院关于修改《全国年节及纪念日放假办法》的决定
Golden holidays for the Labor Day and “Independence Day” will no longer be holidays of disaster. Prior to the change, holidays in China were mostly for commemorating political events, and they provided two longest holidays in China when the entire country basically went on vacation. That brought immeasurable opportunities and hardship to the transportation, tourism and service industries. The new holiday schedule adds three traditional holidays (Grave Sweeping Day, Dragon Boat Festival and the Moon Festival); correspondingly, the Labor Day and Independence Day holidays are shortened to one day and three days respectively.

I included this in the review because I thought that this change not only makes sense but also reflects the wishes of the people. In addition, the change gives traditional/cultural holidays a higher status, which is a very good thing for the dying traditions in China. Cheers to traditions!

As we wait for the ball to drop (bell to ring, or whatever way you celebrate) to usher in the year of the Rat, 2007 will be remembered as a year of hard-hitting legislations. Let’s see what 2008 has in store for the China law blogosphere.

For a complete of all the legislations adopted in 2007, visit here (in Chinese only).

Blogroll Addition: Experience Not Logic

Though there is an abundance of China related blogs out there, same is not true for blogs on China law and business written by current law students. My friend, Will Lewis, has a new blog named Experience Not Logic. Will Lewis, like me, is still in law school, and here is how he describes his blog:

The purpose of this blog is to explore the business and legal culture of China. In 1881 Oliver Wendell Holmes, Jr. wrote, "The life of the law has not been logic; it has been experience." Each time I read a US court decision, Holmes' quote flashes through my mind. In China, the rule is the same, but the experience is different. Here's to broadening the experience...

In just about a month, he has put up some amazing posts:

Liebman on Restricted Reform in China Courts
China IP Litigation Data: What Does it Mean?
Chinese Scholars Examine New US Patent Law

Check out this very cool blog.

Death of a Migrant, Pregnant Woman

Ms. Liyun Li (李丽云), a migrant worker from Hunan Province, met her boyfriend Zhijun Xiao (肖志军) in Beijing and had dated him for three year. Like so many other young Chinese ladies, she went to Beijing in search of better paying jobs and a future. Unfortunately, her pursuit of happiness ended abruptly in November 2007, along with her short hopeful life and her unborn child.

She felt under the weather for two weeks in early November, and probably for lack of funds, she avoided expensive doctors in hospitals. Instead, she went a private clinic where she was treated for a common cold. But, her health deteriorated afterwards and her boyfriend had to send her to the Beijing Chaoyang District Hospital (West District), where doctors found her to be in a dire medical emergency—her heart was failing in addition to a host of other symptoms. In order to avert a disaster, she must undergo a C-section and other emergency care immediately.

She did not have a penny on her; nor did her boyfriend. But, the hospital staff offered to operate first on credit, which rarely happens in China.

Money was not the issue on that day when she died. It did not matter; what mattered, what would have mattered was her boyfriend’s signature on an agreement for the hospital to operate and do what it needed to do to save her and her baby’s life. Before any medical operation, the hospital had to have informed consent, by law, in the form of a signature from Ms. Liyun Li, her family member, or persons related to her. But her boyfriend, the only person who could have given the consent refused, repeatedly.

As the clock ticked on, her breath grew fainter; as hours vanished together with the precious heart beat of the baby in her womb, doctors, nurses, administrators begged for his signature. But he still wouldn’t do it. In stead of signing his signature on the consent form, he wrote: “I refuse the C-section, and I shall be responsible for all consequences.” With that, the emergency care staff, in despair, witnessed the death of Ms. Liyun Li and her unborn baby, in a span of about three hours.

That sums up the griping story of Ms. Liyun Li’s death in a Beijing hospital on November 21, 2007.

Bad things happen every day, everywhere; tragedies occur all the time in China, many of which go unreported. But, Ms. Li’s story is different—it bothered me and it still does. I cannot help but think about other possible outcome to her emergency visit to the hospital. What would have happened had her boyfriend just signed the damn consent form? What if there had been no legal requirement for the consent of a boyfriend under that kind of medical emergency? And what if the hospital took matters into its own hands and operated without his consent? And what might have been had her boyfriend simply been absent from the entire situation in the hospital?

Unpleasant as it might be, death often awakens social conscience and engenders action. Ms. Liyun Li’s death was no exception. Her death has sparked a flurry of debate in the medical and legal communities in China. They are asking the same “what if” questions; they want to know whom to hold responsible for the tragic loss of two lives, one of whom never had a chance to behold the wonders of the world. They want to avoid any repetition of such a gut-wrenching tragedy.

(Please check back later for the legal issues in and possible ramifications of this story.)

Wahaha Wins Suit Against Danone Board of Director Case

Here is yet another update on the Danone v. Wahaha dispute---"Wahaha Wins Suit Against Danone Director for Conflict". In China, of course.

“China Trademark Update: Has Your Distributor (Representative, Manufacturer) in China Registered your Mark?”

Mr. Paul Jones, an international lawyer based in Toronto, recently wrote a piece on Chinese Trademark Law. Basing his analysis on a trademark registration/opposition case that went all the way to the Supreme Court of China, he posits that foreign companies that “are doing, or planning on doing, business in China, the best solution is to register lots of your early on.” Because I am in my final exams, I have obtained permission from Paul to post his writing in its entirety, without my personal comments.

Unfortunately many foreign companies do not register their trademarks in China promptly. Sometimes they do not register them even after they have commenced selling goods in China through a sales representative. More than one sales representative or distributor has noticed this and registered the mark for themselves. China is a “first-to-file” jurisdiction.

Article 15 of China’s Trademark Law (中华人民共和国商标法) provides that:“第十五条 未经授权，代理人或者代表人以自己的名义将被代理人或者被代表 的商标进行注册，被代理人或者被代表人提出异议的，不予注册并禁止使用.”

“Article 15 Where any agent or representative registers, in its or his own name, the trademark of a person for whom it or he acts as the agent or representative without authorization therefrom, and the latter raises opposition, the trademark shall be rejected for registration and prohibited from use.”

The Chinese terms 代理人 (dai li ren - agent) or 代表人 (dai biao ren -representative) have been interpreted narrowly to mean someone who has an obligation to a principal. In the case of重庆正通药业有限公司 诉国家工商行政管理总局商标评审委员会 和四川华蜀动物药业有限公司 ( Chongqing Zhengtong Pharmaceuticals Ltd. v. State Administration for Industry & Commerce Trademark Review Board and Sichuan Animal Pharmaceutical Ltd) 最高人民法院, (2007）行提字第2号, 二○○七年八月三十一日, Sichuan Animal had entered into a sales agreement with Zhengtong Pharmaceutical with respect to certain veterinary medicines. Shortly afterward it applied to register the trademark under which the goods would be sold. Two years later the agreement was terminated but Sichuan Animal continued using the mark that it had registered, presumably by obtaining its products from another source.

Zhengtong Pharmaceuticals brought an administrative action under Article 15 to have the registration of Sichuan Animal expunged. They won in the Trademarks Review Board, and in the Beijing No. 1 Intermediate People’s Court based on what was considered to be a principal-agent relationship between Zhengtong Pharmaceutical as principal and Sichuan Animal as agent.

But in the Beijing Higher People’s Court Sichuan Animal argued that there was no principal-agent relationship, rather simply a co-operative sales agreement. Therefore the exemption to the “first-to-file” rule in Article 15 did not apply. Finally Sichuan Animal won at this level.

Normally there is no appeal from the decision of a Higher People’s Court, but in this case Zhengtong Pharmaceutical managed to obtain leave to appeal to the Supreme People’s Court (“SPC”). Unlike the supreme courts in common law systems, China’s Supreme Court rarely hears cases and primarily influences the development of the law and the legal system through written interpretations. However the SPC wanted to make a statement here.

In a decision dated August 31, 2007, and released in mid-September, the SPC looked at the record of the legislative intent and the provisions of the relevant international treaties to determine the meaning. It read the wording of Article 15 as representing China’s obligations under Article 6 septies of the Paris Convention. Although this Section uses the words “agent or representative” the international practice is to interpret these words broadly to include distributors and sales agents and similar people. The SPC took note of this international practice and also took into account the growing phenomenon in China of the practice of distributors and others registering the marks of foreign companies. Finally the manufacturer, Zhengtong Pharmaceutical, prevailed.

Link to the decision in Chinese: https://webmail.smu.edu/exchweb/bin/redir.asp?URL=http://ipr.chinacourt.org/public/detail_sfws.php?id=11423

It should be noted however that the SPC required the relationship to be one of “special sales agent” or exclusive distributor. And there is no mention of original equipment manufacturers, who have also been known to register the trademarks associated with the company for whom they are manufacturing the export goods.

If you are doing, or planning on doing, business in China, the best solution is to register lots of your early on. In November I was part of a panel in a seminar put on by the U.S. Department of Commerce on developing a brand protection strategy in China. The case study that the Department of Commerce prepared for our discussion involved just this scenario. In was helpful to point out this recent decision by the Supreme People’s Court.

Judicial Committees Reformed for Fairer Rulings

Judicial reform has been a pretty hot topic these days on the Chinese judges’ mind. When Grand Justice Wang Erxiang last visited the United Stated to deliver his speech at a function organized by the Organization of American States, he detailed past reforms to the Chinese judiciary, and sketched out a blueprint for future reform targets. At the U.S.-China Rule of Law Forum held at SMU Dedman School of Law this month, the topic also surfaced during the program.

And just a few days ago, Chief Justice of the Supreme People’s Court of China, Xiao Yang, announced some more reforms to the judiciary. Changes introduced by the reforms focus on how judicial committees in each court conduct their business. Judicial committees are “the highest decision-making bodies in the Chinese judicial system.” From now on, judicial committee members must cease to make their rulings behind the curtains, and must “join the bench to hear or try cases themselves.” With respect to decisions, the judges of judicial committees will cast secret ballots to reach agreements (assuming that majority vote controls).

If these changes do occur in the first instance courts (trial courts), it is hopeful that quality of judicial decisions might improve. After all, judicial committees used to rule on cases without sitting on the bench. I understand that a heavy portion of trials is about written advocacy and examining real evidence, but it is quite baffling to have trial judges making final rulings on cases without taking a single look at the parties involved. Maybe, forcing decision-making judges to be present on the bench will have a positive impact on the overall quality of rulings. At least, they will have a better picture/understanding of cases by hearing or trying them on the bench, rather than in their chambers.

Well, for whatever its worth is, here is the report on this out of the Supreme People’s Court.

Why Did My Lawyer Quit?

Commenting on Latham & Watkins’s withdrawal from representing the Chinese company Wahaha, I kept looking for the reason(s) for the withdrawal. I knew that there had to be some legitimate reason(s); otherwise, the withdrawal would be unethical under the American Bar Association’s Model Rule on Professional Ethics. My mind also led me to wonder how the Chinese law and legal ethics deal with the same issue. Bearing in mind that this post might be a bit technical, I will try to stick to simplicity and help people understand the differences between the two regimes of legal ethics, and how they protect clients’ interests when lawyers decide to quit.

First off, the ABA contemplates two types of withdrawals—permissible and mandatory. A lawyer must withdraw under the following conditions:

1. The lawyer’s physical or mental condition materially impairs the lawyer’s ability to represent the client;
2. The lawyer is discharged;
3. When the lawyer learns of a client’s crime or fraud, and the lawyer fails to dissuade the client from continuing such crime or fraud (Actual knowledge required, mere suspicion not enough). See In re American Continental Corp.

Under ABA Rule 1.16, a lawyer may withdraw if the following conditions are met:

4. The withdrawal will have no material adverse effect on the interests of the client; see Gilles v. Wiley, Malehorn & Sirota
5. The lawyer reasonably believes that the client is doing something criminal or fraudulent;
6. The client has used the client’s service to perpetrate fraud or a crime;
7. The client insists on doing stuff repugnant to the lawyer, and with which the lawyer has a fundamental disagreement;
8. Client fails to perform substantially under contract (paying fees);
9. The representation will result in an unreasonable financial burden on the lawyer or has been rendered unreasonably difficult by the client;
10. The representation will result in a violation of ethical rules or other law; or
11. Other good cause as deemed appropriate by a sitting judge.

Latham & Watkins’s withdrawal from representing Wahaha in the Los Angeles case has to be based on one of the above 11 causes. Once a lawyer decides to withdraw, she has to obtain permission from the court in a litigation case, and the court will examine the reason(s) given by the lawyer to determine whether the facts warrant a withdrawal. Of course, since the case is in California, Latham & Watkins’s lawyers in the local office have to follow California ethical rules, which might differ from the ABA Rules. Because I am not very knowledgeable about the California rules, I will just use the ABA Rules for illustration purposes.(In reality, the California rules and ABA Rules should be substantially similar with respect to terminating representation.)

Compared to the ABA Rules on withdrawal, the Chinese counterpart is far less specific. Currently, two documents provide guidance on the subject of terminating legal representation—the Lawyer’s Law of China (2007) and the Code of Conduct for Practicing Lawyers (2004 Provisional).

The Lawyer’s Law states that lawyers have the right to refuse or terminate representation in the following situations (similar to mandatory withdrawal):

1. the matter to be undertaken by the lawyer violates the law;
2. the client uses the lawyer’s service to violate the law;
3. the client purposefully withhold material facts from the lawyer.
See Lawyer’s Law (2007 Amended), Article 32, paragraph 2.

The Code of Conduct for Practicing Lawyers forbids terminating representation without appropriate cause, see Article 65; but it allows withdrawal when:

4. the lawyer learns of a present conflict of interest between her client and another existing client, (withdraw from representing the client who signed the contract but has not paid fees) see Article 85;

5. the lawyer is suddenly stricken with illness or disease and cannot physically continue the representation, see Article 89; [prompt notice to and agreement from client required before withdrawal]

6. the lawyer has changed her job and needs to move away, see Article 89 [prompt notice to and agreement from client required before withdrawal].

A simple and literal comparison of the American and Chinese rules may lead one to conclude the following:
1. Both rules mandate withdrawal when clients engage in fraud and/or crime, but the American rule requires the lawyer’s subjective knowledge, while the Chinese rule is less transparent on whether knowledge or suspicion is required for terminating the representation.

2. Where withdrawal is permissible, both rules require proper cause. The ABA Rules list six detailed and one general cause, whereas the Chinese rule provides three detailed causes for withdrawal, making the Code of Conduct much less instructive than its American counterpart. But, this is probably typical of statutes and rules in a civil law jurisdiction, where minute and exhaustive provisions on certain topics are less common than in the common law jurisdictions.

3. Overall, from a legal ethics perspective, clients with American lawyers should be able to enjoy more protection under the ABA Rules than they might under the Chinese rules. Under the ABA Rules, a client, at least, pretty much knows why her lawyer quit by way of eliminating the possibilities. But the Chinese rules leave so much room for generality that it might be hard to figure out why her lawyer terminated.

Vote for China Law Blog

Editors of the American Bar Association Journal have norminated China Law Blog as one of the best blogs in its kind---"Black Letter Law" in a vote.

Readers, please vote for China Law Blog, one of the best law blogs out there, and certainly one of the most authoritative on Chinese law and business.

Click here to vote.

Blogroll Addition

Check out Romain Guerel's blog: China and I.

He blogs on a host of interesting topics, and he posts an assortment of videos & audios. The following are just a few examples:

The battle for oil: China vs US oil companies

Powering China: Roundtable with Three-time Pulitzer winner Thomas L. Friedman

As the French President Sarkozy visits China with his delegation of business persons, lots of big contracts have been signed during the visit. Be sure to check Romain's blog for his take on the visit and its impact on both countries.

Move Over, Administrative Regulations!

Mr. Ma wanted to tour some of the most beautiful places in central China with his son. He always wanted to visit those places himself, and he longed for his son to tag along so that he may appreciate the natural and historical beauty of these places too. The only time to go is, of course, during the week long May Day holiday when the entire country travels and vacations. Mr. Ma knew that the trip would be expensive, tiresome, and crowded, but he did not care, because he really wanted to go and figured this year would be the year. So, he called a traveling agency and booked the tour for two. Upon paying the necessary amount to and signing a contract with the traveling company, Mr. Ma was pregnant with excitement about touring the sites with his son, despite the inconveniences that he foresaw.

The tour lived up to its hype for the most part, and Mr. Ma enjoyed almost all the sites he visited, except for two. His tour guide, an agent of the traveling agency—Shanghai Chunqiu Huangpu Traveling Agency, had decided that visits to those two sites would be replaced by a shopping trip instead. When Mr. Ma confronted the agent and the agency about skipping the two sites, they pretty much thumbed their noses at him, telling him that a distant glance at those two places would be just as gratifying as walking through them with thousands of people. Mr. Ma insisted that those two sites were included in the contract, but to no avail.

Mr. Ma was outraged and decided to sue under the contract for damages. But the real issue was what laws/regulations should apply to determine the appropriate amount of damage. The plaintiff argued the Contract Law of China should apply since the parties had a valid contract governing their relationship, while the defendant averred that the Standards for Compensation on Traveling Quality Guarantee (Provisional) (“Compensation Standards”), issued by the National Tourism Administration in 1997.

Plaintiff pleaded for specific performance of the contract, i.e. tour of the sites skipped by the defendant. In the alternative, he asked for monetary damages in the amount of 5,890 Yuan (amount that it would cost the plaintiff to travel to those sites in an alternative tour), in addition to attorney’s fees totaling 4,000 Yuan. The defendant, on the other hand, answered that the proper damage under the Compensation Standards should be 280 Yuan, the value of admissions to the two sites plus relevant compensation.

The Court ruled in favor of Mr. Ma, but denied all that he desired. It held that the Contract Law should apply, and the defendant should compensate Mr. Ma for the economic damages resulting from the breach of contract. Specific performance of the contract, given the nature of the contract and the circumstances, is not the proper remedy. Rather, the defendant should pay Mr. Ma 2,400 Yuan, on account of the contractual provisions regarding transportation, admission tickets, lodging, and tour guide fees. And the Court specifically pointed out that it came out with the amount because the parties did not stipulate the method and amount of damages in case of breach by either party.

That is the story, but it does not end here.

Although insignificant in the amount of damages, this case is very significant in a few aspects:

1. The Court refused to apply the Compensation Standards even though they were directly applicable to the facts of this case. So, it can be inferred that in case of a direct conflict between the Contract Law and an administrative regulation the former prevails. Theoretically, it has always been the case, but it is less obvious in reality. The Court made the theory alive, which entitles the Court a pat on the back.

2. More consumers are choosing to exercise their legal rights and are not afraid of doing so in courts. Mr. Ma represents one of those individuals that do not let a wrongdoer walk free without putting up a fight. His attorney’s fees are probably more than the compensation he received. But that is kinda beside the point here.

3. The Court was very competent in reaching its decision. It looked at the plain language of the contract, excluded force majeure as an excuse for the breach, and reached an equitable decision for lack of contractual provisions on damages.

Remember that China currently has more than 10,000 regulations of various hues? If Chinese courts start to follow the example of this Shanghai court, those regulations that conflict with Chinese laws might have to really MOVE OVER. And that might not be a bad thing at all.

Danone-Wahaha Dispute: No End in Sight

As the Danone-Wahaha dispute drags on, no end seems near for each party in their multi-country, multi-continent war. Lately, Danone has received some good news, whereas Wahaha is feeling the heat of loosing its original lawyers in the United States and some adverse judicial rulings against its off-shore assets.

By way of background, the following are the battle fronts:

1. Danone v. Wahaha in arbitration in Stockholm

2. Danone v. Wahaha, Zong Qinghou’s daughter and wife, Wahaha off-shore companies in a Los Angeles Superior court

3. Wahaha v. Danone in arbitration in Hangzhou, China

4. Danone v. Wahaha off-shore companies in a British Virgin Islands court

5. Danone v. Wahaha off-shore companies in an American Samoa court

6. Wahaha v. Danone in derivative action in Shenyang Intermediate People’s Court in China

Wahaha was shocked to learn that its litigation lawyers withdrew from the representation in the case pending in Los Angeles. Some speculate that Latham & Watkins withdrew because its client provided false testimony. In any international litigation, changing lawyers midstream always adds a strain to the case, in terms of finances, preparedness, and possibly momentum. Wahaha quickly found new lawyers for its case, and let’s hope that the new lawyers will get up to speed on the case for Wahaha. Because of the change, it will probably take more time for the parties to conduct discovery, thus pushing the trial to a later date if they do not settle.

Bad news also arrived for Wahaha from the courts in the British Virgin Islands and the American Samoa. Reportedly, both courts ruled in favor of Danone, freezing assets [in Chinese only] of Wahaha’s off-shore companies in both jurisdictions, respectively. The courts also appointed receivers for said companies. (I do not know Danone’s causes of action in these two courts, after some research.) Given the two rulings, Wahaha should be evaluating its overall strategies because it has been defending itself in multiple jurisdictions, with less than satisfactory results. It is unknown whether Wahaha will challenge these rulings.

In addition, final arbitral decisions are also pending in Stockholm and Hangzhou.

Overall, Wahaha has a pretty tough road ahead, while Danone is having the upper hand on the legal matters. Of course, Danone’s business prospect in China is a totally different matter, since winning in courts does not naturally and necessarily translate into winning consumers’ hearts in China. Wahaha is apparently preparing for the worse by using a brand new trademark—Qili 启力.

With no end in sight for this international dispute, both parties are probably feeling the battle fatigue, and the bite of their legal fees. Will they try to work things out with some kind of compromise on their own? Will they attempt to reach some kind of agreement with the French president as an intermediary (if he chose to intervene during his trip to China)? Or will they continue the knock-down, drag-out fight? As far as Danone is concerned, the last option seems most likely if Wahaha does not give up a few inches, because Danone currently stands in a very strong position.

“No Harm, No Foul”: China Wins Trade Dispute on Paper Exports

As reported by the New York Times, the United States International Trade Commission (USITC) handed a victory to the Chinese government and a few glossy paper exporters in their trade dispute with the U.S. government over “illegal subsidies.”

Notably, the USITC refused to endorse tariffs on Chinese glossy paper as requested by American producers, and it “threw out” duties on Chinese imports “authorized” by the Bush government. The reason for this ruling against the American parties is that the USITC found no “material injury” or “threat of material injury” to American manufacturers, despite allegations of illegal subsidies by the Chinese government.

Currently, industries such as steel and tire are also seeking relief, and of course the key to their success seems be to evidence of “material injury” or threat thereof.

China Hearsay looks beyond these trade cases and rulings, and sees glimpse of protectionism in the U.S. and the EU.

Maybe, the Chinese government and those Chinese glossy paper exporters will have something to be thankful for at this time of the year.

"China Hearsayworthy" and Signs of China JV Trouble

The always prolific and thoughtful China Hearsay came out with something quite entertaining, and with a bit of southern accent: You Know You’re [Your China JV Is] in Trouble When the . . .

[For a sampling:]

JV partners haven’t spoken to each other for 7 years.
CFO is the wife of the local partner.
Foreign investor has never visited the JV and forgot what city it’s in.
Local partner claims he is son of a PLA general.
Neither party can remember who was supposed to file the application docs.

Stan points out five more signs dooming a China joint venture. Of course, not all of these signs will be present in all JV failures, but some definitely are in the Danone-Wahaha joint venture fallout.

U.S.--China Rule of Law Forum

Today, I had the distinct pleasure of attending the U.S.-China Rule of Law Forum. The U.S.—China Rule of Law Forum is an exchange program, sponsored by Senator Kaye Bailey Hutchinson (Texas), and it is hosted by Dean Attanasio at the SMU Dedman School of Law. Because of the high profile of the Chinese delegation and the lively discussions during the program, it is one hour well spent, and I’d like to share what I witnessed.

First, the Chinese delegation consists of a group of people from various legal backgrounds. Some are law professors, such as Professor Lixin Yang; some are from the Standing Committee of the People’s Congress; some are from the Ministry of Justice; some are from the Supreme People’s Procuratorate of China; and a few are from private practice; and a Grand Justice, Mr. Liu Jiachen of the Supreme People’s Court, was also a member. In sum, the delegation is good mix of people with substantial knowledge about the development and reform in China’s legal system.

Second, Madam Liu gave a 30 minute keynote speech, titled the Legal Situation and Law Reform in China. During her speech, she briefly highlighted China’s achievement in comprehensive legal reform since the late 1970s. She cited some interesting statistics: in the past 30 years, China enacted about 230 laws, 1000 administrative regulations, and over 10,000 local rules and regulations throughout the country. In the meantime, China also amended and appealed many laws to weed out those no longer in sync with the Chinese society. As a result of these developments, China has established political, social, economic relationships in a brand new legal system governed by law. And the establishment of the legal system has led to specifications of rights and duties of parties, methods of dispute resolution, and a fundamental state policy—rule by law.

Madam Liu was also quick to note the long way ahead of China’s efforts to build a society ruled by law. Much has been accomplished, yet much remains to be done. In the long way ahead, China is willing and ready to borrow from legislative successes from other nations, including those in the common law system. She specifically noted the legal accomplishments of the United States in building a system of the rule of law that works for the U.S., and in training “an army of a million lawyers.”

Her identification with the U.S. legal system quickly turned into a discussion about the importance of building individual legal systems appropriate for each sovereign nation. Each nation has the right to choose a legal system based its own historical, social, and economic backgrounds. And a recognition of the uniqueness of legal systems in different countries help build a world with diverse and colorful legal systems.

Then, Madam Liu calls on the U.S. and China to cooperate in building stronger mutual understanding on the rule of law. In the context of increasing globalization, nations need to work together to achieve justice, build equality, and resolve conflicts. To achieve that, many Chinese students are choosing the study of law, making law practice a fast growing professional area.

Third, I post only the highlights of the Q & A session that I was able to jot down.

Question 1 (SMU law student)—How much deference do courts give to the Chinese communist party opinions/directions in reaching their decisions?

Answer (Grand Justice Jiachen Liu)—Judicial independence is protected by the Chinese Constitution. The judiciary works very hard to try cases independently and their work is in line with the will of the people. Some people in the West misunderstand judicial independence in China, and ignores that China has chosen its own path for its judiciary, which serves China well.

Question 2 (SMU law student)—How will Hong Kong’s common law system mesh with China’s legal system in the coming years?

Answer (member from the Standing Committee of the People’s Congress)—Hong Kong is currently governed by its own Basic Law, under which judicial judgments are independent and final. Even though the judicial systems in China and Hong Kong are widely different, the Central Government and Hong Kong (SAR) Government can operate under the Basic Law to resolve differences. However, if issues concerning technicality cannot be resolved that way, the Standing Committee of the People’s Congress has the power and authority to issue its own interpretation, which will be controlling in resolving such technical differences. This has been done and been accepted by the people of Hong Kong.

Question 3 (SMU reference librarian)—China currently has a compilation system for laws based principally on the date of promulgation. What kind of progress has China made in creating a comprehensive code, like the US Code, to make research on Chinese law easier?

Answer (Member from the Standing Committee)—It is still a work in progress; and it has been a problem for our own researcher as well. We have made some progress in building a comprehensive legal database of laws and regulations. That should make researching easier if you have the URL to that website.

Question 4 (SMU student, me)—China recently revised its Lawyer’s Law to make lawyers’ lives easier. But one persistent issue still seems to loom at large. Article 34 of the Lawyer’s Law requires a lawyer to keep his client’s secret information confidential (i.e. past crime), but Article 84 of the Criminal Procedure Law requires any individual to report any information about crimes to law enforcement authorities. If we consider lawyers as individuals in the sense of the Criminal Procedure Law, there is an apparent conflict between the two laws. How should a lawyer deal with this issue in his/her practice?

Answer 4 (Law professor, Bingzhi Zhao)—As a law professor and a part-time practicing attorney, I hope to answer this question. On the surface, there seems to be a conflict. However, there is no direct conflict. If you look at the apparent conflict in the frame of the relationship between laws, it looks very different. Some laws are special, such as the Lawyer’s Law. Because lawyers enjoy an immunity from the reporting duty under the Criminal Procedure Law while representing a client, the conflict goes away in that situation. In the past decade since the promulgation of the Lawyer’s Law, this apparent conflict was consistently dealt that way.

[Sidebar: another delegate told me in private conversation that the Criminal Procedure Law will soon be amended, which will probably deal with the conflict.]

Question 5 (SMU law student)—Would you please talk about China’s efforts in intellectual property protection?

Answer—IPR protection is both a Chinese and a global issue. Since China’s entry to the WTO, China has paid more attention to IPR protection in a three-pronged approach: legislation, administrative agency enforcement, and police involvement. In terms of progress made in China, here are the statistics:
2002—2006, about 54,321 IP cases were filed in various courts; 52,000 cases were adjudicated by courts. Compared to the same 5 year period between 1997 and 2001, those numbers represent a growth of 145% and 141%, respectively.

By 2006, China has 172 courts devoted to try IP cases.

China has 16,600 judges specializing in IP cases.

Question 6 (SMU law student)—What type of legal regime does China have in dealing with product liability in light of the recent product recalls?

Answer (Professor Lixin Yang)—China actually borrowed heavily from the American and British common law in creating its own product liability law. In 1986, the General Principles of Civil Code was passed, whose Article 122 is devoted to tort liability. While China is in the middle of creating its comprehensive Civil Code, the Tort Law will be lifted out of general provisions and be an independent body of law in the Civil Code. In a civil law system, it is rare to have an independent Tort Law. And the Tort Law will probably come out either next year or in 2009.

I hope that you enjoyed my long notes from this function. It was an incredible experience for me.

Judges: Mind Your Image and Manners

The Henan Supreme People’s Court recently made news here and here. It issued China’s first institutionalized provincial level judicial etiquette—《河南省人民法院司法礼仪规范(试行)》, the Henan Province People's Court judicial etiquette (Provisional) (“Judicial Etiquettes”). The much hyped Judicial Etiquettes will become effective on August 1, 2008, across the central province of Henan.

It sets out some norms for judges to follow while on or off the bench. Some deal with speech, some deal with dress code, and others concern basic manners in a court room.

The following 11 types of sentences addressing lawyers are banned:

1. Stop talking (or more crudely, shut up).
别再说了。

2. Am I the judge or you are?
你当法官还是我当法官。

3. Do you or I know the law?
你懂法还是我懂法。

4. Whose words are controlling here?
你说了算还是我说了算。

5. Shall we listen to you or me?
听你的还是听我的。

6. Not agreeing to mediation is not good for you.
　　 不同意调解对你可没好处。

7. Your case is sure to win/lose.
你这个案件肯定要输（赢）的。

8. How are you lawyering the case?!
你这个律师怎么当的。

9. This Court is not here for you alone.
法院不是为你一个人开的。

10. You are annoying.
烦人。

　11. This is how I’m gonna rule. You are free to appeal, to whomever and wherever.
我就这样判了，你去告好了，想找谁找谁，想去哪告去哪告。

Aren’t these rules great?! Taxi drivers in Beijing and the judges in Henan finally have something in common to talk about—Caution, Speech. What is more, the judges in Henan are now officially required to deliver justice and politeness. Hopefully, that is not a tall order.

There is more to the Judicial Etiquettes. Judges in Henan also have to mind their manners too on the bench. For example, they cannot do these:

1. leave the bench in the middle of proceedings;
不得擅自离开审判席

2. receive phone calls or play computer games;
不得接听电话、玩游戏

3. wear sandals or slippers;
不得有穿拖鞋

4. Pick ears or cut fingernails;
掏耳朵、剪指甲

5. Smoke, eat snacks, or any other improper activities
吸烟、吃零食等不雅行为

I cannot imagine these happening in a court room; but apparently it’s been an issue in Henan People’s courts. Not targeting Henan Province here or have anything against it, which is the cradle of the Chinese civilization, but it is Henan that first came up with these rules.

And the following are my favorites:
1. Male judges shall not grow long hair, beard, or shave their heads bald.
2. Female judges shall not “dye their hair, wear heavy make-up, tattoos or painted nails.”
3. While wearing their uniforms, judges should not hold hands, arms with others in the public.

Overall, I see the Judicial Etiquettes as a positive thing, especially in the light that lawyers will get more respect in court rooms. But, what is wrong with male judges growing long hair? Is it the continuing campaign to root out any remaining influence of the Qing Dynasty? And female judge paining their nails?

Take it easy, your Honors in Henan.

IP Piracy: Does China Deserve the Bad Name?

The answer is more likely a “yes” than “no” for the average consumer exposed to the media’s persistent portrayal of China.

Assuming that you live in the West, you probably have heard the usually song and dance from the media—China is undergoing drastic changes, BUT its record on intellectual property is atrocious.

Now, Tim Johnson of the China Rises Blog (added to my blogroll) came out with a post, titled Is China unfairly bashed on piracy? In his post he urges a fresh look, posing the question: “Is it possible that the media have got it wrong?”

Then, he went on to cite a research report by a law professor out of Thomas Jefferson Law School:

That’s what a professor at the Thomas Jefferson School of Law in San Diego says [The media might have got it wrong]. He’s written a 24-page report that essentially says China, taken as a whole, is not the leading global pirate. When figures are adjusted for population, China's rates of intellectual property violation are lower than those of many other countries, including the United States.

Read his entire post and the underlying report; maybe a new perspective will change the way you view China’s piracy sin.

China's New Anti-Monopoly Law: More Power to the People or the Government?

China’s promulgation of its first ever comprehensive anti-monopoly statute captivated the interest of many scholars and practicing lawyers. Since the first draft of the Anti-Monopoly Law (“AML”) first surfaced, countless articles and comments have been written about the law, given the heavy-weight nature of a comprehensive competition law. Some even referred to this newly-adopted AML as “an economic constitution”, underlining its prospective important rule in China’s economy.

As the clock ticks down toward August 1, 2008, when the AML will become effective, some have expressed their concerns and thoughts about what exactly the AML could bring to the table in terms of fulfilling the stated legislative purposes of this law. Will it be a law enforced in the best interest of protecting consumer rights and general public interests, or will it be just another vehicle for the government to increase its power and influence in the private domain of business and commerce?

Recently, I finished reading an article written by Mr. Paul Jones, a Canadian international lawyer based in Toronto. Paul not only does an excellent job of reassembling the AML in a more reader-friendly fashion (unless you are a civil law statute purist who loves reading civil codes as they are), but also adds some very thoughtful discussions about what the AML is about or could morph into in the future:

On August 30, 2007, after l3 years of discussion the 29th Session of the l0th National People's Congress adopted the Anti-Monopoly Law ("AML") to come into effect on August l, 2008. Will this be the new "economic constitution" for China's market economy as hoped by the sponsors; or a source of "uncertainty for domestic and foreign companies over how the government will use its new powers?" Foreign companies are particularly concerned about provisions allowing for a review of mergers and acquisitions on national security grounds.

The answer at this time must be that, like the development of China's market economy, the AML is still a work in progress. While the basic framework of general principles has been set out in the AML, as would be appropriate for a fundamental piece of civil law legislation, the details that expand upon and clarify the principles will come in the regulations, measures and guidelines that hopefully will be issued in the months to come.

Please click here to read the entire article.

China’s Foreign Investment Guide Catalogue Revised

November 7, 2007 marks an important date for foreign investment policies in China, as reported by the China Briefing Blog and elsewhere (in Chinese):

The Ministry of Commerce and the National Development and Reform Commission jointly released the latest Catalogue for the Guidance of Foreign Investment Industries today.

The catalogue, approved by the state council, will take effect on December 1 according to the NDRC’s website. The new catalogue replaces a catalogue that came into effect in 2004.

While continuing to encourage foreign investment towards the hi-tech, equipment manufacturing and new material industries, the catalogue adds service-outsourcing and modern logistics to the service industry in an effort to fulfill China’s commitment to the WTO.

Overseas investment targeting conventional manufacturing industries in which China has mastered advanced technologies and has competent production capacity is no longer encouraged in the new catalogue.

Under pressure to clean up a growing environmental catastrophe, Beijing is pushing FDI towards developing clean production, reproducible energy, and ecological protection. Foreign capital is not permitted in the exploration of rare and non-reproducible mineral resources, or in high consuming and polluting industries.

Hoping to further spur development away from the booming coast, the revised catalogue drops the article limiting foreign investment in the central and western regions of China. Introducing foreign capital will also be considered in rejuvenating Northeast China and other historical industrial bases.

These revisions to the Investment Guide Catalogue are consistent with recent changes in other Chinese laws and regulations. For example, China revised it tax code to unify tax rates for domestic and foreign-originated companies, while at the same time providing tax incentives for clean and environmentally friendly industries. In addition, China modified its catalogue of export products to limit the export of inexpensive and labor-intensive goods, with the purpose of adjusting trade imbalance with its trading partners and addressing environmental concerns.

Here is the revised Investment Guide Catalogue in Chinese [I have not been able to find an English version]; here is the old Investment Guide Catalogue in English as of 2004. Be sure to note the differences.
**********************************************************************************
Update:

The English version of the Revised Foreign Investment Guide Catalogue can be found below:

Here, for an unofficial translation.

So far, I have not been able to find an official translation. Generally, one should be able to find official translations of important laws and regulations at http://www.fdi.gov.cn/pub/FDI_EN/default.htm

If a reader finds the official translation, would you please leave the URL of the site in your comment to this post? Thanks!

Check Out These Blogs

I have added the following to my blogroll, and they are essential courses of my weekly China reading diet:

China Business Blog
China Success Stories
China Digital Times
The China Vortex
Cup of Cha

Visit often and enjoy the intellectual nurishment...

China Forces Corporate Social Responsibility Down Chinese Exporters’ Throat

The idea of corporate governance and responsibility seems to be gaining quite a bit of traction lately in China.

In the wake of China’s product quality/safety/reputation perfect storm, discussions, new policies and governmental actions regarding corporate governance and responsibility are taking place in China in many spectrums of the society.

The Chinese government has taken a slew of actions to address food safety, and the quality of export products.

Recently, China Vortex, a blog authored by China expert Paul Denlinger, did an excellent post, titled Are Chinese Corporate Earnings Inflated? The post examines the discussions of corporate responsibility by former Chinese official, and it states that such discussions signal “strong internal pressure in China to make corporations more accountable…” [I have added China Vortex to the blogroll.]

I left a comment there:

The days of high corporate earnings without internalizing the externalities related to such income appear, at least in theory, to be nearing their end, at least to the exporters. As you might be aware of already, China has introduced tougher environmental regulations, specifically targeting exporters. Basically, the rules spell out this message–if you pollute, you don’t export for as long as it takes you to clean up.

For concerned people, like Mr. Xu Shanda, this means an advancement of their cause for corporate responsibility, at least in the export industries as of now. The following is an excerpt of the
above-mentioned article by Jane Spencer of [Wall Street Journal] on Nov. 1, 2007:

“China is introducing new antipollution regulations for its booming export industry, in an unusual collaboration between thegovernment’s environmental-enforcement arm and the Ministry of Commerce.
The rules could affect thousands of Chinese suppliers that make goods for multinational companies. Earlier this week, Zhang Lijun, vice director of China’s State Environmental Protection Administration, said export manufacturers that violate China’s pollution laws would be forced to close for one to three years. The policy will be enforced jointly by SEPA and the Ministry of Commerce. The ministry said the prices of Chinese exports are artificially low because factories aren’t …”

This is a good move, and it would be better to expand the rules to cover non-export companies too. After all, a polluter is a polluter, regardless of the nature of the underlying operations. Internalizing externalities should be party of every company’s cost of operations.

Besides, the Nankai University Business School just hosted the 4th International Symposium of Corporate Governance, highlighting current academic research and discourse about corporate governance and social responsibility around the world. One international symposium does not make Chinese corporations improve their governance, nor does it shape them up to be more socially responsible. However, such exchanges of ideas very likely will lead to policy shifts inside China on the very issue of corporate social responsibility, especially in the greater context of growing awareness on the consequences of corporate irresponsibility and a government touting sustainable growth and social harmony.

Even though China has not had its version of Enron and Worldcom, it has the ever-worsening environmental disaster, caused by countless irresponsible corporate polluters. To maintain sustainable growth, policy-makers in China have no other options other than adopting new rules and regulations to cause the birth of responsible corporate governance within companies in China. An international symposium is a good step forward, but definitely not the only step. For a list of papers presented in the symposium, read this (Chinese only). And keep your eyes peeled for policy adjustments on corporate social responsibility in China as it will affect a lot of players out there.

China and Macao Signed Arbitration Enforcement Agreement

On October 30, 2007, mainland China and Macao Special Administrative Region (SAR) signed an agreement to mutually recognize and enforce arbitral awards originated from both sides (China-Macao Arbitration Enforcement Agreement). This agreement, as explained by a justice of the Supreme People’s Court, represents another step forward in China and Macao’s judicial cooperation.

Even though Macao will not in the near future be as financially important as Hong Kong is in terms of international trade, commerce, and dispute resolution, it has the potential to become a regional hub for commercial transactions in service industries. As it has been reported, the gaming industry in Macao is poised to rival Las Vegas. Given Macao’s commercial importance in the service industries, China Business Law Blog aims to write more posts on laws and regulations of Macao, SAR.

The agreement signed recently is a continuation of previous judicial cooperation agreements. And it is the third agreement between the respective judiciaries. In 2001, they signed the 《关于内地与澳门特别行政区法院就民商事案件相互委托送达司法文书和调取证据的安排》, an agreement to mutually deliver judicial documents and cooperate in evidence gathering, with respect to civil disputes. In 2006, cooperation between the two sides expanded to include the mutual recognition and enforcement of judgments in civil cases, which is called the 《内地与澳门特别行政区关于相互认可和执行民商事判决的安排》.

The China-Macao Arbitration Agreement referenced the New York Convention for its content, and the agreement consists of 16 articles, covering topics from applicability of the agreement, to the requirements for enforcement, and to retroactivity.

Please check back later for details of the China-Macao Arbitration Enforcement Agreement.

Money Laundering Case In Spotlight

As China’s economy continues to sizzle, financial crimes have become a prime target for the law enforcement folks. Many discussions out there deplored the seemingly ubiquity of money laundering activities in China. To sharpen tools used against such crimes, the Anti-money Laundering Law (“AMLL”) was adopted in 2006 and has become effective as of January 1, 2007.

In terms of the scope of authority granted responsibilities imposed by the AMLL, Michael Sylvester at Flaming Hoops Blog nicely summed it up for us:

The Law on Anti-Money Laundering … establishes, for the first time and in a comprehensive manner, the anti-money laundering supervision and management system in China, and defines the AML responsibilities and functions of the competent authority of the State Council, relevant agencies and organizations under the State Council; it imposes anti-money laundering obligations on designated non-financial institutions, and clearly defines the scope of financial
institutions that shall undertake anti-money laundering obligations, their obligations as well as legal liabilities in the case of violation of the Law; as for the anti-money laundering investigation measures, it establishes the terms of such exercise, the agencies to carry out investigation, approval procedures and time limit of investigation; it also stipulates the fundamental principles of international anti-money laundering cooperation.

Recently the government successfully prosecuted a significant money laundering case, using the AMLL. According to this report, the defendants, consisting mostly of Taiwanese individuals, illegally obtained money by stealing banking information from Internet shoppers. Then they transferred such funds into their accounts in a Shanghai Industrial & Commerce Bank branch. Afterwards, to avoid suspicion, defendants acquired multiple debit cards to disperse their “dirty” funds; then they withdrew cash totaling 1.08 million Yuan from ATM machines and bank tellers, all of which was subsequently transferred to another bank account set up by their ring leader. Unbeknownst to them, their activities did not escape the eyes of the newly-established anti-money laundering network, a consortium among commercial banks, the People’s Bank (central bank), the police, and procurators (prosecutors).

The defendants got their jail time and monetary fines. But, I do not think that is the end of this case. It looks to me that the government is going after violators, and in the absence of detailed statistics regarding suspected and prosecuted violations, it is hard to comment on the effectiveness of the anti-money laundering monitoring system currently in place. Nonetheless, a small success is still a success.

And the fact that the defendants are Taiwanese individuals is curious to me. Does it signal that the Chinese government is not afraid of putting “foreigners” behind bars for financial crimes?

For Better Court Ruling Enforcement: Civil Procedure Law Amended

The standing committee of the National People’s Congress adopted (in Chinese) a draft amendment to the Civil Procedure Law of China on October 28, 2007, and the amendment will come into effect on April 1, 2008.

Aimed at solving persistent problems with the enforcement of civil judgments, the Amendment has been expected to improve the execution of court rulings. The following sheds some light on the background of the adoption of the Amendment:

Chinese courts found that in 2006, 2.13 million civil case rulings had not been carried out by the due date. Almost half of those rulings have still not been implemented, and the verdicts remain empty words on a piece of judicial paper.

The amendment multiplies by a factor of ten fines for those who refuse to execute a civil court ruling -- fines climb from 1,000 yuan to 10,000 yuan (1300 U.S. dollars) for individual offenders, and from 30,000 yuan to 300,000 yuan (39,000 U.S. dollars) for companies.

The law also said that those who refuse to cooperate with civil courts in making sure a ruling is executed may be detained.

Hopefully, the Amendment will give the Civil Procedure Law some sharp teeth, and one can only hope those charged with the authority and duty to carry out enforcement duties will actually “bite” hard.

Read this for more background info regarding the Amendment.

Calling China “Names”

I have read or heard many labels used to describe China lately.

For example, some call it “the country of contradictions” while others conventionally label it the “Asian Dragon.” Still others view it as “strategic competitor” or “the China Threat.” Meanwhile, the Chinese government calls its country “socialism with Chinese characteristics.”

The latest one I read comes from the governor of the State of Tennessee, Gov. Phil Bredesen, who just wrapped up a nine-day business trip to China along with some 100 strong business delegates. On his way home somewhere in the Pacific Ocean, he wrote down his thoughts about China, which can be shortened to four items:

First, an insight about America: The Chinese are willing to do big things; we need to rediscover that audacity here at home. I've felt for a long time that we confine ourselves far too much to frittering around the edges of opportunities — in infrastructure, in transportation, in health care.

Second, China is enormous; 1.3 billion people is a quarter of the world…wealth is definitely there and growing exponentially. China is having its coming-out party.

Third, the political system in China is unique and defies labels…

And fourth, we need to work hard to open more doors to China. I want more trade missions, and I especially want more Chinese students here and more American students to go to China…

Despite Governor’s comment that China “defies labels”, he defines China as, “A one party capitalist country with no Bill of Rights.” I thought that is a pretty good one.

Read the Governor’s report here.

Amendments to Lawyer's Law Adopted

China's top legislature, the Standing Committee of the People's Congress, adopted amendments to the Lawyer's Law. The amendments should, as reported, bring some much needed good news to criminal lawyers.

One distinct change in the new Law will "make it easier for lawyers to meet criminal suspects and obtain evidence", because "Chinese attorneys have long complained of difficulties in meeting criminal suspects and having access to files and evidence when defending criminal cases."

Attorney-client privilege, a long coveted luxury for Chinese criminal defense lawyers, might become a reality to a certain extent. As reported, "[d]efense attorneys and criminal suspects will not be monitored when they have a conversation ... and defense lawyers are entitled to look up all files and materials relating to the case."

The amendments will also provide immunity to defense lawyers for their in-court comments and remarks. But the immunity can be had to the extent that the comments and remarks "do not threaten national security or slander others." But, as many know, the concept of "national security" is a very fluid one in China.

As the practice of law has gradually become more and more important to the Chinese society, these amendments represent yet another step forward in building a national under the "rule of law."

I will examine the amendments more closely and report other significant changes to the existing Lawyer's Law. Please check out my previous posts (I and II) on the anticipated amendments.

Interesting Blog about Life and Law in China

I have been reading posts at a new blog out there called the Boulder2Beijing (砬到北京). It is written by two lawyers who just moved to Beijing, and they describe their blog as "chronicles the life of two American attorneys moving along the 40th parallel from Boulder, Colorado to Beijing, China for a year." Any time you link your experience with earth's parallel, it just sounds intelligent, somehow.

The authors, Katie and Micah Schwalb (not sure if they are related), write about their encounters in China, observing life with their acute lawyers' eyes. For a sampling, the following is an excerpt of a confession written to the Beijing police for "violating" Chinese law:

Under prompting by the female officer, Katie wrote the following:

I have lived at Yicheng Dongyuan Garden and did not re-register at the local police station as I was unaware of the necessity to do so. I understand that I have been given a warning. I apologize for not complying with the requirement, and will comply this afternoon.

The officer really wanted Katie to write, "I know I was wrong to break the law and apologize for doing so," but Katie just couldn't bring herself to take the dictation of that last sentence. She got pretty close, though.

Imagine an American lawyer admitting that she violated the law in a written confession handed to the police...Her constitutional criminal procedure prof would not be happy had she succumbed to the officer's demand.

The blog has been added to my blog roll.

Italian Pasta Makers: Under Investigation for Price Fixing

This title has nothing to do with Chinese law, but it does resemble a previous post here on noodle price fixing in China.

According to a BBC report, the Italian authorities have initiated an investigation into suspected price collusion on pasta by Italian pasta makers. Microscope has been placed on the “members of the Industrial Union of Pasta Makers, which represents about 85% of the market, [allegedly] colluded to fix the price of spaghetti, fettuccine and other favourite pasta dishes.” A sharp rise of about 20% in pasta price and angry consumer reactions to the price surge prompted the government to take regulatory action.

Responding to suspected price collusion, the pasta makers blame rising cost of durum wheat for the surge of price in pasta. Ramen noodle makers in China presented similar arguments while under investigation for price fixing, claiming that rising cost of flour and cooking oil was to blame.

Never thought a low profile food like noodles could be in the spot light like this, in China and Italy.

China and the WTO: Six Years of what?

It has been almost 6 years since China ascended into (or shall I say onto) the WTO. And what a six years it has been for China and the other member countries of the WTO! For optimists, the six years have been a period of remarkable progress in terms of regulatory reformation and unprecedented market access into China. A recent report brought forth by China Trade Gateway rings such an optimistic tone, yet with restrained hope for more reforms to be undertaken by China.

First off, the report shows some notable benefits that China has harvested from its entry into the WTO. Contrary to fears of many Chinese, foreign competition resulting from the WTO has increased domestic companies ability to survive an ever more competitive market. For example:

[T]he price of imported vehicles are getting lower but at the same time cars made in China are increasing their market share more, banking reforms are coming into place, the insurance sector is finally improving, the entertainment industries are opening up to the West, but also Chinese movies and music are targeting Western audiences.

Along the same line, many Chinese companies have “selectively adopted” Western practices, such as “management principles and customer service, which leads to a beneficial integration in companies, and in the long term into the consciousness of Chinese people.” I agree with this observation and believe the Chinese will catch up with some Western companies soon, adopting and adapting to skills, methods, and technologies brought by foreign firms.

Second, WTO member countries have also mutually benefited from China. Most obviously, improved market access means more opportunities to invest in sectors and industries previously inaccessible. Retail, franchising and other means of distribution have become bright spots for investment due to more friendly governmental regulations. In all, according to this report, “China has reviewed more than 2,000 trade related laws and regulations…and has abolished over 700 of them, amending others to bring the country into compliance.” As reflected in figures released by the World Bank, “the Chinese economy contributes to 13 percent of the world's economic growth.” Furthermore, the report cites that a total of “USD 57.94 billion was remitted out of China as profits” in a span of five years following China’s entry to the WTO. These are impressive figures and presumably rewarding profits.

Third, areas of outstanding concerns exist despite the mutually beneficial relationship between China and other member countries. Cited by the Europeans and the Americans, the following areas remain problematic and contentious:

China's enforcement, the transparency and consistency of Intellectual Rights Protection, the currency evaluation of the renminbi, existing trade barriers in China for agricultural products through Sanitary and Phytosanitary measures, continuous interferences of the state in certain industries, such as telecommunications and for example the steel industry, as well as recent import tariffs on foreign auto parts. On the other hand, China still faces protection from the US and European governments in industries they feel threatened by, leading to high anti-dumping cases.

Finally, looking beyond the haze of remaining issues, the author of the report sees promising opportunities ahead in many major industries and areas. Examples include banking & financial services sector, telecommunication, distribution and retail sectors, services as well as mergers and acquisitions.

The future sure looks good in the eyes of this report, does it? Read the full article here.

A Delicious Case of Moon Cakes for Hong Kong

For many westerners, moon cakes, a traditional Chinese dessert consumed during the Mid-Autumn Festival, are much like fruitcakes (if you get my drift).

For the Chinese, moon cakes, however, are an integral part of the wonderful traditions surrounding the Mid-Autumn Festival.

And for a Hong Kong moon cake maker, Wing Wah Moon Cake Co. (“WWMC” Co.), a recent victorious lawsuit in the Dong Guan Intermediate Court brought an extra measure of sweetness.

WWMC Co. has had many problematic encounters with infringers in the mainland over its trademark. It began selling its delicious moon cakes in the mainland in 1987, and established a factory in Dong Guan, Guangdong Province subsequently. Infringing moon cakes bearing WWMC Co.’s trademarks soon followed its presence in China. Unfortunately, WWMC Co. did not register its signature moon cake trademark, which significantly limited its options in term of protecting its trademark rights.

After waiting for more than a decade (and probably swallowing the dire consequences of not registering its trademark prior to entering China), WWMC Co. finally slammed its infringers with a lawsuit in Dong Guan, claiming trademark infringement and unfair competition. Notwithstanding the unregistered status of its trademark, WWMC Co. wisely predicated its request for trademark protection on the provisions regarding famous trademarks provided in the Chinese Trademark Law. Defendants in the case included many large retail supermarkets and small companies.

The Court agreed with WWMC Co. It found confusion between the infringing moon cakes and those of the plaintiff because the packaging and appearance of the alleged infringing cakes were the same as or similar to the plaintiff’s. Given the similarities, consumers, as the Court reasoned, could be easily confused as to the source of the moon cakes. (I would have liked a copy of the opinion to see how exactly the court reached this conclusion since most moon cakes do look pretty much the same to me. I guess the Court mostly focused on the packaging.)

With respect to trademark protection, the Court stated that registration of a trademark is not a necessary condition to protection in China under the Trademark Law. A trademark could gain the “famous trademark” status in a given market if its owner has conducted continuous, extended advertising and marketing, and if its owner has established brand recognition among consumers in a given market. Since WWMC Co. has met the above requirements, the Court held that its trademark is legally “famous”, thus deserving protection in spite of the fact that it is not registered.

Of course another important factor is that the infringement occurred in the same category of products—moon cakes. Had the usage of the trademark in question been in a totally unrelated industry, the result would be very different. Got to remember that protection for unregistered famous trademark is only limited to instances where illegal use occurred in the same or similar products/goods.

This case is significant for a few reasons. First, many trademark owners have an alternative way to protect their intellectual property rights if somehow their trademark is not registered in China, and I do see an increasing number of cases where plaintiffs take the “famous trademark” route for relief. In fact, that is what inspired WWMC Co. to sue in this case.

Second, the strategic choice of venue in Dong Guan Intermediate Court was a shrewd move. WWMC Co. has a factory in Dong Guan, and presumptively this factory generates good tax revenue for the city, and making this venue a friendly place, even though WWMC Co. is an outsider. Of course, the Court seemed competent in arriving at the right decision.

Third, I kept wondering whether a Hong Kong plaintiff has a distinctive advantage over its western counterparts in “famous trademark” cases. In Southern China, especially in Guangdong, certain famous marks in Hong Kong will probably gain consumer recognition easily due to the affinity in culture and language. However, western famous trademarks might not because of the huge cultural and language barriers. To overcome the barrier, western companies will have a higher bar to meet in terms of the requisite advertising, establishing consumer recognition with their brands. Therefore, I think that Hong Kong trademark owners have an edge over their western counterparts in famous mark lawsuits. (as a side note, this is purely based on my instinct and limited understanding of doing business in Southern China.)

So, your comments are welcome.

China's New Property Law--Common Ownership Dispute Surfaces

Another interesting case involving the new property law is pending in the Beijing Intermediate People’s Court for er sheng (court of second instance).

Briefly, plaintiff Ms. Ji sued her three sons to regain ownership of real property gifted to them. The property in question had been transferred by plaintiff and her late husband, but following his death, plaintiff wanted to retract the gift because her sons did not properly fulfill their filial obligations to her. The trial court held the defendants did not substantially violate the rights of the transferors, thus the gifted property stays with defendants. Plaintiff appeals the judgment, citing the new Property Law’s treatment on common ownership.

Common ownership, in the Property Law, is divided into two forms: ownership by shares and undivided common ownership. For a concise yet accurate rendition of the law, I quote in full China Law Blog’s post:

Division 8: Common Ownership

There are two forms of common ownership: ownership by shares and undivided common ownership. Absent a specific agreement, common ownership is assumed to be ownership by shares except in the case of a family relationship, where the opposite assumption is made.

1. The basic attributes of ownership by shares is:

Each common owner has a percentage ownership in the undivided property. The amount of each share is based on the amount contributed by the party to purchase the property. If this amount cannot be determined and there is no express agreement, the common owners will all have equal shares.

The common owners share in income and expenses in proportion to their share interest. However, with respect to third parties, common owners have joint liability.

Each common owner has the right to sell his share in the property, subject to the right of first refusal of the other common owners to purchase that share.
Each common owner has the right to petition for partition of the commonly owned property.
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2. The basic attributes of undivided common ownership is:

Each common owner has an undivided ownership interest in the entire property.

Each common owner has a right to the income of the property and also the obligation for the expenses of the property. The common owners have joint liability with respect to third parties.

No common owner has a right to sell any portion of the property absent the consent of all of the other common owners.

As a general rule, a common owner does not have the right to petition for partition of the property. However, partition is
permissible if a) there is a compelling reason or b) the underlying relationship is terminated. A compelling reason is not defined in the statute, but the commentaries suggest a major medical expense would be such a reason.

Termination of the relationship most commonly would be divorce.
As with ownership by shares, the default rules for undivided common ownership can be modified by agreement.
******

In the present case, a presumption of undivided ownership applies to the property at bar because of ownership by a wife and her deceased husband. If plaintiff’s assertion of undivided ownership prevails, the plaintiff has the right to alienate the property with the consent of her co-owner, who is now dead. So the sticky issue is whether she has the sole authority to withdraw the gift.

Of course, the plaintiff can argue in the alternative that she owns the property by shares, presumably equal shares, thus she has the right to alienate her half of the property. But she has the burden to overcome the presumption of undivided ownership.

A fascinating case, and I will track its progress in the Court.

“Corruption Threatens China’s Future”

Just read Dr. Pei Minxin’s article titled Corruption Threatens China’s Future published under the auspices of the Carnegie Endowment for International Peace. This comprehensive piece details the extent, causes, impact of corruption in China.

A. Extent of corruption in China

People generally know that corruption is rampant in China, but how bad is it? How much does it cost China? According to Dr. Pei’s research, China’s National Audit Agency measured misused governmental funds at a whopping $170 billion (yes, that is in U.S. dollars) from 1996-2005, representing about 8% of “on-budge spending for this period.” While acknowledging the difficulty of accurately measuring the exact dollar amount of corruption, Dr. Pei did come up with a unique formula to arrive at a concrete number.

To estimate roughly the direct cost of corruption, we can suppose that 10 percent ofgovernment spending, contracts, and transactions is used as kickbacks and bribes or is simply stolen. The Chinese government’s procurement budget in 2005 was 300 billion yuan. The so-called administrative spending in China’s official budget, about 20 percent of the total spending (470 billion yuan in 2003), is another juicy target. If 10 percent of the procurement budget and administrative spending is stolen or misused, this would amount to
0.65 percent of gross domestic product. Sales of land user rights by the government generated 580 billion yuan in 2005. Bribes to local officials could easily amount to 10–2percent of the revenues generated (58–116 billion yuan, or 0.5–1.0 percent of GDP). In 2003, the state-owned entities spent 2.1 trillion yuan (19 percent of the GDP) on fixed asset investments. If 10 percent were stolen, it would cost nearly 2 percent of GDP. Based on the conservative assumption that 10 percent of the land lease revenues, fixed investments, and government spending is stolen or misused, the direct costs of corruption in 2003
could be 3 percent of GDP, roughly $86 billion, an amount exceeding the government’s entire spending on education in 2006.

Based on his formula, the direct cost of corruption in 2003 to $86 billion, an amount larger than the Chinese government’s entire spending on education in 2006 (emphasis added). [all I can think of is how many schools could have been established, how many teachers in rural China could have been paid on time, and how many first rate research labs could be set up…]

B. Causes of corruption in China

Dr. Pei then pointed out some characteristics of corruption in China, to wit:

Corruption in China is concentrated in the sectors with extensive state involvement: infrastructural projects, sale of land user rights, real estate, government procurement, financial services, and heavily regulated industries. The absence of a competitive political process and a free press in China makes these high risk sectors even more susceptible to fraud, theft, kickbacks, and bribery.

In other words, wherever governmental control and interferences are the greatest, corruption is likely to result for lack of political transparency. In addition, a “partially reformed economy”, lack of enforcement of laws and regulations, and the government’s inability to adopt an effective regime to combat corruption all contribute to the festering of corruption in China. His analysis on the root causes of corruption in China is the most incisive that I have read so far.

C. Impact of corruption

Dr. Pei argues that corruption affects China and the rest of the world. Domestically, corruption fuels “China’s rapid increase in socioeconomic inequality and the public’s perception of social injustice.” And, “the indirect costs of corruption—efficiency losses; waste; and damage to the environment, public health, education, the credibility of key public institutions, and the morale of the civil service—are incalculable.” Additionally, the impact of corruption in China could spill over to foreign countries, and it could be manifested in areas such as global public health and the environment. Therefore, Dr. Pei calls on western countries to assist China in fighting corruption, specifically by urging it to reform its political and legal systems, sharing information with China, and increasing legal cooperation with China.

A great read if you care about this stuff, but I doubt that the situation will improve unless fundamental changes occur within China’s political system. Until then, anything done by the Chinese government is like a band-aid on a malignant tumor. For example, the newly established cabinet level—The National Corruption Prevention Bureau of P.R. China.