Will the New Chinese Food & Drug Resolution Be Enforced Resolutely?

If there is one vivid way to describe the crisis faced by the “made-in-China” label, it has to be the ancient Chinese idiom “四面楚歌”, meaning besieged on all sides and surrounded by “enemy” battle cry.

Against the backdrop of intense domestic and international pressure, on July 26, 2007, Premier Wen Jiabao signed a new executive order, titled Special Rules on the Supervision of Food and Drug Regulations (“Special Rules”) (in Chinese only).

To a cynical China watcher, this law represents another manifestation of the all-too-familiar syndrome in Chinese authority’s response to problems—when existing laws and regulations are not enforced against certain problems, more new laws and regulations are thrown at problems resulting from a lack of such enforcement.

If you are do think so, I’d argue that this seemingly familiar pattern was woven with a different fabric. And let me explain why.

Textually speaking, the Special Rules packs some potent new measures unseen in a host of existing laws, regulations, measures, rules, circulars, and opinions (almost impossible to calculate the total number and no wander enforcement has been…), to wit:

a. calls for coordinated actions amongst ministries of agriculture, public health, quality inspection, commerce, industry and commerce, and medical quality control. Each has the power to crack down food and drug quality violations in accordance with its designated authority;

b. specifies the administrative authorities and power of the above-mentioned ministries/departments in connection with executing quality regulations;

c. any person or entity has the right to report quality violations;

d. establishes food quality violation recording system to track repeat offenders;

e. increases administrative penalties for violations (where amount in question exceeds 10,000 yuan, the violator will be fined 10 to 20 times of the amount in controversy.)

f. requires distributors/sellers to establish mandatory quality inspection system to record purchase and sale information relative to products distributed or sold;

g. requires producers to recall problematic products;
h. ties food quality regulation results with evaluation of county-level officials;

i. specifies incentives and penalties for importing high or low quality products.

In a political sense, the Special Rules pronounce a loud and clear message—an admission that the existing regulatory scheme is too fraught with overlapping responsibility among ministries to be effective, too ambiguous to enforce, and too toothless to have a bite. Each ministry has a portion of authority in food and drug quality control, and authorities have been dispersed among six ministries. Down to the provincial or county level, the sharing and overlapping of authorities severely hinders effective enforcement of existing rules because no one has clear understanding of what they can do and no one wants to take responsibility. To a large extent, the quality woes of China can be blamed on this ineffective distribution of power and authority. The problem is compounded with relatively insignificant consequences for quality violations.

Special Rules clearly states that ministries/departments must act in concert, and they all have identical authorities in their execution of the Special Rules. Of course, the sharing of enforcement power problem is still not eliminated, but the newly created Food & Drug Special Group under the State Council and the specification of enforcement authorities are two mitigating factors.

To put things in a historical context, China is at a very critical stage of development where sharp social conflict exist between and among segments of the society. Harmony cannot be cultivated when people cannot even trust what goes into their stomach. As a Chinese proverb puts it nicely, food is of first priority ("民以食为天") (literally means people regard food as important as the sky). Food quality concern is not just an international trade problem; this is one that affects the very fiber of the Chinese society, and the stability of the country as a whole, for which the CCP has sworn to maintain. Therefore, I believe (and hope) that the government has the critical impetus to enforce the Special Rules.

Examined in a purely economic sense, export will in the near future continue to be a major engine for the growth and development for China. When the world’s faith in “made in China” is shaken, the consequences are as clear as the Tibetan blue sky. The United States already issued a ban on certain Chinese seafood imports, which is a billion dollar industry. Without drastic measures, the image of Chinese products could spiral further down, thus jeopardizing China’s economic bottom line—export. China has no other option other than enforcing quality control laws, now.

Historical records of the idiom—“besieged on all sides” account an impossible and hopeless situation for General Xiang Yu. His beloved wife committed suicide amid intense pressure. Most of his brave soldiers suffered low morale due to enemy’s siege. Seeing a complete loss of support, General Xiang Yu killed himself by the Wu River. What distinguishes the current Chinese government from General Xiang Yu is that the situation is not impossible and hopeless. EU’s chief consumer protection, Meglena Kuneva, went to China last week for joint efforts to solve problems; likewise, the American food and drug safety team is in China with the purpose—to develop an agreement on food and drug safety in cross-border trade.


Short of a complete loss of hope and support home and abroad, the current government is no General Xiang Yu. However, continued hope and support depend on China itself. Do you think the Chinese leaders know that?

Where Art Thou, Chinese Anti-trust Law?

Ok, I know that is a rhetorical question. Here, I blogged about the legislative progress in China’s Anti-Monopoly Law. But the recent chain of events in China only highlights the urgent need for the promulgation of a comprehensive antitrust law in China.

Collusions in price fixing in beef noodles and milk products caught people’s attention and caused quiet a few controversies.

Now, instant Raman noodles are the most recent consumer product that fell prey to, as I suspect, price fixing by major producers in China. Leading producers like Master Kang and President have lifted prices of their noodles by about 20%. Others are following the lead. They blamed the price hike on rising food material costs.

Behind the façade of inflation, in the form of food price increases, is a more culpable factor—horizontal price fixing. And this got me plenty concerned for very personal reasons.

1. Raman noodles are the staple food for college students. When I was getting my undergraduate degree in China, I lived on that stuff of various flavors: spicy beef, fresh seafood, comforting chicken…Poor and cheap students cannot afford to buy noodles that cost more than 1.5 yuan. I am talking about empathy here.

2. Raman noodles are a source for many small business owners. I sold Raman noodles in my dorm to make money, and many others too. For a cent on the dollar, we made a little cash enough for occasional movies and date nights. If the prices of all brands rose for more than 20%, fewer people could afford to buy a package to stave off late-night hunger. That would potentially kill the dormitory grocers' opportunity for entertainment and romance. Serious consequences!!

So, what is horizontal price fixing? Under the U.S. federal law, it is defined as:

Horizontal price fixing is any arrangement among competitors that interferes with the setting of price by open market forces. These price fixing claims arise from competitors’ concerted action to charge pre-set minimum or maximum prices for their goods or services. Horizontal price fixing can violate Sections 1 and 3 of the Sherman Act, which proscribe concerted action in restraint of trade, as well as Section 5 of the Federal Trade Commission Act, which prohibits unfair methods of competition in or affecting commerce, and Section 2 of the Sherman Act, which prohibits conspiracies or combinations to monopolize.

To prove an antitrust claim, the plaintiff must show evidence of agreement between or among manufacturers. And uniform price increases could be one result of such an agreement in restraint of trade.

China Anti-trust Law, you can help this situation (at least cause a serious investigation into the noodle monsters’ pricing hikes). Would you come out soon?

Until then, eat more rice.

Investors in Labor Intensive Goods: Where is Your Future?

China just made a move that puts Chinese exports of labor intensive goods in a bind. According to this report, “China will curb exports of cheap labor-intensive, low-value-added products to force manufacturers into making higher-quality goods, in a move to narrow the world's largest trade surplus and reduce environmental damage.” If you have invested, plan to invest in labor intensive manufacturing in China, you definitely need to be concerned, and should read this order by the Ministry of Commerce.

Due to spats with western countries over China’s uncomfortably large trade surplus, the Chinese government has started to take measures to ease concerns of the EU and the U.S. This order is ostensibly one of them.

Highlights of this order:

1. Imposed restrictions on more commodities in processing trade for export; the commodities include: plastic/plastic-based products, cloth, furniture, and metal processing

2. “Raise a levy on companies that import metals, plastic and textiles into China for use in products that will in turn be shipped abroad.”


3. “A total of 1,853 types of commodities including copper, lead, zinc and cloth will be added to the restricted category, requiring importers to deposit half of their payable levies including duty and value-added tax at the customs office, according to the trade ministry's statement.”

4. With respect to commodities restricted from import, the importer must pay "standing book deposit=import tariff and VAT of import link of all commodity restricted from import * 50%"


5. With respect to commodities restricted from export, the amount of standing book deposit due equals to the "registered sum of bonded imported materials * (registered sum of commodity restricted from export / registered sum of commodity restricted for processing trade)* composite tax rate * 50%"

6. This order applies to eastern regions /provinces/municipalities only, and they are: Beijing, Tianjin, Shanghai, Liaoning, Hebei, Shandong, Jiangsu, Zhejiang, Fujian, and Guangdong.

7. The order goes into effect on August 23, 2007, and those already acquired permission for processing prior to July 23, 2007 are grandfathered.

So what does this mean to companies in this business of manufacturing low-value-added commodities for export?

My thoughts are:

1. It is time to upgrade your technology so that you bypass the effect of this order.

2. It is time to move out of the statutory eastern region and go westward where the order offers an exception.

3. It is time to rethink your business strategy in light of this order and the new Chinese Corporate Tax Law, which levies a uniform corporate rate of 25% (with exceptions for high tech, alternative energy, or areas related to environmental protection).

Astute Advice for All Advocates Dealing with China

I just read through the feature article in the May 07 issue of the New England In-House. Titled “Made in China: In-House Lawyers Confront Explosion of Chinese Business Activity”, this is a well researched article with insightful advice that transcends the in-house counsel circle. I tip my hat to John Cunningham for packing so much good stuff in so little space. His article proceeds in five subsections: cultural adaptation, laws & regulations, potential risks, China’s lures & attractions, and due diligence & planning.

He starts off by establishing the background of his article: "The China boom is in full swing, and sooner or later your company will be doing business in China. If you aren’t there now, one of your competitors probably is."

Citing the explosive growth of the Chinese market and its attractions to U.S. companies, Cunningham advises that:

in-house lawyers have to get up to speed now on the intricacies of doing business in China – from bridging the cultural divide to knowing the key differences between U.S. and Chinese laws and regulations.

Then he delves into “crossing the cultural divide” by stating that adapting to the Chinese culture is “perhaps the biggest hurdle” for many foreign firms. To illustrate how to adapt, Cunningham has a few excellent quotes from some experienced China hands (Zhong guo tong, 中国通):

“You must be flexible in your approach to business, and learn to do things the Chinese way,” said Edward Epstein, who works in the new Shanghai office ofAtlanta-based Troutman Sanders.

For example, “time is not money there,” Epstein explained. “And deadlines can’t be
used as a negotiating lever because they just have to get comfortable with you.”

“You must establish a relationship before you negotiate a contract, because in China you only do business with friends,” said Lucia Lian of Goulston & Storrs in Boston...and “you should never talk business during meals.”

Cunningham wraps up the cultural adaptation part with:

“Companies who fail don’t adjust to Chinese culture and values, don’t understand the [Foreign Corrupt Practices Act], don’t localize supply, don’t train and promote Chinese to top levels of their business, or don’t make a commitment that top management physically go there at least four times a year,” Daniels said. [Jack Daniels with Eastbridge Partners]

With respect to Chinese laws and regulations, the article stresses the differences between the U.S. and China; it calls for good Chinese counsel in any “entry team”, because,

For Americans, the Chinese system may look similar, but it is not. While both the U.S. and Chinese systems have central, provincial and local levels of government, and many written regulations, the similarities end there.

Because China has a civil law system, the codes, statutes, and regulations are readily available in Chinese on Chinese websites. Two big problems are inherent: the ability to read and understand them; the accurate interpretation of the law. With assistance of a China-trained lawyer, the first problem will dissolve, but the second problem presents greater challenges, since,

“The rule of law means something different in China,” said Robert Woll of WilmerHale’s Beijing office. “It is more of a planning and control mechanism than a predictor of outcomes. The regulatory framework looks very complex, but you have to understand the agency motivations more than the language to get interpretations
right.”

Additionally,

Epstein explained: “An enforcement or approval authority interprets the law with
great discretion there, and that can work in your favor or it can work against you. You can often get an approval in one place and a rejection in another based on the same law.”

Other legal issues with potential for trouble in China-related deals, dealt with in the article, include IP protection, dispute resolution, U.S. anti-corruption law (FCPA), export controls, anti-dumping enforcement. He cautions that U.S. companies need to take these into careful consideration.

Risks abound in a China deal, but the most salient point made in the article is “vetting your partners in any transaction”, which I touched upon in one of my past posts. Another good point made here is the mindset about doing business in China, which is, according to Lian (a bilingual lawyer from China), not just about competition and is also about building relationships.
Cunningham then highlights the lures of the China market. An expanding middle class of more than 200 million is a big piece of consumer pie to grab. Besides the known areas of attraction such as, real estate development, venture capital, low cost manufacturing, sectors like financial services, alternative energy could present huge opportunities because of government incentives and market potential. Therefore, "weaving China into investment strategies is now practically a given."

However, he also cautions:

The best time to go is before you’re pressured into it – when you have good markets and technology, but have time to plan your future in China.

Because of the lure of the China market, Cunningham offers wise counsel through his China experts:

“China has a seductive appeal, but you can’t check your common sense at the
border,” warned Edward Epstein.

(It is hard to imagine that people would do that, but stranger things have happened. Really.)

Cunningham then quotes Samuel Shafner of Burns & Levinson in Boston, who suggests that Americans heed the Art of War-- Know yourself and your enemy, and he said:“It is much more important to have intelligence on the ground in China than anywhere else in the world. You have to find people who know China, who know your business and are trustworthy.”

Beyond that, tax and currency repatriation should also be part of the due diligence and strategic planning.

Overall, this article is an excellent checklist for those in China-related deals, not just in-house lawyers.

Read the whole article here.

BIS China Rule Compliance: Document and Information List on VEU Application

Along with the implementation of the BIS China Rule, the VEU application becomes a new practice area for attorneys in the cross border transactions, especially related to China. This article, with reference to BIS official publication, intends to address some basic filing document and information issues related to the VEU application.

I: Where to File?
An Advisory Opinion Request for Authorization Validated End-User (VEU) should be filed to apply for the Validated End User (VEU) status. The request for authorization should be filed to the Office of Exporter Services at BIS Department of Commerce with attention to the End-User Review Committee.

II: Who Can File?
As currently the VEU program applies only to Chinese companies, the Chinese companies can apply directly for the VEU authorization. US companies can also file the VEU applications on behalf of Chinese companies to whom they have export business relations. Generally, in determining the eligibility of the VEU status, the following criteria apply:
• Any end user in the PRC may apply to use Validated End-User authorization. All applications will be considered on the merits.

• Subsidiaries of U.S. or foreign companies in the PRC, as well as Chinese companies, may apply to receive products that might otherwise need an individual license.

• End users must demonstrate a record of using sensitive, U.S.-origin commodities, software or technology responsibly and must only be involved in civilian activities.


III: Document and Information List on VEU Application

According to the Supplement No. 8 to part 748 of the EAR and the template published in the BIS website, the following documents and information shall be provided with the filing of the VEU application:

1: General Information
The proposed VEU candidates’ name (including business operating name if applicable); company physical address (P.O. box address only not sufficient); contact persons and telephone, fax numbers; email address and company website if applicable; filing company information other than the candidate company if applicable, candidate multiple location list in the eligible destination if applicable.

2: Structure, Ownership and Business Activities of the Candidate Company
An overview description of the structure, ownership and business activities of the candidate company should be provided in the request of the VEU status. These shall include the operating and organizing structure of the company (closely held or publicly held companies, partnership etc.), the ownership (state owned, foreign owned, joint-venture, privately owned etc.), business activities and nature of the business (including any activity or relations with either government or military organizations.)


3: Item(s) Description Proposed for VEU Authorization
The items proposed for VEU application and their intended end-uses should be listed, including the description of the items and the relevant Export Control Classification Number (ECCN) and the Commodity Classification Automated Tracking System (CCATS) number, if BIS has previously classified the item. The application should also describe how the validated end-user will use the item(s) received under VEU authorization. If the items received under VEU authorization will be used at a location different from the location(s) listed in the General Information section of this submission, identify such location(s). Also identify any items that will be reexported or transferred after they are received under VEU authorization, and the destination(s) in which they will ultimately reside.

4: Information on Record Keeping and Compliance
The system in place to ensure compliance with VEU authorization requirements related to the items received under VEU authorization should be described. As recommended by BIS, the Validated End-Users should maintain records relating to: the specific location to which the items were exported or reexported; the end-use of such items; and the ECCN(s) of such items. The record keeping requirements are set forth in §748.15(e) of the EAR.

5: Certification
The application for VEU authorization must also include an original statement, which can be provided as a letter attached to the advisory opinion request, on letterhead of the prospective validated end-user, signed and dated by a person who has authority to legally bind the prospective validated end-user, certifying that the end-user will comply with all VEU requirements. According to the Template, this statement must include acknowledgement by the prospective end-user that it:

1) Has been informed of and understands that the item(s) it may receive as a validated end-user will be exported in accordance with the EAR and that use or diversion of such items contrary to the EAR is prohibited;
2) Understands and will abide by all authorization VEU end-use restrictions, including the requirement that items received under authorization VEU will only be used for civil end-uses and may not be used for any activities described in part 744 of the EAR;
3) Will comply with VEU recordkeeping requirements; and
4) Agrees to allow on-site reviews by U.S. Government officials to verify its compliance with the conditions of the VEU authorization.

6: Additional Information
Any helpful and supporting information has been encouraged to be included in the application package for VEU authorization. This kind of information may include, but not limited to, background information other than general information of the candidate company, China law and policy information about the company ownership, structure and operations (expert affidavit can be used whenever necessary), technical or marketing literature about the related items and product or promotional information about line of business, the business relation history of the import and export companies etc.

With that, “I Pronounce You Famous and Well-known!”

Your trademark, is probably one of your most valuable assets. It rings more true if your mark has established remarkable secondary meaning in relevant market where you sell your product or service with that mark. In one of my past posts, I discussed Chinese law on trademark dilution, which is the exclusive method of protecting a famous trademark in China in terms of invoking legal actions.

This post primarily focuses on the legal standard for what constitutes a famous or well-known trademark in China. A trademark owner needs to go no further than China’s Trademark Law (2001), Implementing Regulations of Trademark Law (2002) (promulgated by the State Council) (“Implementing Regulations”), and the Interim Measures for the Recognition and Management of Well-Known Trademarks (1998) (promulgated by the State Administration of Industry and Commerce) (“Interim Measures”) [Chinese only].

According to the Interim Measures, the Trademark Office (part of the State Administration of Industry and Commerce) has the exclusive jurisdiction over the registration and management of well-known trademarks. See Article Three. To register a well-known trademark in China, an applicant must show evidence as follows:

1. the volume of product sales in connection with the registering trademark in China;
2. the main economic indicators associated with the products bearing the trademark (production volume, sales volume, profit, market shares)and comparative ranking of the products in the Chinese market;
3. the sales volume of products in connection with the trademark in foreign countries and regions;
4. the amount of advertising related to the mark;
5. the earliest date and length of continuous use of the trademark;
6. the registration status of the mark in China and elsewhere; and
7. other documentation establishing the famousness of the mark.

(The translation is mine.)

By requiring relevant market data of the mark in China, the Interim Measures set a relatively high bar in recognizing a well-known trademark prior to China’s assent to the WTO.

The amended Trademark Law (2001) and the subsequent Implementing Regulations mark a change in famous trademark law. Specifically, the Trademark Law does not stipulate that the Trademark Office has the exclusive jurisdiction over the registration and management of famous trademarks even though the Trademark office still has the exclusive administrative jurisdiction over the registration of trademarks in China. Of course, this leaves open the question of whether a foreign trademark owner can utilize the People’s court to ascertain whether a mark is famous in China (will be addressed later).

Pursuant to the Trademark Law, in order to get a “well-known” status for your trademark, a registrant must show the Trademark Office:

1. reputation of the mark to the relevant public;
2. time for continued use of the mark;
3. consecutive time, extent and geographical area of advertisement of the mark;
4. records of protection of the mark as a well-known mark; and
5. any other factors relevant to the reputation of the mark.

See Art. 14; Implementing Regulations, Art. 5.

In comparison, the amended Trademark Law covertly removes the requirements that the mark be famous inside China, with the exception of item one where the reputation of the mark is tied to the “relevant public.” This change, to a certain extent, reflects a general shift of attitude toward foreign famous trademarks. Of course, to register a famous mark in China, one still has to go through the normal procedures of hiring a local trademark agent, and present the requisite proof.

With that said, the next question, naturally, would be whether one has to register a mark with the Trademark Office in order to get the corresponding protection afforded to a famous mark. It is a fair question. In China, a trademark owner has two courses of action against infringement: through a local bureau of industry and commerce; or through a local People’s court.

Based on my observation, an owner can get a “famous” status for his mark. In Starbucks v. Shanghai Copycat, Starbucks Co. did exactly that, and the court was willing to hand out that label to it. In fact, a search on the well-known trademarks database in the China Trademark Office website revealed that Starbucks Co. has not registered its mark as a famous one. Absent errors in the database, Starbucks Co. is relying on the Shanghai court’s ruling as an official declaration of the well-known status for the “Starbucks” mark.

Should you do as Starbucks did? If you don’t mind paying high litigation cost, and if you have a stomach for unpredictability, copy what Starbucks did.

Danone Group to Make Things Personal

According to a report, on July 19, 2007, four subsidiary companies of Danone, NOVALC Pte. Ltd., Festine Pte. Ltd., Jinja Investments Pte. Ltd. and Myen Pte. Ltd., initiated legal proceedings to file a derivative action against Zong Qingou, the former board chairman of the Danone-Wahaha joint venture. He resigned in June 2007 amid the intensifying disputes with Danone.

Essentially, this new lawsuit will be directly against Zong for his “illegal” activities while serving on the board of directors of the joint venture. The four shareholders of the joint venture will more than likely allege that Zong breached his fiduciary duty as a board member by engaging in competitive activities that injured the interests of the shareholders.

In addition, Danone also asserted claims directly against Zong in its Stockholm arbitration. [But I haven’t heard anything from that case lately.]

Chinese Anti-Dilution Law: Are You Sufficiently Confused?

From Ferrari’s loss to Levi’s victory in their trademark lawsuits in China, one of the common elements, as I see it, is the confusion about the Chinese law on trademark dilution. Maybe it is the Paris Convention and TRIPS Agreement in connection with the Chinese Trademark Law that caused the bewilderment. Once you see the interplay among the three, Chinese anti-dilution law will look pretty clear.

First, dilution goes hand in hand with famous or well-known trademarks. The basic purpose behind anti-dilution is to prevent “free ride” by some of famous trademarks, either nationally or internationally. For example, without anti-dilution law, someone can just take the “Coca Cola” mark and use it to market his/her cars, cigarettes, or clothes simple because of consumer’s identification with the famous brand. Over a certain period of time, the fear is that, without restraining, such use of a mark will dilute its ability to assist consumers in identifying products with their sources.

The Paris Convention is an international treaty that protects intellectual properties. Member countries are supposed to protect a famous trademark of another country. Article 6bis provides that if the legislation of a member allows, such country should prevent a well-known mark of a member country (registered or unregistered) from being used in such a way that “constitutes a reproduction, an imitation, or a translation, liable to create confusion”. It further states that protection of the subject trademark is limited to its being used for identical or similar goods.

TRIPS Agreement expands protection of famous trademarks in two ways. First, the Paris Convention Article 6bis protection applies also to service marks. Secondly, it applies to prohibit the use of a registered famous trademark from being used in another country in dissimilar goods and services.

Article 16
3. Article 6bis of the Paris Convention (1967) shall apply, mutatis mutandis, to goods or services which are not similar to those in respect of which a trademark is registered, provided that use of that trademark in relation to those goods or services would indicate a connection between those goods or services and the owner of the
registered trademark and provided that the interests of the owner of the registered trademark are likely to be damaged by such use.

China is signatory to both treaties, and the Chinese Trademark Law (2001) reflects China’s identification with its obligations under the two treaties. Article 13 prevents anyone from using a registered well-known trademark in China for either similar or dissimilar goods or services.

Article 13 Where a trademark in respect of which the application for registration is filed for use for identical or similar goods is a reproduction, imitation or translation of another person's trademark not registered in China and likely to cause confusion, it shall be rejected for registration and prohibited from use. Where a trademark in respect of which the application for registration is filed for use for non-identical or dissimilar goods is a reproduction, imitation or translation of the well-known mark of another person that has been registered in China, misleads the pub1ic and is likely to create prejudice to the interests of the well-known mark registrant, it shall be rejected for registration and prohibited from use.

So, let’s put all of the above in the context of the Ferrari’s horse symbol case that I wrote about. It should make things look pretty clear.

Under the Paris Convention, the Ferrari horse symbol is not registered in China, and the alleged Chinese infringer tried to register the horse symbol for use in clothing, which is a dissimilar to Ferrari sports cars. The Chinese Trademark Law protects unregistered foreign trademarks only to the extent that it is being infringed for use in similar or like goods or services. Therefore, Ferrari's argument that its unregistered famous trademark enjoys protection beyond the automotible industry failed.

Under the TRIPS Agreement, the Ferrari horse symbol still does not get protection in China since it has not been registered as a famous trademark there.

A short lesson here: if you reckon your trademark is famous in your own country (either registered or unregistered), and you don’t want anyone in China to use your trademark in any goods or services, you must obtain a famous trademark registration with the Chinese Trademark Office in order to get protection.

Even more simply--no registration; no easy protection. If you do not believe me, go ask Ferrari.

Levi’s Looking Pretty in Chinese Court Despite Painful Lesson

As Dan Harris stated repeatedly in his China Law Blog (“CLB”), Chinese trademark law is “simple and effective” when enforced. Clothing giant Levi Strauss & Co.’s (“Levi’s Co.) recent victory in a Shanghai court would further bolster Dan’s averment, but its triumph came with a unique twist. So let’s just call the victory “bitter sweet.”

Levi’s Co. is known for its jeans in America and beyond. (My first pair of jeans in the U.S was a pair of blue Levi’s, which still go well with my boots.) In 1974, Levi’s Co. registered its LEVI’S trademark with the Chinese Trademark Office and has kept the registration effective by renewing and adding more categories of clothing related to the trademark since then.

Levi’s Co. entered into a distribution relationship with Shanghai Beizi Clothing Company, Ltd. (“Beizi Clothing”) some time before 2005. (I have not been able to verify the exact starting date.) And Beizi Clothing was to be a non-exclusive distributor of Levi’s products, probably in Shanghai (for lack of information, this fact might be a little off.).

In June 2006, a branch office of the Shanghai Administration of Industry & Commerce (“SHAIC”) caught Beizi red-handed in selling counterfeit Levi’s jeans. After investigation, the SHAIC issued an administrative order, penalizing it for selling counterfeit products. Soon after, Levi’s Co. woke up from this nightmare and sued for trademark infringement in the Shanghai 1st Intermediate People’s Court. Levi’s Co. asked for an injunction, civil damages in the amount of 500,000 yuan, and a public apology in the Morning News (a local newspaper).

The Court hammered Beizi Clothing, taking the SHAIC’s administrative order as a prima facie case for trademark infringement. With some feeble attempts to challenge the “famousness” of Levi’s brand, Beizi Clothing was ordered to cease all infringement activities, pay 100,000 yuan, and issued a public apology.

Sounds like a slam dunk for Levi’s Co.? Right! Easy case. But doesn’t this whole thing bother anyone? By now, you might be thinking what I am thinking now—“What the hell was Levi’s Co. thinking in picking this unscrupulous distributor?”

Besides that thought, a few other Chinese idioms keep echoing in my head: “引狼入室” and “同床异梦”.

Let me explain. The first idiom literally means leading a wolf into your bedroom, and if you do that you might have to face the consequences of a devious company (pun intended.) The second one gets even better, which means sleeping in the same bed but with different dreams. It applies to relationships where parties only superficially cooperate, while they actually possess different visions about their relationship.

Ok, I know that Levi Strauss & Co. is incorporated in Delaware and headquartered in San Francisco, and that it is unfair for me to expect it to know traditional Chinese wisdom. But, could Levi’s Co. have done a better job of choosing a local Chinese partner? I think so and I run the risk of Monday morning quarterbacking (hindsight wisdom). However, for the sake of good corporate governance, any foreign company selecting partners in China should bear in mind choosing your partner carefully. Find yourself a friend, not a foe. To do that, you got to abide by Ten Commandments for doing business in China as compiled by ChinaSolved.

BIS Implements New “China Rule”on Dual-use Export Control

The Federal Register published the Department of Commerce’s updated China regulations, which have come to collectively be known as the “China rule.” As commented by Mario Mancuso, the Under Secretary of Industry and Security, it is a “right of balance” and a “model of future cooperation.” BIS intends the China Rule to encourage trade with legitimate civil end-users in the PRC, while further tightening controls on exports that could assist the PRC with its military modernization efforts.

Three main issues have been included in the Rule. First, it imposes additional licensing requirements for exports destined for a military end-use in the PRC; second, it creates the Validated End-User program (VEU); and the third, it revises the existing End-User Statement requirements by improving the threshold from the value of $5, 000.00 to $50,000.00.
This article addresses the VEU and the Threshold increase for End-User Statement issues, which are closely related to our clients’ business operation.

Validated End-User Program

Based on the China Rule, BIS removed individual license requirements for certain authorized customers in China. Under the “Validated End-User” (VEU) program, certain “trusted customers” in China with a track record of responsible civilian use of U.S.-controlled technology will be able to receive certain items without individual export licenses. This arrangement shall actually and significantly lower the administrative and regulatory burden of exporting to these “trusted” customers. “VEU will reduce lag time, expense, and uncertainty in the licensing process, helping U.S. exporters to be even more competitive in China. VEU will also act as a powerful market-based incentive for good behavior by rewarding the many firms in China who handle sensitive U.S. technology with care,” as remarked by Mario Mancuso. Currently the VEU program applies only to Chinese companies, with the expectation that it will be extended to India companies and companies in other countries in the future.

The complete procedure to request VEU authorization, as well as the procedures, timelines, and criteria the End-User Review Committee (ERC) will use in considering such requests can be found in Section 748.15 and Supplement Nos. 8 and 9 to Part 748 of the Export Administration Regulations (EAR). The Commerce Department expects to publish an initial list of approved Validated End-Users as early as July. Sectors likely to benefit from VEU include electronics, semiconductor equipment, and chemicals. BIS anticipates that a number of Chinese companies that must currently apply for individual licenses to import many items will seek VEU status to eliminate the burdens associated with repeatedly applying for multiple individual licenses.

Based on the Rule, either Chinese companies, or exporters on behalf of intended import Chinese Companies may apply for VEU status. According to the template designed to assist the application in preparing and submitting their requests for Validated End-User (VEU) authorization, some initial information and documentation should be included in the filing for an Advisory Opinion Request for Authorization Validated End-User (VEU). This includes general information such as candidate company name, operating name, destinations, company physical address and contact information, information about submitting company; structure, ownership and business activities of the candidate company; recording keep and compliance information; certification which can be an original statement with candidate company letter head containing required statements and other additional information. The deadline for the End-User Review Committee (ERC) to make a decision on the request is 30 calendar days after the application is circulated to all ERC agencies.

End-Use Certificate Threshold Improvement

The China Rule expanded the range of items for which U.S. exporters must acquire End-User Statements (“EUSs”) from the Chinese Ministry of Commerce (“MOFCOM”). However, the China Rule also addresses industry concern about additional administrative burdens relating to end-use certificates by raising the dollar threshold for obtaining an end-use certificate to $50,000 (from $5,000). However, the value limitation does not apply to the transfers of particularly sensitive items or technology to the PRC, in which case, the exporters or re-exporters shall still need to get a EUS.

Additional Links for Reference

The links below contain some helpful information and the full text of the Rule:

http://www.bis.doc.gov/News/2007/Mancuso06182007.htm

http://www.bis.doc.gov/validated_End_User.pdf

http://a257.g.akamaitech.net/7/257/2422/%2001jan20071800/edocket.access.gpo.gov/2007/pdf/E7-11588.pdf

Wahaha & Danone Dispute: “The Good, The Bad, and The Ugly”

To my fellow Texans, “the good, the bad, and the ugly” may mean the University of Texas at Austin, the Texas A & M University at College Station, and the University of Oklahoma, depending on where your loyalty lies.

To those following Danone’s dispute with Wahaha Group, this unique expression bears extraterritorial meaning.

Back in 1996, the Danone + Wahaha joint venture (“Marriage” as the Chinese media puts it) seemed rosy, promising, and “good”. Danone had the capital, international management know-how, a world renowned brand name, and much more; Wahaha Group, on the other hand, had an evolving Chinese brand, the local market, and Zong Qinghou, Wahaha’s charismatic chief. As expected, the joint venture grew into something quite respectable, 39 sub-joint ventures and controlling market share in China’s beverage business.

A lot of “bad” surfaced ever since early spring 2007. Arbitration claims have been filed by both sides in China and Sweden; Danone sued Wahaha in a state court in Los Angeles. In response to attacks from Danone on both sides, Danone threatened to sue three foreign board members on the joint venture board, alleging breach of fiduciary duty.

The “ugly” is coming in like waves in this growing international show of will and force. First, responding to Wahaha’s arbitration petitions in the Hangzhou Arbitration Commission, Danone has filed counter claims. [full report here] According to Danone’s attorney Randal Lewis, so far
“there has been no circumstance or event that is sufficient to result in the termination of the rights and obligations of the parties under the Trademark Transfer Agreement.”

Second, Danone’s litigation lawyer in the case pending in Los Angeles, which is against Ever Maple Trading and Hangzhou Hongsheng Beverage Co, said that Danone has a witness who can testify against Zong. [full report here.] The witness, named Chen Zhonghua, claims that Zong forged Chen’s signature to set up companies overseas that compete against the Danone-Wahaha joint venture. If the “marriage” metaphor about the joint venture has any merits, this would the stage of the divorce where parties dig out as much dirt as possible against each other. [by the way, as of July 13, 2007 based on this Chinese report, Zong’s wife and daughter sued individually in L.A. have refused service of process.] Boy, this is getting ugly or what.

Third, Wahaha has joined forces with another party in another lawsuit against Mr. Qin Peng of Danone in the Intermediate People’s Court in Shenyang, Liaoning Province. [read about it here.] Wahaha Beverage Ltd. and Shenyang Lingdong Shiye Development, Ltd., respective shareholders of Wahaha Group, filed derivative suit against Qin Peng for breaching his fiduciary duty by serving on the board of other companies competing against the joint venture. They base their complaint on Article 149 and 152 of the Company Law of the P. R. China (2005), which provides shareholders a right to file a derivative suit against board members for breaching their fiduciary duty to the company.

More dirt out there?

Wikipedia has a pretty good entry on this dispute.

Hepatitis B Carriers: Will Chinese Law Protect Your Job & Dignity?

Hepatitis B is the nemesis of more than 100 million people in China. Having this disease often means you face blatant discrimination in your job, career, and education. Due to the large number of people affected by the disease and the “disgrace” associated with it, more and more people have begun to speak out against discrimination of Hepatitis B carriers in China. Thus, on May 18, 2007, the Ministry of Labor & Social Security and the Ministry of Public Health jointly issued an administrative document. Bearing the title, Opinions on the Employment Rights of Hepatitis B Carriers, this document represents the first step taken by the Chinese government in protecting the rights of more than 100 million of its own people. (Applaud!)

This opinion provides that:

Employer shall not refuse to employ or cease to employ a worker for being Hepatitis B positive except for fields of employment as provided in the laws, administrative regulations, and mandates issues by the Ministry of Public Health.

国家法律、行政法规和卫生部规定禁止从事的易使乙肝扩散的工作外，用人单位不得以劳动者携带乙肝表面抗原为由，拒绝招用或辞退乙肝表面抗原携带者。

It also gives the employees a right to privacy and employers even though it recognizes that employers have the right to conduct physical exams.

Overall, this opinion is a feeble measure in light of the magnitude of the problem. For those 100 million plus Chinese folks, it is not just the torture of the disease itself that wears them down; what is worse is the stigma associated with Hepatitis. And the worse of all, their livelihood is in jeopardy just because they have the disease. Stronger and more comprehensive legislation must be introduced to protect the rights of more about 1/10 of the Chinese population.

Currently, a new law, Employment Enhancement Act (Draft) (《就业促进法》（草案)）(Chinese only), which is under debate and consideration in the National People’s Congress, does contain prospective measures aimed at employment discrimination in Article Five:

Employees shall not be discriminated on the basis of nationality, race, sex, religion, age, and physical disability.

草案第五条第二款规定：“劳动者就业，不因民族、种族、性别、宗教信仰、年龄、身体残疾等因素而受歧视。”

Prominently missing from protection under this proposed law is discrimination of people with Hepatitis B.

These 100 million strong people deserve equal treatment, a right to employment, a right to a decent livelihood, and most importantly social dignity which often flows from employment, education, and a decent livelihood.

Besides ending with a plea for protection for these folks, I also want to recount one of my personal encounters with a Hepatitis B carrier. It is one that I shall never forget.

She [to protect her identity, I will not reveal her identity] was my best friend’s girlfriend. Young, pretty, diligent, and smart. After years of study, and after passing the grueling Chinese college entrance exams, she made it into her dream college in the wondrous city of Wuhan, Hubei Province.

One day, I got an emergency phone call from my best friend, who was in a state of shock and panic. He pleaded for help for her girl friend, who just arrived in Wuhan for official enrollment. When she got to Wuhan, the school notified her that she had to go through a physical exam. That notice was like lightening out of the blue, or in Chinese, a bucket of cold water over her head that chilled her burning desires to embark on a path to a bright future for a country girl. The notice had put her hopes, dreams, and the possibility of a decent life in jeopardy because she is a Hepatitis B carrier. If the physical revealed her little secret, her acceptance to the college would be revoked.

In China, when your best friend calls for help, you do whatever you can to help. As simple as that. I had to find a solution for my best friend’s girlfriend. [Before I proceed further, I plead 5th Amendment protection. ] Someone came up with the brilliant idea of finding someone that looks like my best friend’s girlfriend, and let the look-alike go for the Hepatitis B part of the physical…

Yes, you guessed it. A replacement was found and my best friend’s girlfriend kept her little secret and a chance to a better future.

Years have passed since the date of that physical exam. I have always struggled with that incident. Something seemed wrong and out of place. She should not have to hide a medical condition probably caused by an incompetent doctor or nurse. She should not be robbed of a chance to a better life if she had not committed fraud.

So, will the Chinese law protect people like her in their employment and safeguard their sense of dignity?

It should. But I don’t know.

China’s New Labor Contract Law (II)

After the promulgation of the Labor Contract Law of the P. R. China, the legal community interested in Chinese law is abuzz with excitement and curiosity. For those who have not been able to view the full text in English, get it here. If you can read it in Chinese, get it here. Further, I suggest that you read the Labor Contract Law in conjunction with the Labor Law of P. R. China, and for that in Chinese view it here. (English version, here.) If you are a labor and employment lawyer in need of a thorough understanding of Chinese labor law, you might also want to read the Ministry of Labor’s Several Opinions on the Implementation of the Labor Law of the P. R. China (Chinese only). For regulations on minimum wage in China, you may want to read the order issued by Ministry of Labor and Social Security in 2003. (Read it here.)

Sweeping the New Labor Contract Law is on paper, but I agree with the sentiment expressed by Dan Harris of China Law Blog where he stated “Enforcement is Key.” As the law aims to extend protection to multitudes of workers from China’s vast countryside, enforcement of this law would be more problematic since so many of those from the countryside sleep on their rights for many reasons. They might simply not know what their rights are; or, they might not care to have their rights protected for the sake of getting or keeping a job.

For another comment I wrote on China's Labor Law, please read:

What Foreign Companies Need to Know About Chinese Labor Law

China's New Anti-Bribery Measures & More

Zheng Xiaoyu’s execution yesterday, amid China’s perfect storm of food and drug safety concerns from inside the country and beyond, did not surprise me. He died not just for accepting more than $850,000 in bribes for giving approval to sub-standard drugs. His death serves multiple political purposes, one of which I discussed here.

Corruption in the Chinese FDA is but a small mirror reflecting deep-rooted problems on a ginormous (gigantic + enormous) scale in China. In fact, corruption has become so rampant that even the President knows and admits that it affects the ultimate fate of the Communist Party. Thus, the government has put forth efforts, utilizing conventional and unconventional means to combat corruption among governmental officials, such as Zheng Xiaoyu, the former FDA chief of China. One of the most recent measures taken by the government appears in the form of a joint opinion issued by the Supreme People’s Court and Supreme People’s Procuratorate of the P. R. China. Titled Several Opinions on the Relevant Laws in Dealing with Accepting Bribery (“Joint Opinions”), this document spells out the types of activities to be under watch. It lays out six categories of emerging bribing venues and how they would be combated.

Here, I will try to summarize the Joint Opinions.

The six categories of bribing activities are as follows:

1. Bribery in the form of transactions whereby governmental employees assist a bribing party gain interests by:
a. selling the governmental employees automobiles or houses at prices markedly lower than reasonable market rates;
b. buying the governmental employees’ automobiles or houses at prices markedly higher than reasonable market rates;
c. or other illegal transactions of properties.

2. Bribery in the form of acquiring corporate stocks without monetary payment or investment.

3. Bribery in the form of establishing joint ownership in companies or investments whereby governmental employees assist a bribing party gain interests.

4. Bribery in the form of receiving payback from stock market investments, stock options, or other types of investments entrusted to a bribing party who in return acquires interests due to the governmental employees’ position in the government.

5. Bribery in the form of income gathered from illegal gambling whereby the bribing party gains interests from governmental employees for providing interests in return.

6. Bribery in the form of obtaining employment for family members in return for furnishing the bribing party with conveniences or interests whereby the family members receive salary without actually working.

Government employees engaging in activities listed above would be, theoretically, prosecuted and bear criminal liability. I do not have a lot of sympathy for corrupt officials who abuse their offices of trust and responsibility, but I do share the concerns that Mr. Nicholas Zamiska raised in his WSJ article titled China Targets Bribe Takers, But What About Givers? (subscription may be required.)

Mr. Zamiska states:

But what is less certain is China's commitment to addressing the possibly more-widespread practice of offering bribes, not just the high-profile government officials who take them.

He then quotes a Hong Kong law professor who sheds a little culture light on the reasons behind the Chinese government’s apparent disinterest in going after bribe givers:

"As a policy, the Chinese prosecution -- they normally don't go after the people who bribe. It's been very consistent," says Fu Hualing, an associate professor on the faculty of law at the University of Hong Kong." It doesn't matter if it's the lawyers bribing the judges or the companies bribing the officials."

Dr. Fu says bribery is a part of Chinese society and that the public and the government look at those who bribe with more sympathy than the government officials who accept bribes." If you talk to people on the street, they will think that it's the government officials who should be prosecuted, not the people who bribe," Dr. Fu
says.

No matter how insightful and incisive Dr. Fu is in his observations and assessment of the bribery scene in China, there needs to be, in my humble opinion, a resolve on the part of the government to sew up this gaping hole in the country’s crusade against corruption.

With respect to “bribery is a part of Chinese society,” I keep wondering whether Dr. Fu meant it is something that cannot be changed easily. If people are sick and tired of bribery, as I am sure they are, they might welcome a fresh idea of prosecuting bribe givers. And in response to “If you talk to people on the street,” I’d argue that people on the street 1) do bribe every day; 2) are probably ill-informed of incidents where some people bribe regularly for government contracts or approvals. If provided with a new way to look at curing the country of this cancer, the people might just buy it.

Safe Motorola Cell Phone + Deadly Battery: Who Is Liable for Tort Damages?

I have been following a high profile consumer death incident in China involving a Motorola cell phone. Here is the gist of the story reported widely in China lately (in Chinese only). On, June 19, 2007, a welder named Xiao Jinpeng (肖金鹏) (“Xiao”) with a mining company out in Gansu Province suffered a fatal injury when his Motorola cell phone exploded while on the job. It turned out that the battery was the culprit. The battery of his phone exploded under high temperature, which broke Xiao’s ribs, and one of the broken ribs pierced his heart.

Soon after the incident, Motorola (China Division) sent its investigators and lawyers to figure out what exactly happened. A governmental report came out stating that this is a case of work place death caused by shoddy cell phone battery. Xiao’s family received 130,000 Yuan in compensation from his company, but according to the Law of the People's Republic of China on Protection of the Rights and Interests of the Consumers (“Consumer Rights Protection Law”) (Chinese) and the Product Quality Law of the P. R. China (“Product Quality Law”) (Chinese), Xiao’s family is also entitled to damages from the sell and manufacturer of the cell phone battery.

According to the Product Quality Law, a seller and manufacturer have comparative tort liability for injuries or death caused by products in question.

With respect to injury or damages to property caused by products with defects, the seller is personally liable when selling products with unknown manufacturers:

Article 42

A seller shall be liable for a personal injury or damage to the other's property caused by a product's defect resulted from the fault of the seller.

A seller shall be liable for damage if he can not give the producer or the supplier of the defective product.

An injured person may seek compensation from both the seller and manufacturer:

Article 43
If the defect of a product causes personal injury or damage to other's property, the injured or damaged person may claim compensation from the producer of the product or may also claim compensation from the seller of the product. If the compensation lies to the liability of the producer of the product but the seller of the product has made the compensation, the seller of the product has the right to seek the compensation from the producer of the product. If it lies to the liability of the seller of the product but the producer of the product has made the compensation, the producer of the product has the right to seek the compensation from the seller of the product.

Article 44

If the defect of a product causes personal injury to the injured person, the injurer shall compensate for the medical expenses, the nursing fees during the period of treatment and income lost due to the miss of work; if it causes the disability of the injured person, the injurer shall pay the fees for self-aid tools, living allowance, compensation for the disability and the living expenses for the persons the injured person supports; and if it causes the death of the injured person, the injurer shall pay the funeral expenses, the pension for the family of the deceased and the living expenses necessary for the persons supported by the deceased before his death.

If the defect of a product causes damage to the property of the injured person, the injurer shall restore the damaged property to its original state or pay compensation according to the market price. If the injured person suffers other substantial damages therefrom, the injurer shall be liable therefor.

[note: the above statutory texts are extracted from the website of Lehman & Hu. For the full texts of the laws quoted here, go here]

Upon further investigation, Motorola has stated in the Chinese media that the battery involved in the case is not genuine Motorola batter; therefore, it should not bear liability for Xiao’s death. In that case, if true, Xiao’s family could only go after the seller of the cell phone, who could then trace the provider of the battery. At the same time, it is not beyond all reason that Xiao probably chose to purchase the shoddy battery when the original battery became unusable. In all possibilities, tracking down the persons liable for producing and selling these types of fake, low-quality battery will very difficult because of the lack of quality regulation enforcement and wide spread practices of the selling and buying of substandard products in China.

Correction

In my yesterday's post, there was an error about the name of the company seeking a trademark for the symbol of a horse, which Ferrari opposed.

In that post, I named the applicant White Clouds Sports Merchandise (“While Clouds”).

It should be corrected as Jia Jian Sports Merchandise of White Clouds District of Guangzhou.

Ferrari is Famous, But Is the Horse Too?

The Beijing 1st Intermediate Court was called to decided whether the picture of the horse corresponding to the Ferrari trademark is a famous trademark. And it decided that it is not, therefore not entitled to protection that the Ferrari trademark has in China.

Ferrari’s “horsing” saga with a Chinese trademark registrant started back in 1996. A Chinese department in Guangzhou, White Clouds Sports Merchandise (“While Clouds”), sought to register a trademark with a picture of a horse for use in selling a line of clothing on April 1, 1995. When the Chinese Trademark Office published the prospective trademark for public opposition on September 7, 1996, Ferrari filed a timely opposition to the registration, claiming that the trademark at issue would cause confusion among consumers with respect to the emblematic Ferrari horse. The Chinese Trademark Office did not buy Ferrari’s argument, citing that White Clouds registered the graphic of the horse first.

Ferrari appealed to the trademark review board. It advanced the argument that both the Ferrari with the horse graphic trademark and the horse graphic alone constitute famous trademarks; therefore, the registration sought by the opponent, if granted, would cause confusion among consumers. Unfortunately to Ferrari, the review board affirmed the trademark office’s decision. Ferrari then brought its battle to the people’s court for relief.

In the Court, Ferrari averred that the Ferrari, along with the graphic of the horse which is closely tied to the Ferrari mark, should enjoy protection as famous trademarks because the Ferrari trademark has become well known around the world, and it has also gained considerable familiarity among Chinese consumers. However, the Court flatly rejected Ferrari’s claim of fame for its heroic horsy. It states three reasons:
1. Ferrari failed to provide evidence of the use and advertisement relative to the trademark at issue, meaning the “horse.” Ferrari proffered evidence supporting the famous status of a related trademark—“Ferrari”, but that is not sufficient to prove that that the mark in question is entitled to protection as requested.
2. China has established an independent system to recognize famous trademarks. The recognition of “Ferrari” as a famous trademark does not equate to the recognition of the horse graphic.
3. The focal issue in the suit is not the Ferrari trademark; rather it is the “horse” graphic. The “horse” cannot be bootstrapped to the Ferrari trademark for like protection.

After more than ten years of trekking in the Chinese legal system, Ferrari got a disappointing verdict. Hopefully, Ferrari got something else too, a lesson to register its trademark, related trademarks as early as possible. Oh, do some advertising on the horse as well, in China!

Wahaha Goes on the Offensive

On July 2, 2007, the chief of Wahaha Group, Zong Qinghou, announced in a press conference that Wahaha would sue three foreign members on the Danon-Wahaha joint venture companies' board within 30 days.

In the past few months since May 2007, Wahaha has been busy defending itself against Danon’s assault on several fronts. On May 9, Danon submitted its disputes with Wahaha Group and Zong Qinghou to arbitration in Stockholm; on June 4, Danon sued two companies managed by Zong’s wife and daughter in a California state court. On June 18, Zong feebly pulled a punch by declaring the trademark transfer agreement with Danon invalid, and submitted that to the Hangzhou Arbitration Commission.

Then Wahaha Group hired the biggest law firm in China -- King & Wood to pull off something big. If Wahaha does what it said, it will file a derivative action against 3 foreign board members: Emmanuel Faber, Francois Caquelin, Qing Peng (秦鹏). The thrust of its allegations is that these three Danon-Wahaha joint venture board members violated Company Law of the P. R. China. It will, allegedly, claim that the defendants violated their duty to be loyal to the joint venture companies as board members by serving on competitor companies’ boards. Wahaha reportedly would seek damages in the amount of 1 million yuan.

If this is the only substantive blaming stone that Wahaha and Zong have got to cast at Danon, the legal ramifications of this derivative action for Danon is less than what the Chinese media have done. Given nationalistic sentiments against Danon (the “foreign devil”), many distributors of Danon-Wahaha joint venture companies have ceased to sell and distribute their products. Legal fees and judicial assessment of damages against Danon would do far less damages than consumer sentiments. After all, that is what ultimately makes or breaks a company.

The saga continues; stay tuned.

China’s New Labor Contract Law (I)

On June 29, 2007, the Standing Committee of the National People’s Congress passed the new Labor Contract Law of the P. R. China (“Labor Contract Law”). After four committee rounds of reading, consultations, and 190,000 or more public pieces of comments, the new law will go into effect on January 1, 2008, and it is expected to be a milestone for protecting workers’ rights across China.

Through a series of blog posts, I intend to introduce a snapshot view of the key clauses set forth in the Labor Contract Law. I hope that readers will have a better understanding of what the new law requires and expects of parties to an employment relationship, and that the enactment of another piece of legislation is but one small step forward in China’s long struggle to build a country under the rule of law.

Statutory Scope of the Labor Contract Law

This law applies to all corporations, privately-owned entities, Private, non-enterprise units and organizations who establish labor employment relationship with workers. Likewise, government agencies, institutions and social groups must comply with the labor contract law in their labor employment relationship with employees.

The net cast by the legislators is wide enough to afford broad protection to employees, workers, especially migrant workers from the countryside. Prior to the enactment of this law, most migrant workers enjoyed little to no legal protection, and they fell through the crack of the Lab law. In recent years, there have been widespread practices of abuses, mutilations, and downright savage treatment of those migrant workers. The slave worker scandal that broke out last month in Shanxi and Henan Province involved hundreds of migrant workers being abducted or forced into slave labor with little to no pay. The savagery gripped the world and shocked conscience of the country. At the same time, it revealed the extent of labor abuses despite the existing labor laws and regulations. In a sense, this law could not have arrived at a better time.