Enforcements of Judgments in China: Pretty Good in Urban Areas (Republish)

Contrary to the popular view that enforcement of judgments is poor in China, Professor Randall Peerenboom stated in his recent article that: 

While enforcement is often portrayed as difficult in China, recent studies have found significant improvements in urban areas, where more than half of creditor-plaintiffs receive 100 per cent of the amount owed, and three quarters are able to receive partial enforcement, a situation explored in more detail [elsewhere]. Moreover, the main reason for non-enforcement is that defendants are judgment proof: they are insolvent or their assets are encumbered.  No legal system is able to enforce judgments in such circumstances.  Although cross-country comparisons can be misleading, it would appear that enforcement in China may be less problematic than in many jurisdictions, including in rich countries such as the United States, the United Kingdom, or Russia (He policy brief 3). In the World Bank’s ‘Doing Business 2008’ survey, China ranked twentieth out of 178 economies in enforcement of contracts. The survey measures the time, cost, and number of procedures involved from the moment a suit is filed until payment is made.

Looking into the reasons behind the improvement in enforcement of judgments, Peerenboom found that:

The main reasons for the improvement in enforcement are changes in the nature of the economy; general judicial reforms aiming at institution building and increasing theprofessionalism of the judiciary; and specific measures to strengthen enforcement (citation omitted). The economy in many urban areas is now more diversified, with the private sector playing a dominant role. The fate of a single company is less important to the local government, which has a broader interest in protecting its reputation as an attractive investment environment. As a result, the incentive for governments to engage in local protectionism has diminished (citation omitted).

According to Peerenboom, enforcement in less developed areas, i.e. rural China, remains a dire problem for a host of reasons.  Competency and quality of judges are still less than satisfactory.  Local economy still depend on a few sources; thus, the incentive for non enforcement of judicial judgments remain.

Improving enforcement of judgments in rural areas is likely to be a difficult task as it is not simply a judicial problem.  Lax enforcement, as can be inferred from the experience of urban areas, is a complicated institutional issue, linked to economic development, availability of well-educated, professional judges, and very significantly a thriving private business sector.  Given the reality in the vast rural areas, better enforcement in these areas probably won’t come any time soon, short of drastic changes to local conditions

Yellow Cranes, Will You Return? (Republish)

 

The Yellow Crane Tower

Forefathers departed on yellow cranes,

leaving this spectacular tower empty.

Yellow cranes will not return,

leaving the white clouds for millennia without companion.

–by Cui Hao (704-754 A.D.), Tang Dynasty

This poem has remained one of my favorites, throughout my education in China. In college in the city of Wuhan, I passed by the truly spectacular Yellow Crane Tower hundreds of times while commuting to and fro Hankou, marveling at its beauty and historical significance. It looks beautiful when you observe it on the First Bridge over theYangtze River (Chang Jiang, for Chinese readers), as it sits on the Snake Hill, stretching into the clouds over the ever grand Wuhan stretch of the Yangtze. Before I get carried away with nostalgia and poetry, I’d better move on to Chinese business law.Luckily, I get to return to the “Yellow CraneTower” for this post on cybersquatting law inChina.

As reported,Yellow Crane Tower Tobacco Company (“TCTTC”) is one of the most famed tobacco companies in Wuhan and throughoutHubei Province. And when it sought to register the www.YellowCraneTowerTobacco.cndomain name in Chinese (Huanghelou) in June 2005, it found, to its dismay, that domain name had been registered by a certain Mr. Deng, a restaurant owner in Jiangxi Province.TCTTC further found that Mr. Deng also had registered a slew of domain names using the core words “Yellow Crane Towner,” such aswww.YellowCraneTowerCigrette.cn,www.YellowCraneTowerTrade.cn, etc.

Naturally, TCTTC took Mr. Deng to court, in the Wuhan Intermediate People’s Court.

TCTTC sued Deng for trademark infringement in the form of cybersquatting. Since the central issue here is whether Deng’s registration of the domain names using the TCTTC’s registeredword mark constitutes trademark infringement, the 2001 Several Explanations on Domain Name Civil Disputes (“Domain Name Explanations”) issued by the China Supreme People’s Court apply in this instance. The Domain Name Explanations expressly provide that a mark owner can ask a court of competent jurisdiction to determine whether its mark is famous, and the court may order the cancellation of the infringing domain name if it finds unfair competition, and monetary damages are also available to the victorious plaintiff. Upon request, the Court may also order the transfer of such infringing domain name to the plaintiff. See Arts. 4-8.

To prevail, TCTTC must prove that its marks were infringed and they were famous prior to Defendant’s use. The Court found TCTTC’s marks well known, the “Yellow Crane Tower” word mark and the “Yellow Crane Tower” design mark, both of which were used by Defendant in his website. In finding these marks well-known, the Court looked to the scope and expenses of advertisement for the marks, and it cited the reputation of products bearing the marks.

Upon finding the marks in question well-known, which is the prerequisite to prevail in a domain name cancellation dispute, the Court also found infringement in Defendant’s unauthorized use of the marks in question. It reasoned that both domain names and trademarks have the quality to help consumers relate to the source of goods and services.Given that shared quality of trademarks and domain names, Defendant’s use of TCTTC’s word mark could confuse consumers, despite the unrelated nature of the parties’ trades, one in restaurant while the other in tobacco.Further, the Court disagreed with Defendant’s argument that he did not have the intent to ride on TCTTC’s trademarks to gain economic advantages, because, as the Court stated it is obvious that Defendant’s use of a well-known mark as the core for his domain names was to obtain more economic opportunities, and such use was marked with commercial intentions.

This is easy win for TCTTC here. Of course, Plaintiff had an obvious home court advantage. The “Yellow Crane Tower” brand is very well-known in Wuhan, because it is a local trademark. Even though I am not a smoker, I knew that brand while I lived inWuhan. There was advertisement everywhere in the city. Though the Court may be suspected of local protectionism, I still think it just applied the black letter law. I do not see the Court straining to protect a local player while “screwing” an outsider. Another thing noteworthy here is that Plaintiff can get either the infringing domain names canceled or transferred. I would want a transfer.

So, with a win for the local player, the “Yellow Cranes” should be able to return toWuhan upon a transfer. And that should make TCTTC happy.

But, will the “real” yellow cranes return after millennia of absence? Poets wait on…

Minimum Wages; Big Differences (Republish)

On my blog, I see a lot of searches for minimum wage standards in China, and I have been waiting for a compiled chart, detailing the wage standards. Given the size of China and the huge variance of economic development, minimum wage standards vary considerably. I need to wait no more as China Herald just posted a piece, in which Fons Tuinstra stated that a team from the Renmin University of China had prepared and made available minimum wage standards of all the provinces and regions. And this work resulted from China’s joining the Global Wage Indicator.

With respect to minimum wage variance, the standards range pretty wildly. For example,

Beijing———– 730.00 Yuan/month; 8.7 Yuan/hour

Shanghai——– 840.00 Yuan/month; 7.5 Yuan/hour

Shaanxi——— 540.00 Yuan/month for Xi’an CBD, and wage standards decrease gradually for less developed areas. In my home town (Chenggu County), the minimum wage is 460.00 Yuan/month.

This is just a sampling of the significant differences in minimum wage standards in China. So, to those who want to know the “minimum wage standard in China,” I will remind them that there is no uniform minimum wage. Luckily, they can go here to view all of the minimum wage standards, broken down to provinces, cities/districts, and counties (in some instances).

Amount in Controversy and Jurisdiction Redefined by the SPC (Republish)

On March 31, 2008, the Supreme People promulgated a new set of judicial rules, redefining first-instance jurisdiction of higher and intermediate people’s courts in civil matters across the country.

In these extremely detailed rules, the SPC lays out the required amount in controversy in order for higher or intermediate people’s courts to exercise first-instance jurisdiction over civil cases. What is really amazing is that the rules do not generalize; rather, they detail the exact minimum amount required for each province, autonomous region, and municipality.

For example:

A. Beijing

Beijing Higher People Court as first instance court:

The amount in controversy must exceed 2,000,000,000.00 200,000,000.00 Yuan, or

the amount in controversy must exceed 1,000,000,000.00 100,000,000.00 Yuan and one of the parties in dispute must be domiciled outside this jurisdiction (outside Beijing, parties from Hong Kong, Macau, or other countries).

Beijing intermediate courts (including Railway Intermediate) as first instance courts:

The amount in controversy must exceed 50,000,000.00 Yuan, or

the amount in controversy must exceed 50,000,000.00 20,000,000.00 Yuan and one of the parties in dispute must be domiciled outside this jurisdiction (outside Beijing, parties from Hong Kong, Macau, or other countries).

B. Shanghai

Same as Beijing

C. Guangdong Province

Higher People’s Court as first instance court:

The amount in controversy must exceed 3,000,000,000.00 300,000,000.00 Yuan;

the amount in controversy must exceed 2,000,000,000.00 200,000,000.00 Yuan and one of the parties in dispute must be domiciled outside this jurisdiction (outside Beijing, parties from Hong Kong, Macau, or other countries);

Cases with substantial impact on the entire province; or

Any cases that the Court deems it should exercise first-instance jurisdiction.

Intermediate courts:

1. Guangzhou, Shenzhen, Foshan, and Dongguan Intermediate courts:

The amount in controversy should be between 3,000,000,000.00300,000,000.00 and 50,000,000.00 Yuan; or

The amount in controversy should be between 2,000,000,000.00200,000,000.00 and 40,000,000.00 Yuan and one of the parties in dispute must be domiciled outside this jurisdiction (outside Beijing, parties from Hong Kong, Macau, or other countries).

2. Zhuhai, Zhongshan, Jiangmen, and Huizhou intermediate courts:

The amount in controversy should be between 3,000,000,000.00300,000,000.00 and 30,000,000.00 Yuan; or

The amount in controversy should be between 2,000,000,000.00200,000,000.00 and 20,000,000.00 Yuan and one of the parties in dispute must be domiciled outside this jurisdiction (outside Beijing, parties from Hong Kong, Macau, or other countries).

3. All of the rest intermediate courts in Guangdong:

The amount in controversy should be between 3,000,000,000.00300,000,000.00 and 20,000,000.00 Yuan; or

The amount in controversy should be between 2,000,000,000.00200,000,000.00 and 10,000,000.00 Yuan and one of the parties in dispute must be domiciled outside this jurisdiction (outside Beijing, parties from Hong Kong, Macau, or other countries).

As indicated above, these rules cover all the higher and intermediate courts inChina with like details on amount in controversy. And the amounts vary significantly from province to province, city to city, district to district in some instances. Parties in dispute should refer to these rules to find the court of competent jurisdiction.

Personally, I am very surprised to see rules that detailed on jurisdiction inChina since many rules are intentionally vague for civil law jurisdictions. As a result of these rules, there would be, presumably, less uncertainty with respect to finding the right court to sue in China. But, I am wondering what prompted the promulgation of these rules. I also wonder what these rules would have on forum shopping in China. Does anyone out there know?

Go here for the entirety of the rules in Chinese.

Summary Judgment/Procedure in China (Republish)

Having been working on summary judgment motions at work for three consecutive weeks, I kept thinking whetherChina has something similar to summary judgment in its civil trials. With limited knowledge on Chinese procedural laws, I disclaim that what I write here is really subject to future corrections from readers.

In the United States, summary judgments are available in federal and state courts. The purpose of summary judgments is to “eliminate patently unmeritorious claims and untenable defenses, not to deny a party its right to a full hearing on the merits of any real issue of fact.”Ramirez v. The Pecan Deluxe Candy Co., 839 S.W.2d 101, 105 (Tex. App.-Dallas 1992, writ denied). As to federal rules, the Federal Rules of Civil Procedure, Rule 56, governs. In the State of Texas, parties can file a conventional motion for summary judgment under Tex. R. Civ. P. 166a or a no-evidence motion for summary judgment under Tex. R. Civ. P. 166a(i).

In a traditional summary judgment motion, in order to prevail, the movant must present enough evidence to show that there are no issues of material fact, and that no reasonable jury would find for the non-movant. The key is that the movant must present evidence showing that the other party could not possibly win. On the other hand, in a no-evidence motion for summary judgment under 166 a(i), the movant does not need to submit summary judgment evidence; instead it only needs to raise specifically the issues for which the non-movant lacks supporting evidence, and argue that no reasonable jury would find for the non-movant.

In response to a traditional motion for summary judgment, the non-movant does not have the burden of proof. It only needs to present evidence contradicting the movant’s evidence, showing that issues of material fact exist.

Responding to a no-evidence motion for summary judgment, the non-movant, however, has the burden of proof; as such, it must present summary judgment evidence on each issue raised by the movant. If the non-movant in its response, presents more than a scintilla of evidence on the elements challenged by the movant, the court should deny the movant’s motion and the nonmovant is entitled to a trial on merits.

Summary judgment practice is a routine in many courts.As far as I know, it is very much alive in DallasCounty. Due to shifting political winds, the landscape of summary judgment changes with election results. Pro-plaintiff judges will probably not grant a summary judgment for anything; however, pro-defendant judges will do it more frequently. So, summary judgment is both technical and politically volatile (in Texas, at least).

After consulting a Chinese lawyer, here is what I got from an e-mail response on summary judgment, or the lack there of in China:

The concept in Chinese legal system most similar to summary judgment in the common law system is called “Summary Procedure” in Chinese civil procedural law. I attach the bilingual law for your information, as well as the excerpt below:

Chapter 13 Summary Procedure

Article 142 When adjudicating simple civil cases in which facts are clear, the relations of rights and obligations are definite, and disputes are minor, the basic people’s courts or their dispatched tribunals may apply the summary procedure stipulated in this Chapter.

Article 143 For simple civil cases, their plaintiffs may file their complaints orally.
Both parties may appear at the same time in a basic people’s court or its dispatched tribunal for a solution of their dispute. The basic people’s court or its dispatched tribunal may adjudicate the case immediately or set a date for the trial.

Article 144 When adjudicating a simple civil case, the basic people’s court or its dispatched tribunal may, at any time, use simplified methods to summon the parties and witnesses.

Article 145 A simple civil case shall be tried by one judge alone and the trial of such cases shall not be restricted by the provisions of Articles 123, 125, and 128 of this Law.

Article 146 The people’s court shall complete the adjudication of a case to which the summary procedure is applied within three months after the case is accepted.

Without real trial experience in China, I can only say that “summary Procedure” practice seems very different from summary judgment in the United States. Summary judgment, as a pre-trial practice, is a pretty evolved creature, with features like voluminous motions, persuasive affidavits, piles of records sometimes, and a hearing in a court room. I wonder how a summary procedure is played out in China.

Sichuan Earthquake (Republish)

Closely following the news in and outside China on the Sichuan earthquake, I elected to avoid blogging about it as I thought any writing from me will be, largely, irrelevant to the suffering of the victims and China in general. In addition, other China law bloggers, such as the CLB and China Esquire, have provided information on how to donate for the disaster relief in China. However, after my arrival in China on May 16, 2008, I have experienced first hand the blanketing media coverage of the events and stories unfolding constantly in the worst hit areas in Southwestern China. With the information that I have been exposed to and gathered, I feel that I could offer some of my observations and impressions without trivializing the gravity of the tragedy.

Since May 12, 2008, earthquakes have sent shock waves of destruction, grief, honor, hope and courage across China and around the world. Both Chinese and international media have intensely covered the disaster relief work, and if any of my impressions mirror what readers have already heard or read, please accept my apologies.

1. People’s Response is unprecedented. China is prone to disasters, natural and man-made. In the past, disaster relief was a matter of governmental concern, so the common man usually stayed on the sidelines, watching how the government took care of business. This quake changed that. Everyone seems genuinely impacted and concerned, and they have turned that concern into real action. The first comment I got at the Shanghai Pudong Int’l Airportwas—“Be sure to donate for the quake victims.” My father, with whom I have not talked inside China for about eight years, posed his first question to me upon my arrival—“Have you donated?”

Along side corporate and international donors, the average Chinese people at least in the cities are contributing as well. This is, in my opinion, a healthy and monumental development. After all, in a country with so many present and potential issues, a growing sense of civil/social responsibility and personal engagement could play a very positive role in solving problems that the government could not easily do alone.

2. The Chinese media coverage is less monotonous and a bit more colorful. In the past and usually, media coverage of disaster relief in Chinacharacteristically focused on which leader/official went where, said what, and brought whatever assistance…This time around, expectantly, there is still lot of that. But, I am often quite moved by stories of the average relief workers and amazing survivors. Reportedly, a mother died with her body firmly arched over her baby, who survived unscathed with a parting text message from the mother saying something to the effect of –“Dear baby, if you survive this, please forever remember that I love you.” In addition, stories about courage and sacrifice of students and teachers abound. Many victims gave up critical moments of survival so that others could escape collapsing buildings.Undoubtedly, officials and leaders sacrificed as well in a disaster of such magnitude, but, it is the tales of raw courage, love, and hope demonstrated by the common man/woman that lift people up in a difficult time such as this.

3. Tax Relief. The Chinese treasury and Central taxation authority have jointly issued guidance on tax breaks for recipients and donors of disaster-relief funds. Victims will not be taxed on their gift/relief income and donors will receive, in return, tax deductions. This quick, policy-driven response reflects the government’s flexibility, which will hopefully sustain the generous flow of donations.

4. Housing Challenges. With millions of people rendered homeless by the earthquake, the enormous problem of housing these displaced and homeless people looms. In a few months, the media coverage will soon turn its attention to the Beijing Olympic Games and other news-worthy events, but the quake victims will still be living in their tents. Similarly, businesses have also been hit or destroyed. Without a stable income, the victims must live at the mercy of the government and donors, and they must face the daunting task of rebuilding their homes and lives. How can that be done? Will the government subsidize the entire reconstruction of all the disaster areas? Even if the government does, how can corruption be avoided in allotting funds and rebuilt apartments? These are indeed challenging issues for the victims, local governments and Beijing.

5. Existing Mortgages of Destroyed Housing. What will happen to them?Assuming that most homeowners (quake victims) did not purchase mortgage insurance, which is likely to be the case given the relatively less developed economy of these areas, will they still be obligated to pay off their mortgage absent some kind of administrative exemption? Creditors, especially secured ones, want their debts paid, but victims of this quake have neither a home nor stable income. Therefore, I don’t see them having the ability nor the willingness to pay.

6. Liability for Shoddy Buildings (Schools, especially). I see a lot of tort claims arising from the shattering of the school buildings. Policy-wise, how will the courts/government (looking from a common law tort law perspective) analyze the foreseeability and causation issues? As we all know, current technology is not sophisticated enough yet to provide advanced warning of earthquakes, so the tort feasors would argue that such events are unforeseeable, thus escaping liability. But, victims could argue on the theory of negligence per se since they might be able to prove construction code violations with some expert testimonies. In addition, it is not entirely impossible for the Chinese tort law to adopt a strict liability stance on the building of school houses, in light of the disproportionately large number of schools demolished by the quake. So, I think that this powerful earthquake could potentially have a long-lasting impact on liability law in China, and that is not necessarily a bad thing.

The Case for Individual Bankruptcy in China (Republish)

Some stories rattle you so much that you cannot stop thinking about’em for a long time, and the story of Mr. Chen Si did just that to me.

Chen Si, as reported by the LA Times in its story titledOn His Weekends, Chinese Samaritan Saves Lives, is a manager of a shipping company in the city of Nanjing. On weekends, he patrols the Nanjing Changjiang Bridge, known as the “bridge of death.” For almost four years, he has appointed himself as the “guarding angel” of people in despair because many individuals come to this spectacular bridge to end their misery and lives.Usually, he tries to spot people bent on committing suicide, and runs over to rescue them from the brink of despair and death. To date, he has saved one hundred forty four (144) lives. That is an amazing number, considering that he has been pretty much on his own, without government or civilian assistance. He wants to continue saving lives and families.

At a first glance, Chen’s story warms your heart because it is good to know that there are people like him who care and act to prevent tragedies from happening. It is good to know that there are people out there in Chinawho do not worship money. And it surely is good to know that those saved by him might have a second chance at life no matter how tough it is to live on.

Yet, this story is sad at the same time. Chen is a lone “ranger,” trying to save an ever increasing number of despaired and hopeless people in China. Chen can only patrol the Nanjing Bridge. Chen can only patrol theNanjing Bridge on weekends. What about the Wuhanbridges, the Jiujiang Bridge, the numerous bridges and cliffs around the country? What about those people who commit suicide by taking poison pills? Chen saved 144 lives in four years, and “by official estimates, as many as 288,000 Chinese commit suicide each year…” The exact number of suicide in China is probably greater, and what Chen can do is so limited. What the Chens, Lis, and Wangs can do is also limited because of the size and extent of the problem.

What exactly is causing the rising suicide rate? I’m not a sociologist, nor a psychologist. And I don’t claim to know the exact answer to this question. However, I do think that people’s inability to pay their debt has something to do with it. At least some people who could not pay their debt would probably end up killing themselves, just to be over with the shame, frustration, and debt. If you read Chen’s story, you might find that a lot of people that he saved wanted to commit suicide due to their “hopeless” financial situation.

Taking this presumption that inability to pay debt, in part, contributes to the rising suicide rate, I would argue that China should seriously consider making bankruptcy available to individuals, thus creating an institutional structure to abate the massive problem that Chen could never accomplish by himself in his life time.

Bankruptcy is about giving the debtor a second chance, a fresh start. It gives those individuals in financial trouble another chance(s) to reorganize or restart by discharging certain creditors’ claims. At the same time, bankruptcy also has to balance the interest of the debtor with those of the creditors. After all, all creditors want their money back at a minimum. Therefore, reaching the right balance between creditors and the debtor in bankruptcy has always been a huge issue, and continues to be an intriguing phenomenon in the states of the U.S. For example, some states are extremely pro-creditor, like New York, Delaware; while others, likeTexas and Florida are very pro-debtor. Hence goes the popular saying: “Debtors either go to Texas or die.”Despite the inconsistencies and differences among the states in America, personal bankruptcies do accomplish a great deal by giving people in financial trouble a fresh start. Of course, bankruptcy abuses have occurred.Nonetheless, Congress has addressed that issue by amending the Bankruptcy Code to make Chapter 7 liquidation less accessible while pushing more individual bankrupt debtors to Chapter 13 proceedings.

Could personal bankruptcy work in China?

Currently, individuals are not eligible for bankruptcy under China’s new Enterprise Bankruptcy Law effective since June 1, 2007. One of the reasons cited for foreclosing individuals from bankruptcy is that Chinadoes not have a credit system like other developed countries. Of course, there is the argument that Chinashould not transplant all Western legal concepts into Chinese law.

I would give credit to both arguments, but would also argue that personal bankruptcy should be made available as soon as possible. A credit system is an important element in that it allows creditors to reasonably assess the level of risks in handing out credits. It is a simple, quick and cost-effective way to do business, and it lowers the transaction cost of moving capital from place to place. But, is it an absolute prerequisite to making bankruptcy available to individuals? Are there alternative ways to reduce creditors risks yet keep the transaction cost down? A credit system in the U.S.played an important rule in making personal bankruptcy a reality, but Americans were, are and will probably for a long time be more mobile than the Chinese. With less mobility, tracking down or discovering a person’s credit history is arguably easier, thus the transaction cost can indeed be kept low. In contrast to Americans, the Chinese are more community oriented, living in close-knit social units; therefore, the social structure also makes it a lot easier to track a person’s credit history. On account of the stated differences, the necessity of a credit system as a prerequisite for personal bankruptcy is doubtful.

With respect to the second argument, I agree that Chinashould not at any time blindly transplant legal concepts. Nonetheless, that does not mean China cannot borrow and remodel certain concepts like personal bankruptcy. The fear of introducing individual bankruptcy, I assume, is that it would encourage irresponsible spending, promote consumerism. First of all, consumerism is already there, so forget about keeping it out. Second, the Chinese believes in saving, practices saving, and loves saving. In fact, Chinaprobably has very high saving rates among its citizens, if not the highest. The introduction of a foreign legal concept is unlikely to reverse virtues passed down from thousands of years ago. And the conservative thinking that “the son shall pay the father’s debts” is still pretty prevalent,” which could help keeping abuses down.

So, individual bankruptcy could work in China.Traditional views about paying debts will act as a filter against irresponsible spending and bankruptcy abuse. Even if that fails, the NPC and/or the State Council can always step in and stem abuses by creating higher legal barriers (as it was done in the U.S.). A credit system, crucial to establishing individual bankruptcy, might be not so crucial to China because the social, geographical and cultural conditions are very different from those in the U.S. Third, allowing fictional persons, corporations, to avail themselves of the benefits of bankruptcy (a second chance) is a great move, but keeping real people, with emotions, despair, families, from have a fresh start via bankruptcy simply does not contribute to social harmony. In short, Chinashould allow individual bankruptcies as soon as possible.

Until then, Chen Si will continue to be a lone hero and savior, patrolling the Nanjing Bridge.

“Wahaha” Ain’t French, and It Belongs to China. (Republish)

Major news came out of the Danone v. Wahaha lawsuit saga, and it is again bad for Danone.

On July 30, 2008, the Hangzhou Intermediate People’s Court ruled that the “Wahaha” trademark belongs to the Wahaha Co. , not the joint venture between Danone and Wahaha, of which Danone is the majority shareholder.

Because this ruling affirms that of the Hangzhou Arbitration Commission  of December 2007 regarding this matter, the decision is not appealable, according to this report (in Chinese).

I will restate the facts briefly.  In 1996, the two parties signed a trademark agreement, transferring the “Wahaha” trademark from the Wahaha Co. to the then newly formed joint venture.  However, the Trademark Office of China disapproved this transfer.  So in the eyes of Chinese law, the transfer was never consummated, and there was no deal to speak of in terms of an IP transfer.

In 1999, the parties got creative about the trademark “transfer.”  Instead of calling it a “transfer,” they signed another agreement, titling it “Trademark Use Agreement.”  And of course, this deal was done under the table, irrespective of Chinese law.  Things went along smoothly and well for seven years, until 2006 when Danone found that it was not getting all the money that it should, and that its Chinese partner was competing against the JV.  To end all the “trickery,” Danone decided to buy out the Chinese partner, Zong Qinghou, but only to be rejected.

Hence, the lawsuits, all over the world, and all over China.

Now, the final gavel has fallen against Danone, to nobody but Danone’s surprise.  In China, the 1996 trademark transfer has been referred to the “Yang” contract, while the 1999 trademark “use” agreement the “Yin” contract.  It is pretty obvious what happened there.  Danone could not resist walking away from a guy as powerful and resourceful as Zong Qinghou, and certainly could not step away from the unbelievable profits to be made from the JV.  The “Wahaha” trademark would just be another pretty flower on the beautiful wreath that came into the JV.  However, it did not think about the consequences of doing things not in accordance with Chinese law even though it knew that the transfer was illegal in 1996.  If it is illegal done on the table, it is probably still so if done under the table.  I guess Danone pretended that there would be no problem, or even if there were a problem, its Chinese partner would take care of it.

Now, that mistake has come back to haunt Danone, for a long time.

The biggest “takeaway” from this is to follow the law no matter what your Chinese partner says, and regardless of the amount at stake.

Check out my previous posts for background information if you care about this stuff:

Wahaha v. Danone: Who Will Have the Last Laugh?

Wahaha v. Danone: Partnership at Grace’s End

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

IP Registration in Macao (Republish)

Just ran across an article Filing for Industrial Property Protection in Macau, China.  I thought it is very informative about Macao and its IP laws.

Here is what it has to say about Macao:

Macao is a small territory set on the southern coast of China, located not far from Hong Kong. It was colonized by the Portuguese in the 1500’s and became the first European settlement in the Far East. Macao’s treaty stipulated the territory would return to Chinese control. Therefore, on December 20, 1999, it changed [its] names [sic] to the Macau Special Administrative Region (SAR) of China.

The agreement that returned the region to China also stipulated it would remain under a “one country, two systems” formula. Consequently, the Chinese socialist economic system will not be practiced in Macau and great autonomy will exist, save for decisions on foreign relations and defense affairs for the next 50 years. The area is set on several islands about a sixth the size of Washington, DC, USA. Yet, tiny Macau is currently undergoing one of the greatest casino-building booms the world has ever seen.

The author, Kelly O’Connell’s description is brief yet accurate.

Then the article talks about the IP laws of Macao:

Intellectual Property rights (IPR’s) protection in Macau is administered completely separate from the People’s Republic of China. The administration is handled through the Intellectual Property Department of the Economic Services Bureau (DES) of the MSAR Government, charged with handling all IP matters in the territory. IP protection is legislated in the Industrial Property Code of Macau and the territory is also a member of the WTO and party to most WIPO conventions. All applications for protections of IP rights must be submitted in one of the official languages: Portuguese or Chinese.

The subject matter is covered by the Industrial Property Code Decree-Law Nº 97/99/M of 13 December 1999 (IP Code). The following questions will be answered to help explain the IP application process: What Subjects May Be Protected Under the Industrial Property law?; Who May File for Industrial Property Protection, what is the Fee and Where it is Published?; How is Priority Established? How are Application Inspections Conducted? On What Grounds Are Applications Rejected and What about Rectification.

Pretty good stuff, and it surely educated me.  To find out the answers to these important questions, read on here.

Any Recourse for the Slaying of American Tourist in Beijing? (Republish)

By now, I think everybody knows about the brutal attack and killing of Mr. Todd Bachman, an American tourist at the Bell Tower in Beijing on the first day of the Olympic Games. 

Caijing has a nice rendition of what happened:

Workers at a Hangzhou instrument gauge factory in eastern China’s Zhejiang Province remember Tang Yongming as an ordinary colleague who liked to joke and play cards at a local tea house.

Tang could be talkative, opinionated and moody, his former workmates told Caijing. But none thought he could kill in cold blood.

Police, however, have identified 47-year-old Tang as the knife-wielding man who shattered the peace of the Beijing Olympics’ first day by attacking an American couple and their Chinese tour guide before killing himself. The U.S. Embassy in Beijing said the couple’s adult daughter was also at the scene but escaped injury.

The husband, however, didn’t escape Tang’s blade and  died at the Drum Tower tourist site near central Beijing. U.S. news agencies identified the man as the father-in-law of the coach of the U.S. men’s volleyball team. The wounded wife and tour guide are expected to recover.

After the stabbing spree, police said, Tang killed himself by leaping from the tower’s upper level.

The August 9 incident came less than 24 hours after the capital city successfully opened the games with a Bird’s Nest stadium gala a few miles away. An embassy statement said the attack was “what appears to be a senseless act of violence.”

I agree that this is a “senseless” killing of a man and violent attack of  a few more people, right there in the heart of Beijing, where the 2008 Summer Olympic Games were unfolding.  But, I cannot brush aside my thoughts as to who should be held responsible, other than the assailant. 

Yes, you are right–I am asking if and how the family of the aggrieved can be justly compensated for the loss of their loved one.  To me, someone has got to be held responsible.  But who and how? 

Thinking from a U.S. perspective, I am trying to figure out causes of action against the parties responsible for providing security at the Bell Tower.  The Beijing city government?  The Beijing Police?  And/or whoever was providing security. 

“Sure, the defendants will argue that criminal activities committed by Mr. Tang was a superseding cause of Mr. Bachman’s death.  But, don’t we have a special and unique circumstance here?  Does the defendant(s) owe the deceased a heightened level of duty of care?  Mr. Bachman was an invitee, and those in charge of securing the Bell Tower had a duty to make that place reasonably safe and secure for folks like him.  Further, those in charge had a duty to adequately train their security personnel so that the popular tourist destination would be reasonably safe and secure.  In addition, since those in charge of security knew or should have known that more visitors were coming to the Bell Tower, which enhances the odds of harm and danger to invitees like Mr. Bachman, they have the duty to provide adequate security as reasonably prudent men would.  

But, they failed, miserably.  An attacker was able to get into the crowd, injure a few individuals, and fatally attack another before he committed suicide.  Where were the security guards?  What were they doing when the attack was happening?  Had there been adequate security Mr. Bachman would not have been fatally attacked and killed consequently.  Had there been adequate security personnel with adequate training Mr. Bachman would not have been so brutally killed by his assailant.  Therefore, it was the negligence of the parties providing security at the Bell Tower that proximately caused Mr. Bachman’s death.”

That is kind of what and how I would have argued on behalf of the deceased. 

What do you think?

What If Pigs Fly? (Republish)

“Why if pigs fly?” as my boss always asks.

Dan at China Law Blog beat me to blogging about the New York Times articleCourts Compound Pain of China’s Tainted Milk.  Doubting that I can say anything more eloquent about this topic, I quote Dan in full here:

This New York Times article does as good a job of any at setting out the issues China is facing in deciding whether to allow milk taint victims to pursue their claims in court. The article is, somewhat wrongly entitled, “Courts Compound Pain of China’s Tainted Milk.” It does a nice job dealing with the issues of whether China’s courts are set up for these sorts of mass tort cases and also whether the rejection/acceptance of such lawsuits is being driven from Beijing or locally.

I would think most Western lawyers would agree China eventually needs a system that can handle class action torts (or just mass tort cases), but the much tougher question is what it should do in the meantime.

The fact in China is that there is no recourse or redress for the wrongs committed against them.  More than sixty thousands were sickened; four babies, as far as I can remember, lost their lives to baby formula made with tainted milk; hundreds of hours of work were missed, therefore, wages lost; and countless tears shed on top of nauseating pain, suffering and mental anguish.  The list of wrongs and grief can go on and on, but, other than limited compensation from the Chinese government, there is no recourse against the individuals, companies, and entities responsible for the atrocities committed against so many innocent people.  For so many of them, money is not what they seek.  They probably seek justice, in the American vernacular–their day in court.

As Dan so nicely put, ” China eventually needs a system that can handle class action torts…”  But, no one knows, none in China, none in America, none in Europe, none in the rest of the world knows when that day will arrive.  Nobody knows when people so wronged like the families of those sicked children can seek their day in court to be heard.  So, instead of going after reality, I want to imagine what it might be like when that day finally arrives.  I want to imagine the day when “pigs fly.”  Of course, my rendition is totally based on my legal training in a common law jurisdiction as unique as that of the United States (throw in some Texas law as well because I currently clerk for a Texan lawyer).

A.  Parents Can File a Class Action against the Government.

The government entity in charge of quality control failed the suffering children, and they need to be held accountable.  As a government entity, it had the nondelegable duty to supervise, manage and control the quality of consumer products as mandated by law.  Consumers at large rely on the government’s efforts in choosing products endorsed by the government as safe, secure and of high quality.  Sanlu was endorsed by the government as a brand that was exempt from quality supervision and scrutiny, which conveyed a message to consumers that it was of superior quality and reliability.  Based on that reliance, consumers suffered paid a heavy price–their health, lives in some instances, and their blind trust in the government.  Due to this breach of its duty, the government caused injuries and damages to consumers at large, for which the government should be held responsible.  (assume that sovereign immunity is a non issue here; assume also that numerosity, typicality, adequacy of class representation, and commonality of claims are satisfied).

B.  Parents Can File a Class Action against the Manufacturers.

Filing and winning a lawsuit against the manufacturer–Sanlu should be a “slam dunk.”  Slam dunk does not mean any kind of guarantee, of course.  But, it should not be a terribly difficult case to win given the obvious duty, breach thereof, causation, and damages.  In a jury trial, it is hard to imagine a jury not giving the plaintiffs a favorable verdict.  The sticky issue might be the amount of damages, which will be addressed below.

C.  Parents Can File a Products Liability Action against the Distributors/Sellers of the Tainted Milk.

The theory of strict product liability holds all players in the chain of product manufacturing and distribution liable for defective products.  In an action regarding the tainted milk, obviously many companies sold and/or distributed defective and toxic products to consumers and caused unbelievably enormous damages to them, so they should be held liable for doing so. 

D.  Parents Can Recover under Implied Contract/Warranty and Fraud Causes of Action.

Plaintiffs may argue that manufactures, like Sanlu, breached the implied warranty that the products are fit for consumption.  Further, they can argue that when the manufacturers made products with substandard and adulterated raw materials, with knowledge that they are substandard, they engaged in fraud.  Of course, as in all fraud cases, the standard of proof is higher, but it should not be difficult to prove the massive fraud within Sanlu.  Furthermore, Plaintiff can advance the theory that manufacturers, like Sanlu, intentionally failed to disclose that their product was defective.  Evidence can establish that the management at Sanlu knew months before the scandal that the milk used in their products were tainted with melamine; yet, they chose not to disclose or recall their product.  Consequently, consumers sustained injuries and damages.

E.  Parents Can Recover Damages on Multiple Grounds.

1.  Actual damages, including but are not limited to, medical expenses, lost wages;

2.  Pain and suffering in the past and future;

3.  Mental anguish in the past and future;

4.  Exemplary damages due to intentional conduct;

5.  court costs;

6.  Attorneys’ fees; and

7.  A public apology by all defendants to the consumers at large for their wrongful acts and/or omissions (uniquely Chinese).

Even if you discount the 33% that plaintiffs’ lawyers take, Plaintiffs will still be compensated for their huge losses to a certain degree.  But what is most important to the Plaintiffs is not the money; rather, it is the very fact that they lodged their complaint, they got heard, and they found justice.  And that is the day when pigs actually flew high up in the air.

(Obviously, I am not even going to try the criminal size of the story.  That belongs to another day. )  

Sanlu Group Co. Bankrupt: Morally & Financially (Republish)

It has been reported that the infamous Sanlu Group Co. has been declared bankrupt by a Chinese court (h/t China Digital Times).  It is about time.

For background information, Sanlu Group Co. is one of the companies that manufactured and sold adulterated dairy products, including baby formula, tainted with industrial melamine.

Sanlu Group Co. and its board were thoroughly morally bankrupt.  The company knew that their products were contaminated by melamine when they used unsafe and impure milk during the manufacturing process.  Despite their knowledge of the danger that contaminated products might have on consumers, especially the young ones, they purposefully hid the information from the public and failed to disclose to the public until it was too late.  As a result, “[a]t least six infants died and more than 54,000 were hospitalized after 22 companies including Sanlu sold formula made from milk contaminated with melamine, an industrial chemical.”  When the news came out in waves about babies being sickened, I was too disgusted by the greed, immorality, and corporate filth to write anything about it.  To date, I still cannot imagine how the company managers and board members, who knew about the contamination before hand, sleep at night.  I have young children, and many of my friends and relatives in China have young children and babies.  The thought of harming helpless babies with poisonous food is too much to bear.  That is why I believe the entire management team at Sanlu Group Co. was morally bankrupt.

Now, Sanlu Group Co. is financially bankrupt in the legal sense.  “Sanlu’s bankruptcy was sought by a creditor of the company, Auckland-based Fonterra said today. The court’s ruling will ensure the orderly disposal of the company’s assets and repayment of creditors according to Chinese law, it said.”  According to the Bloomberg report, Sanlu has already been declared bankrupt by the Court after it accepted the case.  But this report is contradicted by another report in the widely read and respected Chinese financial newspaper Caijing, which reports that the Shijiazhuang Intermediate People’s Court No. 4 Tribunal has accepted the creditor-initiated petition but has yet to rule on it.  Irrespective of the discrepancy betweent the two news sources, a number of issues are noteworty, especially in light of the China’s new Enterprise Bankruptcy Law  (unofficial English translation) promulgated in 2006:

a.     Creditors can file a bankruptcy petition in the court of proper jurisdiction.  This right for creditors is provided for under Article 7.  When the debtor is unable to pay its debts when they become due, creditors have the right to apply for a reorganization or liquidation.  According to the Caijing article, a bank creditor applied for the liquidation of the debtor, Sanlu Group Co.  Presumably, the creditor has evidence to show that Sanlu could not pay its debts and reorganization is not the way to go.

b.     It is probably a smart move on the part of the bank creditor.  Under the Enterprise Bankruptcy Law, only the debtor in possession and the court appointed administrator can propose reorganization plans.  Without the right to submit reorganization plans, creditors lose a potential leverage point in the reorganization process.  Unlike the China, in the U.S. Bankruptcy Code, creditors can, after the exclusive period alloted for the debtor in possession, file their own plans.  In addition, even though various local governments (courts indirectly) have so far blocked lawsuits against Sanlu for products liability associated with the contaminated milk products, it is uncertain that whether some consumers could ultimately sue within the general two year statute of limitations.  Further, since the bank creditor is a secured creditor, it has the first lick at anything in the company.  One of the most applauded features of the new Bankruptcy Law is that secured creditors’ claims have superiority over employee compensation and other general claims.  With this priority, the secured bank creditor is guaranteed payment to the greatest extent before anyone else can jump in for a share.  So, it makes great sense for the bank to file for liquidation when Sanlu still has something left at this stage.

c.     Besides liquidation, reorganization and conciliation are also options for Sanlu under certain circumstances as provided in the Enterprise Bankruptcy Law.  According to the Caijing report, another compnay, Beijing Sanyuan Food Products Co., Ltd. is in the process of formalizing acquiring Sanlu.  Of course, as the new owner of Sanlu, Sanyuan plans to reorganize rather than liquidate Sanlu.  However, Sanyuan apparently did not anticipate that a creditor could race it to the court house and file for liquidation.  How will this strategic move by the bank creditor end up impacting Sanyuan is something to watch for in the future.  But I bet you Sanyuan is probably kicking itself for not filing for reorganization as soon as possbile after the M & A is consummated.  Of course, I am assuming that the M & A has already been done by the time the bank filed the liquidation suit.  This raises an interesting legal issue–does a prospective owner of a insolvent company have standing to file an application for reorganization?  (I don’t have the answer yet, and I’d love to hear your opinion.)

Won’t this be a good law school exam question?

The Protection of Secured Creditors in China Under the New Enterprise Bankruptcy Law (Republish)

 Bankruptcy law is exceedingly complex yet interesting.  It is complex because the law has to banlance many competing interests when a business entity falls into financial trouble: the entity itself, its employees, its secured creditors, its general unsecured creditors, its owners, its suppliers, and the federal government (the IRS).  It is interesting because bankruptcy constitutes either the end or the springboard for rebirth for a business entity, or individual for that matter. 

Bankruptcy lawyers are probably doing pretty well now.  Given the bad and worsening economic conditions, more and more business and individuals will fall behind on their debts, thus in need of bankruptcy protection, either liquidation or reorganization.  If the reorganization route is taken, legal counsel plays a very pivotal role during the entire reorganization process.

Since I just wrote a post about Sanlu’s bankruptcy, I figured that I should share a paper that I wrote for my comparative law class on China’s new Enterprise Bankruptcy Law.  The paper is titled–Secured Creditors in Corporate Reorganization: A Comparative View of the United States and China.  If interested, please email me.

Shenzhen Court Convicts Software Pirates: A Cause for Cautious Optismism (Republish)

On December 31, 2008, a criminal court in the Futian District of the southern city of Shenzhen convicted 11 suspects charged with pirating Microsoft software.  Besides the criminal convictions, the Court also handed out hefty fines to some of the criminals.  The result of this case surprised many, and was welcomed, of course, by Microsoft Corporation and many intellectual property holders that do or want to do business in China.  In part, I agree this is a great case to celebrate for the enforcement of IP laws in China, I am only cautiously optimistic about the progress that China is making in the overall enforcement of its otherwise strong laws.

The following provides the background information for this post:

Wang and his counterfeit ring were found to have made illicit gains of 1.9 million yuan by counterfeiting 15,000 disks of Microsoft software and distributing 54,837 disks, said the statement.

On Dec. 31, Wang was sentenced to six and a-half years in prison with a fine of 1.5 million yuan.

China’s Criminal Law defines “especially grave violations of copyright” as those involving 2,500 or more copies. Violators could be sentenced to three to seven years in jail. Suspects in similar cases could face up to five years in prison in the United States.

Zhang and Che were sentenced to five years and three and a-half years in jail, respectively, with fines of 400,000 yuan and 800,000 yuan. Eight other offenders were jailed for 18 months to three and a half years.

The verdict was arrived at under the Criminal Law and two judicial explanations on criminal cases of violation of intellectual property rights by the Supreme People’s Court and Supreme People’s Procuratorate, the statement said.

There is no doubt that software piracy is a tremendous legal and economic problem for China and for the business community.  There is also no doubt that China does have the necessary laws and regulations already in place, protecting property rights in software by imposing monetary fines and even criminal punishment.  However, as is well known, the problem always lies in enforcement.

For example, as far as the legal infrastructure is concerned, China has the following (to name just a few) that directly deal with criminalizing software piracy:

a.    Copyright Law of China (2001), see Articles 47, 48;

b.    Regulations on Computer Software Protection (2002), see Articles 23, 24;

c.    Criminal Law of China (1997), see Articles 213-220.

d.   IP Infringement Criminal Thresholds (2004).

Basically, China’s got all the laws on paper that will make all software owners’ hearts sing.  But, as many commentators have suggested, software piracy is not simply a legal problem that can be addressed by a few pieces of legislation and a host of regulations and judicial interpretations.  That is why piracy is so rampant in China, almost everywhere in the nation, despite all the progress China has made on IP protection.

Now, the Shenzhen Court has put a bunch of software pirates out of business and has given a number of them jail time.  Does this suggest a breakthrough in enforcing software rights in China? Or does it still represent yet another critical step in China’s long march towards becoming a serious software protector?  Views diverge on this.  For instance,

Li Shunde, a legal scholar who heads the Chinese Academy of Social Sciences Intellectual Property Research Center, told Xinhua: “This [case] shows China’s sincerity in implementing intellectual property law enforcement.”

Mr. Li regards this case as a prime example of China’s “sincerity” and real action in enforcing software law enforcement.  But I respectfully disagree.  I think this case serves as an example of what China can do when under intense international pressure.  The fact that Microsoft and FBI were involved in the initial busting of the convicted should not be lost on readers.  Further, this case shows what the city of Shenzhen has chosen to do to fight software piracy.  Long regarded as a manufacturing powerhouse, Shenzhen has been trying to transform itself to be the next high-tech city in China.  Shutting down a piracy ring within jurisdiction of Shenzhen is a good additional step towards providing the necessary infrastructure to incubate the rebirth of the new high-tech Shenzhen.  But, equating the progress made in this southern pearl of a city to that of the entire country is unrealistic and exaggerating.  The fact is that much of China has much to do to catch up with what this Shenzhen Court has done.

Want Lasting Relationships in China? Start with Mutual Trust (Republish)

First of all, if you have not read Jack Perkowski’s Managing The Dragon, you are missing a tremendous resource like a lawyer missing a copy of the Black’s Law Dictionary.  Yea, it is that good.  I bought that book and could not put it down for an entire day…

Besides offering insights on doing business in China from the ground up in that book, Jack consistently updates his blog with amazing nuggets of practical “how-to-dos.”  In a recent post, Managing the Dragon discussed “Building Relationships in China,” which topic is a perennial item for people interested in or mystified by China.  In the post, when asked by a Korean reader of his excellent book on how to build lasting relationships in China, Jack states from personal experience, trial and error:

Before discussing specifics, keep in mind that establishing a level of trust with your Chinese counterparts should be your overriding long-term goal. When I first came to China, everyone emphasized the importance of “mutual trust.” In fact, it was said so many times that I began to think of it as a platitude, just like motherhood and apple pie. “Of course,” I thought to myself, “who could possibly be against ‘mutual trust’?” The longer I’m in China, though, the more I appreciate the wisdom of that advice. Once a level of mutual trust is achieved, life becomes a great deal easier. Mutual trust is not something that can be achieved overnight. It takes years, but it’s important to get started right away. How do you do it? It’s simple, do what you say you are going to do, and treat your partner withrespect, openness and candor. If you do this consistently over a long period of time, mutual trust will follow.

(Emphasis added)

I could not agree more about the absolute importance of “mutual trust”. 

First, why is there a a need for trust?  Despite China’s opening up and decades of business dealing between the Chinese and “westerners” in general, there is still a lack of trust in at the start of a business relationship.  Historically, business people in China do not enjoy a reputation as being trustworthy, honest, and forthright, and people generally approach them with caution.  We have the recent product quality scandals as adequate proof of an actual lack of trustworthiness on the part of many business people.  This need for trust is, in a sense, heightened with respect to foreigners because of the vast differences: culture, language, world view, educational background, to name a few.  On  a personal level, doubts and questions are legitimate when people of vastly different backgrounds try to forge relationships.  Where business people intend to engage in investments and commercial transactions with Chinese parties, doubts and questions are not only inevitable but also warranted.  

Second, how do you build mutual trust?  Jack’s prescription calls for “respect, openness and candor.”  Once again, he is 100% right on the money.  To echo Jack’s point, I tell a story.  In the not so distant past, the relationship between the U.S. and China came to a historical low when the U.S. led NATO forces “mistakenly” bombed the Chinese Embassy building in the former Belgrade, Yugoslavia, sending Chinese college students into a frenzy of hatred and confusion towards Americans.  Students protested in front of foreign (European and American) consulates; they smashed windows of KFC and McDonald’s restaurants; and they painted huge American national flags on roads for Chinese students and cars to trample…They were angry, their emotions were raw, and the government allowed them to vent to show the outrage at the manifestly wrong American policy and actions in Yugoslavia.  Although angry and hurt, college students still had to go to their English classes, taught by American professors. 

One of my friends was teaching at a large university in China at that time, and her experience offers some unique insights into how mutual trust is built in China, even against a difficult political backdrop.  One day after the bombing incident, she knew that she had to do something about it in class, but she did not know what to say.  The most important thing she had in mind was to be open to the students, to let them express their thoughts and emotions.  When she stepped into her classroom, the students were obviously emotional, and she noticed that a few officials from the college’s administration were sitting in the back (maybe for her safety; maybe for other reasons).  To begin, she said something to the effect: I don’t know what exactly happened in Belgrade, I don’t understand why it happened, I don’t think it should have happened, and I am so sorry for the loss (of lives and face) that you have suffered.  I am willing to listen to whatever you want to say.  After that, she began to invite her students to talk about what they thought and how they felt.  Very soon, the dynamics of the classroom transformed.  Students were expressing themselves, instead of brewing inside with hatred.  Even the officials in the back of the classroom relaxed.  Needless to say, from thereon, her status in the school changed.  Students became more open, and they came to her to discuss other matters.  And significantly, her employment contract was extended for another year.

What does this experience of a foreign teacher suggest?  Be open to the Chinese party that you are dealing with.  Don’t be afraid of talking about tough issues.  But, when you are talking about them, respect what they want to express.  Perhaps you don’t agree with them and perhaps you don’t understand their emotions, positions or arguments, but you need to show basic respect for their right to express themselves.  Then, be candid about your thoughts as well.  Let them know what you are thinking, and show some vulnerability, show them that you are a human being, with doubts, frustrations, and concerns.  But when you are expressing yourself, use sound judgment about what you say.  Gauge your audience so that your statements do not put them off.  Remember, mutual trust comes not in one day, but through a long, incremental process.  While you need to be candid, don’t try to rush things.

In sum, building relationships in China takes time and effort.  But one needs to work on creating mutual trust with openness, respect, candor, and wisdom.  Before all that, check out Jack’s post.

Families Victimized in the Melamine Scandal: Will You Ever Be Heard? (Republish)

The NY Times reported that some family members related to the victims of the melamine scandal have filed a products liability class action lawsuit.

This latest lawsuit is intriguing in a number of ways, which will be discussed below:

A.  Plaintiffs Sued in the The Supreme People’s Court of China.

Despite repeated efforts to bring lawsuits in various local courts in China, Hubei Province, Henan Province, etc., plaintiffs have failed to be heard because those courts simply refused to accept the cases.  Due to political reasons and pressure, the courts did not want to take political and social “hot potatoes” into their own hands.  

Very recently, dairy companies, under the auspice of the China Dairy Product Association, offered to settle all claims, present and future, for a sum widely reported in China and abroad.  That effort, to a large degree, has failed because many victims and their families refused to be “bought” by the paltry amount offered in the settlement proposal.  Therefore, the families still actively seek redress through other channels, courts, petitions, and the media.  Of course, suing the perpetrators in the highest court of the land would be the ideal thing to do, but probably the last resort given the fact that other courts have shut their doors at plaintiffs’ face.

The legal question, naturally, is whether the Supreme People’s Court has proper subject matter jurisdiction.  In all lawsuits, this is the first order of business and probably one of the most important questions because a court without proper subject matter jurisdiction cannot adjudicate a case, period.  In this case, according to the Chinese Civil Procedure Law (and subsequent judicial opinions), the Supreme People’s Court can have jurisdiction and be the First Instance Court over matters of national significance, and over cases that it deems ripe and proper for adjudication by the Court.

In light of the procedural law as stated above, the inquiry is then whether the case in question is of “national significance” or if it is the type of case that the Court feels it can properly adjudicate.  I’d argue “yes” to both questions.  First, the scale of the tort was unprecedentedly large.  Melamine tainted milk has so far killed six children and sickened thousands, all over the country.  Victims are mostly children, from different family background, poor, rich, and middle class.  Second, tainted milk was sold all over the country, thus spreading the impact of tort liability all over the nation.  Third, products safety and liability, given their importance, are national issues, dogging manufacturers, distributors, and consumers across the nation.  In sum, the case at bar involves claims of national significance.  

Further, the Court should accept the case because of the large stake in question.  Social harmony is in jeopardy as a result of this massive scandal because of the number of people sickened.  It is the egregious tort committed by the defendants that breached social harmony, not  the resultant lawsuits that will allegedly harm social harmony.  Many victims have so far not been able to seek justice in a court since lower courts have, without exception, refused to accept these type of cases.  As the highest court of the People’s Republic of China, it is the time for the Court to step up and lead the way when the lower courts are directionless and victims have definitely suffered injuries that call for adjudication and redress.  

In addition, civil liability should be imposed in addition to criminal liability.  Some involved in the scandal have been held criminally liable for their intentional acts.  Even though criminal liability serves its purpose in addressing the wrongs committed, it is not complete and thorough justice for those hurt for no faults of their own.  Many suffered permanent losses, and many will continue to suffer in the future.  For their losses and damages, they should be compensated.  Such compensation, in addition to criminal liability, will work together to form a formidable deterrent for future tortious acts and/or omissions.

B.  Plaintiffs Filed a Class Action Lawsuit.

[check back later for updates.]

Zhejiang Courts Making a Mark on China's IP Law (Republish)

Over the years, folks familiar with China’s IP laws know in general that courts in Beijing, Shanghai, and Guangdong are pretty good.  These courts are good for many reasons: the judges are well trained and versed in intellectual property laws; the judges make reasonable decisions; the courts are not terribly biased toward foreign parties.  Overall, foreign IPR holders are more likely to have a fair trial in courts situated in these locales. 

However, I have noticed another trend–IP courts in the eastern province of Zhejiang are also making noticeable decisions as well.  In fact, in a conversation with Toronto-based international lawyer, Paul Jones, both of us were pretty impressed by the some of the courts in Zhejiang because the judges seem to “get it.”

A recent piece out of the American Daily confirmed my observation and hunch about the Zhejiang Courts.  In that piece, the author notes:

For years, foreign companies have complained that patent and trademark infringers in China are treated too lightly. With damages typically capped at 500,000 yuan ($73,000), actual awards are often much lower.

But some courts in China’s Zhejiang province have recently gotten tough, ordering high-profile infringers to pay millions of dollars in damages. Unfortunately for multinational corporations, the verdicts have all been against them.

Last month, Samsung Corp. was ordered by a Zhejiang court to pay 50 million yuan ($7.3 million) for infringing  local company Holley Communication’s cell phone technology patent. Earlier in 2008 another Zhejiang court ordered well-known Hong Kong clothing chain G2000 to pay 20 million yuan ($2.9 million) for violating a local entrepreneur’s “2000″ trademark. In 2007 brewer Zhejiang Lanye won a 3 million yuan ($439,000) judgment against Pepsi over the latter’s use of the phrase “blue storm” in a marketing campaign.

These verdicts follow the most closely watched case of all: In September 2007 France’s Schneider Electric was ordered to pay a whopping 334.8 million yuan ($49 million) for violating Wenzhou-based CHINT Group’s circuit breaker patent. Schneider says the damages are more than 20 times greater than the next-highest award by a Chinese court in a similar case.

China Business Law Blog discussed most of the cases in the past.  Read the post about Lanye here, where I analyzed why the Court held in favor of a little known brewer and against the American beverage giant Pepsi.  Read the post about G2000 here and here , where I analyzed how G2000 fell short in protecting its trademark rights by not registering for a wider range of goods and the bitter fruit of that failure.  Taken as a whole, the four notable IP cases out of Zhejiang Province all bear the same remarkable characteristic–very large award for damages.  The $49 million hit against Schneider Electric is a pretty hefty chunk of money to fork over for any IPR holder, in any jurisdiction.

So, what do all these cases out of Zhejiang mean?  Will the Zhejiang courts lead the way for large awards in IP infringement cases in China?  So far, we know that three of the cases referred to above have not been reversed/remanded yet, and that means the Zhejiang courts will likely continue to hand out heavy fines for IP infringements.  However, as suggested by the American Daily article, the large fines have so far been levied against foreign/Hong Kong defendants, which tends to lead one to conclude that the Zhejiang courts hold foreign IP infringers to a higher standard, thus subjecting them to harsher penalties.  We don’t know yet, if and when given an opportunity, if the Zhejiang courts will be willing to levy harsh fines against Chinese infringers where the circumstances require as such.  

Assuming that the courts do not, then this local favoritism will not go challenged.  When the Chinese courts do adhere to the 500,000 RMB damage limit, foreigners cried foul.  Now, when the Chinese courts do hand out much larger fines, as had been wished for by foreigners, foreigners held accountable cry foul too.  Of course, this complaint is a legitimate one if there is indeed local favoritism.  To confirm, a comprehensive study based on statistics is warranted.  However, if no study or reliable data can confirm that the Zhejiang courts are biased, then foreign IP holders really have a problem themselves because they cannot have the best of both worlds on the damage issue.

I see that the Supreme People’s Court may need to speak up once again on damages in IP lawsuits.

Basics about Setting Up Business in China (Republish)

A few days ago, I ran into this article intended for Australians who want to set up business in China.  It discusses eight (8) basic elements that each businessperson  needs to know before charging into China.  I thought it was pretty good, and would like to share below.

1.  You have more than one way to skin the cat.  Namely, you can do joint ventures, wholly foreign owned enterprise, or a representative office.  Each form of business entity has its own advantages and disadvantages, and they have been well discussed by folks at China Law Blog and China Briefing.  Not to keep beating the dead horse, but you need to know that a representative office is not a really good way to go if you want to conduct business on the ground in China.

2.  Articulate clearly what you intend to do in China.  If you have a business idea/concept, you need to be able to articulate how you plan to execute that big plan, how you intend to make money.  A vague idea will not do.  This is so because when you fill out all your application materials, you have to draft, by yourself or through your lawyer, a feasibility study, which has to be somewhat detailed in describing your business.

3.   Pick your spot in China.  Even though China is big, places suitable for your business might be few.  Take full advantage of the tax breaks on the table courtesy of the Chinese government.  Western and central provinces still have nice tax cuts to hand out.

4.  Put down your minimum registered capital.  The local industry and commerce bureau office/administration where you submit your application will determine, pursuant to your business plans and feasibility study, how much minimum capital you need to inject.  You may contribute a part of your IP or equipment toward that registered capital, but they set the cash-equipment ratio for you.

5.  Treat your Articles of Association seriously.  This is a very important piece of governing document for your business in China because the business scope therein may impact your ability to repatriate profits back home.  If your actual business scope is larger than the scope described in the AOA, problems may arise since you are technically doing part of your business illegally.

6.  Take care of your labor relations.  Enough has been said and discussed about China’s Labor Employment Law.  Even though enforcement is pretty lax right now due to the global economic crisis, don’t count on the Chinese government to cut you some slack all the time.  Do it right from the start.

7.  Know your local partner.  Dances with Wolves might be romantic, but it is also dangerous.  No kidding, go ask Danone, Inc. if you have doubts about this.  If you want control of the joint venture, make sure you know exactly what it means to control a business in China from a legal stand point, i.e. stock ownership, having a trustworthy local manager, be in charge of that all powerful corporate seal, etc.

8.  Develop local relationships.  This includes relationships with your employees, staff, local government officials, suppliers, etc.  An earlier postdiscuss how to do this.

These are very basic stuff for preparing to do business in China, and I’d like to add the following:

9.  Protect your intellectual property.  If you got intellectual property components in your business, treat like they are yours.  China will protect your IPR in trademarks, patents, copyrights and trade secrets if you take the initial steps toward safeguarding them through proper registration, recordation, and non-compete/nondisclosure agreements.  I disagree with assertions that China has no IP laws.

10.  Be patient.  Things WILL take longer than you planned.  Simple as that.  I’m not saying that the Chinese are inefficient or incompetent; I am saying that things will go wrong, little things, like renting a place for your business and the landlord has no proof of land ownership, like you don’t have a board resolution for something.  Similarly, things will be different with handling your local staff.  They have different experiences and expectations, and you have yours.  It takes time to mesh.

11.   Find the nuance.  China changes quickly.  Its laws, regulations, macro socio-economic factors all change constantly.  It’s hard to imagine a business will thrive in an country with impactful yet nuanced changes in its business and legal environments.  The Chinese government adjusts its macro economic policies constantly in accordance with local and global shifts.  For example, when the economic situation got worse in the last two quarters, China quickened the pace for granting business license to foreigners (Read China Law Blog’s latest post.); when China wanted to slow down exporting and start to make its growth more sustainable, it stopped the VAT rebates to exporters (available yet again recently), and put a ban on certain manufacturing in parts of China.  To be able to survive China, a businessperson must be constantly on the lookout for nuanced changes in China.

12.  What can you do for China?  ”Ask not what your country can do for you; ask what you can do for your country.”  While you contemplate business success in China, ask yourself what you can do for China.  It maybe creating jobs, generating tax revenue, contributing to charity, setting up university scholarships, making available internship opportunities for local students, or whatever.  Small measures of kindness, small gestures of friendship will make you a “hero,” rich and successful ultimately assuming you do 1-12.  The Chinese almost “deify” foreigners that do stuff for China.  Consider the Flying Tigers, Dr. Henry Norman Bethune.  Of course, you don’t need to be a savior, just do something while you make money.