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.