Wahaha Goes on the Offensive

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

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

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

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

The saga continues; stay tuned.

China’s New Labor Contract Law (I)

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

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

Statutory Scope of the Labor Contract Law

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

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

Time to Raise the Bar on Professional Ethics for Chinese Lawyers? (II)

Duty of Confidentiality

Confidentiality is the bedrock of an open and trusting relationship between a lawyer and his clients. Confidential information is what a lawyer learns from or as a result of representing a client. Such information should be kept strictly confidential and secret unless exceptions apply. See ABA Rule 1.6

The Current Lawyer’s Law and Ethics prohibit a lawyer from divulging “national secrets, clients’ trade secrets, and privacy of parties” learned by the lawyer during representation. What is protected by confidentiality is, as seen, limited to national secrets, trade secrets, and personal privacy; to further comprise the safeguard of confidentiality, personal privacy is not defined and its scope not delineated. In China, personal privacy does not get as much protection as in the west where a higher premium is placed on it. Additionally, in representations where trade secrets are not of concern (i.e. an ordinary breach of contract case), clients are out of luck in term of confidentiality. Simply put, duty of confidentiality as stated in the Current Lawyer’s Law and Ethics does not provide sufficient protection to clients.

Amendments to the Current Lawyer’s Law expand the scope of information to be protected by confidentiality. Article 42 § One maintains the original confidentiality language; but Section Two inserts the difference. It provides that: “With respect to information gathered during the course of the representation which is adverse to clients’ interests, lawyers have no duty to testify and report such information unless…crime or against public interests…”

Positive step forward this amendment is, but this new provision does not go far enough to impose an affirmative duty to maintain the secrecy of information adverse to the interests of clients. Contrary to the ABA Rules, which allow disclosure under limited conditions, the Amended Law states apparently that a lawyer has no duty to disclose under most circumstances (excepting info about criminal activities and that which affects national security and major public interests), which makes such disclosure permissive. Will permissive disclosure of clients’ confidential foster better communication between clients and their lawyers? One surely hopes so. But if I were a client, I’d hesitate talking about certain things, not even with my Chinese lawyer.

Time to Raise the Professional Ethics Bar for Chinese Lawyers?

You bet!

Undoubtedly, many Chinese lawyers adhere to their code of professional conduct, and they operate with utmost ethical conviction. Co-existing with such honorable professionals in China is, however, an often times unclear set of ethical rules insufficient in regulating a fast growing profession—lawyering. At the end of 2006, China had more than 130,000 lawyers and 13,000 plus lawyer firms. Law on Lawyers of the P. R. China (“Current Lawyer’s Law”) was last amended in 2001. Rules of Professional Ethics and Discipline (“Ethics Rules”) was accordingly revised in 2001 to reflect the changes in the law. On June 24, 2007, amendments to the Old Lawyer’s Law were discussed and some higher standards might be adopted for Chinese lawyers.

Duty of Loyalty

Under the Current Laywer’s Law and Ethics Rule, a lawyer is forbidden to represent both sides of the same conflict. Similar to the American Bar Association Rules (“ABA Rules”), the Chinese rule is a bright line rule, disallowing representation where a concurrent conflict of interests is present.

The new proposed law adds some more restriction to a lawyer’s scope of representation. It requires a lawyer to avoid conflict of interests in joint representations, and to shun conflicts between the lawyer, his close families, and the lawyer’s clients. See Article 43 Draft Amended Law on Lawyers 2007. Obviously, this is a big problem in China where family ties are stronger than those of some other countries, and a close relationship generates a higher possibility for conflict of interests where the lawyer and his client’s interests diverge if the lawyer’s family members are involved in the same transaction in question. This additional requirement is, to my mind, a bold step toward clearly drawing the line in the sand for the lawyer where conflict of interest might surface in his/her practice.

Furthermore, the new amended law expressly calls for lawyers to conduct conflict checks prior to representation. In actual practice, many lawyers probably have already been doing this to avoid conflicts. However, an affirmative duty to run a conflict check sets a bright line rule easier for all to see and follow.

Unfortunately, this amended law still does not address loyalty to former clients. The ABA Rule 1.9 states that a lawyer shall not represent new client in the same or substantially related matter whose interests are materially adverse to a former client absent written informed consent from a former client. Without the affirmative duty of loyalty to former clients, a lawyer can turn on his own clients while not offending his duty of confidentiality to them. Hopefully, this issue would be raised before the formal adoption of the new Law.

Duty of Confidentiality—(to be continued…)

American Passport & China Franchise Registration

What do getting an American passport and registering a franchise in China have to do with each other? Normally, I would say NOTHING unless you have to register your franchise personally in China (which by the way is totally unnecessary).

Now, I think one word accurately describes them both---hard.

If you are an American and you need a passport to travel this summer, my deepest sympathy goes to you for what will have to endure to acquire it. Images of people encircling a passport office in the summer heat makes me feel lucky about my passport experience in China seven years ago.

The Bush Administration initiated a new security rule requiring all U.S. citizens to show their I.D. and proof of U.S. citizenship at border crossing. (Read about it here.) This requirement threw Americans quiet a bit, and a large number of Americans began to apply for a passport at the beginning of 2007. Passport offices, faced with a sudden increase of applications, are not equipped with the necessary personnel and equipment to process the applications, thus generating a back log of applications. When travelers figured out that if they do not do something to speed up the application process, they would not be able to leave the country as planned. Hence, the long lines.

The root of the problem is governmental regulations without the requisite resources to carry them out.

Chinese franchise regulators have created just the same problem. Three pieces of franchise regulations went into effect on May 1, 2007:

Regulations for the Administration of Commercial Franchising Operations
Commercial Franchise Registration Management Measures
Commercial Franchise Information Disclosure Management Measures

These new regulations did away with pre-approval in order to franchise in most industries in China. However, they impose mandatory registration and disclosure duties on franchisors. For American franchisors, registration and disclosure are nothing new because disclosure is required under the FTC Franchise Rule, and 15 states require registration as well. Registration of franchises, however, is new to both Chinese franchisors and regulators in that it has not been done before, and administrative glitches abound, to say the least.

Both local and central governments are not adequately equipped and prepared to implement the registration rules. Registration of a franchise in China involves a large quantity of paper work to be reviewed by regulators, and documents filed by franchisors are to be archived by the government. In addition, franchisors are required to amend material changes and file annual reports with the regulators. These mandates inevitably necessitate personnel, equipment, office space, and other resources.
A lack of planning and preparation is not the end of the story. At the end of 2006, China has about 26,000 franchise systems in place according to an industry report. Mandatory registration requirement means all of the 26,000 plus franchise systems must be registered before May 2008 to avoid administrative penalties. Imagine the amount of documents, the volume of phone calls, and number of inquiries that the regulators would have to keep up with. I am not even counting all of those foreign franchisors impatiently waiting to cash in before the 2008 Olympic gold rush.

The Chinese franchise regulators are not prepared, if not overwhelmed, to carry out rules made by the government.

With due respect to regulators in China and the U.S or elsewhere, regulating personal or commercial activities ain’t as simple as passing a law (sorry to state the obvious). Before making people do or not do something, it benefits all if the government would do a little bit more planning.

Please!

China’s Anti-monopoly Law: A Second Look

The Standing Committee of the People’s Congress read the draft anti-monopoly law for the second time on June 24, 2007. Six new proposals (Chinese only) have been added onto the draft law. Since there is so much hype about the much anticipated law, I will detail what was added in the 2nd read.

1. The central government shall formulate and implement regulations to strengthen and improve macro control, and to effect a unified, open, competitive, and orderly market system.

国家制定和实施与社会主义经济相适应的竞争规则，加强和完善宏观调控，健全统一、开放、竞争、有序的市场体系。

The overall policy concern underlying this addition is to achieve a balanced and coordinated relationship between anti-monopoly and other economic policies.


2. Operators can legally combine and merge through fair competition and voluntary association to expand the scale of operations, and improve their market competitiveness.

经营者可以通过公平竞争、自愿联合，依法实施集中，扩大经营规模，提高市场竞争能力。

This addition is aimed at achieving a balance between combating monopoly and allowing Chinese companies to join forces against global competition. However, in order to accomplish large scale mergers, operators must face a proposed western-style legislative hearing in order to effectively prevent monopoly.


3. Operator in dominant market positions may not abuse their position to exclude or restrict competition.

具有市场支配地位的经营者，不得滥用市场支配地位，排除、限制竞争

This new rule corresponds with # 2. As many developed countries allow companies to gain dominant market positions yet at the same time regulate against the manipulation of such position to the detriment of trade, China sees that it should adopt similar antimonopoly rules that keep companies in check once they become big enough to be able to abuse its market power. During the 2nd read session of the law, the issue of price fixing was also raised.


4. State-owned companies with a national franchise are to be scrutinized in their pricing.

专营专卖将被严格监控

There has been growing dissatisfaction in China with state-owned companies in many industries, i.e, telecom, oil & gas, and other utilities. These companies seem to be immune from market forces in that they charge unreasonable fees for their products and services. This new provision represents an attempt to keep state-owned companies in strategic industries on the national pedestal yet scrutinize their commercial activities relative to consumer protection.


5. Industry associations should strengthen self regulation to guide the operators to compete legally, and to maintain the market competition order.

行业协会应当加强行业自律，引导本行业经营者依法竞争，维护市场竞争秩序。

Industry associations wear a semi-governmental hat. It has been given the responsibility of guiding players in relevant industries to play by the rules of the Pricing Law fair competition regulations.


6. Foreign mergers and acquisitions may not endanger national security

外资并购不得危及国家安全

This provision places national security checks on acquisitions of domestic firms. Mr. Paul Jones has a very interesting comment on this, and I quote here in full:

The draft has been amended since the first reading to include provisions regarding a review of mergers and acquisitions with regard to security considerations. The Chinese version of the article on this topic specifically mentions the concern expressed in the U.S. regarding the proposed acquisition of Unocal by a Chinese company. This aspect does not appear in the English language news stories that I have seen.

Licensing Your Trademark in China: One More Thing to Remember

I am on a “trademark” crusade, so I want to beat this dead horse of a topic again.

If you have not registered your trademark in China (the Chinese translation of your mark, including Chinese characters, pinyin, any proprietary pictures, graphics, etc.), you should not even consider signing any licensing agreement at all. Many China bloggers have repeatedly discussed this topic, and I loathe restating the obvious.

Assuming you have done your homework and registered your trademark with the Chinese Trademark Office (“CTMO”), you still have one more regulatory hoop to jump through—submit your licensing agreement to the CTMO and local Industry and Commerce Administration agencies. (Trademark Law of China Article 43)

Please add the above to your due diligence checklist. The failure to notify the CTMO will result in serious consequences. First, you will be subject to administrative penalty for failure to do so. Second, failure to notify the CTMO will unnecessarily make your attempt to enforce the license agreement more difficult. If you did not even follow the Chinese law while doing business there, invoking the protection of the Chinese law will of course make your life a little more complicated. Third, your trademark is likely the most valuable asset, and not doing what is necessary to protect it is just simply not good business practice.

Further assuming that you have done all of the above, your next job is to vigilantly watch the quality of products or services provided under the trademark license. A failure to monitor the quality of products or services under your trademark also bears consequences. Poor quality of products or services under your trademark might cause your licensing to be considered as naked licensing, which could theoretically strip you of your rights in the trademark. In addition, poor quality associated with your trademark might also subject you to administrative monetary penalties. (See Id.)