China Trademark Filings: National or Madrid Protocol Filing. National Filing is ...

December 19, 2018| Mr. David A. Dodge, Esq. | Uncategorized

As more and more businesses continue to expand their interests to China, Dodge Zhong Partners is commonly asked by clients how best to protect a trade mark there?

It is currently possible to register a trade mark in two ways:

  1. designating China under a Madrid Protocol application; or
  2. filing a National Trade Mark application directly with the Chinese Trade Marks Office (CTMO).

Both systems have their advantages and disadvantages. In this article, we will evaluate both systems in more detail so businesses can make an informed decision.

The Madrid Protocol (MP)

The MP is an extremely cost-effective way of obtaining protection in a range of countries under one application. Working like a shopping cart, countries of interest can be added from a designated list of over 90 countries, including China. Each country designated will examine the application in accordance with local laws. If the trade mark receives an objection when it is examined, the applicant may decide that it does not wish to pursue protection in that particular country and simply remove that country from the MP application without it affecting the other designated countries.

Another advantage is if a business decides at a later date to protect a mark in additional countries, then provided those countries are party to the MP, it can add them to the existing registration. However, it should be noted that rights in those additional countries can only run from the date that they are designated rather than from the filing date of the original MP registration.

In order to utilize the MP system it is necessary to begin by having an application or registration (base mark) for the chosen mark in the home territory. This application or registration will then form the basis for the MP application.

For the first five years of the life of an MP application it is important that the base mark remains validly registered. This is because if the base mark is successfully ‘attacked’ in those first five years, resulting in the base mark being rendered invalid, then the MP application and the countries designated will also be deemed invalid. If this were to happen, all is not lost as it is possible to ‘transform’ the designated countries into individual registrations. However, this would increase costs and the applicant would no longer have all of its countries encompassed under one MP application.

When designated under the MP application, the goods and services in China cannot be any broader than the goods and services covered by the original application or registration.

Furthermore, while the goods or services listed might be acceptable in the home territory, it does not automatically follow that such goods or services are acceptable in China. The application may receive a provisional refusal from the CTMO requesting further clarification. This can result in a delay in the progress of the application and additional costs. This can be less of an issue if the goods or services are extremely precise and for a limited list of items.

Seeking protection in China under a MP application can take longer than a National application as the CTMO has between 12-18 months to examine any applications which have been filed via the MP route. If protection is required relatively quickly in China, the MP route may not therefore be the best route for the client.

Once registered, a Chinese designation under a MP application is recognized and enforceable in China. However, the CTMO does not automatically issue registration certificates to those marks which have been protected in China via the MP route. In order to enforce a mark in China, it is necessary to have a Chinese registration certificate and so there will be additional costs associated with obtaining these registration certificates from the CTMO. It can take between three to five months for the certificates to be issued.

Renewing a MP registration is very cost effective as only one renewal fee is payable to cover all of the countries which have been designated. Management of a trade mark portfolio is also easier with a MP registration as it is only one registration number to look after.

Any changes to ownership of a MP registration can take a long time to be reflected on the CTMO register (normally 10 months at least) and after the changes are recorded, the CTMO will not issue a certificate proving the change and the correct owner. In such circumstances it is necessary to apply for a correct certificate indicating the updated information from the CTMO.

Finally, if a third party were to challenge the validity of a Chinese designation of an MP application or registration, the notice can be sent directly to the applicant rather than the recorded representative. Such notifications may be ignored which can lead to the cancellation of the Chinese designation if the deadline set by the CTMO to file a response is not met.

National Filings

A National filing in China is not dependent upon the validity of any other applications or registrations.

If China is the only country of interest, then it may be more cost effective to file a National application.

The CTMO are generally quite strict on the specifications for goods and services, tending to only accept the standard or basic standard specifications. Furthermore, each class breaks down further in to sub-classes, so protection of the mark in one subclass does not prevent another third party from registering the same mark in a different subclass within the same class.

The benefit when filing a National application means it is possible to overcome this problem by listing one item from every subclass within the class of interest. This guarantees protection for the whole class. Dodge Zhong Partners works closely with a number of trusted Attorneys in China who can provide guidance on the broadest specifications to ensure a trade mark meets with the CTMO’s strict requirements while providing our clients with the protection that they need.

Examination of an application is quicker for a National filing as it must be completed within nine months. If the application is provisionally approved there is a three-month opposition period. So, if everything goes smoothly, it will take around 12 months to secure a National registration.

For a National filing, if it is approved for registration, the CTMO will automatically issue the Certificate of Registration.

The timeframes for recording any changes to the proprietor details are much shorter under a National filing, with the CTMO issuing a certificate to reflect the change in details.

For any third-party challenges to the National application or registration, the CTMO will always send notification to the representative recorded before the CTMO and will be dealt with in a timely manner.

Clearly, both routes have their advantages and disadvantages. If a client is seeking to protect a mark in a number of other countries in addition to China, and have very specific goods or services, then the MP route might be the more favorable option. However, if protection is only required in China, and that protection is required quickly, then the National route may be better. Dodge Zhong Partners can advise on the best route to take once it has a clear understanding of a client’s requirements for China.


Chinese Competitors Registering .CN Domain Names in Your Company’s Tradema...

July 12, 2018| Mr. David A. Dodge, Esq. | Uncategorized

We recently received an email from a well-established American company perplexed that they had registered several TM’s in China but still found their company’s .cn domain name had been registered by a Chinese competitor.

Our email response:

“Thank you for your message regarding the TM infringement / domain name matter.

CNNIC (the China Internet Network Information Centre) is a non-profit organization authorized by the Ministry of Information Industry to operate and administer China’s domain name registry for China’s country code top level domain known as “.cn”

In China, a brand name or trademark registration in China is independent from domain name registration. Brand name and trademark registration are administered by the Trademark Office of China (CTMO) administered under the State Intellectual Property Office (SIPO). It is important to note that both registrations are on a first-to-file system.

We advise our clients who are multinational corporations operating in China to have registered a number of “.cn” domain names (even in the hundreds) that contain the keywords of their brand names or trademarks in order to secure their distinct identity and avoid them being registered by others.

In terms of the current situation, we can assist your company by:

1. Working with your IT team to add additional hyphens, letters or numbers to make several new domain names and registering them in China;
2. Negotiating with the registrant entity to transfer the domain name to your company and/or to cease and desist violating our rights to our trade name by forwarding to competitor companies that are violating our TM;
3. Initiating dispute resolution, as called for by the CNNIC, and following the dispute resolution procedures as to behavior which violates IP rights.

CNNIC regulations provide that if a company determines that its legal rights and interests have been breached as a result of a particular domain name being registered by another party, either of the two CNNIC accredited domain name dispute resolution institutions should be contacted. One of those is CIETAC which we are familiar with.”

Registering a TM in China DOES NOT equate to securing your company’s .cn domain name or variants thereof.



Getting Money Out of China — Legally Expatriating Corporate Profits from C...

June 28, 2018| Mr. Bowen Zhang, Esq. | Uncategorized

From the end of 2016 to present, China has been increasingly tightening its capital controls. Faced with an outflow of money resulting from a depreciating yuan, Chinese officials are restricting the flow of money into foreign currencies such as the US dollar, causing severe complications to businesses with a large portion of international operations and profits in China from moving their profits to their home jurisdictions.

Recently, one of our firm’s client, who is a foreign investor, wanted to use their Chinese WFOE to invest in a country outside of China. Such a transaction generally requires the approval of at least four (4) regulating entities: Applications with Ministry of Finance (MOF), Peoples Bank of China (PBOC), State Administration of Foreign Exchange (SAFE) and the National Development and Reform Commission (NDRC). As a result of the complexities involved in this process, it took nearly half a year for our firm to obtain approval for this transaction.

Also, adding to business uncertainty in the process, during the process of receiving approval from the above-stated formal entities no one can confidently say whether such approval will be granted or not. Based on our experiences in several cases we have handled, we would like to summarize the following factors, at bare minimum, regulators would want to evaluate surrounding a client expatriating money from China:

1. The nature of the transaction;

2. The nature of the parties (a lot more than just their corporate structures);

3. The histories of the parties;

4. The location of the parties;

5. The nationalities of the parties (especially the receiving party);

6. The source of funds to be demonstrated; and,

7. That all involved entities demonstrate that they have paid sufficient tax in China to the relevant taxation authorities.

These are some other restrictions to consider:

1. The government will not allow money to exit China destined to certain countries deemed at high risk for fake transactions unless there is conclusive proof that the transaction is bona fide — in other words, requiring significantly more proof than would otherwise be required.

2. Money will not be cleared for transfer outside China for certain types of transactions, especially services, which are often used to disguise moving money out of China illegally unless there is a lawyer who can document that the relevant services were indeed rendered.

Under the most restrictive regulations, there are still some legitimate alternative methods we have pursued to get large sum money out of China:

1. A WFOE or shareholder, if it turns a profit, can legitimately repatriate (expatriate from China) its profits as dividends to the overseas holding entity. This incurs a tax burden – both the profits of the business, and the dividends paid to the holding company of the WFOE in China, incur tax (which is 25%). The operation of repatriating profits can be administratively complicated and requires completion of the annual full company audit and a lawyer’s certification;

2. The WFOE can lose in a foreign arbitration and, thus, be required to pay litigation costs and liabilities outside China. This approach is complex and requires particularized advice and consultation;

3. Money can be paid to an overseas service provider, including for services such as consulting, training, design, and the like. Tax rates depend on the nature of the service, and whether withholding taxes are due, but can be less than 7%. This is a legitimate channel for payments overseas, but tightly regulated. SAFE would be responsible for approving each payment, which requires some complex legal work and takes approximately 2-3 weeks; and,

4. Each Chinese citizen has an annual exchange allowance of $50,000 USD, which can then be transferred overseas. This exception to restrictions can be used to operate what is known as “Smurfing”, whereby anyone requiring funds overseas would pool the personal allowance of friends and family — eventually fanning the payments out to all the contacts in this network.

Of course, there are some electronic methods such as Bitcoin and other electronic “money” that can assist in such a transfer. However, such electronic “money” can only be transferred with a high degree of risk of some or total loss. The value of Bitcoin has dropped significantly during the last half year. Our firm strongly recommends against becoming involved with any illegal, tax evasive activities that could result the in the risk of loss of a company’s monies and/or incurring criminal and tax liabilities when attempting to expatriate capital outside of China without seeking legal advice as to how to properly proceed.

Issues in International Licensing and Sublicensing

June 18, 2018| Mr. David A. Dodge, Esq. | Uncategorized

Issues and questions pertaining to licensing and sublicensing are becoming increasingly common in our practice as companies outside the PRC that we assist with successfully obtaining duly registered and approved PRC trademarks, copyrights and patents in China seek to further expand their business by contracting with Chinese companies, third parties and/or subcontractors in order to sell their products to Chinese consumers.

Obtaining favorable terms to these licensing and sublicensing agreements is critical to both protecting a licensor entity’s rights and assuring a strong future royalty stream. Having a clear policy that supports a strong negotiating position toward sublicensing is the first step in dealing effectively with this sometimes contentious issue.

There are several issues to be aware of when contemplating the granting of license and sublicenses in the China context.

Royalty Structures and Sublicensing  

Sometimes the head license agreement will provide that the licensor receives a royalty on the sale price of the sublicensee.  Alternatively, the license agreement may provide that the licensor receives a percentage of the royalty that the licensee gets from the sublicensee.  In other agreements, a hybrid arrangement may be agreed, whereby the licensor receives milestones at different stages of development of licensed products, whether by the licensee or a sublicensee.  The licensor does not receive a percentage of milestone payments received by the licensee from the sublicensee. but does receive a percentage of royalty payments received by the licensee from the sublicensee calculated on the sale price of licensed products (sometimes known as running royalties).  All of these provisions require very careful drafting.  We have occasionally been asked by clients to base royalties on the ultimate sale price to the consumer for example by a retailer who may have purchased the products from a sublicensee.  It may be very difficult to audit such sales, so such a structure should usually be avoided unless the licensor has strong auditing rights granted in the sub-licensing agreement and a monthly or bi-annual right to inspect the sub-licensees books.

Prohibiting License Assignment

One of the first priorities in constructing sublicensing terms and conditions is to distinguish clearly between sublicensing and assignment.

Due to the complexity of international enforcement issues and the potential for complex legal maneuverings by licensees, assignment of a license should simply be prohibited. That advice is sometimes difficult for licensors to enforce, however. Licensors should prevent sublicensees from automatic assignment but may permit assignment under specific circumstances.

For example, licensors can ordinarily permit assignment of a sublicense by the sublicensee in the context of mergers and acquisitions of the entire business to which it pertains, except in the event that the proposed M&A partner is a direct competitor of the patent or trademark owner.

Licensees Should Seek Notification and/or Approval

Licensors generally differ on whether to ask for notification or approval of sublicensing rights. Most licensor companies are reluctant to grant the open-ended right to approve sublicenses. Further, licensees are often reluctant to seek that right, preferring instead to seek notification and ensure original license agreements stipulate that sublicenses comply with the original license terms.

Most licensors should ask for a complete, nonredacted copy of the sublicense in their licensing agreements. Licensors should also add language in the license agreement that the sublicensee will be bound by all of the terms and conditions in the original license agreement.

Licensors should also consider having a pro forma sublicense document attached as an exhibit to their licensing contracts, so the parties have agreed in advance to the terms and conditions of the sublicense.

Require Reporting of Sublicense Income

Reporting and payment of sublicense income is another area that requires due diligence on the part of the licensor. Irregularities in reporting sublicensing income occur often, so licenses should allow for regular audits of sublicensing income.

Generally, licensors should put in a provision where the licensor will pay the cost of any audit of sales unless it shows an underpayment of 5% or more under the agreement in which case the licensee will be responsible for the cost of the audit and will pay the amount of the deficiency plus a penalty which is usually prime plus 4%.

Licensors should also consider requiring that any royalty report is signed by the licensee’s and/or sublicensee’s chief financial officer, ensuring that there the licensee and/or sublicensee is more careful about the accounting. Thus, if a licensor finds irregularities in the sublicensing data, the licensee would have the right to audit their sublicensee or allow for the licensor to conduct an audit at the licensors and/or sublicensors expense.

Should the License Extend to Affiliates of the Licensee? 

Understandably, many licensees wish the license to extend to their group companies.  This can be addressed in different ways.  If affiliates are “automatically” covered by the head license (for example, by defining the Licensee to include Affiliates), this raises contractual questions including: (a) can the licensor sue an affiliate for breach of contract, indeed is the affiliate bound by the terms of the license; (b) can an affiliate sue the licensor to enforce its rights (whether as a party or third party beneficiary); and (c) if affiliates are directly parties to the license agreement, does the person signing on behalf of the licensee have signing authority on behalf of every affiliate?  Sometimes, these issues are glossed over, which in our view is undesirable.  Instead, it may be preferable to include a provision in the license agreement allowing sublicensing to affiliates of the licensee.

Sublicensing and Subcontracting 

Licensees sometimes assume that they are entitled to subcontract manufacturing or other rights under the license to a third party.  If the grant clause includes a specific right to “have made”, then subcontracting of manufacture is permitted.

A fairly recent trend in license grant clauses is to provide that the licensee may not only “have made” but may also “have sold”.  Depending on how the clause is worded, this is potentially troubling for a licensor, as if a licensee appoints someone to make and sell the licensed product on the licensee’s behalf, this could amount to sublicensing via a back-door route.

Sublicensing Conditions 

A licensor may wish to impose conditions on sublicensing, including ensuring that the sublicensee is bound by certain terms of the head license.  Template license agreements often include detailed provisions in this area.  An important issue is whether the sublicense survives termination of the head license by the licensor.  From the sublicensee’s perspective, the sublicense may be of limited value if it can be terminated due to no fault on the sublicensee’s part, for example, if the head licensee is in breach of the terms of the head license agreement.  Sometimes, a sublicensee will enter into a side agreement with the head licensor to ensure that the sublicense continues in such circumstances.


International Trademark Classes

June 18, 2018| Mr. David A. Dodge, Esq. | Uncategorized

Here are the forty-five so-called “Nice classes” into which trademark applications are classified. The classes are named after the city of Nice, France, where the first listing of classes was negotiated in 1957.

Please note that the terms in the class headings or short titles of the classes are generally too broad to be used alone as your actual description of products or services. Also, an international class number alone is never an acceptable listing.

Product (“Goods”) Classes

Class 1: Chemical Products
Chemicals used in industry, science and photography, as well as in agriculture, horticulture and forestry; unprocessed artificial resins; unprocessed plastics; manures; fire extinguishing compositions; tempering and soldering preparations; chemical substances for preserving foodstuffs; tanning substances; adhesives used in industry.

Class 2: Paint Products
Paints, varnishes, lacquers; preservatives against rust and against deterioration of wood; colorants; mordants; raw natural resins; metals in foil and powder form for painters, decorators, printers and artists.

Class 3: Cosmetics and Cleaning Products
Bleaching preparations and other substances for laundry use; cleaning, polishing, scouring and abrasive preparations; soaps; perfumery, essential oils, cosmetics, hair lotions; dentifrices.

Class 4: Lubricant and Fuel Products
Industrial oils and greases; lubricants; dust absorbing, wetting and binding compositions; fuels (including motor spirit) and illuminants; candles and wicks for lighting.

Class 5: Pharmaceutical Products
Pharmaceutical and veterinary preparations; sanitary preparations for medical purposes; dietetic substances adapted for medical use, food for babies; plasters, materials for dressings; material for stopping teeth, dental wax; disinfectants; preparations for destroying vermin; fungicides, herbicides.

Class 6: Metal Products
Common metals and their alloys; metal building materials; transportable buildings of metal; materials of metal for railway tracks; nonelectric cables and wires of common metal; ironmongery, small items of metal hardware; pipes and tubes of metal; safes; goods of common metal not included in other classes; ores.

Class 7: Machinery Products
Machines and machine tools; motors and engines (except for land vehicles); machine coupling and transmission components (except for land vehicles); agricultural implements other than hand-operated; incubators for eggs.

Class 8: Hand Tool Products
Hand tools and implements (hand-operated); cutlery; side arms; razors.

Class 9: Computer and Software Products and Electrical and Scientific Products
Scientific, nautical, surveying, photographic, cinematographic, optical, weighing, measuring, signalling, checking (supervision), life-saving and teaching apparatus and instruments; apparatus and instruments for conducting, switching, transforming, accumulating, regulating or controlling electricity; apparatus for recording, transmission or reproduction of sound or images; magnetic data carriers, recording discs; automatic vending machines and mechanisms for coin operated apparatus; cash registers, calculating machines, data processing equipment and computers; fire extinguishing apparatus.

Class 10: Medical Instrument Products
Surgical, medical, dental, and veterinary apparatus and instruments, artificial limbs, eyes, and teeth; orthopedic articles; suture materials.

Class 11: Environmental Control Instrument Products (lighting, heating, cooling, cooking)
Apparatus for lighting, heating, steam generating, cooking, refrigerating, drying, ventilating, water supply, and sanitary purposes.

Class 12: Vehicles and Products for locomotion by land, air or water
Vehicles; apparatus for locomotion by land, air, or water.

Class 13: Firearm Products
Firearms; ammunition and projectiles; explosives; fireworks.

Class 14: Jewelry Products
Precious metals and their alloys and goods in precious metals or coated therewith, not included in other classes; jewelry, precious stones; horological and chronometric instruments.

Class 15: Musical Instrument Products
Musical instruments

Class 16: Paper and Printed Material Products
Paper, cardboard and goods made from these materials, not included in other classes; printed matter; bookbinding material; photographs; stationery; adhesives for stationery or household purposes; artists’ materials; paint brushes; typewriters and office requisites (except furniture); instructional and teaching material (except apparatus); plastic materials for packaging (not included in other classes); printers’ type; printing blocks.

Class 17: Rubber Products
Rubber, gutta-percha, gum, asbestos, mica and goods made from these materials and not included in other classes; plastics in extruded form for use in manufacture; packing, stopping and insulating materials; flexible pipes, not of metal.

Class 18: Leather Products (not including clothing)
Leather and imitations of leather, and goods made of these materials and not included in other classes; animal skins, hides; trunks and traveling bags; umbrellas, parasols and walking sticks; whips, harness and saddlery.

Class 19: Non-Metallic Building Material Products
Building materials (non-metallic); nonmetallic rigid pipes for building; asphalt, pitch and bitumen; nonmetallic transportable buildings; monuments, not of metal.

Class 20: Furniture Products
Furniture, mirrors, picture frames; goods (not included in other classes) of wood, cork, reed, cane, wicker, horn, bone, ivory, whalebone, shell, amber, mother-of-pearl, meerschaum and substitutes for all these materials, or of plastics.

Class 21: Houseware and Glass Products
Household or kitchen utensils and containers; combs and sponges; brushes (except paint brushes); brush-making materials; articles for cleaning purposes; steel-wool; unworked or semi-worked glass (except glass used in building); glassware, porcelain and earthenware not included in other classes.

Class 22: Ropes, Cordage and Fiber Products
opes, string, nets, tents, awnings, tarpaulins, sails, sacks and bags (not included in other classes); padding and stuffing materials (except of rubber or plastics); raw fibrous textile materials.

Class 23: Yarns and Threads
Yarns and threads, for textile use.

Class 24: Fabrics and Textile Products
Textiles and textile goods, not included in other classes; beds and table covers.

Class 25: Clothing and Apparel Products
Clothing, footwear, headgear.

Class 26: Lace, Ribbons, Embroidery and Fancy Goods
Lace and embroidery, ribbons and braid; buttons, hooks and eyes, pins and needles; artificial flowers.

Class 27: Floor Covering Products
Carpets, rugs, mats and matting, linoleum and other materials for covering existing floors; wall hangings (non-textile).

Class 28: Toys and Sporting Goods Products
Games and playthings; gymnastic and sporting articles not included in other classes; decorations for Christmas trees.

Class 29: Meat and Processed Food Products
Meat, fish, poultry and game; meat extracts; preserved, frozen, dried and cooked fruits and vegetables; jellies, jams, compotes; eggs, milk and milk products; edible oils and fats.

Class 30: Staple Food Products
Coffee, tea, cocoa, sugar, rice, tapioca, sago, artificial coffee; flour and preparations made from cereals, bread, pastry and confectionery, ices; honey, treacle; yeast, baking powder; salt, mustard; vinegar, sauces (condiments); spices; ice.

Class 31: Natural Agricultural Products
Agricultural, horticultural and forestry products and grains not included in other classes; live animals; fresh fruits and vegetables; seeds, natural plants and flowers; foodstuffs for animals; malt.

Class 32: Light Beverage Products
Beers; mineral and aerated waters and other nonalcoholic drinks; fruit drinks and fruit juices; syrups and other preparations for making beverages.

Class 33: Wines and Spirits (not including beers)
Alcoholic beverages (except beers).

Class 34: Smoker’s Products
Tobacco; smokers’ articles; matches.

Service Classes

Class 35: Advertising, Business and Retail Services
Advertising; business management; business administration; office functions.

Class 36: Insurance and Financial Services
Insurance; financial affairs; monetary affairs; real estate affairs.

Class 37: Construction and Repair Services
Building construction; repair; installation services.

Class 38: Communication Services
Services allowing people to communicate with another by a sensory means.

Class 39: Transportation and Storage Services
Transport; packaging and storage of goods; travel arrangement

Class 40: Treatment and Processing of Materials Services
Treatment of materials.

Class 41: Education and Entertainment Services
Education; providing of training; entertainment; sporting and cultural activities.

Class 42: Computer and Software Services and Scientific Services
Scientific and technological services and research and design relating thereto; industrial analysis and research services; design and development of computer hardware and software.

Class 43: Restaurant and Hotel Services
Services for providing food and drink; temporary accommodations.

Class 44: Medical and Beauty Services and Agricultural Services
Medical services; veterinary services; hygienic and beauty care for human beings or animals; agriculture, horticulture and forestry services.

Class 45: Personal, Legal and Social Services
Legal services; security services for the protection of property and individuals; personal and social services rendered by others to meet the needs of individuals.

Do I Really Need Underwriters Laboratories (UL)?

May 1, 2018| | Uncategorized

Underwriters Laboratories (UL) is one of seventeen privately owned companies in the United States approved by the U.S. government to perform safety tests on products sold in the United States. Since UL is only one of the several companies approved to perform these tests, in many cases, you do not need to obtain a UL safety certification in order to sell your products in the United States. You can obtain safety certificates from other approved companies such as MET, NSF, TUV Rheinland and CCL. However, in many cases you will simply have no choice but to “choose” a safety certificate through UL. To understand why, you need to know more about the way the U.S. safety certifiers market works.

The United States safety certification market often fails to provide the maximum value for the money U.S. customers eventually pay for safety certification. Changing the current situation is a task for politicians, but for several reasons, the solution is not likely to appear soon. Nonetheless, if you need your products to have a safety certification, knowing how the safety certification market works can help you save time and money. The following is meant for those of you who intend to develop products and import them to the United States.

United States Safety Standards

Safety standards are standards designed to ensure the safety of products, activities, or processes. They set the standards for safety tests made by safety certifiers. The job of safety certifiers is to test for any foreseeable hazard such as fire, shock, sharp edges, radiation and so on. They look for the worst possible condition, simulate it, and test it to make sure that if a product fails, it fails safely. They provide assurance that the products they certify meet basic safety requirements.
Companies that sell products notify the customer that their product meets the safety standards by making sure that the product is marked by the mark of the safety certifier who tested the product. Each safety certifier company has its own unique mark. These marks signal to the customer that the product is safe to use.

Since almost everything we use poses a certain amount of risk, safety certifiers’ marks can be found almost everywhere. You will find them on the alarm clock that rousts you out of bed in the morning, on the reading lamp you turn off at night, on your coffee maker, toaster, refrigerator, stove, gas grill, television, CD player, telephone, computer monitor, automated bank tellers, vending machines, window glass, roof shingles, wallboard, bulletproof vests, safes, locks, pinball machines, vacuum cleaners, pizza cookers, hair dryers, flashlights, medical beds, garage doors, adhesives, yachts and even on pet-bed warmers.

In many countries, safety standards are set by the government with some industry involvement. In addition, the safety tests for making sure that these standards are met are conducted by the government. In the U.S, government involvement exists but is very limited and performed through the U.S. Consumer Product Safety Commission (CPSC). The CPSC is charged with protecting consumers from hazardous products. Most safety standards in the U.S. are set by the private industry, and the CPSC imposes federal regulations only when it believes that the industry’s voluntary efforts are insufficient. As a result, U.S. safety standards are divided into two types: advisory and compulsory by law.

The United States legally requires that safety testing be performed by safety certifiers. This places product safety in the hands of the private sector because these certifiers are privately owned companies. In order for a company to become an approved certifier, it must meet the requirements of the U.S. federal agency Occupational Safety and Health Administration (OSHA). OSHA maintains a list of approved safety certifiers which are known as Nationally Recognized Testing Laboratories. This list can easily be found on the Internet.

The administrator and coordinator of the U.S. voluntary standardization system, the American National Standards Institute (ANSI), is also not a federal agency. The ANSI is a private organization supported by a diverse constituency of private and public sector organizations. This description sounds vague for a reason.

ANSI does not directly develop standards; instead, it facilitates the development of standards by establishing consensus among the groups who are interested in safety certification. These are producers, users, government agencies and safety certifiers. In practice, safety certifiers are not just testing standards and providing safety certifications, but they are also the main source for developing the standards.

The system described above is intended to provide users (customers, companies, organizations, and insurance companies who rely on certification to control losses) with products that are safe to use. This is meant to ensure that obtaining the safety certification is done effectively and for a fair and reasonable price.

In addition, the system provides the standards for government agencies so they can use them to assess regulatory compliance in cases where meeting the standard is required by law.

The Game and Inherent Problems

The players in the game of private safety certifiers are divided into four categories:

a) The Customers (who purchase and consume certified products)

b) Manufacturers (of raw material, components, and finished goods)
c) Certifiers

d) Other Players: companies and organizations who buy directly from manufacturers, importers and distributors, brand names, store chains, government agencies, states, cities, local authorities, and insurance companies

Private certification harnesses market demand for safety certification. Without sufficient demand, private safety certifiers would not be able to profit from the service, and private certification would not exist. It is market demand that gives manufacturers the incentive to pay for product testing. Those who form the demand for safety certification seek the assurance provided by safety certifiers, and companies that fail to obtain certification risk losing market share. Companies rely on safety certification when obtaining inputs and choosing suppliers. Government agencies use it to assess regulation compliance.

Since the products customers buy are not purchased directly from manufacturers, certifiers aim their marketing efforts towards the players in category (d) above. This way, they don’t have to convince the final customer that their safety certification is better than the safety certifications of other certifiers. Demand in the model above is not created by the final customers but by those who lie in the layers between the manufacturer and the final customer.

However, the model described above has a few inherent problems. The first problem is related to the question: “How much safety is enough?” While it is obvious that products with certification are safer to use than products without certification, it is not clear how to compare the benefits of safety certification to the cost of obtaining the certification. This problem makes the entire safety certification business vague. It creates fertile ground for the decision-making process in companies, organizations, and government agencies to be based more on personal network relationships within the system rather than on objective criteria.

Second, those who eventually pay for safety certification (the final customers who buy the product which carrying the safety certification mark) are not those who pay the certifiers directly for safety testing (the manufacturers of the products). This necessarily means a waste in the safety certification process, which then translates to higher prices for the consumer.

Third, certifiers write many of the standards in the United States which implies that there are too many standards. By writing more standards, certifiers increase their income from manufacturers who are then required to meet the new standards.

Under a truly competitive market for private safety certifiers, private certification may offer a better alternative to government regulation. Ideally, it means faster testing, lower costs for testing, superior technical expertise, better inspections, and increased responsiveness to consumers. Under a truly competitive market, the inherent problems listed above would not be very significant.
Unfortunately, the private safety certifiers market in the U.S. is far from being competitive. The dominance of UL has been indisputable for almost 100 years. Under these conditions, the above list creates a significant problem of which U.S. consumers are not aware and therefore don’t care about. This system feature helps UL improve its grasp on the industry and continue increasing its market share. Despite this issue, none of the involved entities are speaking up: manufacturers, consumers, and government agencies. In fact, the United States government benefits from private certification because it offers a comfortable solution that involves less responsibility.

UL’s market share does not reflect the quality of the safety tests carried out by UL. All safety certifiers perform the same tests and get the approval to operate based on the same criteria. UL’s market share is the result of factors that have nothing to do with the services offered: a) Their investment in marketing and branding, b) Their operation times, and, c) The fact that they were the first in the business when safety standards began to be enforced. The fact that they were the first allowed them to adopt safety – a public domain – as their own domain. As a result, UL is essentially a branding business that uses safety as a cover to continuing exploiting the system.
Some would say that this is a legitimate operation within a capitalist system. However, safety is not a product that this company has invented. One can argue that safety is a public domain, and no one entity should have a monopoly on safety just as no one should have a monopoly on the air we breathe.

The Market Share of UL and History

It all started at the end of the 19th century with standards for fire safety. At the end of the 19th century, fire ravaged many American cities (Ex: The Great Chicago Fire of 1871 and similar scale fires in cities from Boston to Seattle). Fire risks varied unpredictably from building to building, and effective policies required extensive information gathering and vigilant compliance monitoring – all of which did not exist at that time.

The initial demand for safety standards did not arrive from customers or government. It came from insurance companies who were looking for ways to price risk and reduce losses caused by fire. To investigate fire and determine what caused them, insurance companies sponsored laboratory research to analyze building materials and firefighting equipment. The first to write safety standards in the United States were underwriters in insurance companies. Insurance companies placed conditions on coverage based on adherence to these standards and conducted routine inspections of buildings covered by their policies.

As part of their efforts to determine what caused fires, they also invested money in research conducted by individual experts. In 1895, they funded an engineer named William Merrill to conduct fire safety testing on building materials and electrical appliances. Using a budget of USD300 (USD6,000 in 2016 dollars), Merrill and his small staff completed seventy-five safety tests.

Two year later, Merrill published a list of “approved fittings and electrical devices” which he distributed to fire underwriters at insurance companies and municipal fire service officers. The small operation of Merrill was incorporated in 1901 under the name “Underwriters Laboratories”, or in short: UL. The underwriters in the name of UL are the insurance fire underwriters who were the first to use safety standards in the U.S.

Having no government regulation in the field of fire safety, UL fulfilled the need of insurance companies and flourished. By 1905, UL published 75,000 reports, and its annual budget was 5.5 million USD in terms of 2016 dollars. In 1916, UL ended its financial dependence on the insurance industry and relied exclusively on fees from manufacturers for testing, factory inspection, and labeling. Fire insurance companies continued to use conditional coverage on the use of UL approved building materials, and the local government incorporated UL standards into their building codes. The government role in regulating fire safety continued to be zero, and UL played the “good boy” role and submitted its safety standards to the American National Standards Institute to establish nationally recognized standards.
The first claims against UL as a monopoly started to appear in 1922. But by that time, it was too late. UL had a firm grasp on the safety certification system, and it was already too strong to reverse. The proof is the current condition of private safety certification in the U.S. Ninety-five years later, UL is still dominating the market in more than just fire safety.

Until 1935, UL operated as a not-for-profit-organization which helped position it as something similar to a public organization. At the same time, it was a fast-growing business with goals that had very little to do with the public welfare. In 1935, the IRS revoked the tax-exempt status UL enjoyed as a not-for-profit-organization on the grounds that it was more of a commercial business than a scientific endeavor. UL appealed but was turned down due to an opinion which stated that UL did not operate on the basis of science for the sake of science, but was science for the sake of business. As a result, UL switched tactics to change the rules of the game, and in 1954 it obtained once again tax-exempt status after Congress amended the tax laws to include organizations “testing for the public safety”. The organizations held the same nonprofit status as religious groups, educational institutions, and charities. No explanation was provided for the change in the law.

Today, UL certifies more than 20,000 types of products, not just building materials and electrical devices. What started in 1893 as a two-person operation with $350 worth of equipment, by marketing and branding safety as their own, has now grown into a corporation with more than 12,000 employees and 64 certification facilities. It oversees more than 700 safety standards. The managers who lead UL appear online as heroes. The average American home contains more than 125 UL markings which most customers don’t bother to notice. Whether they take time to notice or not, they pay the full price for this mark.


The current system of safety certifiers in the U.S. charges a price that is too high for the service it offers, produces too many standards and invests too much money in marketing and branding that have nothing to do with the quality of the service certifiers offer. In addition, the system encourages personal relationships within the certification system network and leads to political corruption intended to preserve the current situation.

MET, NSF, and CCL are just as good as UL. It is ridiculous that UL is permitted to play the game it plays, but given the roots it has in the safety certification system, it’s almost impossible to fight.
Individuals who develop products and import them to the U.S. belong to a new, rapidly growing breed. Given the current safety certification market in the United States, here are my personal two tips to conclude this blog:

A safety certificate can be obtained for a raw material, a component in a product, and the product itself. In cases where the certification is not for the product itself, you will likely get a cheaper deal without sacrificing quality if you choose a certifier who is not UL.

As for certification for the product itself, choosing a certifier is more difficult and depends on your cost-benefit analysis. The cost includes the additional cost in obtaining a UL certificate versus a certificate of a competitor. The benefit is the contribution a UL mark will add to your sales. If you don’t expect that a UL mark will open additional sales channels, there is no reason not to choose certifier from the remaining sixteen certifiers.

This article is published with the permission of

A Comparison of a WFOE, Representative Office and Joint Venture Models of Compan...

April 13, 2018| Mr. David A. Dodge, Esq. | Uncategorized

It seems with every passing day increasingly we are being approached by companies outside China who seek not cheap manufacturing in the PRC like in the 80’s, 90’s and early 2000’s, but rather seek access to a market of 1.35 billion Chinese consumers. These companies look to grow internationally to sell and distribute their products to the Chinese consumer much like KFC and McDonald’s who caught the wave early and are now making record profits from their China-side product sales and distribution operations and are firmly entrenched in the consciousness of the Chinese consumer.

The first step (not the subject of this article) is to protect and establish a company’s intellectual property rights in that company’s brand name, product line name, logos, trademarks and patents in China in a legal and astute manner. However, from there, how should a company outside of China establish a functional entity that can carry on day to day operations effectively and efficiently?

One of the biggest considerations is the structure of the presence the company wishes to establish in China. There are three main options: Wholly Foreign Owned Enterprise, Representative Office, or Joint Venture. Each has its own merits and drawbacks with the right choice dependent on your organization’s goals and strategy.

It would perhaps be helpful for starter to provide a quick description for each of them:

Wholly Foreign Owned Enterprise (also commonly known as WOFE) – A WFOE is a privately held limited liability company in China in which all the shareholders are foreign.

Representative Office (RO) – A representative office is a base from which to manage relationships, attend meetings, and is not a “legal person”.

Joint Venture (JV) – A joint venture means starting a company in China with at least one foreign and one Chinese shareholder.
Ok now that we are all caught up, let’s jump into the comparisons:

Ease of Setup

Wholly Foreign Owned Enterprise – Moderate

The process of setting up a Wholly Foreign Owned Enterprise generally takes around 40 working days. During the application process, which varies depending on the type of of this business that you require (there are 3 types: Service, Trading, and Manufacturing), you will need to specify the scope of your business. The process can be broken down into 2 parts: Pre-registration and post-registration. Pre-registration requires the submission of a number of business related documents while post-registration requires companies to formally register with a number of Chinese government agencies.

Representative Office – Easy

Of the three structures, the easiest to setup and get off the ground is an RO. Recently, amendments have been made to curb the abuse of RO’s by foreign entities. Parent companies must have been established for a minimum of 2 years and RO’s are subject to inspection and need to keep accounting records. The application process, however, remains relatively simple. Submissions of company documents and then, once the application has been approved, registering with the various Chinese government agencies.

Joint Venture – Difficult

The process of setting up a JV is complicated by the need to, firstly, find a suitable Chinese company to partner with and then, secondly, to effectively negotiate the terms of the relationship with the prospective Chinese shareholder. Choosing partners that can make tangible business contributions, safeguarding intellectual property, ensuring operational control of the joint venture, and managing talent are some of the main points that need to be agreed upon. Others issues that need to be addressed are: aligning strategic priorities, creating a structure that permits rapid responses to change, and preparing up front for eventual restructuring. All these factors add to the complexity of setting up a JV.

Protection of Intellectual Property (IP)

Wholly Owned Foreign Enterprise – Easy

This company is completely owned by its foreign parent company. That means that the parent company controls all aspects of the business process and daily operations. This makes it easy for the company to protect its business processes, trademarks, and trade secrets.

RO – Moderate

RO’s have limited capabilities. They cannot issue invoices, receive payment, or engage in for profit activities. The result is that they still have to outsource the production of their business activities to local suppliers although they are able to monitor progress and thereby limit any IP violations.

JV – Difficult

A JV requires a foreign company to join forces with a local Chinese business. The benefits of sharing internal business networks, contacts, and processes is apparent as it reduces the time it takes for the company to establish itself. The danger, however, is that it makes the company vulnerable to theft and abuse of its intellectual property if the relationship between the shareholders deteriorates or if adequate protection isn’t built into the initial company setup.

Cost of setup

WOFE – Moderate

Setting up a WOFE used to require a company to invest Registered Capital. For a limited liability company with one single shareholder, the required amount of registered capital used to be designated at RMB 100,000. That however has changed. In 2014, the regulation regarding minimum registered capital for WFOEs were abolished in many cases to further promote it as an investment vehicle for foreign companies.

RO – Low

RO’s are relatively affordable to setup. The regulatory changes in 2010 have however made operating an RO more expensive. Additional compliance requirements means a greater financial burden on the RO or facing heavy fine for not complying as well as having their registration certificate revoked. The tax burden is also higher, going up by more than 2% from 9.5% to 11.69%.

JV – Moderate

The costs associated with setting up a JV are dependent on the type of JV setup (Equity Joint Ventures and Cooperative Joint Ventures) and how it is decided among the shareholders to capitalize the JV. Generally the absolute minimum of registered capital is RMB 30,000 for each investor in a company with multiple shareholders and RMB 100,000 for a company with one shareholder.

Deciding on how to structure an expansion into China is a critical decision. Each option has its own benefits depending on your organizational goals. An RO is best suited for companies that wish to test the waters in China. It allows you to develop relationships, create a presence, and gain more insight into how business is done in China. A WOFE on the other hand allows a company to set up a more tangible presence that allows them to trade and conduct for-profit activities and benefits from lower tax rate as well as giving them full control of the operation. A JV is a good solution for companies that have well established relationships with Chinese companies and for situations where a WOFE might not be an option due to government regulation.

Free Trade Zones

There are also opportunities to take advantage of dramatic tax benefits by forming a foreign run entity in one of China’s Free Trade Zones such as the Qianhai Free Trade Port Zone in the Guangdong Province. Eligible companies registered in Qianhai are subject to a 15% preferential corporate income tax rate and eligible professional employees who are employed in Qianhai are exempt from personal income tax.

Whichever structure you decide to go with, make sure you do through research and that you understand the regulatory environment regarding your specific sector or industry.

Employment of Foreign and Chinese Workers in China: Distinguishing a FESCO or WF...

April 13, 2018| Mr. David A. Dodge, Esq. | Uncategorized

We were recently approached by a mid-sized U.S. company that had been operating a sourcing, sales and distribution center in China through what is commonly known as a FESCO (Foreign Enterprise Service Company). As their China sales were increasing they were looking to transition from a Representative Office (contracting with a FESCO to pay independent contractors) to a Wholly Foreign Owned Enterprise (WFOE). The question being is it better to operate in China – a FESCO or to directly hire employees and have a WFOE directly employ workers?

The use of a FESCO (Foreign Enterprise Service Company) was a commonly used practice before there were significant regulatory reforms as to WFOE formation and when companies faced significant hurdles to forming a WFOE in China. Such Chinese run and operated FESCO’s would serve as an intermediary party for foreign companies employing workers or independent contractors in China. There are advantages and disadvantages to hiring labor through a FESCO, which should be weighed against other available options. Because employees in China (foreign or Chinese) may not be paid remotely, there must be some type of local payroll provider or entity that complies with Chinese laws. A FESCO can fill this role and allow a foreign company to quickly dispatch labor in China.

A FESCO is a company that provides labor and payroll services to companies in China, essentially acting as an agent for the recruitment, contracting and payroll management of Chinese employees. This can be helpful to a foreign company that does not have the resources for hiring local employees via internal payroll or prefers to have some assistance in the case of labor disputes.

Another reason to use a FESCO is that Chinese employees can be dispatched during the incorporation process for a foreign-invested company. Otherwise, the company would be unable to legally hire the needed employees during the pre-incorporation period. Because this process can take up to three to six months, many companies opt to use a FESCO to engage the necessary personnel. A FESCO is limited to hiring only temporary or auxiliary employees and may not dispatch ‘core’ personnel.

It is important to note that there are many FESCOs, and that this is a generic term for agencies that provide this service. It is a powerful and well-known brand, and some foreign companies mistakenly believe there is only one FESCO in China.

Is Contracting Workers Directly Possible in China?

A foreign company may not contract with a Chinese worker without a local, incorporated entity such as a Wholly Foreign Owned Entity (WFOE). Therefore, there is a need for a third-party agency, such as a FESCO or GEO, to contract with Chinese workers during the startup phase in country. A remote payroll, where a worker in China is paid directly by foreign company is illegal in China.

This also applies to independent contractors, since this type of work relationship is not allowed in China. Many companies that think they have independent contractors in China really have illegal employees being paid remotely without a WFOE. This is a risky practice, and one that Chinese authorities are watching for carefully.

Advantages and Disadvantages of a FESCO

A FESCO is not an ideal solution and does have both pros and cons that have to be considered. Companies should keep in mind that the FESCO is a Chinese entity and will operate according to that country’s cultural and language standards. Also, FESCOs typically use standard employment contracts that may not be adequate for some foreign employers and are not typically open to negotiation.


• The FESCO can assist the foreign company in the case of labor disputes with employees

• May be state-owned and have a strong legal team to assist clients with litigation and arbitration

• Can hire and dispatch employees prior to incorporation, which can prevent delays in starting business operations

• The FESCO can pay mandatory benefits to employees located in multiple cities, which can vary widely between regions


• May be conflict of interest where a FESCO is both recruiting and managing payroll, with the misuse of confidential data

• Lack of transparency in the payroll process

• Reports may only be in basic English, with little detail

• FESCO should not be used to hire “core staff” under China labor laws, and are limited to temporary and auxiliary staff

• A FESCO labor contract must be fixed term only for two years (although lawful termination of employees is allowed.)

Impact on Social Security Benefits

The welfare system in China is mandatory for both employee and employer contribution and is a complex system that can amount to almost a 40% total contribution based on income. The FESCO, as a Chinese HR organization can handle the withholding of contributions for a foreign company that might find it difficult to navigate the state and regional variances for employees in multiple locations.

Alternative Options to Using a FESCO

1. Hire Chinese employees directly as professional service providers on a contract basis through a legal corporate entity outside China and require the employees to pay contributions to the Chinese welfare and tax system. (This is not a viable long-term solution although some professionals like tax, legal and accounting professionals can be contracted with in this manner early on.)

2. Hire individuals as consultants pre-incorporation, then formally employ them after incorporation under a similar model as supra.

3. Formally incorporate with a JV or WFOE and use a local payroll provider: This is one way to manage the employment process directly.


A FESCO is not the only way to employ workers in China, but it is one solution for companies that do not have a WFOE set up and want to use a Chinese-based agent. The advantages of legal representation and employee benefits payments have to be weighed against the cost and commitment required. As a Chinese entity, a FESCO will adhere to local contractual, cultural and language norms, which may not suit every foreign employer.

While a FESCO can offer temporary employment during the incorporation process or even after, there are several better alternatives.

Hong Kong Firm Fubs Mainland TM Appeal: Appeal From the Publication Notice Not F...

January 12, 2018| Mr. David A. Dodge, Esq. | Uncategorized

We were retained recently to handle a China trademark appeal as to a rejection our client received while being represented by their previous legal representatives in Hong Kong. It appeared that our client’s supplier in Dongguan or another party affiliated with them, had filed for the TM before the client did. This is commonplace in China. Hence, our firm’s first task for clients doing business in China is to secure their IP rights as it is a “first to file” jurisdiction and the clients’ suppliers and China competitors will attempt to trademark and patent technology before the client is able to file for their own protection, resulting in a loss of their future intellectual property rights in China.

The previous Hong Kong law firm (overpriced and inexperienced in matters involving mainland China intellectual property matters) received the client’s Certificate of Incorporation and had their Mainland patent agents file an application for that TM with the State Intellectual Property Office (SIPO).

Because the client’s supplier had previously filed a TM application with SIPO, a notice of rejection due to the previous filing by the competitor/supplier was mailed out by SIPO. Under Chinese law, an appeal of the rejection notice is due within 15 days from the date of the receipt of the notice.

However, it is meaningless to appeal the rejection notice if there is a previous filed application (the competitor’s). SIPO will reject the appeal of the rejection notice as if there is an existing same trademark application that has already been filed.

Under these circumstances, instead, the foreign client must file an opposition against the previous filed trademark application (the competitor’s application) and apply for a new trademark just as same as the original contemporaneous with filing an opposition to the competitor’s TM application.

In order to accomplish this successfully, one must look to when the competitor’s publication period commenced, in other words, the date it was published. Under Chinese law, there is a three (3) month period during this publication for any parties with superior rights (i.e. the client who already has a previously granted USPTO TM) to file an application and opposition against the competitor’s application for the TM.

This is in accordance with the Trademark Law of the People’s Republic of China, Article 33:

“For a preliminary approved and published trademark, within three months from the date of publication, a prior rights holder or an interested party which believes that paragraph 2 or 3 of Article 13, Article 15, paragraph 1 of Article 16, Article 30, Article 31, or Article 32 of this Law is violated or any person which believes that Article 10, 11, or 12 of this Law is violated may file an opposition with the Trademark Office. If no opposition has been filed upon expiry of the publication period, the registration shall be approved, a certificate of trademark registration shall be issued, and the registered trademark shall be published.”

The Hong Kong IP firm was advising the client (wrongfully and expensively) that they must appeal from the rejection notice they received from SIPO. Fortunately, we were retained to step in and file and application and opposition against the competitor’s application for trademark rights to our client’s company name in China.

Drafting China Manufacturing and Supply Agreements (MSA) — Huge Errors

January 10, 2018| Mr. David A. Dodge, Esq. | Uncategorized

We recently advised a client who had retained their regular corporate counsel in the U.S. to draft a China Manufacturing and Supply Agreement (MSA) in regards to their Chinese potential suppliers in Dongguan and Shenzhen. The client was concerned that although the MSA appeared to be workable in the U.S. context, there was nothing China-particular.

There were numerous huge errors in contract drafting and legal judgment made by their corporate legal counsel who had advised the client in the past on non-China matters.

The contract itself was what I would call “U.S. boilerplate” and there needed to be several changes beyond translation to render it China appropriate and, most importantly, enforceable in the PRC context. Without internationally enforceable and China appropriate enforcement provisions the agreement had no teeth. Particularly as it related to the dispute resolution clause.

1. The Manufacturing and Supply Agreement (MSA) had a non-disclosure and confidentiality provision embedded in it as part of the agreement — a huge error in the China context. What happens when parties engage in negotiations and information disclosure but do not reach an agreement? Then the Chinese supplier has all of the plans and specifications as to the product but there is no enforceable confidentiality agreement?

Also, there were no provisions as to non-circumvention and non-competition. A huge issue in the China manufacturing context.

We had to clean the whole thing up and style things as a non-disclosure, non-circumvention and non-competition (NNN) addendum. The timing of entering into an NNN as a separate consideration to the MSA is crucial. In the event parties do not reach a final agreement, our foreign client’s proprietary and confidential information disclosed in negotiations should be protected from any prospective Chinese supplier engaging in wrongful disclosure, competition and/or circumvention.

Also, they needed to include non-competition and non-circumvention provisions that are China appropriate and enforceable in China as that is a huge consideration for the China side business.

2. There was no treatment as to liquidated damages although contract damages can be difficult to prove internationally and, in particular, in the China context. Furthermore, there needs to be some leverage over the supplier such the liquidated damages provide a strong motive to abide by the terms of the contract. We needed to draft an LDA as to liquidated damage considerations that spoke as to delays in the Contract Schedule or violation of the NNN or the wrongful retention of the client’s tooling. We styled the NNN as an addendum so that we could decide which provisions we wished to incorporate and which not.

3. Next was the issue of dispute resolution — namely, it was nowhere addressed. I asked their corporate counsel, “What happens if a disagreement arises with the Chinese supplier?’ He answered, “We would sue them in federal court.” Obviously, it would be utterly foolish to sue most Chinese companies and in particular suppliers in a U.S. federal court who have no assets in the United States. Obviously, with Chinese courts being decidedly pro-Chinese companies, we needed a choice of arbitration clause that could be enforced in Chinese court that also would be cost-effective and expedient. Otherwise, the foreign client would have no negotiating power with the Chinese supplier if and when problems arose.

I asked their corporate counsel to start contemplating whether we prefer CIETAC or HKIAC binding or non-binding arbitration in the event of disputes with our supplier. They had no idea what I was speaking of, let alone how to properly proceed.

When doing business in the China context, we strongly encourage our clients to seek competent legal counsel with China experience.