Dumb And Dumber: How Not To Spy

A guy I know that supplies tools/equipment for my industry set up a plant in Communist China, after 3 years the local hires had learned the programs , plans and fabrication tickets for most of his equipment. They all quit en-mass and went to work for a new start-up in the same business, about 2K up the road. Owned by Chinese, citizen and government. They are now flooding the market with the same equipment for about 2/3rds of the price on average. My personal experience was a labour contract signed with a Communist China company for my project in HK. After 3 weeks they came back and asked for a large increase. When I mentioned we signed a contract, they said, "So?". They made it clear that if it went to the courts...owned and run by the same Communist government... My company stood no chance.

LALoser, There are so many of these types of stories that it's a puzzle why companies are in a rush to do business with the Chinese... I guess the short term money to be made is worth it. Seems like capital costs would be cost prohibitive knowing there's a short runway to make your money, but what do I know.

LALoser: Always ask me first. And never forget the following clause:

Arbitration. Any dispute, controversy or claim arising out of or relating to this Agreement, or the breach, termination or invalidity thereof, shall be settled by binding and final arbitration in accordance with the UNCITRAL Arbitration Rules as at presently in force and as may be amended by the rest of this clause. The appointing authority shall be the Hong Kong International Arbitration Centre. The place of arbitration shall be in Hong Kong at the Hong Kong International Arbitration Centre (HKIAC). There shall be only one arbitrator. Any such arbitration shall be administered by HKIAC in accordance with HKIAC Procedures for Arbitration in force at the date of this Agreement including such additions to the UNCITRAL Arbitration Rules as are therein contained.

Actually, with a HK business and a contract that specifies HK as the jurisdiction, it would have ended up in a HK court, which is totally different than a Chinese court, It's like a British court with many salty old British judges left.

You can request binding arbitration in HK even if you do a contract on the Chinese mainland. We do that all the time. I never sign a Chinese contract without an arbitration clause.

With a proper employment contract, the hires of your friend could have been prevented from working fro the competition. Non-competes are fairly easy in Chinese employment contracts.

Remember: PRC stands for "Price. Relationship. Contract."

Jacross22: These stories are mostly about naive business people who think that things work the same in China as back home., They don't. If you operate in China, you need to familiarize yourself with the lay and law of the land. You need good Chinese lawyers, best Chinese lawyers who went to U.S. law-school. For each horror story there are 100 stories about people who worked successfully in China for many, many years. They are just smarter, and willing to learn.

When I came to the U.S. 30 years ago and started my business, I had to learn U.S. law, and the U.S. way of doing business, which was quite different from the German way. You need to do the same when coming to China. Don't complain about a trademark or patent infringement if you didn't bother to register your trademark or patent in China. Don't complain about slap on the wrist awards if you haven't written contractual damages into your contracts, Don't complain about vague or ambiguous Chinese contracts if you have signed something in Chinese which you can't read. Write your contract in English, and don't forget: "In the event that this Agreement is translated into any language other than English, the English language version of this Agreement shall be controlling and govern."

@Bertel Just curious, what kind of rate/budget should I expect from a competent Chinese lawyer who went to a U.S. law school? Also, how do their credentials work? If s/he passed the U.S. bar exam, does that mean s/he can practice in all common law jurisdictions, including HK? Does s/he also need to pass the bar in mainland to practice on both sides?

Excellent question. You are ahead of the crowd.

1.) A good lawyer who can practice law both in the USA and China will cost you a pretty Yuan, similar to the U.S. $300 an hour and up are quite common. Everything in China is negotiable, including lawyer's fees. Try to negotiate flat fees. The art of running up the clock is performed masterfully here as well.

2.) If they passed the U.S. bar, they definitely are NOT qualified to represent you in court in China. They need to be licensed in China. China is full of foreign lawyers who suddenly turn out as "consultants", and full of Chinese lawyers who lack the proper credentials. A "lawyer" alone is good for nothing, he or she also must be employed by a licensed lawfirm. HK and mainland are completely different with different systems.

3.) A good question to ask and a good answer to get in writing is "Can you represent me in a Chinese court of law, at CIETAC (China International Trade And Arbitration Commission) and at HKIAC?"

4.) HK lawyers can be even more expensive. Their rates will look VERY familiar to U.S. eyes.

5.) For low level trademark and patent work, you don't need a lawyer, a "Trademark Agency" will suffice. Even lawyers usually use them and mark them up by 100% to 200%.

6.) For contract work, you don't need an expensive lawyer, unless you are buying a company or real estate. Clauses must be "reasonable" to stand up in court, have a lawyer write a boilerplate contract once, then edit. Or tag it on in 4 point type as "standard terms and conditions." A contractual damage of 50,000 yuan per trademark violation will sound reasonable (big deal, $7,500), but oops, every piece with your mark on it counts as one violation, and if he makes a million pieces, it's a million violations, and he's done. "Punitive" damages don't exist, unless you write them into the contract. Compensatory damages must be proven. "Loss of future business" doesn't cut it. PRC. Price, Relationship, Contract.

7.) For business registration in mainland China, a well connected CPA is usually better than a lawyer. Business registration needs numerous approvals. It can go smoothly or get entangled in red tape, depending on who it does and where. The scope of a business is usually narrowly defined, the broad "may engage in any and all" does not exist. Be careful.

8.) A business in HK can be up and running in a week with a broad scope, done by a CPA for $1500. A HK registration is usually a good first step into China. Scratch on many Chinese companies, and you find them owned by a HK company. Details on request.

9.) Before hiring people in China, definitely have a lawyer draw up a standard employment contract and have it signed. Contrary to lore, you cannot exploit a Chinese worker. The new employment law is pretty much like the German (where I believe they received inspiration.) If you hire someone without a contract, it can turn into a lifelong and/or expensive affair. There ARE social security payments, and you better make them. You may not hire anybody without a legal presence in China. Even a lowly "Representative Office" suffices, but you need to be legit.

For more advice, ask. My company helps companies source merchandise in China, and sourcing often turns into establishing a business presence here. We have helped many companies, without the horror stories. We've taken Chinese companies to arbitration, and won awards. Chinese courts? Never.

Wow, very thorough reponse! I had no idea about the difference in "scope" limitations, and the ways compensations work. Regarding a separate HK parent company, what are its advantages specific to doing businesses on the mainland? Am I correct to assume that because a lot of mainland companies also have HK presences, you can settle matters directly in HK, which is less messy?

The reason for a HK parent is not to avoid messy lawsuits. You can write binding arbitration in HK (or even in Switzerland or wherever ...) into any Chinese contract. The Chinese courts have a good record of enforcing the decisions of arbitration panels.

The reason for a HK parent is that it becomes the parent of a WFOE (Wholly Foreign Owned Enterprise) in China. As far as that is concerned, HK is foreign, even "overseas." HK is one of the world's last and best tax havens. It's one huge duty free shop.Having your parent in HK and the production a short taxi (or even subway) ride across the border opens interesting opportunities ...