Transcript Doing Biz In China & Contracting with Sources

DOING BUSINESS IN CHINA
Making Products, Structuring Investments
and Protecting Your Intellectual Property
March 16, 2004
DINSMORE & SHOHL LLP
Charleston – Cincinnati – Columbus – Dayton
Lexington – Louisville – Nashville – Pittsburgh
255 East Fifth Street
Suite 1900
Cincinnati, OH 45202
Phone: (513) 977-8200
Fax: (513) 977-8141
Harvey Jay Cohen
Email: [email protected]
Phone (513) 977-8200 / Fax: (513) 977-8141
Website: www.dinslaw.com
LEHMAN, LEE & XU
A Licensed Chinese Law Partnership
Beijing – Shanghai – Shenzhen – Shaoguan – Hong Kong
6th floor, Dongwai Diplomatic Office Building
23 Dongzhimenwai Dajie
Beijing 100600 China
Tel: (8610) 8532-1919
Fax: (8610) 8532-1999
Edward E. Lehman
Email: [email protected]
Tel: (8610) 8532-1919 / Fax: (8610) 8532-1999
Website: www.lehmanlaw.com
Chinese Business
Environment
Many Investment Opportunities
Business Variety
Foreign Direct Investments
Joint Ventures
PRC Government
Organization
CENTRAL GOVERNMENT
Local
Governments
Autonomous
Regions
Centrally
Governed
Municipalities
Special
Administrative
Regions
China’s Legal Structure
National People’s Congress
Laws are enacted by the National People’s Congress.
State Council – Central Government
Administrative regulations are passed by the State Council or
organs under the State Council (eg. MOFTEC, Ministry of
Agriculture, Ministry of Foreign Affairs etc).
China’s Legal Structure
Local Government Agencies
Local government agencies (eg. COFTEC, Hygiene Bureau,
Education Bureau etc.) are empowered to interpret legislation
within their respective areas of jurisdiction.
People’s Court
The People’s Court at various levels have authority to hear and
decide criminal and civil lawsuits.
Prosecutor
The prosecutor investigates criminal matters and represents the
State in criminal cases.
Foreign Investment in China
Central Government
decides types of business open to foreign investors.
Ministry of Commerce
monitors foreign investment, empowered to approve
all applications to establish foreign investment
enterprises (FIEs).
Foreign Investment in China
MINISTRY OF COMMERCE
STATE DEVELOPMENT AND REFORM COMMISSION
Foreign
Investment
Direction
Catalogue for the Guidance of
Foreign Investment Industries
(list of encouraged, restricted and
prohibited industries)
Foreign Investment in China
Some industries (eg. telecommunication
services) - mandatory that the foreign
investor have a Chinese partner, or Chinese
partner hold a majority interest in the FIE.
Foreign Investment Operating
Structures
Representative Office
Equity Joint Venture
Cooperative Joint Venture
Wholly Foreign Owned Enterprise
Representative Office
Quick (procedure to register is not complicated) and
inexpensive way to establish a legal presence in
China.
Can carry out market research, render advice,
collection of information, coordinate company
activities in China.
No direct business activities – cannot enter into
sales contract, issue invoices, arrange for importing
goods.
Equity Joint Venture
A most commonly used foreign investment
structure for the following reasons:
First foreign investment structure allowed in China;
Mandated by Chinese law to be used for most types of
foreign investment;
Benefit to the Chinese economy - foreign party generally
provides technology, management expertise & cash.
Equity Joint Venture
Benefit to the foreign party - Chinese partner may have
established sale and distribution network;
Well connected Chinese partner can help cut through red
tape.
Important Considerations
Selection of the Chinese JV partner and due diligence
of partner/assets
WTO Schedule
Location set up
Equity Joint Venture
The joint venture set up requirements:
Feasibility study
Letter of intent
JV contract
Articles of Association
Capital investment requirements
Minimum equity investment by the Foreign
investor is 25%
Cooperative Joint Venture
Similar to Equity Joint Venture in structure
but with more flexibility because
Sharing of profits is governed entirely by contract
Foreign partner can obtain return of investment in
priority to Chinese partner
Establishment procedure similar to Equity
Joint Venture
Wholly Foreign Owned
Enterprise
A Wholly Foreign Owned Enterprise is
basically a wholly owned subsidiary of
foreign enterprise.
Restricted to fewer business sectors then
Joint Ventures.
Wholly Foreign Owned
Enterprise
Must further the development of the Chinese
economy and should use some degree of
advanced technology.
Approval and registration procedure similar
to Joint Ventures.
Joint Ventures:
After the Setup
GARBAGE IN – GARBAGE OUT
The majority of JV problems can be avoided
through hard work and organization
Stumbling Blocks
Lack of transparency in legislation
Local protectionism in some areas
Cultural differences
Different management styles
Connections (‘Guanxi’)
Chinese Pride & Prejudice
“You foreigners don’t understand about
China and the Chinese way of doing things”
“We don’t do it this way in China”
Be An Active Partner
A good foreign partner does not mean
providing expertise and technology and then
getting out of the way
When partners do not work together
actively, inequalities cause problems
Do What You Say and
Document What You Do
Follow-up on items agreed upon during setup
Example 1: land use rights (understand what is being promised
and what one is getting, and then follow up).
Example 2: technology transfer and improvements (document
what you provide and make sure it is adequately protected).
Do not leave important items to oral
agreements during setup negotiations –
document everything.
Importance of Continuity
Documentation should let a new company
representative to JV step into his
predecessor’s shoes smoothly.
Personal relationships and trust DO mean
something.
Regulatory Filings
Technology Transfers, Trademark Licenses,
Management Agreements.
All Must be Filed – this will not get done by
itself, so follow up.
Royalty payments cannot be remitted unless
filings are made.
Technology Transfer
Basis can be Patent, Confidential
Information/Trade Secrets.
Must be recorded at local Ministry of Foreign
Trade & Economic Cooperation (MOFTEC).
Royalty payments can be made following
approval of State Administration of Foreign
Exchange (SAFE).
Patent Law of China
1985
enacted
1992
first revision
2000
second revision-effective
on July 1, 2001
Type and Duration of
Patent Protection
TYPE
DURATION
Invention
20 years
Utility model
10 years
Industrial design
10 years from the filing date
Requirements for Granting a Patent
for Invention and Utility Model
Novelty
Inventiveness and
Practical applicability
For Utility Model & Design
Formality examination
Published after granting
Right of Patent Owner
No entity or individual may, without the
authorization of the patentee,
make
use
offer to sell
sell
import
the patented product or patented method
Re-examination, Invalidation
and Appeal to Court
When application is rejected , applicant can file
reexamination request to Reexamination Board.
After patent is granted, any party can request the
Patent Reexamination Board to declare a patent
right invalid.
Decision by the reexamination board can be
appealed to court
Action should be taken within 3 months from the
notification
Settlement of Patent
Infringement
Consultation
Institute legal procedure to court
Mediation by the local administrative
authority on patent work
Damage Calculation for
Infringement
Firstly decided by the actual profits or
losses by the patentee or infringer, or
1-3 times of royalties, or
RMB 500, 000 at most
Chinese Trademark Law
1982
took effect
1993
first revision
2001
second revision, took effect
on Dec 1, 2001
Protection Scope of the
Trademark Law
Registered trademarks
Unregistered, but famous trademarks
What Can Be Protected Under
The Chinese Trademark Law
Trademark
Service mark
Collective mark
Certification mark
Trademark Registration
What Can Be Registered
Words
Graphs
Letters
Numerals
Three Dimension Signs
Combinations Of Color
Combinations Of The Forgoing Elements
The Requirements Of A
Registered Mark
The trademark will not be registered if its
use would be considered contrary to law,
public order, liable to cause offense or seen
as immoral or scandalous.
The trademark should be distinctive
The trademark should not infringe any
legitimate rights of others
How Do Foreign Entities
Register Trademarks In China?
A foreign person or foreign enterprise,
without a registered address in China that
wants to apply for the registration of a
trademark or deal with matters concerning a
trademark in China must retain a Trademark
Agent that is licensed by the Chinese
government.
The Examination Process
For Trademark Applications
Submit
trademark
application
yes
Formal
Examination
2 weeks
no
yes
Substantive
examination
2-3
months
yes
Publish for
opposition
(3 months)
5-8
months
no
no
TMO issue
Notification of
Correction or
application shall
be returned to
the applicant
Application
rejected
File an appeal
with TRAB
yes
1 month
Issue
trademark
Certificate
The Amended Chinese
Trademark Law Owner Rights
Enhancement of trademark protection
Progress in application and dispute
procedures
Improvement in Relief for Trademark Owners
Enhancement of Trademark
Protection
Subject matter protection expanded
Lifts bans on trademark application by a
natural person
Allows co-owned trademarks
Lowers threshold for registration
Protection for well-known marks
Added Protection-Subject
Matter
Three-dimensional trademarks
Collective and certification marks
Geographical indication
Enhancement of Trademark
Protection
Lowering threshold for Registration by
introducing the concept of “Secondary
meaning.” “Secondary meaning” - means
“acquiring distinctiveness through use”
A trademark which lacks inherent distinctiveness may obtain
registration if it can prove that it has acquired distinctiveness
through use.
Evidence to show secondary meaning may include output, sales
volume, advertisement coverage, especially market survey of
the products/services in respect of which the trademark is used.
Enhancement of Trademark
Protection
Explicit protection to well-known marks
If a trademark for which the registration is applied for is identical or
similar to other goods or is a reproduction, imitation or translation of a
well-known trademark of another which has not been registered in
China thus being liable to create confusion to the public, registration
will be refused and the use of such trademark will be prohibited.
If a trademark for which the registration is applied for is a reproduction,
imitation or translation of a well-known trademark of another which has
been registered in China and creates confusion to the public, thus
causing a likelihood of infringement on the interests of the registered
proprietor of the well-known mark, registration will be refused and the
use of the trademark will be prohibited.
Enhancement of Trademark
Protection
Explicit protection to well-known marks
If a third party registers a well-known trademark as
part of its enterprise name, which is likely to deceive
or mislead consumers, the owner of the well known
trademark may apply to the enterprise registry for
cancellation of the enterprise name.
Progress In Application And
Dispute Procedures
Voluntary amendment and assignment are
allowed for pending applications
Partial opposition/cancellation is introduced
to trademark dispute cases
Oral hearing is possible for cases examined
by TRAB
Introduction of judicial review
Improvement in Relief for
Trademark Owners
Preliminary injunction available
Awareness of the selling of counterfeiting
goods
Legislative remedy available (no more
than RMB 500,000)
Improvement in Relief for
Trademark Owners
Preliminary Injunction
If the trademark owner, its assignee or licensee can
prove that the infringer is engaging in or will conduct
infringement activities, and that without timely intervention
from the courts, the trademark owner or assignee or
licensee will incur irreparable loss, the trademark owner,
its assignee or licensee may seek an order of injunction
from the court and take measures to retain the infringing
property.
Improvement in Relief for
Trademark Owners -- Awareness of
selling counterfeiting goods
Awareness of selling counterfeiting goods
The claim of being unaware of selling counterfeit
products does not remove the liability of infringement.
The only difference between an infringer who is
aware or unaware of the infringing characteristics of
the goods is that the latter does not bear liability if he
is able to prove that he acquired the goods through a
legitimate route.
Calculation of Damages
The amount of damages for infringement of a trademark will be
either the income obtained by the infringer from the use of the
trademark or the loss suffered by the owner of the trademark
due to the infringement.The loss suffered by the owner of the
trademark can include his reasonable expenses for preventing
the act of infringement.
The profit earned because of the infringement may be
calculated on the basis of a multiplication of the sales of the
infringing goods by the unit profit of the goods. Where it is
impossible to find out the unit profit of the goods, it is
calculated on the basis of the unit profit of goods of the
registered trademark.
Calculation of Damages
The injury suffered because of the infringement may be calculated
on the basis of multiplication of the quantity of reduction suffered
by the right holder in his sales of the goods because of the
infringement or the sales of the infringing goods by the unit profit
of goods of the registered trademark.
If neither the income obtained by the infringer, nor the loss
suffered by the trademark owner can be calculated, the people's
court can determine the amount which amount should not be more
than RMB500,000
The reasonable expenses for stopping an infringing act can
include the reasonable expenses of the right holder or his agent for
investigation or evidence collection in respect of the infringing act.
Trademark License
Trademarks must already be registered or
agreement invalid.
Agreement must be recorded at the
Administration of Industry & Commerce
(AIC).
SAFE procedure necessary before royalty
can be remitted.
When to File?
Plan A: Take care of everything when JV
is set up
Technology transfer usually part of contribution, filings done as
part of setup
If all licenses filed during setup, initial momentum can ensure
proper follow-up
Plan B: Calendar deadlines
Example: Trademark license entered into when trademark is
registered (proper communication between trademark counsel
and company representative)
Documentation
JV setup should be treated like an historical
event – collect documents for posterity
Keep copies of everything that is executed
by parties and filed with any government
agency – keep copies with JV and parent
Exit Strategy
Long-term planning is never a bad thing
Time changes everything
new business strategy
internal reorganization
merger/acquisition
JV reorganization or buyout
Exit Strategy
Offshore vehicle enhances flexibility and
presents options for both partners
Keep everything current
Board meetings
Redistribution of profits
Take care of internal disputes when they happen
Sourcing from China
In time, China may be the factory of the
world.
China may be the fuel for the world’s next
great industrial revolution
Opportunities for everyone to participate
Why Source from China?
Competitive costs
Lower cost alternatives
Extensive capacity resources
Time reduction
Overall substantial savings
Quality
The quality and reliability of most products
produced in China today have improved
substantially in the past few years
The quality of most products such as
chemicals purchased in China today is of
world-class standards
No quality problems and no delivery
problems
Why so?
Awareness - Chinese producers are aware of the
demand and their advantage in the market. Thus,
they begin to invest monies in training and
modernizing their production sites as well as
improvement in technology.
Condition - Purchasers demand that the local
suppliers prove or verify that their products are
consistent in quality and deliveries made on time.
Sourcing Team
Establish procurement team that will help
the company to identify and qualify new
suppliers in China
Contract Manufacturing
Direct Sourcing
Vendor/Purchaser relationships
Auditing own resources
Quality control
Out-sourcing
Manage relationships
Quality control
Important Points For
Establishing Manufacturing
Know your own criteria
Have foresight
Out-source experience
Consider investment options
Use a screening process
Site-selection-make sure the location is right
Partner due diligence
Market research
China as a source – take note!
Find experienced suppliers
Check referrals
QC is the key
Train supplier on foreign expectations
Minimize financial risks
have tight contracts with penalties
Understand logistics costs & timing
Basic Points in Contract
Document
Terms of payment
Acceptance
Delays
License
Warranty
Infringement
Basic Points in Contract
Document
Limitation of liability
Force Majeure
Dispute Resolution
Appendices must be checked for
consistency
Conclusion
Contract as a whole must make commercial
and legal sense.
Keep long term perspective. Contracts may
not be once off affair, so consider future
implications of agreement (e.g. products,
logistics, timeline, cash flow).