You Need an Enforceable China Contract No Matter How Much You are Feeling the Love

china attorneys
Love is a many splintered thing.

Our China attorneys often hear something like the following from our clients:

“I am not worried about this deal/contract/transaction with this Chinese company because” [choose one or more]:

  • The owner and I are great friends.
  • I trust the owner implicitly.
  • There is no way they [the Chinese company] would do this because it would destroy their business.

I start one of my “how to protect your IP from China” speeches with the following:

“Big companies in China want to steal your IP. Small companies in China want to steal your IP. Private companies in China want to steal your IP. Public companies (and SOEs) s in China want to steal your IP. Oh, and that company whose owner you like so much and whose son’s or daughter’s wedding you attended, that company also wants to steal your IP.”

So how then do our China lawyers respond to the client who insists “it’s all good” with their China counter-party and there’s no need for protection [choose one]?

  1. You are wrong about your friendship with the owner. He is a liar and a thief.
  2. You are wrong to trust the owner. He is a liar and a thief.
  3. You are wrong about the economics. They will . . . because they only think short term?
  4. None of the above.

None of the above is the correct answer because our China lawyers do not have any special knowledge about the Chinese counter-party or its owner(s) and so we have no way to refute what our clients are telling us about them. On top of this, we have seen plenty of instances where an American or a European company has had a fantastic relationship with its Chinese counter-party for decades.

No, what we say is that even if all they are saying about their Chinese counter-party is true, there are still substantial risks. And then we tell them about the countless instances where we have seen things go badly wrong even when the American or European company was entirely right in trusting their Chinese counter-party or the economics of the situation.

But how can that be?

Because the foreign company that believes trust or economics solves all when doing business with a Chinese company is ignoring the following:

Just because you are friends with the owner or just because the owner can be trusted or just because it would not make economic sense for the company to cross you, this does not apply to 1) the company’s employees, 2) the company’s vendors/suppliers; 3) the company’s subsequent owners, or to a 4) changed economic situation.

The risk is often not the owner of the company, but everyone else who gets access to your IP or your trade secrets. These are the sort of things our China lawyers see all the time:

  1. Everything is going great with the Chinese company and then the son or someone else takes over for and everything completely changes. Our China lawyers must have dealt with this at least a dozen times.
  2. Everything is going great with the Chinese company and then the General Manager of the Chinese company or someone else goes off and starts a competitor of the Chinese company and this new competitor steals our client’s IP or trade secrets and starts competing with our client. Our China lawyers must have seen this at least two dozen times. See Inside a Heist of American Chip Designs, as China Bids for Tech Power.
  3. Everything is going great with the Chinese company and then a vendor or a supplier of the Chinese company starts competing with the Chinese company by using our client’s IP or trade secret.
  4. Everything is going great with the Chinese company but then the economics of the industry change and the Chinese company can now make a lot more money by stealing our client’s IP or trade secrets and so it does.

For these four reasons (and more), my firm’s China lawyers (and pretty much every other China attorney we know) virtually always insist on our clients having enforceable contracts with the Chinese companies with which they are doing business. We draft these contracts to cover ownership changes and to cover employees and vendors and suppliers and changing economic situations.

Because this only makes sense.

And of course there is more. Beyond the contract, you need the registrations required to protect your product/technology/IP. This  often means registering your trademark in China in English and in Chinese, registering the copyright in your software and anything else that applies in the PRC and maybe Taiwan elsewhere and registering a design patent in China. These will give you protection against those beyond just the Chinese company with which you are doing business. I will write more on these things in my next post.

Your thoughts?

This article was written by Dan Harris and published on China Law Blog. Original Post:      

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Dan Harris

Dan Harris is internationally regarded as a leading authority on legal matters related to doing business in China and in other emerging economies in Asia. Forbes Magazine, Business Week, Fortune Magazine, BBC News, The Wall Street Journal, The Washington Post, The Economist, CNBC, The New York Times, and many other major media players, have looked to him for his perspective on international law issues.