CHINA ESQUIRE

The Institute for International and Comparative Law is hosting their Annual Symposium: International Mergers & Acquisitions - Strategies and Trends. This two day program takes place in Plano, Texas, on June 17-18. Both days are packed with programs, as can be seen here. Of particular note are some of the sessions, which cover a lot of topics:

A Case Study of a Cross-Border M&A (3 parts and nearly all of one day to present!)

Practical Problems and Guidance for a Cross Border M&A

Best Practices and Worst Mistakes Made by Foreigners in Brazil, India, Russia, U.S. and Venezuela

General Counsels’ Roundtable on M&A Issues

Pitfalls and Disputes in Multi-Jurisdictional M&A Transaction

You can even register online here.

I have been hammering the fact that Chinese IPR enforcement–the protection of various sorts of intellectual property like patents and trademarks–has been getting better and better.  Statistics are powerful, and I don’t think these are any different.  The Economist recently did an article called “850,000 lawsuits in the Making” ( h/t Rich Brubaker at All Roads), which reads:

Since 2003 the number of trademark applications has grown by 60%; the number of patents has nearly doubled (850,000 are now active) and the number of lawsuits about intellectual property has more than doubled (see chart). The government is encouraging the trend in many ways, including signalling to the press to cheer it on.

This enthusiasm marks a dramatic change. During the Maoist era, private property of any kind was seen as theft from the masses, and so subject to just expropriation. Only in 1985 did China begin to enact laws to protect patents. It did not enforce them much until 2001, when the authorities promised to crack down in order to win admission to the World Trade Organisation.

China has since opened more than 50 courts that deal solely with intellectual-property cases, and Chinese firms are using them. Prominent litigants include a pram manufacturer protecting designs, a soya-milk producer defending an industrial process and a maker of Chinese medicines shielding a name that, roughly translated, means “mind and blood purge”.

Again, very encouraging numbers.  50 specialty courts that deal with IP?  That’s fantastic.  Sure, they are not all up to par with the Federal Circuit Court of Appeals, but I cannot complain.  Chinese judiciary specializing in IP and learning how to deal with these sorts of cases is a good thing.

As companies in China establish brands and develop products, the incentive to sue will grow, particularly because the cost of bringing a case is minimal. “If you can afford a car, you can afford a lawsuit,” says Tony Chen, who works in the Shanghai office of Jones Day, an international law firm.

In America, firms often settle intellectual-property cases out of court for fear of enormous awards by juries. That is not true in China, Mr Chen says, where a judge rules in the majority of cases and damages tend to be small. They normally cover legal costs, however, turning lawsuits into a self-funding method to battle piracy.

Well, perhaps there is an argument to be made for the British system…  that being a tangent, the British winner-takes-all approach will only allow the rule of law to grow in the early stages of IPR enforcement.  Maybe later it can hurt, but for now, including damages into legal costs will encourage more and more companies to turn to the courts for IP remedies.  That is a good thing.  Few things encourage the rule of law such as the general citizenship of a country embracing lawsuits.  And if Chinese companies can embrace them wholeheartedly, then perhaps the Chinese people will finally be able to as well.

Unsurprisingly, the main beneficiaries of the sudden interest in intellectual property are Chinese lawyers. Some reportedly earn more than $5m a year. Non-Chinese law firms sometimes provide advice on thorny cases. But they are not allowed to file patents or appear in court on behalf of a client—a proprietary process that Chinese lawyers are keen to defend.

Yes, there is a silver lining in the advancement of the rule of law: it’s that the lawyers profit most.  I guess I can’t complain.  But yes, someone will have to profit off of this sort of growth.  For most people, that’s an unfortunate fact.  But it’s a fact of life.  The more that law becomes integral to Chinese society, the more lawyers will become more important.  That’s an already established fact in America–much as lawyers are hated, they are also necessary to the functioning of everyday business.  Expect the same in China.

So onward rule of law!  Just make sure your coattails are long enough for the lawyers…

This is sort of a follow up on my previous post about networking tips for law students (see here), hence the title, but also in response to the fact that blogging made the cover of the California Lawyer Magazine this month. I found the main article to be a re-hash of most such articles because of the content:

• lawyer blogging is booming (a 3500% jump in 5 years, which is no surprise)
• attorneys have many reasons to blog: to build a reputation in a specialty, attract clients, monitoring a legal niche, starting a conversation with a community of interest, etc. (common sense, no surprise again)
• the downside of blogging (lawyers are often technophobes and trolls are annoying, nothing new)
• future of blogging (no real information, just some pretty lame speculation)

However, the magazine provided 7 tips for blogging. Since I had counseled law students to learn about blogging and start their own blogs (or join the staff of a blog which has multiple authors like Transnational Law Blog), I thought I would put up some excerpts of the tips:

1. THINK GLOBALLY
In blogging, even though it feels like you’re sharing your thoughts with an intimate circle of friends, remember that millions of Internet users around the world will be able to read-and react to-what you’ve written.

This is even more important if you are taking on an international niche–then you really do need to think globally.

2. MANAGE YOUR READING REQUIREMENTS
Everyone already has too much to read, and the popularity of blogs is an added burden. But to be a well-regarded blogger, you really need to keep up with what fellow bloggers are saying. “Blogs act as funnels,” says Kevin O’Keefe, president of Seattle consulting firm LexBlog. “It’s like you have an intelligence agent that puts things in perspective for you.”

It is possible to follow a dozen or two dozen blogs without taking too much time if you have RSS or a standard bookmark list that you check once or twice a day. No need to keep on reading a blog over and over because there will be new stuff eventually.

3. KEEP IT CIVIL
If you wind up in a heated online spat but aren’t familiar with the tone and behavior expected in the blogosphere, resist the urge to respond immediately.

4. JOIN THE CONVERSATION (BUT IGNORE THE TROLLS)
When someone blogs misinformation about you, your firm, or an issue you are involved in, you should go ahead and set the record straight online. “The remedy for false speech is more speech,” says JoAnne Speers, executive director and ethics program director of the Institute for Local Government in Sacramento.  However, if you encounter a rabid, screaming, and pertinacious blogger-often referred to as a troll-you might want to hang back.

Just common sense, though I slightly disagree with #4. One thing is that when “trolls” abound, in general, just let them be. That usually works well. It’s the debate that will keep them coming back. No debate, moderate their comments, and you will be just fine.

5. FOLLOW OFFLINE RULES ONLINE
For the most part, you can avoid getting in hot water while blogging. “Use the same standard of ethics and decorum that applies to any medium,” including a person-to-person conversation, Speers advises.

Remember you are a professional. If you are a to-be lawyer, what you say will be remembered by the lawyer blog community. It’s a small community. So be professional always.

6. ABANDON ANONYMITY
Although it may be tempting to launch an anonymous blog in which you can speak freely, keep in mind that anonymous bloggers rarely stay anonymous. “Eventually, you are going to get found out,” says Kristie D. Prinz, founder of the California Biotech Law Blog. Howell agrees. “It’s not that difficult to figure out who someone is,” she says. Just ask Rick Frenkel, a lawyer at Cisco Systems. Shortly after his anonymous blog-Patent Troll Tracker-was outed this year, two Texas patent attorneys sued Frenkel and Cisco for defamation. Cisco has since revised its blog policy.

As a law student, I think this is a definite must. You need to be known in the community, and anonymity will hurt you. Of course, this assumes you are writing an informative blog and not something like Anonymous Lawyer (by Jeremy Blachman I believe).

7. SPEAK FOR YOURSELF
A blog is not the place for corporate blather or marketing blasts-it’s a place of personality. Keep that in mind as you write, suggests J. Craig Williams, a Newport Beachbased litigator. “Blogging by committee is bland and dry,” he says. “What makes blogging successful is voice. The most important thing is to be yourself.”

I also disagree with #7. Some blogs do it quite well, so I don’t think that’s a reason to stay away from group blogs. You can still develop your personal voice in a committee blog, especially when your partners aren’t going to heavily edit your work.

I hope this helps!

From China Law & Practice’s website, Asia Law & Practice is hosting an Asia Pacific Mergers & Acquisitions Summit in Hong Kong on 6/3/2008. Their description of the event:

This top-level business symposium will feature open discussion and expert advice on the key regional and cross-border M&A issues in Asia. The Asia Pacific M&A Summit will bring together over 200 of the top corporate legal counsel and business leaders. They represent some of the largest and most active companies from across Asia and beyond – companies and individuals who are key clients of leading legal advisers.

Should prove fascinating because I wonder if they will cover reverse M&A into America, which is technically a Pacific Rim practice.

The Los Angeles Times recently published an article entitled “Chinese Firms Bargain Hunting in U.S.” ( h/t to CDT).  Ironically, I had just posted an article recently about western companies going into China because the U.S. economy was faltering.  ( here)  And while I had also written about China’s growing economic muscle ( here), the LA Times article puts two and two together: Chinese companies are setting up shop in the U.S. because it is actually cheaper or almost cheaper to set up shop here.  Scary thought.  But the more the west goes to China and drives up costs (particularly raw materials and HR costs), the more that China might be tempted to bring more of that capital here.

Here are excerpts of the article:

Liu Keli couldn’t tell you much about South Carolina, not even where it is in the United States. It’s as obscure to him as his home region, Shanxi province, is to most Americans.

But Liu is investing $10 million in the Palmetto State, building a printing-plate factory that will open this fall and hire 120 workers. His main aim is to tap the large American market, but when his finance staff penciled out the costs, he was stunned to learn how they compared with those in China.

Liu spent about $500,000 for seven acres in Spartanburg — less than one-fourth what it would cost to buy the same amount of land in Dongguan, a city in southeast China where he runs three plants. U.S. electricity rates are about 75% lower, and in South Carolina, Liu doesn’t have to put up with frequent blackouts.

About the only major thing that’s more expensive in Spartanburg is labor. Liu is looking to offer $12 to $13 an hour there, versus about $2 an hour in Dongguan, not including room and board. But Liu expects to offset some of the higher labor costs with a payroll tax credit of $1,500 per employee from South Carolina.

Liu is part of a growing wave of Chinese entrepreneurs expanding into the U.S. From Spartanburg to Los Angeles they are building factories, buying companies and investing in business and real estate.

For years, investment between the U.S. and China flowed one way, with American firms spending billions in the Asian nation. But the Beijing government’s $5-billion stake in Morgan Stanley and $3-billion investment in the private equity firm Blackstone Group brought China’s overall investments in U.S. firms to $9.8 billion in 2007, up from $36 million the year before, according to Thomson Financial.

“It’s a lot of pressure going to the largest market in the world,” Liu said. But he thinks it’s certain to help his business become more competitive. “That’s one of the real benefits from this expansion.”

(emphasis added in bold)  We all know that the dollar has been weakening and that international players are finding bargains here.  It’s just an interesting surprise to discover its not just the CNOOC’s and the Blackstone’s that are coming to the west–it’s even smaller Chinese operations quietly coming in. It isn’t terribly surprising once I think about it a little–because it does make a lot of sense.  It’s just that I wouldn’t normally put two and two together in this sort of way.

What does this mean for corporate attorneys?  Or more specifically, for U.S. corporate attorneys?  The large M&A market is sputtering in the U.S. according to a recent article in the Recorder.  ( here, subscription required)  However, the mid-level deals are still alive and kicking according to the article.  These Chinese businessmen bringing business to the U.S. will be mid-level deals at best.  And more likely, need corporate attorneys who can help them set up shop: entity formation, real estate transactions, employment agreements.  In other words, basic corporate lawyers.  This is a bit of good news in a rather slow economy.

And for those M&A, LBO, and structured finance folks who are out of work with the spate of layoffs, maybe its a good time to do entity formation work.  Here’s a start for retraining:

whither the c-corp, s-corp, llc, lp, etc.?

Maybe I will get around to doing that analysis of different U.S. corporate entity types once my work slows down.

Okay, I know this is controversial…  My blog says that I comment on law, business, society, and of course, anything else interesting.  Anyone following these blogs can quickly tell I normally talk law and business, and rarely about anything else.  (maybe some American politics once or twice)  But Chinese society is something I rarely talk about.  Frankly, it is hard to do in an objective way.  I was a sociologist in college, and I disliked a lot of the biased sociologists back then as well.

Well, California Magazine (the alumni magazine of UC Berkeley) recently did a cover on China with the Olympics coming up.  There is an interesting article called “The Great Leap Nowhere” (credit to my Chinese lawyer friend at Boalt), which argues that Chinese “culture” is becoming more and more amorphous.  I am not terribly surprised because globalism, with international media, pop culture, music, movies, etc., seems to bring more conformity in terms of culture.  Here are some excerpts from the article:

The Chinese are not polled about feelings of national identity; such questions, much less their answers, would too dangerously approach the political nerve of China’s ruling mandarins. Polling on other issues, however—tastes in carbonated drinks, preferences for shampoos, ratings of certain sports celebrities, the appeal of mobile phone designs—is commonplace and, in a real way, reflects a changing social landscape. Despite the lack of significant data, after many years in China I am most acutely struck by China’s confusion over what, in the end, it means to be Chinese.

The rapidly shifting cultural footing is nowhere more apparent than for China’s urban 20-somethings. Take, for example, Yang Ling, as I will call her. Born in Xian to a military family—her father retired before reaching the rank of general—she chose, perhaps as a dutiful Chinese daughter, to attend a local university rather than a more prestigious institution in Beijing or Shanghai, so that she could be close to her recently divorced mother. “Now I realize I probably made a mistake,” says Yang, a petite woman of 27 who sports radically fashioned bobbed hair and, she confides, a splendid polychromatic butterfly tattoo on her shoulder. “Chinese children are supposed to take care of their parents and I thought it was the thing to do. But now I think I should have gone to Beijing.”

For her fealty, or perhaps because of her family background, she was invited to join the Communist Party but never did. “I just forgot to fill out the paperwork,” she recounts. “It wasn’t important to me. There were other things in my life that mattered more.” For hundreds of thousands of young people like Yang who have migrated to Beijing for professional reasons, the Party is no longer meaningful. “I’m not even sure I know anybody in the Party,” she says. “What’s the point? How does it help you? It’s just ancient history.”

Yet it is true that for up-and-coming 20- and 30-somethings in a cosseted and increasingly international metropolis such as Beijing, Shanghai, or Guangzhou, all history is ancient, and largely irrelevant. Yang Ling sped from provincial Xian after college to Beijing, where she worked as a marketing consultant before founding her own consultancy targeting medium-sized Chinese companies. For her, there is little about China’s history or culture that is either particularly appealing or necessary except, perhaps, the multiplicities of Chinese cuisine. She and other young Chinese live their lives in a world that would fit as easily in Europe or America, a world that is ultimately more recognizable as Western than Chinese.

For most Beijingers, the rhythms of daily life have been inexorably recast by the modern, largely Western economy that undergirds China’s astonishing growth. Consider “Tang Wenhai,” a 40ish director of corporate communications for one of the capital’s largest commercial and residential developers. Because her husband travels extensively for work, as does she, their son boards during the week at an elite primary school. Every morning Tang leaves her utterly modern 22nd floor apartment just off the Fourth Ring Road and drives her gleaming white Honda to an office in a gray, crystalline trapezoidal tower in the CBD. With an MBA from Tsinghua University (”China’s MIT”), she worked on her company’s recent $1.5 billion initial public offering, jetting around the globe with other senior company officers and their investment banking consultants. She’s taken her staff on whirlwind tours of Europe, and most recently vacationed in Egypt with friends.

“Of course this isn’t how my parents live,” she laughs, “or frankly how I thought I would live when I was growing up. My parents”—working-class people from China’s far northeast—”could never have imagined a China like this. The funny thing is, now we live like everyone else in the world.” Or at least like other First World corporate executives. “It’s globalization,” she says.

The article notes, to its credit, that much of the analysis does not apply in the rural areas of China.  But is this really all that different from what has happened in places like Tokyo or Seoul?  Those are metropolitan areas that are reminiscent of western cities as well.  Tall buildings, flashing lights–very New York-ish.

This is not a critique necessarily on Chinese culture.  It is, however, a warning that the global economy–and its attendant culture–does threaten any country’s native culture.  China is not exempted from this either.  Not exactly rocket science, but still makes for an interesting read.

CNN Money ran an article the other day with a title that made me want to read it: “You Have 7 Years to Learn Mandarin”. Oh really? Why so you might ask? My original thinking is because the Chinese business (and therefore legal) market would become too saturated with ex-pats and half-pats to break in. I was wrong. Instead, the article talks about a prediction that China will be the world’s economic superpower by… 2015. 2015? You got to be joking. But that’s what CNN is peddling to an unsuspecting public:

Back in 2001 when the International Olympic Committee chose Beijing as the site of this summer’s games, the event was meant to mark China’s debut as a player on the global economic stage. But a recent study by the economist Angus Maddison projects that China will become the world’s dominant economic superpower much sooner than expected - not in 2050, but in 2015.

While short-term investors are already cashing in on China’s growth by playing the global commodities boom, smart long-term thinkers are contemplating what happens when China matures from an exporter of cheap goods to a competitor in sectors where the U.S. is dominant - technology, brand building, finance. China has almost wiped U.S. makers of low-value items like toys and socks, but by 2015 it may threaten Apple (AAPL, Fortune 500), J.P. Morgan Chase (JPM, Fortune 500), and Procter & Gamble (PG, Fortune 500). It will increasingly influence the S&P 500 and the mutual funds in our 401(k)s. So it’s worth looking at how that will happen, what it means, and what anyone can do in the seven years before the baton is passed.

Just using the exchange rate to convert China’s GDP into dollars isn’t helpful in comparing the two economies, because China controls its exchange rate; by that method, China’s economy might not pass America’s for decades. Exchange rates apply only to tradable products and services; they aren’t very useful in valuing nontradable goods in a country like China that is much poorer than the United States. So we need some way to compare the real value of China’s economic output with America’s, and economists have developed one. It is called purchasing power parity.

Angus Maddison’s forecast (which uses purchasing power parity) isn’t built on outlandish assumptions. He assumes China’s growth will slow way down year by year, and America’s will average about 2.6% annually, which seems reasonable. But because China has grown so stupendously during the past decade, it should still be able to take the crown in just seven more years.

If that happens, America will close out a 125-year run as the No. 1 economy. We assumed the title in 1890 from - guess who. Britain? France? No. The world’s largest economy until 1890 was China’s. That’s why Maddison says he expects China to “resume its natural role as the world’s largest economy by 2015.” That scenario makes sense.

China was the largest economy for centuries because everyone had the same type of economy - subsistence - and so the country with the most people would be economically biggest. Then the Industrial Revolution sent the West on a more prosperous path. Now the world is returning to a common economy, this time technology- and information-based, so once again population triumphs.

Where do I even begin? I think the 2015 number is built on a number that heavily favors anyone who wants to make grand declarations about China catching up quickly. In fact, last I remember, when Rich Brubaker at All Roads posted that China would catch up by 2028, we all took that number with quite a bit of skepticism. Sure, you can choose one particular figure to represent your claim? But this sort of economics… well, it seems more sensationalistic to me than realistic. Nor will it reflect reality. I doubt in 7 years that value-added industries, the service professions, will be ceded over to China. Hardly–that’s exactly what the U.S., EU, and other Asian Tigers will try to specialize in. So I think the 2015 stats were more shock value than anything else.

I also doubt that China have companies that can play along to the tune of Apple or JP Morgan. Or even Samsung. Not that China doesn’t have some successful companies, or some that have catchet like Lenovo. (okay, Lenovo didn’t have it… they bought it from IBM when they took over the Thinkpad series, which had serious cachet) The Chinese economy isn’t built on innovation and product advancement in the same way that other economies are. The educational system doesn’t embrace such thinking yet. So I doubt that we’ll see that. We will see SOE’s flexing their muscles more. I expect that. But I really don’t think a Chinese computer company will over take Apple in terms of computer and culture maker. Not by 2015.

The global economy is not a subsistence economy. It’s different. It’s more like a pyramid scheme in terms of value added industries. There is a reason why the west dominates in consulting still–because white collar professions, which are services and about “value”, have existed far longer there than in China. And it will be that pyramid for some time still, I am not saying that the Chinese services industry and other higher food chain type businesses won’t evolve. They will. They just won’t overtake the world by 2015.

I think that’s where the conclusion of the CNN Money article is going:

For companies: Focus on getting better at your highest-value activities. Just because the Chinese will be fighting you in the same industries doesn’t mean you’ll lose.

For individuals: You can avoid competition with Chinese workers by doing place-based work, which ranges in value from highly skilled (emergency-room surgery) to menial (pouring concrete). But the many people who do information-based work, which is most subject to competition, will have to get dramatically better to be worth what they cost.

I agree with the advice for companies. It’s a global food chain or pyramid more than a subsistence economy. I disagree slightly for individuals. Why? Because I don’t think information services will require that the west gets dramatically better. It just needs to stay a few steps ahead.

The American Chamber of Commerce recently published its “2008 White Paper on American Business in China”, which can be found here. ( h/t to Chinese Law Prof Blog) It is a very helpful overview of issues that American businesses will face coming into and doing business in China. The usual suspects are there: IPR enforcement (or lack thereof), human resources problems (the talent pool market), visa issues.

But there are a few encouraging trends in Part I of the report in terms of the way businesses perceive issues:

• Management level HR constraints is the top reported problem for 2008. (37%, up from 29% the year below). Again, I don’t think there is anything particularly new about this. This will be a problem for some time to come, especially in places like Beijing and Shanghai. I expect that this will be more and more of an issue as the 2nd and 3rd tier cities expand as well.
• Lack of transparency is fourth top problem for 2008, cited by 28% of respondents. It sounds pretty common-sensical. However, it ought be noted that this is down from 41% during 2007. That is a big difference in my mind. Especially from the Chinese government, where things aren’t always as transparent as western standards would prefer, this is a big thing. Very encouraging.
• Intellectual property rights infringements is not a newcomer to this list. However, it is the 6th top problem at 21%. And this is down from 26% the year before. I have been saying for the past few weeks that Chinese IP enforcement is getting better. This just validates this in my mind: even American businesses are taking notice, in spite of the rhetoric of the U.S. government at the WTO level.

Everything has gone down. Even bureacracy. (which places 5th) Except for the Human resources problem. I would note that there are some very good resources out there about this. I would start with Andrew Hupert’s China Solved Blog, which I follow and sometimes refer to on this blog. In fact, Andrew had an interesting post on point a few days ago. Other than, be warned that you will face stiff competition (to the point of the absurd at times) for good talent in major cities. Expect this.

So why the blog title? Because Am-Cham is so predictably American in their recommendations. I don’t disagree with any of them. However, it is urging the Chinese government to become more like our own government in how things are run. It won’t be easy. And sometimes, I think it well nigh impossible… at least, in this generation. These changes take time.

For example, the suggestions that Am-Cham came up with the following regarding how to fix deal with the HR problem:

Begin steps to reform the education system to encourage greater creative thinking, problem solving and teamwork. Courses should emphasize curricula that are more project-based and that encourage collaborative learning, which are vital skills in the workplace.

Reduce emphasis on one standardized college entrance examination and focus more on assessing individuals based on various abilities and skills that are applicable to the workplace. This includes team problem-solving, practical innovation and public service.

Re-evaluate the “985 Project” and “211 Project” aimed at strengthening the top universities and improving the curricula in order to propel the top universities to world class institutions in the next 10-20 years. Although we support the Chinese Government’s efforts to increase investment and standards in post-secondary education, these projects should include more cooperation and input from the business community to help ensure that students are learning the skills required to succeed in the labor market.

Relax hukou restrictions for qualified technical or managerial candidates and consider expanding the “Blue Stamp” system to other areas in China beyond Shanghai and Shenzhen.

Creative-thinking? Problem-solving? These are not fundamentally Chinese strengths. And in the current education system which emphasizes rote memorization and regurgitation, they will not be for a long time. So I don’t see these happening. Also, is this something China really wants? From a government level, I would want citizens who are hard working and listen to orders. That’s a cooperative citizenship. Second, where has America gone with its creative-thinking, teamwork oriented approaches? The math and science skills of children have plumetted. Sure, our youth are now great at teamwork–which is good practice for business and other services oriented industries. But even my high school teachers made fun of these “new” and “innovative” teaching methods. Why? Because they often produce poor students with no self-motivation and mental toughness.

I also don’t see the college entrance system changing anytime soon. It’s not just a China thing–it’s present in other Asian countries. It works. I don’t think Chinese college administrations will be ready for an American application system because of the sheer scope of the undertaking. There are going to be far more applicants in China due to its population. Really, this can kill resources in the universities like no other. I also question whether the American obsession with being an A+ student with high SAT scores and a varsity athlete and a humanitarian volunteer and being a participant of many clubs and <insert here> really helps anyone. There is a business for people in America who provide college admissions counseling. And I don’t mean in public high schools. The wealthy actually hire people to help their kids write their essays (”revise” the essay so they say), give guidance as to classes and extracurricular activities, etc. That isn’t really much better.

While I do agree that many of the suggestions would be helpful to American businesses, I want to caveat that they need to be taken with a grain of salt because the ideas are very American. Not that we expected any different.

While I am still talking about intellectual property and IPR enforcement, I thought I would highlight an article I read recently. The Associated Press recently published an article entitled “While upset about piracy, EU is more serene about China than US”. The article reads:

Compared to Washington, the European Union has been serene about piracy in China of its trademarks, copyright and patents. Can that last?

The EU estimates pirated goods cost EU businesses €21 billion (US$33.3 billion) in lost trade annually — about a third of current EU exports to China. But unlike the United States, it has to date not pursued any Chinese piracy cases in the World Trade Organization.

Still, the EU has put China in the category of worst violators of intellectual property. It is the only country in that category because its anti-piracy efforts are so weak that 80 percent of counterfeit goods imported into the 27-nation bloc are Chinese-made.

Again, I would like to know how that figure of 21 billion euros is calculated. As I mentioned before: if it wasn’t for piracy, I really doubt the figures many times.

I also think it can last. Why do all the dirty work of calling China out when America is already more than willing to do that? I think its the best policy.

Mandelson has repeatedly criticized blatant sales of fake goods throughout China that cost European and U.S. businesses dearly. To counter this he has nudged China into a 2007-2011 venture designed to boost enforcement of Chinese piracy laws by providing expertise and training.

“It is important to offer the Chinese all possibilities to put their house in order,” says Luc Devigne, head of intellectual property issues at the European Commission’s trade directorate. “We are not always convinced there is a willingness to stamp out piracy.”

That’s as tough as the piracy language gets at the EU.

I disagree. I think China has done a pretty good of trying to stamp out piracy. It’s true: China has not taken a zero tolerance policy, as evidenced by street vendors continuing to sell pirated products and fly-by-night stores that sell counterfeit goods. But I think the numbers are pretty good: 10% drop in software piracy in years; 76 million discs and other goods confiscated, 13,000 businesses shut down in 1 year (see here); 1.3 billion illegal publications over 20 years (though not all piracy related) (see here). Court cases being won regarding trademark, copyright, and patent. Realistically, there isn’t all that much that China has not already done in my book.

“In America, there are strong feelings of protectionism in the Congress. And the U.S.-China relationship is much more complex, more interdependent. There is America’s huge trade deficit with China. China has leverage over the U.S. because it holds significant amounts of U.S. Treasury debt. And there are security issues like Taiwan and North Korea.”

By comparison, says Innis, Europe “is much more in an appeasement mode with China.”

That is “a bad thing,” says Stuart Newman, head of the Brussels-based Foreign Trade Association whose 100 members include Europe’s biggest supermarket groups and textile importers. “We should be going after China in a tough way on intellectual property rights violations.”

While he favors legal action through the WTO, Newman does not underestimate the job of eradicating piracy in China.

I also disagree. I think the appeasement mode works better. Here’s why: (1) America will be the bad cop, while the EU can be the good cop. Good cop/bad cop works pretty well actually. And I think the EU will end up having a better image for it. Piracy will go down. America is hated. The EU is loved. That’s a win-win if I ever saw one. (2) That is how the Chinese prefer to negotiate. The government knows that IP is a problem. And the government knows that IP enforcement will be important to China’s economy in the future. China is not naive. But to throw that into their face like America does makes China defensive. And it makes China amp up the rhetoric as well. It’s just unproductive. But if the EU can dialog with China and do things in a less-blatant fashion, I think it will encourage the Chinese government to want to work with the EU. I know it sounds so offensive and ridiculous to westerners, but let the Chinese save face where you can. Really, it works.

My take: the EU should stay the course. The EU will benefit from America’s aggressiveness and still get what it wants, while maintaining the favor of the Chinese government and people.

Review time… I didn’t think too many frivolous lawsuits happened in China. In fact, that’s often the criticism I hear about the United States. (think of lawsuits like McDonald’s making you fat, etc.) But here is a case where I think there is a frivolous lawsuit… in China of all places. Not that I don’t understand the sentiment behind the lawsuit. I do. But to actually allow this one to go to court? Let’s just say that if it does, China’s legal system will remain a laughing stock of the modernized world.

First the news itself:

A group of Chinese lawyers have sued CNN, saying remarks by commentator Jack Cafferty in which he called Chinese “goons” violated the dignity and reputation of the Chinese people, a Hong Kong newspaper said.

The Beijing-backed Wen Wei Po said the Beijing court had yet to accept the case, which comes amid a wave of criticism in China against Western news outlets in the wake of recent unrest in Tibet and disruptions to the Beijing Olympic torch relay abroad.

China’s Foreign Ministry summoned CNN’s Beijing bureau chief last week and demanded an apology after Cafferty said Chinese products were “junk,” adding the remark: “They are basically the same bunch of goons and thugs they’ve been for the last 50 years.”

One of the 14 lawyers who launched the case told the newspaper Cafferty’s remarks “seriously violated and abused the reputation and dignity of the plaintiffs as Chinese people, and caused serious spiritual and psychological injury to the plaintiffs.”

The lawyers sought the restoration of the Chinese people’s reputation through publications and in the media and asked for 100 yuan ($14.31) in damages, it said.

In response to the Foreign Ministry’s initial demand for an apology, CNN said there was no intent to cause offence and that Cafferty was offering a “strongly held” opinion of the Chinese government, not the people.

I know that China does not have free speech. But to allow civil liability for editorial comments will surely chill speech in China. Or even worse, force media outlets to censor… and of course, that will force the journalists to take underhanded jabs at China. Which will really screw up the desire for us to have factual, unbiased reporting. And of course, for more local news outlets without the reach of CNN in China, I can see reporters publishing stories with those local outfits to criticize China.

Either way, this will not help China. I think it will make the attacks nastier. People know Cafferty mouths off, and no one takes him all that seriously. I think this will encourage other reporters–who the public does take seriously–to adopt an anti-China stance. You mess with one journalist, you mess with all of them. But don’t tell the Chinese government that, because the government seems to stick its head in the sand when it comes to smart PR campaigns.

Of course, it wouldn’t be Chinese unless it had China sized damages. Reuters reported:

A Chinese primary school teacher and a beautician have filed a suit against CNN in New York over remarks they say insulted the Chinese people and are seeking $1.3 billion in compensation — $1 per person in China, a Hong Kong newspaper reported.

Seriously, $1.3B in damages?! Can we say groundless? Again, if you want to make China’s courts the laughing stock of the world, you would allow damages based on pure speculation and without any merit. Otherwise, give me a break. I really hope the court tosses this one out.

Here is Donald Clarke’s take on the law itself:

Chinese law does allow damages for what under US law would be considered merely insulting expressions of opinion (and therefore non-actionable) - I’m thinking of the case in which a journalism professor sued a web site for posting a student’s derogatory opinions about him and his teaching materials. (Discussed here.) Thus, under existing Chinese law, I think the Dalai Lama, Nancy Pelosi, Chris Patten, and Chen Shuibian might have a good case against Xinhua and various Chinese government officials (although of course the prospects of their being allowed to sue and win are, to say the least, remote). The problem here, though, is different: can individuals who feel offended by a general derogatory reference about their group do anything about it? (Let’s assume for the sake of argument that Cafferty was including all Chinese, and not just the government.) To allow this kind of suit is opening a real can of worms. The relevant precedent in this case might be the Zhengzhou lawyers who sued the Shenzhen Public Security Bureau because they were offended at the PSB’s insulting banner about Henan criminal gangs. (Discussed here.) That case ended in a mediated settlement, though, so we don’t have a court ruling. Still, I guess it’s significant that the court accepted the case in the first place, and didn’t throw it out immediately as not stating a claim. At the same time, though, the court in question was a Zhengzhou court, and in any case may not have analyzed the complaint in terms of whether or not it stated a claim for which relief could be granted.

I couldn’t agree more. If China thinks it’s a dandy law to allow to use against foreigners, just wait until people realize that it works against the Chinese government, which is just as slanderous and malicious as any other government. (like Nancy Pelosi and the Olympics opening ceremony)

Even worse, just imagine Chinese individual citizens using this against each other. It will get ugly. Because Chinese people don’t sue… unless there is a real vendetta. Loss of face is a cause for such a vendetta. So I foresee that this could become the precursor to some of the ugliest, scorched earth cases in court if allowed unchecked. If I were the court, I would want no piece of this.

Of course, the Chinese government right now doesn’t seem to think this. The article from Reuters goes on:

Asked if China supported the action against CNN, Foreign Ministry spokeswoman Jiang Yu characterized it as “spontaneous activity by Chinese civilians”.

“We will wait and see CNN’s response,” Jiang told a news conference, referring to the Foreign Ministry’s request for a full apology.

“We hope CNN will take this seriously, because what CNN said and did has not only hurt China’s feelings, but also CNN’s own image.”

I normally don’t take aim at the government. But this time around, I must say: the only one looking stupid and hurting its own image is China.

In summary, this is bad policy. Of course, it will be hugely unpopular in China if CNN got away. But for reasons having to do with policy and rule of law, it would be wise for the courts to drop this case really fast.

Matthew DeFlorio published an article with the ABA International Law Section’s International Law News. It doesn’t directly relate to China, but I think its tips are very applicable. A number of his suggestions are based not only in common sense, but quite a bit of experience as well. However, a number of them are not cheap… and so it’s up to you to decide whether its worth it to protect your IPR. I am going to get the answer will be “yes” in a number of cases.

The article, entitled “Supply Chain Security and Its Impact on IPR” reads in part:

Protecting IPR through supply chain security can occur in a number of ways, either through tangible investments or as intangible process changes. . . . Developing new or improving existing processes for business partner selection and internal communications and data flow represent typical intangible enhancements that can provide additional security. Owners have improved their IPR protections by emplying some or all of the following options.

Visibility. Making assets and products more visible throughout the supply chain can protect against cargo theft and damage and prevent products from becoming instruments of illegal trade. Companies achieve this by investing in satellite tracking systems such as GPS, product protection technology such as EPC, or RFID. These systems provide real-time location status and tamper evidence that enables their use greater control over a shipment’s chain of custody from production to point of purchase.

No argument here. However, I just want to note that these sort of systems will cost more. Not a big revelation. But when profit margins are getting thinner by the day, a number of businesses–likely SMEs–won’t want to pay for these costs. At that point, you need to think about just how valuable your IP is and make a proper business decision.

Physical protection. Businesses protect building structures and cargo handling areas by installing fences and video surveillance equipment, and by controlling access to sensitive areas by employees and visits. These measures benefit IPR by protecting product and shipment integrity while discouraging access by unauthorized personnel.

Again, no argument. However, this needs to be strictly done at all levels. Including, your Chinese manufacturers/suppliers. Sourcing from China is likely a weak link in your chain. How many factories are going to protect in this way? Not many. So be careful and make sure you trust your suppliers. I really expect most companies, even SMEs, to be doing some of these things… but only in the US and not overseas.

Standards. Many companies will benchmark processes and activities, thereby establishing minimum performance requirements . . . . Specific methods for reporting fraud and illegal pursuits have become commonplace and are required for public companies under Sarbanes-Oxley. Such process discipline leads to quicker, more assured compliance while reducing confusion and inefficiency in the movement of goods through the supply chain.

Note that this is true for companies under SOX. In other words, U.S. publicly traded companies. Not your Chinese manufacturers. Reporting requirements and processes are not easily implemented in China. It’s not the same as doing it in the U.S. or even Japan. Chinese work culture is very different. Trying to convince your satellite office employees in China to do so… that’s going to be directly related to the effectiveness of your local manager.

Business Partners. Increased scrutiny of current and potential business partners leads companies to investigate beyond financial soundness and into the previous business conduct and security measures undertaken by the potential partner. Due diligence with this investigation will ensure a secure supply of materials, prevention of unauthorized characters tainting your supply chain, and enable early detection of security breaches due to enriched communication and collaboration. . . . IPR owners benefit through cost avoidance; smoother transit means quicker time to market, allowing for decreased inventory levels and the redirecting of funds previously earmarked to compensate for potential criminal activity.

I cannot reiterate this point enough. First, due diligence–thoroughly done–is your friend, even if it costs time and resources. Do it. And of course, do it regularly… check up on your suppliers on a routine basis. Quality fade isn’t the only problem if you are trying to protect your IP. Really, intellectual property is as valuable as your weakest link. So make sure your partners are doing a good job. Drop in unannounced regularly. Second, it also means that you can’t just go onto Alibaba and expect that this is good enough. It isn’t. Don’t think you can just find someone off a directory listing or at some trade even… it’s never that simple. Whoever you go to, do your due diligence.

And of course, as many people have reiterated time and again… Register your IP in China. (Thanks Dan!)

The International Law News, which is the American Bar Association’s (ABA) publication for the International Law Section, published an article by Richard Gruner entitled “Intellectual Property in the Four Chinas”. You might be wondering if there are four Chinas in the first place since most people think there is one China… unless you are a firm supporter of Taiwan, which is technically the Republic of China. That would give you two.

On that note, Professor Gruner argues astutely:

The analysis of IP laws and their enforcement in China has been hobbled by oversimplifying China itself. A number of astute observers of the developing business environments . . . in China have recognized that there are at least four distinct regional situations–that is, the “four Chinas” within the [PRC]–that are developing as the country emerges into a period of greatly heightened commercial activity.

The regional characteristics . . . of the four regions fo the PRC discussed here create four very different sets of opportunities and problems for IPR holders. The impactof IP varies in different regions of the country because a combination of local differences in types of dominant businesses in local areas, variations of the local political clout of businesses that infringe IPR, and the ability of local officials to grant or withhold strong IP enforcement due to the regional nature of IP enforcement mechanisms in China.

I cannot agree more. China, while it is trying to unify its laws and enforcement of IP law (and other laws, for that matter), is a huge nation. I keep reminding people that China has a landmass that is far more comparable to the entire EU than to America. (yes, there are many geographically challenged Americans) Inevitably, there are bound to be differences. If people forum shop in the U.S. because courts are different, imagine forum shopping in a landmass that encompasses more than three times the population. I think you get the picture.

Gruner identities the Four Chinas as:

1. The municipalities of Beijing, Shanghai, and Hong Kong, and the surrounding areas under the direct control and influence of these cities, which are both commercial centers and heavily industrialized.
2. Coastal China, the areas near China’s coastline other than the major urban centers of the First China, which are often mixed economies with many large scale manufacturing activities conducted at low product cost.
3. Inner China, regions immediately inland from the coastal sections of China, which are heavily dominated by agriculture.
4. Outer China, the western provinces of China and desert areas, which consist mostly of economies of mineral and oil extraction.

Again, this should be no surprise to China watchers. The differences between the “tiered” cities mirrors some of these observations.

Gruner observes that in the First China, “local authorities have strong motivations to pursue IPR enforcement as a means to both reward and enhance local innovators and to entice outsiders . . . to inject new technologies into the local economy through IP licensing.” He approximates the level of IP interest as being similar to those of highly technical western counties like the U.S.

Coastal China’s manufacturing “involves technologies originating in other parts of China or copied (often without proper IP licenses) from foreign sources. The interests of this region are thus largely tied to the . . . profitability of local manufacturing without any reciprocal concern over the lack of IP-based rewards for local innovators.” Gruner concludes about this area:

This region represents the greatest challenges for IP enforcement in China due to both its present economic interests in weak IP enforcement and the breathtaking scope of its infringement capacity in large-scale, low-cost manufacturing of unlicensed goods covered by IPR.

Inner China, on the other hand, will find IP enforcement largely irrelevant except “IP-protected products or services used in agriculture.” On the whole, inner China is more like “unindustrialized portions of Africa.”

Finally, outer China also finds IPR enforcement irrelevant except where mining and oil extraction take place, because businesses “may have significant opportunities to use advanced technologies. While there may be some local innovation in these technologies . . . , these are probably outweighed by the commercial advantages of tolerating infringement.”

Given all of these facts, Gruner argues that a multi-regional view of IP in China is necessary. I agree.