China Esquire

The Legal Intelligencer reported that Reed Smith, the large Philadelphia based international firm, opened shop in Beijing by taking away the office from New York’s Dewey & LeBoeuf, another international firm. After the merger of Dewey Ballantine and LeBoeuf, it appeared that the firm had two separate offices in Beijing. Reed Smith picked up the Dewey team.

I figured this would be a good closing article for the week:

Reed Smith continued its expansion into China with the addition of a Beijing office of recently merged Dewey & LeBoeuf.

The firm will get two partners and what it said was an additional “team of attorneys and legal professionals” including partners Sharon J. Mann and Hugh T. Scogin Jr.

Dewey & LeBoeuf has been operating two Beijing offices until the Ministry of Justice of the People’s Republic of China approves their merger. Reed Smith is essentially acquiring the Dewey Ballantine side of the practice.

That office, according to Dewey & LeBoeuf’s Web site, had two partners, three associates, three consultants and one economist, and included Mann and Scogin.

The Beijing office of the former LeBoeuf Lamb Greene & MacRae still has two partners, three associates and one counsel.

Reed Smith’s acquisition in Beijing follows its Jan. 1, 2008, merger with Richards Butler Hong Kong, which gave the firm 110 lawyers and a license to practice in Beijing. Earlier this month, the firm also snagged Greenberg Traurig shareholder Jinshu “John” Zhang in Los Angeles. He was responsible for starting Greenberg Traurig’s China practice and now serves in Reed Smith’s corporate and securities practice as a partner.

“With more than 110 attorneys in Hong Kong and our expanded office in Beijing, we aim to make this firm the ‘go to’ legal resource for inward and outward capital investment in Asia,” Mann said in a statement.

The group is a perfect fit, he said, because it gives the firm senior partners who have strong ties to the market. The Hong Kong office, while servicing some work on mainland China, has really focused on corporate, securities, regulatory and litigation work for Western companies doing business in Hong Kong. He said the Beijing office would do similar work for clients doing business in mainland China.

Jordan said Reed Smith’s newest acquisition, which is already up and running, puts the firm in a unique position. Aside from the 110 attorneys in Hong Kong, the firm now has American-born and educated attorneys who have long-term ties to Beijing through Mann and Scogin, as well as a Beijing-born and educated attorney working for Reed Smith in the United States through the addition of Zhang.

The combined experience in trade, direct foreign investments and corporate work will be a specific benefit to the firm’s core banking, finance and pharmaceutical clients trying to navigate doing business in China, he said.

Prior to the addition, the Beijing office of Richards Butler Hong Kong was only used on occasion by the firm’s attorneys from other offices. He said it was an important step for the firm to have a real presence on the ground in Beijing and to begin to build that out.

So who’s next?

I had a post earlier saying that Chinese tax enforcement was a problem both because of lack of enforcement codes that I was aware of (though if you know of any, I would love to hear it) and the Chinese way of trying to outsmart the system. I think this story from the BBC confirms some of my thoughts. First, the facts from the story:

Five men are to appear in court in China charged with producing fake receipts that could have cost the state billions of dollars, state media said.

The men are accused of forging over one million receipts worth a total of $147bn (£72bn) at a factory in Guizhou province.

“The fake receipts look almost the same as the real ones,” Tang Xiaozhou, Luoping’s taxation chief, told Xinhua.

“Consumers and even the tax collectors find it hard to distinguish.”

“If put into the market, the national treasury would have lost more than 75bn yuan ($10.5bn, £5bn) in tax revenue.”

Of course, my first reaction was to sum of money involved. It is a huge amount of money. But then here is the part that I think speaks volumes:

Because of China’s rapid economic growth, tax revenues have soared in recent years.

But the authorities have admitted that they need to improve tax collection, and take more action against people failing to report their true income.

There is an active black market for fake receipts in China, which companies can use to claim tax rebates on business expenses.

Let me note that tax enforcement is difficult for any country at any level. But the Chinese will need to come up with a system if the government wants to ensure that its tax income continues to rise with the economy. And even more, the government needs to instill in people at a societal level the sense that paying taxes is not a bad thing. (uncomfortable, yes; but bad, no) That is a difficult thing to do. (this is the sociologist in me speaking now) Message sending punishment is one way, but not always effective. It will take education, propaganda (positive reinforcement), message sending, and more.

Right when I had taken my stance with the Seattle Trademark Lawyer and Dan Harris of China Law Blog that IP damages for lost profits just don’t work, I have to eat my words. Brad Luo recently did some very interesting posts about a trademark case in the Hangzhou Intermediate People’s Court ( here and here), where the court awarded 20 million yuan in damages… in what appears to be lost profits. So I take back what I said, that you can never expect lost profits in Chinese courts. I still believe they are rare. But when you deal with a case this litigious, and with a Defendant who defies a court order, then expect a court to exercise its power–whether in China or America.

I will take straight from China Business Law Blog at this point because Brad does a good job covering it:

The Parties:

Plaintiff is an individual, Mr. Zhao Hua, in the business of manufacturing and selling socks, ties, and scarves. He acquired by assignment and still owns the trademark “2000” . . . , which was first registered by the original owner in 1997. And it was registered for Class 25 Goods, including the following categories: socks, gloves, scarves, ties, belts, sashes, and veils.

Defendant is G2000, a Hong Kong company, in the fashion/clothing business with corporate and franchised units scattered in many Asian countries/regions. It manufactures and sells its full lines of products including casual, formal and informal clothing and accessories for men and women. In addition, it also franchises its business concepts internationally.

In 1992, Defendant registered the “G2000” mark in China for use covering clothing, shoes and headwear.

In 1997, Defendant registered the same G2000 mark for handbags, shopping bags, and straps.

In 2002, Defendant registered the G2 mark for clothing, neckties, socks, scarves, belts, etc.

[Procedural Background:]

In May 2002, Defendant filed an action in the China Trademark Office to cancel plaintiff’s trademark (2000), then it unsuccessfully appealed to the China Trademark Review and Adjudication Board (the “TRAB”). Finally, it brought an administrative action pursuant to Article 33 of Chinese Trademark Law 2001 in the Beijing First Intermediate People’s Court, challenging the TRAB’s decision, but to no avail. On final appeal in 2005, the Beijing Higher People’s Court affirmed the administrative decision, holding that Plaintiff’s mark is valid for the types of goods so registered under Nice 25 Class.

Brief Facts:

Facts of this legal saga lasting more than eight years are complicated. Back in 2000, Plaintiff sent a demand letter (cease & desist letter) to Defendant and co-defendant Shanghai Heyuan Clothing, Ltd., alleging trademark infringement with respect to the use of G2000 in connection with their sale of socks, gloves, ties and scarves. Between 2000 and 2006, Plaintiff also sought redress by filing multiple complaints with local Administration Industry and Commerce (“AIC”) in Beijing, Guangzhou, and other cities, but apparently achieved little (Doesn’t this make you think twice about the efficacy of AICs?). And to gather evidence, in the span of 10 months from May 2005 to March 2006, Plaintiff purchased allegedly infringing goods at various stores and locations sold by Defendant’s/co-defendants’ G2000 specialty units in Beijing, Shanghai, Hangzhou, Ningbo, and other places.

My Thoughts & Reactions:

The court’s award of damages in this case is intriguing. Plaintiff pleaded for damages totaling 20,000,000 Yuan (that is right, 20 million). And the Court ordered the Defendants to turn over the figures for total sales, profits, etc. for the goods complained of in the relevant period of time, but the Defendant failed to do so. Generally, Chinese courts award damages to a plaintiff in an IP infringement case to the extent of a defendant’s illegal profits as proven, rather than losses sustained by the plaintiff. See Kate C. Hunter, Here There Be Pirates: How China is Meeting Its IP Enforcement Obligations Under TRIPS, 8 San Diego Int’l L. J. 523, 547. In addition, if the illegal profits or plaintiff’s losses cannot be accurately ascertained, the statutory maximum award of damages is 500,000 Yuan. See Chinese Trademark Law, Art. 56. Therefore, in an act rarely seen in Chinese courts, the Court awarded a whopping 20 million Yuan to the Plaintiff. Further, given the intertwined relationships among the Defendants, the Court held them jointly and severally liable.

On appeal, the bone of contention, as I expect, would be that award of 20 million in damages to plaintiff. Of course, Defendants will try to set aside that amount, citing that it exceeds the statutory maximum; whereas, the plaintiff might argue that the 20 million award is appropriate given the scope and extent of violations, in addition to their failure to turn over documents within their control to ascertain the exact amount of damages.

A very interesting case indeed. Did the court go against Chinese statutory law? It appears it does. So did the court royally screw up this one? I don’t think so… at least, from a U.S. practitioner’s viewpoint. It means that courts can grant larger damages, which will make it worthwhile for American companies to pursue IP lawsuits in China. It also makes sense to me because of G2000′s wilfulness in not turning over documents.

Here is my read on why something like this could happen. (though it is speculation) Imagine the scene: the parties have been fighting for 8 years. AIC complaints. Trying to invalidate a trademark and appealing that decision. Probably some nasty letters between the two sides throughout this entire ordeal. I surmise there is a lot of fighting over everything. And then after losing, the Defendant refuses to turn over financial information…

I don’t pretend to know how a Chinese judge would look at something like this, but I think a federal judge here in the U.S. would look at this as a zoo. And knowing federal judges here, who hate dealing with messes this big, and then to have your order defied on judgment–that is a big NO-NO. If you don’t believe me, see this article from the Denver post where some prominent American attorneys ignored the court’s order regarding claims construction ( h/t to ATL):

A federal judge recently got so infuriated by the conduct of two highly regarded trial attorneys that he overturned a jury’s $51 million verdict, then ordered the lawyers to pay the fees and costs of the opposing lawyers, a sum that could total several million dollars.

U.S. District Senior Judge Richard P. Matsch sanctioned attorneys Terrance McMahon and Vera Elson of the firm McDermott, Will and Emery, of Chicago and San Francisco, for “cavalier and abusive” misconduct and for having a “what can I get away with?” attitude during a 13-day patent infringement trial in Denver.

Terry McMahon among IP litigators is quite a big name. But even when he crossed a federal judge the wrong way, things go bad.

Frankly, I am not all that surprised by G2000′s conduct. Chinese companies often think they can flaunt Chinese or American law and court orders. (And discovery too… I have a post coming this weekend about that, so stay tuned) No, I am not being racist. This has been the case for actual clients that I have had. And if you play with fire long enough, you are going to get burned. I believe G2000 got burned because they wouldn’t cooperate. Yes, there are probably other factors too. But I see this as the straw that broke the camel’s back.

Will this be overturned on appeal? Probably a good chance to it due to the statute, but IP Dragon had a post about the Supreme People’s Court ordering full compensation in IP cases:

“Courts should fully apply logical reasoning and everyday life experiences, and comprehensively and objectively examine the evidence for calculating the amount of compensation,” SPC vice-president Cao Jianming told a national work conference on IPR trials in Jinan on February 20, 2008, according to the China Daily.

Perhaps the 500,000 yuan statutory cap on damages will fall by the wayside as courts begin to apply principles of equity to determine damages. Maybe the Hangzhou court actually got it right then.

Bottom line: cooperate with the legal process, even when you don’t want to. Trust me, the law is the law and you may well get burned if you don’t.

I’ve heard people say that this will be the year that the Chinese economy will slow down a little, but more importantly, that the Chinese stock market bubble will burst. (or at least enter a bear year) I’ve had my money on 2009 or 2010 before anything like that happens in the Chinese stock market. Why? Because the market already had a minor “correction” last year. (more like a hiccup than anything else) And frankly, I don’t see any evidence that makes me think this will be the year.

From China Venture News:

Xorte is reporting that venture capital deals in the fourth quarter of 2007 were up 6% over that same period of 2006. The fourth quarter saw 60 deals, with $660 million being invested in China compared to 63 deals for a value of $622 million in the fourth quarter of 2006.

For the year as a whole, the big winner in 2007 on China’s venture capital scene was the consumer and retail sector. It saw a record $1.25 billion invested in 94 deals last year. That’s a growth rate of 83% over 2006.

Venture funding for healthcare more than doubled in 2007. Twenty-one deals in the healthcare industry took in $175 million in VC funding in China last year. In 2006, only $86 million went into the healthcare industry from VC coffers.

The majority of VC deals were first round seed money. About half of all VC funding went into second round funding agreements. That was up 15% from 2006.

Anyone care to point me to some evidence to the contrary now? I would love to hear back on this topic.

UPDATE: Will Lewis at Experience Not Logic posted excerpts of a good Forbes article about VC in China. The interviews from the Forbes article lead me to believe that VC is quite alive and well in China, and it is worth a read.

All Roads Lead to China recently did a post on China Sourcing and how WalMart has continued to succeed based on its Chinese operations and how it can save the consumer money in a recession. This is what I have been arguing all along in response to the Trader Joe’s news, and so, I am glad that there is agreement that U.S. recession scares will drive people toward Chinese products, suppliers, manufacturers despite product safety concerns.

Here is Richard Brubaker’s take in his post:

Last summer, the ONLY topic in the news was product safety. Everyone, including myself, was covering it in some way, and going into Christmas I saw Wal-Mart’s association to China as something that could lead consumers away from WalMart. Nothing new here, their production lines are deeply rooted in China and other low cost countries, and I think a lot of the news media showed WalMart more than anyone else. It was not good news for the firm that has been shown to have done so much to help consumers reduce their monthly expenses.

At the same time, you had clouds forming on the horizon of an economic slowdown the in the U.S. It wasn’t high priority in the media until the subprime market started crushing the U.S. banks, but once that happened it highlighted the fact that a lot of people had been getting crushed before that… and so the news cycle kicked into full force. Talk of over-extended consumers loosing confidence in the economy were at the top of the news hour, and questions of how this could impact retailers begun coming out soon after the holiday shopping season started.

Where I saw this as good news was that Wal-Mart has built a model of providing the lowest price points in the retail industry for many items. It is an issue that has been cast in a negative light by many, but the reality is that consumers really don’t care. If their pocket books are tight, it is a 5 minute ride in the family war wagon to the nearest Wal-Mart.

Target on the other hand has always tried to be a notch above, perhaps a couple notches above, Wal-Mart in terms of product placement… and price. Target usually puts more into the stores, and the demogaphics of the typical buyer will reflect this…. when the market is on the way up.

Bringing this all together, it is once again Wal-Mart’s investment in China that really saved them, and the news cycle of product safety bring trumped by the economy. with some experience working with big box retailers, one of the most interesting phenomonon I have seen is that while Wal-Mart has invested so much, and made so much money from that investment, others have yet to really take the same steps. Instead, they chose to continue working through the traders in Chicago, NY, LA, etc who will purchase from a trader in HK/ TW… who will buy from a trader in China… who will buy from a factory in Suzhou.

In an up market, when consumers are not worried about making minimum payments this works, but in a down cycle these intermediate steps become insurmountable in a couple of ways. first, the ability of a group like Target, who operates through more trading firms than through direct relationships, cannot bring their prices down to the level of Walmart – even for the same goods because all those traders who are in the middle need their take too.

Exactly what I have been feeling all along.

There is another reason as well. Not only are products from China cheap, but a lot of them are well done. Take baby toys for example. Some of my friends have amazing toys for their babies and toddlers. One I saw recently was a plastic bongo drum set that made noise if you hit it, but also comes with pre-recorded beats that play on it. I kept thinking, “Wow, stuffed animals and Clifford-the-Big-Red-Dog books were all I had as a toddler.” It didn’t even come close. If you compare stuff from NMICtoys.com, which is wood and blocky, to what you can buy from Playskool at a local Toys-R-Us, which is plastic, but beeps, sings, and moves, it’s a no-brainer. Cheaper + more innovative = sales, particularly in a down economy.

Don’t be scared by a lot of the negative P.R., unless your clientele is like Trader Joe’s. Really. Do your QC and due diligence, but don’t think China sourcing is disappearing anytime soon.

I am a big advocate for the rule of law, but that shouldn’t come as a surprise to you since I am very American and I wrote about it here regarding legal aid in Xi’an. I had lamented the lack of plaintiff’s attorneys in China in other articles, so I was quite warmed to read this article by the CS Monitor called “How One Man in China Strengthens the Rule of Law”. (Note that I don’t necessarily like how the article title seems almost defiant of the Chinese government because the article is not) But I think news of Chinese attorneys like this gives me much hope for the future of Chinese law.

Here is part of the article ( h/t to China Digital Times):

To most Beijingers, the receipt the attendant gives them for the six cents paid to use the public toilets in the subway is a worthless piece of scrap, quickly crumpled up and thrown away.

To Hao Jinsong, that piece of paper is a seed of Chinese democracy.

It took the 35-year-old law scholar a court battle to force the subway authorities to issue the legally required receipt, and he still treasures the one he sued for. But the chit itself, he says, is not important.

“Behind this receipt is a law that gives people the right to ask for one,” he explains. “If nobody respects the dignity of the law, everybody loses his own dignity. If today you lose your right to a receipt, tomorrow you may lose your right to your land, your house, your freedom, and even your life.”

But it is the very weakness of the rule of law in China that inspires his crusade, he says. If “people don’t use legal recourse to defend themselves because they think it’s useless … the law grows even weaker,” he argues.

“When … people use the law as naturally as they use chopsticks, China will be close to democracy,” he adds.

Hao is a pioneer of public interest lawsuits, a growing trend in a country where they were unknown, or dismissed by judges out of hand, only a few years ago.

He and a swelling band of lawyers like him have attracted less international attention than legal activists whose efforts to defend human rights have earned them beatings, house arrest or jail terms.

But they are achieving prominence in China, and winning plaudits from their peers. “We need someone to stand up and challenge shortcomings of institutions,” says Wu Ge, a law professor at Beijing’s Tsinghua University.

Hao is best known for lawsuits he has brought against the powerful Ministry of Railroads, challenging its refusal to give tax receipts for goods bought on trains, and its ticket pricing policy.

And just like in America, the media has quite a bit of sway over the law, especially with public interest type cases:

Key to such victories has been media coverage and the public debate it provokes. Though Chinese newspapers don’t dare report court cases involving political dissidents, many of them – including the Communist Party’s mouthpiece the People’s Daily – have written approvingly about Hao’s cases.

This would not happen if Hao confronted the government head on over issues such as free speech. Instead, he deliberately restricts himself to less political cases, holding the government’s feet to the fire on a goal it has publicly set itself – the rule of law.

“I would like to say the government and I are going forward together,” he explains. “I don’t want to strip the government of its power, but to curb it.”

A proponent of gradual change, Hao insists that democracy can only be won “at the right pace.

In America, law is often changed little by little, one case at a time. I expect China will follow this familiar pattern.

Just wanted to note that it has been one week since Skadden Arps Slate Meagher & Flom, one of the world’s largest law firms, opened its Shanghai office. I hadn’t heard much about it, so I thought I should at least share the (old) news from Legal Week:

Skadden Arps Slate Meagher & Flom [launched] an office in Shanghai on [18 February], with the relocation of corporate partner Gregory Miao, previously sharing his time between Hong Kong and Beijing.

The branch will focus on M&A, corporate and real estate, with Miao leading the corporate practice and Ed Sheremeta heading up its real estate division.

Miao, who was born in Shanghai, is the head of the firm’s China practice. In 2007, he represented China CITIC Bank in a $5.9bn (£3.03bn) shares listing on the Hong Kong Stock Exchange and Shanghai Stock Exchange, one of the world’s largest initial public offerings during the year.

Sheremeta is a partner at the firm’s Tokyo branch. He recently rejoined Skadden and will be based in the Tokyo office until the second quarter. His real estate experience includes non-recourse financings, joint ventures and mezzanine structures.

The launch of the Shanghai outfit takes the number of Asian branches for the top US firm to five, having opened in Tokyo 20 years ago, in Hong Kong in 1989 and in Beijing in 1991. Most recently, Skadden launched an office in Singapore in 1995.

The firm has been planning to expand to Shanghai for some time and applied to Chinese authorities for permission last year. Following the approval, the firm moves into new office space in the city on Monday.

Initially the number of partners will remain at two, but the intention is to develop the practice. The firm is also bringing over additional real estate lawyers from the US, said Skadden executive partner Robert Sheehan.

Recent launches in the city by US firms during the autumn of 2007 include Sheppard Mullin Richter & Hampton, as well as New York firm Fried Frank Harris Shriver & Jacobson.

Expect a lot more firms trying to dig for gold in China.

Brad Luo at Chinese Business Law Blog recently did a translation from Chinese of a decision from the PRC Supreme People’s Court. The decision, dated 2/18/2008, sets forth basic provisions regarding trademark law and damages. It takes effect on 3/1/2008.

Here is his translation:

Article One Provided that requirements under Article 108 of the PRC Civil Procedure Law are met, People’s Court should accept cases filed by plaintiffs on the basis that defendants’ use of letters, graphics in defendants’ registered mark violated Plaintiffs’ existing copyright, patent right in packaging design, rights in business names, etc.

Where Plaintiff brings a lawsuit on the ground that another’s registered mark used in approved categories goods/services are similar or identical to her mark, People’s court should refer plaintiff to relevant administrative bodies for resolution, in accordance with Article 111 (3). However, where plaintiff bring a lawsuit on the grounds that another’s use of its registered mark is beyond the categories of goods/services registered for, or where another uses a registered mark by transforming its distinctive features, disassembling it or re-configuring it, the people’s court shall accept such cases.

Article Two Where Plaintiff brings lawsuits, pursuant to PRC Anti Unfair Competition Law Article 5 (3), on the ground that another’s use of a business name is same or similar to her prior existing business name, which use is sufficient to cause consumer confusion as to the source of the goods/service, the people’s courts should accept such cases.

Article Three The people’s court shall, in accordance with the plaintiff’s claim and the nature of controversial legal relationship under civil law, and in accordance with the Civil Causes of Action (Provisional), ascertain the cause of the conflict in civil disputes between registered trademarks or enterprises and prior existing civil rights, and apply appropriate law accordingly.

Article Four Where the use enterprise name complained of infringe on the exclusive right of registered marks, or constitute unfair competition, the people’s court, in accordance with the plaintiff’s petition and specific circumstances of the case, may assign civil liabilities, such as enjoining defendant from using such name, correcting such use, etc.

So in more plain English, here is what is actually set forth.

Art I. There are different standards for trademark infringment depending on whether the infringing mark is within the scope of the goods and services that the registered mark covers. In other words, there is a difference between infringing on mark X if: (1) mark X is registered only for international class 29 (wine) and the counterfeit is also wine, and (2) mark X is wine and the counterfeit is frozen tuna. My thoughts: frankly, this does not tell me much that is revolutionary. I figured such things were discernable with a good head on your shoulders.

Art II. Courts should accept cases where an potentially infringing business name is confusing.

Art III. Courts should determine the applicable law depending on plaintif’f's claim and the nature of the controversy. Honestly, I am not sure why either of these was an issue either. It seems common-sensical to me that this should be the case. However, note that Article 3 appears to expand the Chinese court’s power in equity to fashion a remedy and determine applicable law. This will prove interesting, as good lawyers should be able to exploit this.

Art IV. In the case of infringement, courts can grant injunctive relief. Again, this is not a surprise. In fact, its probably the only reliable source of damages you will get as Chinese courts will not grant lost profits. (see this post)

So what does this do for you ultimate? Not much, sadly. I don’t think the Supreme Court did much for anyone with this pronoucement. (except if you are trying to learn Chinese or English legal translation, it is good to look at Brad’s full post)

China Solved had a good blog post today about running a successful Chinese business, which includes an incremental exit strategy. There is a lot of good common sense in this post:

What can successful China entrepreneurs do to boost their household finances without destroying the company balance sheet?

Over the years you’ve tweaked the business model, found the right marketing & sales mix and were ready when demand caught up with your offering. What happens when your 5 year old business becomes an overnight success?

1) A sudden uptick in business activity may leave you with lots of money and lots of spare time. Probably not, though. It’s more likely that you’ll find yourself in a period of hyper-growth and hypo-cashflow. Don’t panic. Most small businesses grow at an uneven pace – particularly in China. Be prepared for a significant lag between higher sales and higher retained earnings.

2) Asset rich – household poor. Entrepreneurs are notorious for putting everything they have into their business – and that’s great. But as the business grows you will need a plan for transferring some wealth from the company accounts to your own portfolio.

3) Your business is not an ATM. Pay yourself a predictable salary. Big annual bonuses are fine – as long as you have some sense of how much you are earning. Someone bootstrapping a brand-new business probably doesn’t have a clear idea of how much he will earn in 2008 – but if you’ve been around for a few years and have a steady flow of business, you should be able to give a ballpark estimate of how much you’ll pay yourself.

4) IPOs and M&A grab the headlines, but successful entrepreneurs need a Plan B for cashing out. Leaving ALL your assets in the company can be risky. China business is famous for stories of successful entrepreneurs who ended up running into trouble with partners, bureaucrats, suppliers, key clients – and changes in regulations. Make sure you have a cushion in case the business suffers a major shock.

5) Incremental cash-out options. While living off your expense account is a bad idea, retiring on the company may be a winning strategy. Entrepreneurs and owners should consider setting up in-house pension plans, education funds and health insurance programs that preserve your business’ capital structure but still provide for the owners’ long-term financial health.

As I read this, it occurred to me: this applies not only to Chinese businesses, but domestic ones as well. I have heard from my colleagues and friends over and over again how they want to start a new business, do this and that, and talk about their product and target audience. No one, however, plans ahead to what to do if the business is successful aside from saying, “we want to get bought out by [insert big company name here]“. You cannot plan that way. Not everyone will get bought out by Microsoft, Google, and Time Warner.

These are all good suggestions for Chinese people running business in America, especially smaller sized operations. And it is still fine advice for American companies run by whomever. The key: plan ahead. Recalibrate your plan after 1 year, 2 years, and 5 years. But plan ahead and don’t expect the white knight to come for you.

Online legal research is expensive, and if your clients are like mine, then you know that they don’t like paying for online research like Lexis and Westlaw. Above The Law recently had a post that I thought was worth repeating since I know the China law blogging community usually does not overlap with the legal tabloid/gossip community. I just wanted to pass on this information:

Here are some neat new resources you might find helpful:

1. The Public Library of Law. Here’s a brief blurb, from Ed Walters (the former Covington associate who founded Fastcase):

One of the joys of disruptive technology is that it occasionally allows you to disrupt things. In that spirit, I’m pleased to introduce the Public Library of Law, which debuts today at www.plol.org. PLoL is the world’s largest free law library, with more than 7,100 miles of text in the cases alone.PLoL works hand in hand with our (much larger) subscription library at Fastcase, which features power research tools as good or better than any in the world. PLoL has its virtues as well — it is ad supported and easy to use, and should be a great starting place to find law on the Web.

2. PreCYdent. PLoL isn’t the only free law library on the web. From a tipster:

Have you posted about Professor Tom Smith’s new research tool, PreCYdent? It’s an amazing concept and it works quite well, even though only in its early stages.

A description from Professor Smith:

Right now our library consists of all US Supreme Court cases and US Court of Appeals cases going back to the 1950s (i.e. F.3d and F.2d). Automatic updaters are in place, so new cases are uploaded in slip opinion form as soon as they are released by these courts. We are working on having the last ten years of cases from all 50 states available soon. Everything is in XML.It’s free. We believe that all law that is in the public domain should be available to everybody for free. Personally, I think I paid for it once already around April 15th or so.

3. eDelaware. This last tool is a bit more focused than the others mentioned above; it’s all about Delaware law (of special interest to the corporate lawyers among you). From eDelaware’s press release:

eDelaware is free mobile software that will provide instant access to the full text of key Delaware statutes, along with case law summaries, through a BlackBerry® smartphone device. It is the first mobile software developed by a law firm that allows for seamless, wireless access to important statutes and case law summaries, all of which will be updated so as to provide the most current content possible.

Good stuff. As clients grow more cheap cost-conscious, expect free and/or low-cost research resources to grow in importance.

UPDATE: Thanks to Will Lewis of Experience Not Logic for this update. Free online Chinese legal information can be found at Invest in China, which specifically posts Chinese statutes in English here.

I have been following the coverage about the baseball scandal on and off now. For the sake of disclosure, I am a Yankees fan, and therefore, a Clemens fan as well. Now that I have said that, watching this ordeal unfold has been rather frustrating for me. Why? Because over time, one thing has become obvious: everyone was doing it. Okay, not everyone, but many people. It wasn’t just the superstars: the role players were doing it too.

It feels so un-American to admit that everyone was cheating. CNN noted that Brian McNamee, who allegedly helped Clemens take illegal substances, had this to say:

McNamee said he believes he stopped giving baseball players performance-enhancing substances in 2002. He called steroid usage “pretty prevalent” among players at the time.

Grilled on why he provided players with such substances, McNamee replied, “I just accepted it as the norm, and it was part of the culture in baseball.”

It is ironic that often a chief complaint I hear about Chinese businesses and networking in China is that everyone cheats. But the more I understand business in China and America, I want to say this: this is not a Chinese problem. This is a problem for everyone. (See also this post by China Law Blog some time ago about how all businesses are alike)

A friend of mine told me about an American technology company where the general counsel’s role was not only to do the SEC filings and review contracts, but also to be a “yes man” for the executives. Executives would approach their counsel with scenarios that were often in the gray, if not straight up illegal, and try to get counsel to sign off on the business decision. Obviously such decisions would save the company money, would make it more competitive, etc. But it was also because “everyone else in the industry does it this way.”

Since when did general consensus become the standard for an attorney’s legal advice? Never. And it should never. So when your clients tell you that everyone else in China (or anywhere else for that matter) is cheating, paying bribes to local officials, and cutting corners, should you advise them to do so? No. Inevitably someone will ask you, so be ready to say “no”.

I refer you to an old post at Going Global:

Frequently when I meet with a business person contemplating export entry or the development of operations in a new foreign market they eventually get around to asking about corruption. They ask how bad it is, usually in a voice that is suddenly more nervous. My sense is they’re nervous in part because it’s a subject they haven’t had to confront so directly in their domestic business dealings. But I also sense a bit of nervousness due to what seems to be a percolating realization that if push comes to shove they might feel compelled to go down that road, or at least look the other way while one of their foreign agents does the dirty work for them. “What else can we do?” they wonder.

The simple answer is to just say “No!” There are plenty of good reasons for this. One of course is legal. Under the U.S. Foreign Corrupt Practices Act, it is a criminal act for an American company to obtain business through bribery. Do you really want to go from being an American business person to an American criminal to make a few more bucks? Hopefully that’s reason enough, but there is more.

A second reason is that you can become a hostage to your foreign partners / customers / suppliers / competitors. Most foreign counties also have laws against corruption, and while enforcement may be lax, they are far more apt to be enforced against an alien corporation in response to a complaint by one of their citizens. I don’t know how many times I’ve heard stories of companies that were led down the primrose path by their local agent only to be turned into the local authorities when the relationship starts to go south. Needless to say, this is not a good position to get yourself into.

One more reason is that China has been cracking down on illegal business practices against foreign corporations. (though they seem to ignore local companies doing it) I am sure you probably have read story after story where China has been far from merciless to American and multinational corporations.

Bottom line: Just don’t cheat–even if everyone else is doing it.

I have already written about the need for quality control and due diligence. And for QC, I harp on this everytime I see a news article that mentions that some Chinese imported product has lead paint, poisoned someone, or killed a pet. It seems like every other day when I read articles about this now.

Here is a new twist though. If you don’t do your own quality control, someone else might do it for you. In a pair of articles last week, it seems that both the European Union and some major retailers have decided to test products themselves.

From CNN Money, there was an article last Friday that talks about WalMart and Toys ‘R Us:

Wal-Mart Stores and Toys “R” Us announced new mandatory safety checks Friday for its toy manufacturers following a wave of recalls that hurt the industry this past holiday season.

The separate announcements came ahead of next week’s scheduled statement from the Consumer Product Safety Commission (CPSC) about new stricter toy safety guidelines for both toymakers and retailers.

Wal-Mart, the world’s largest retailer, said it told its suppliers in January that they would have have to meet enhanced safety standards for new and “reordered toys” that will be sold in its stores this year.

The Toys “R” Us guidelines include third-party testing of each batch of toys that’s imported into the United States and calling for a significant reduction in lead content found in paints used for coating toys.

Toys “R” Us – the nation’s biggest independent toy retailer – said these new stricter guidelines apply to all manufacturers whose products are shipped to the company on or after March 1.

The retailer said that, by the end of 2008, all infant products sold at its namesake and Babies “R” Us stores in the United States are prohibited from containing any phthalates, chemicals that have been linked to possible reproductive problems and birth defects.

Wal-Mart spokeswoman Melissa O’Brien said toys made by its suppliers cannot have more than 0.1% phthalate content.

“We are requiring independent third-party lab testing of all new and reordered toys for chemical content,” O’Brien said.

And the European Union is inspecting rice in this AP article:

The European Union imposed strict new testing rules Tuesday on imported rice from China, claiming recent shipments contained a genetically altered strain that is banned in the EU.

EU Health Commissioner Markos Kyprianou said the decision was intended to prevent any future imports of the banned Bt-63, genetically modified variety of rice, which was discovered during 2006-2007 by national food safety authorities.

“Under food safety legislation only GMO’s (genetically modified organisms) which have undergone a thorough scientific assessment and authorization procedure may be put on the EU market,” Kyprianou said in a statement.

The European Commission said that, despite repeated notifications, Chinese authorities have been unable to prevent the banned rice from reaching Europe, so all rice imports will now face testing.

Now, do not think that this means you can get away without doing QC because someone else will do it for you. I’m sure that Toys ‘R Us or WalMart will not continue to buy from you if its your toys that continue to fail the product tests. Sure, you may get away with some of it, but for the long-term health of your business, that’s bad policy. So now you have a few incentives to do QC:

• civil liability, which we all expected;
• criminal liability, which is now being used in the U.S. in the pet food cases;
• media criticism, which happens frequently;
• loss of revenue if your retailer dumps you or you can’t even get your product into the E.U.

Need I say more?