Following a Boat to China, but Not the Slow Boat

Sunday, February 12, 2017 - 00:22

 

Introduction: Dan Harris didn’t plan to specialize in helping companies navigate the choppy legal waters in China. He was representing companies that did business in Asia, but China was not his focus until he was hired in 1999 by a fuel supplier in Singapore to help it collect money it was owed by “arresting” a Russian vessel. The ship was supposed to dock not in China but in Pusan, South Korea. Harris had obtained a court order and, with the help of the local Coast Guard, was all set to swoop in when he learned that the ship was actually headed for Qingdao. He hopped on a plane, found a lawyer and made the arrest. “While I was there,” he continues, “I struck up a friendship with the Qingdao lawyer, and we decided that we should work together to help American companies figure out the legal side of China.” He’s been doing that ever since.  His remarks have been edited for style and length.

MCC: What compelled you to start your firm’s blog?

Harris: Many things, chief among them that there were so many misconceptions about China at the time, including that it had pretty much no laws and what laws it had did not really matter. 

MCC: You recently wrote a post about changes in the regulatory landscape. What impact are they having, and what are you advising clients given our new administration?

Harris: Pretty much every year China gets more legalistic, especially with respect to foreign companies. In just the last two to three weeks, China has begun a campaign to hunt down and tax and penalize and perhaps even expel any American company doing business in China illegally. I see this recent push — which is stronger by far than any I have seen previously — as retaliation against the United States for our having elected Donald Trump as our president. And here’s the thing: many American companies doing business in China do not even know that they are violating the law, but they will undoubtedly learn very soon that they are. 

MCC: There is quite a bit of talk about cultural differences. Can you talk about how their legal system operates and their approach to business and negotiations?

Harris: Their legal system is much more form over substance than ours, and that is what so often gets American companies into trouble. It is not that one system is necessarily any better than the other; it is that they are so incredibly different. The two examples I always use to highlight this are trademark and employment law. In the U.S., the first to use a trademark gets it. In China, it is the first to file, and prior use means almost nothing. In the U.S., we can fire an employee at will. In China, you generally cannot file an employee unless that employee has violated some provision in his or her contract or in the employer’s rules and regulations document. The China lawyers at my firm constantly get calls from American companies asking us to sue a Chinese company for having used their trademark when they don’t actually have a trademark. And we also get calls all the time asking for our help in defending against an employee firing that clearly violates China law because the employer company does not even have a set of rules and regulations. 

As for negotiations, the big difference is that we Americans love to talk about and engage in win-win negotiating, and that is absolutely not the China way.

MCC: What are some of the most common misconceptions about doing business in China?

Harris: That it is the same as in the United States, and that it is completely different from the United States. 

MCC: What is your advice to U.S.-based companies considering doing business in China? Where should they start?

Harris: The first thing they should always do is to make sure that what they are considering is even legally possible. Many years ago a New York financial company called me to assist in their setting up a credit reporting agency in China. They talked of having spent more than $500,000 on a study to determine whether there was a need for such a business and that study had emphatically said there was. The entire time they were telling me this, I kept thinking that 1) everyone knows that China could use a good foreign credit agency; and 2) foreign companies are not allowed to wholly own a credit agency in China. So when they were done talking, I asked if anyone had looked into the legalities of a foreign company owning more than 50 percent of a credit agency in China, and they said no. I said that I thought it was not possible, and I would check and get back to them. Ten minutes of research confirmed my suspicion and forced them to abandon their China plans. This is a big dollar example, but another one we get all the time is skin care and cosmetic companies that don’t test their products on animals. Every few months one will call us after returning from China having lined up a distributer for their products, and we have to tell them that China does not allow foreign company skin care and cosmetics into China stores unless they have been tested on animals. 

MCC: How pervasive is suspected Chinese hacking of law firms?  

Harris: I have no idea. 

MCC: What special precautions does your firm take when operating there?  

Harris: We assume someone will download everything from our laptops and that our telephone conversations are bugged. And we act accordingly. 

MCC: What has been most surprising as you’ve grown your practice in China?

Harris: That ever since a vendor in Tunisia lit himself on fire and the Arab Spring started, China stopped becoming more open and democratic. The Chinese government became afraid of its own people, and that fear has, if anything, only increased in the last few years. There was a time when I and most others were hopeful about China, but that has changed. The other thing that has surprised me is how, despite this, its legal system as applied to business has seen pretty much nothing but straight-line improvements. As an American lawyer, I was trained to believe that a legal system and a government nearly always rise and fall together, but I now think that is not true for the business side of law. 

Dan Harris is internationally regarded as a leading authority on legal matters related to doing business in China and in other emerging economies in Asia. His China Law Blog, co-authored by HB lawyer Steve Dickinson, is regarded as one of the best law blogs on the web today.  He can be reached at dan@harrisbricken.com.