Take Your Brain With You, or How Not to Handle Your Chinese Legal Matters

There is an expression applied to those who do something particularly unwise in China: "checking one's brain at the gate." 

I got a call the other day from an American who told me he was owed more than $250,000 by someone in China.  The American told me he had given this person in China the money so the two of them could start a business in China together.  The Chinese person was now holding on to the money, claiming it as a gift and the American was exploring his options for getting the money back. I asked the American to send me any writings that indicated the purpose of the more than $250,000 transfer.  He told me he had no such writings.  He then said that he had been told written agreements were of almost no value in China so he had not bothered with one. 

Unfortunately, this is not an isolated example.  We have received many calls like this.  We are aware of million dollar OEM contracts with no written mention of quality standards.  We are aware of American companies that brought their "great idea" to China for production, showed their great idea to a Chinese manufacturer without requiring the signing of any sort of trade secret or confidentiality agreement, and then had their great idea stolen from them.  We have had calls from companies claiming to be owed millions in commissions from Chinese companies, but without any written commission agreement. We are aware of companies whose former employees have taken nearly all of their China business for lack of any employee trade secret or non-competition agreements. We know of an American company who was blocked from exporting its product at the Chinese border because someone in China had registered in China the trademark the American company had used in the United States for the last five years. 

The excuses. "We were told business in China is based on relationships and written contracts would interfere with that and are just not done."   "We just felt we did not have time to do these sorts of things."  "The whole reason we went into China was to save money."  "Nobody told us." 

I thought of all this today after coming across an interesting International Herald Tribune article, entitled Crouching Corruption, Hidden Fraud,"  on Rebecca MacKinnon's RConversation Blog.  This article is also being discussed here at The Peking Duck and here at The Shanghaiist.  James Ku writes this article in the first person about his stint as the manager of a Shanghai start up company.  Mr. Ku writes that he, like "some of the world's most experienced business people ... made the mistake of ignoring basic business principles when chasing China's seemingly limitless potential for profit." 

In addition to Chinese work, my law firm has a strong Russian law practice, with an experienced Russian lawyer, Elena Yushkina, on staff.  I cannot remember a single instance involving Russia where someone checked their brains at the gate. I bet nobody woke up this morning and said to themselves, "hey, everybody else is going into Russia so I better get in there today."  I wish I could say this about China. 

Everyone knows China is booming, but everyone should also know there are risks there that require mitigation just like everywhere else. 

For a primer on doing everything right in China, go here.