It’s been referred to as a miracle. In the past 10 years, China’s economy has exploded–doubling in size, making it the seventh-largest economy in the world. And it continues to gain momentum. In 2004, the country’s trade volume totaled
$1.1 trillion and its foreign investment reached $60 billion. In the first quarter of this year, its imports grew 15 percent; its exports grew 35 percent and its economy overall increased 9.5 percent. The growth is showing no signs of slowing.
The good news: This changing economic landscape, not just in China but in all of Asia, has brought American companies more opportunities to expand internationally. The bad news: Those companies often encounter unexpected legal issues.
Every day, companies embarking on new business relationships in Hong Kong, Singapore and China, for example, struggle to understand employment issues, maintain attorney-client privilege and break through language barriers. The most difficult of all the issues companies face doing business in Asia is protecting their intellectual property and trade secrets.
In a recent Martindale-Hubbell Counsel to Counsel forum in San Francisco, titled “The Last Great Frontier: Doing Business in China and the Other Asia Pacific,” participants discussed some of the biggest legal hurdles companies encounter when they take their businesses across the Pacific.
Scaling The Wall
Over the past several decades, China has emerged as the center for economic growth in Asia. The country’s gross domestic product reached almost $1.5 trillion in 2003, up about 9 percent from 2002. As its economy continues to boom, China is becoming one of the world’s leading producers of consumer electronics, DVDs, computers and cell phones.
“To use a phone when I was in China in 1987, I would have to get on my bike, ride a couple miles down the road, and stand in line until it was my turn,” said Dawn Haghighi, vice president and Illinois counsel for Charter One Bank in Chicago.
With such drastic change often comes confusion. Foreign companies want to conduct business as efficiently as possible and avoid potential legal risks, but regulators often are so overwhelmed trying to keep up with the changing economic landscape that they can’t provide much guidance.
“Because laws in China right now are ambiguous, companies need to look specifically at their particular situations and figure out how to minimize risks,” Haghighi said. “The biggest downfall I’ve seen with many companies trying to do business in Asia has simply been failing to identify their issues.”
Talking to other companies that have set up shop in Asia is one way for companies to identify issues and avoid legal problems. Another is consulting with outside counsel.
“International law firms are really helpful because they have large client pools,” Jay Clemens, vice president and international deputy general counsel at eBay. “They often know what other companies, American and foreign, are doing and tend to be able to identify standard practices that may be emerging.”
Haghighi also suggested that in-house counsel join an association that provides resources for companies doing or wanting to do business in Asia. For example, the Hong Kong Trade Development Council (HKTDC), on which Haghighi is a national board member, was established in 1966 to encourage trade with Hong Kong and the rest of China. It offers information about China’s economy, its international business community and general information about doing business in China.
“HKTDC has offices and chapters everywhere,” Haghighi said. “We have regular meetings to discuss best practices for doing business in China.”
A likely topic at one of those meetings: enforcing intellectual property rights and protecting trade secrets in Asia.
All The IP In China
Enforcement of IP rights is one of the most vexing issues facing companies doing business in Asia today. Experts say China produces more counterfeit merchandise than any other country, and its counterfeiting industry pulls in about $16 billion annually, costing companies three or four times that amount in lost sales.
The operations that produce the fake merchandise–everything from designer handbags to DVDs–are getting away with their illegal activity thanks to China’s loose IP laws. As the counterfeiting industry spreads to places such as Singapore and Thailand, foreign companies are finding it increasingly difficult to defend themselves against theft of their patents and trademarks all over Asia.
“The extent of the counterfeit markets in Shanghai alone is unimaginable,” said Dave Tognotti, general counsel of Brisbane, Calif.-based Monster Cable Products, Inc. “They are the biggest in the world. They are highly sophisticated and organized, and include every brand you could think of. And it’s just as bad in Beijing, where the counterfeit markets are set up right outside the World Trade Center near the U.S. Embassy building.”
So far, the country has done little to police the problem. But companies are finding that one way to enforce their IP and protect their trade secrets is through the Closer Economic Partnership Arrangement between Hong Kong and the Chinese mainland (CEPA).
Enacted in January 2004 under the World Trade Organization (WTO), CEPA allows Hong Kong businesses to freely trade with China. Businesses in Hong Kong owned by foreign companies can take advantage of the agreement as well.
“Basically, it provides preferential treatment into the Chinese market, and anyone who does business in Hong Kong will share in this idea,” Haghighi said.
Under CEPA, a company has to produce only 30 percent of the value of a product or technology in Hong Kong. Because IP laws in Hong Kong are stricter and more sophisticated than those on China’s mainland, companies that do business in Hong Kong can use its laws to better protect their IP and trade secrets.
“If you’re concerned about having to disclose all of your critical technology when you have complete manufacturing operations in China, then do some of that work in Hong Kong,” said John McKenzie, a partner at Baker & McKenzie in San Francisco. “That way, you have a higher level of confidence in the efficacy of the legal system to protect your IP.”
If something goes wrong, however, participants agreed finding good legal help in Asia can prove challenging.
While Chinese law firms have come a long way in the past 10 years, experts believe in-house counsel should still be cautious when seeking local counsel.
“Chinese law firms in the mid-1990s weren’t viewed as much as professional service organizations with ethical responsibilities and an ability to provide good client services,” explained one law firm participant who wished to remain anonymous. “They were more a vehicle for lawyers to make a lot of money.”
Chinese firms often didn’t use the U.S. law firm model. “There would be a loose collection of lawyers, or ‘partners,’ who share overhead, but there was no cohesiveness to the structure,” he said.
But that way of thinking is beginning to change. Law firms in China are starting to take the role of providing legal services more seriously. “Some are adopting a more traditional firm model, with partners and associates, and providing high-level expertise and services to their clients,” the participant said.
Finding the right local law firm can be the tricky part. And oftentimes, companies opt just to hire a large international law firm to avoid the hassle.
“But they really don’t need to do this,” he said. “A lot of what you need to get done in China can be done by local counsel more cheaply and more effectively than international counsel because they speak the language, have connections and know where to operate.”
Some experts believe the best source for finding good local counsel is still international law firms. “We work with Chinese firms all the time,” the participant explained. “We work with them on everything from transactions to litigation. And in doing that, we know who’s good and who’s not.”
As China’s economy continues to boom, more and more companies will begin taking their businesses into Asia. And participants agreed, achieving success is dependent on understanding and anticipating risks, protecting intellectual property and trade secrets, and choosing strong international and local counsel.
“The business culture in China has changed tremendously,” Haghighi said. “And it’s becoming an ideal place to do business.”