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How to Reduce & Evaluate your Company’s China Litigation Risks

China’s industrial transformation and massive economic growth are the biggest reasons why foreign companies can’t resist the temptation of doing business in this magnificent country. It has been discussed in the post titled “China Civil Litigation: Tain’t No Big Thing” that the litigation risk for the foreign companies doing business in china have decreased a lot. Chinese authorities have realized that imposing a strong litigation law to the Western companies might hurt them in securing future projects. Now the litigation risk in doing business in China is far more lower than doing business in the USA or with the USA.

I have a twofold explanation for this:

  1. Comparing to the United States, in China awards for damage are much lower.
  2. Chinese companies are reluctant to pursue litigation in the United States because of high expense.

But these things don’t really qualify Chinese companies and individuals as non-litigious. Our previous experience has confirmed the reality of this statement:

“Our China lawyers view Chinese as overall being very litigious in the sense that if someone dies or gets hurt or gets fired, there will be a claim made. But the difference is that the employer company (or a third party company) can usually strike a deal fairly quickly and so lawsuits do not necessarily result. And here is the key: the settlements are low by Western standards. Really low. Paying a family $100,000 for someone’s death is still a very high amount in China and if you hear of an amount like that it usually means the person who died had a high-level job and a family to support. The death of a worker outside a big city might mean $35,000 in settlement or in a judgement”.

The actual reality about the litigious nature of Chinese companies and individuals have been brilliantly portrayed by Susan Finder through her article named “Can You Be Sued In China? What Chinese Court Filing Reforms Mean For Business” published in the Forbes Magazine. At the very beginning of her article, Ms. Finder highlights how “many foreign companies doing business in China do not think about their litigation strategy–until it’s too late” and then goes on to describe how recent China “court filing reforms mean that it is easier than ever for people (and companies) in China to file lawsuits and that foreign invested companies are often regarded as deep pockets for Chinese litigants.”

She furnishes the example of retail giant Walmart, against whom there are more than 2000 cases registered in the Chinese court. She presented some of the common allegations made against Walmart:

  • Workers filing case against Walmart for their termination from work
  • Selling allegedly infringing goods and trademark infringement cases filed against Walmart
  • Patent infringement cases against Walmart

China Litigation Risks

My list comprises of the cases where the China attorneys in my law firm get contacted quite often. Apart from the above mentioned most common types of cases that Chinese plaintiffs levelled against foreign companies, there are two more cases that must be included.

First: Cases where a Chinese manufacturer is threatening a Western company for having failed to pay in full for the products manufactured by them. This sort of cases arises because most of the cases Western companies raise the issue that they have received inferior quality product from the Chinese manufacturer.

Second: Cases involving an injured employee or customer.

Walmart has the financial strength to defend charges against them through expensive and long trial. But in case of the smaller companies that seek our assistance urge us for a fast and low-cost settlement. Applying our experience and acumen, most of the time we manage to achieve this for them. Our success rate is phenomenal when it comes to quick and inexpensive settlement.

Ms. Finder’s article has some valuable information to reduce and properly assess your company’s China litigation risks.

  1. “Chinese civil litigation has abbreviated deadlines and so it is prudent to make arrangements ahead of time.” I completely agree. If your manufacturing facility is going to be in some small Chinese city in the middle of nowhere, now — not later — is the time for you to start researching and interviewing local Chinese attorneys to defend you in any subsequent litigation.
  2. “Manufacturing companies have different litigation risks from those in retail, such as Walmart. All companies should review their supply chain and employment documentation and procedures. Supply chain documentation should contain appropriate representations and warranties that product is non-infringing and meets purchaser’s standards. Companies should anticipate that some terminated employees will challenge that [termination] decision and so should be sure that major personnel decisions follow legal procedures and are properly documented.” I completely agree. Call your China labor lawyer before you terminate anyone, not after. I can assure you that doing this will save you money and hassle.
  3. “If you are entering the Chinese market, register your English (or other foreign language trademark) and Chinese language trademarks at the same time.” Again, I completely agree. See China: Do Just One Thing. Trademarks and Register Your Trademark In China: Now. Just Ask Mike.

To many foreign companies, the Chinese courts are mysterious, particularly when dealing with international civil litigation. That’s why it is highly important to keep a China labor lawyer by your side.

About Michael Wong

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