Doing Business in China – Part 2 AICPA & ALN Executive International Business Conference June 15, 2011 (11:25am to 12:55pm) New York, NY

Doing Business in China – Part 2

AICPA & ALN ExecutiveInternational Business Conference June 15, 2011 (11:25am to 12:55pm)New York, NY

American Institute of CPAs

Introductions• Jing S. Vivatrat, Co-Founder of American Learning Network,

Washington, D.C. (Moderator)

Structuring Foreign Corporate Entities in China• Jing S. Vivatrat, Co-Founder of American Learning Network,

Washington, D.C. (Moderator)

Understanding China’s Business Culture Landscape• Karl Engkvist, Chief Operations Officer, Campus Direct, former

Executive Vice President, Blackboard, Washington, D.C.

Brand Protection in China• Eric T. Fingerhut, Dykema Gossett PLLC, Member, Trademark Practice

Group Leader, Washington, D.C.

Patent Protection and Legal Representation in China• Christopher Shaowei, Chinese Attorney at Law and Chinese Patent

Attorney, NTD Law Office, NTD Patent & Trademark Agency Limited, Liaison Office, Palo Alto, CA.

Agenda


Structuring Foreign Corporate Entities in China

Jing S. VivatratAmerican Learning Network, LLC


Regulatory FrameworkForeign Direct Investment (FDI) and Mergers and Acquisitions (M&A) in China have to be viewed and structured in terms of a legal entity

A legal entity can only engage in approved business activities defined by the “Approval Certificate” issued by Ministry of Commerce or its local counterpart

• Generally, one legal entity is often legally permissible to do one product or service or a series of products or services that are similar in nature. However, in some cities, like Beijing, one legal entity may engage in any business except for those subject to prior approvals by competent authorities.

Setting up a legal entity requires substantive government approvals prior to registration of the entity

• Important central government level agencies: National Development and Reform Commission (NDRC), Ministry of Commerce (MOFCOM), State Administration of Industry & Commerce (SAIC), State Administration of Foreign Exchange (SAFE)

• Other competent authorities in charge of the specific product or service


Regulatory Framework

Important Resource: Catalogue of Industries for Guiding Foreign Investment (Revised 2007)

3 categories of FDI: Encouraged, Restricted and Prohibited, relevant for approval, equity limitations and tax/customs incentives

Within the Encouraged and Restricted categories, certain industries are labeled:• “Limited to EJV,” “Limited to CJV,” “Limited to EJV or CJV”• “With the Chinese party having a controlling share” or “with the Chinese

party having a comparatively controlling share”

Policy dictates maximum shareholding of the foreign entity


Regulatory Framework

Industry-Specific Administrative Permits

• Volume of industry-specific policies, rules and regulations in China is growing at an explosive pace

• In some industries, both domestic and foreign investors have to obtain certain permits from competent authorities before the registration of any form of companies in China

- Telecommunications, internet content providers, pharmaceuticals, mining

• The process for the application of the administrative permit usually takes 3 to 6 months


Investment Vehicles Foreign Direct Investment (FDI)

• Direct establishment of Foreign Invested Enterprises (FIEs)

• Ideal for the industries that do not require industry-specific administrative permits

Mergers & Acquisitions (“M&A”)

• Convert the Chinese entity into a FIE

• Ideal for the industries that require industry-specific administrative permits

• Equity vs. Assets

• Anti-monopoly review and national security review


Choice of Legal Entities – Equity Joint Ventures (EJV)

Independent PRC legal entity with limited liability• Must be approved by appropriate central government authorities (MOCOM, and NDRC or

their local counterpart)• Legal minimum requirement for registered capital is RMB 30,000; industry-specific

regulations may set the threshold much higher than the legal minimum• Profits and losses must be distributed in proportion to each party’s contribution to registered

capital (equity interest of EJV)• At the end of EJV term (usually 20-50 years) it may be extended or liquidated, and

proceeds are distributed between investors

EJV must maintain statutory debt/equity ratios• Normally foreign investors cannot withdraw contribution to registered capital during the term

of EJV• Intangible capital contribution (i.e., technology) should be less than 30% of EJV’s registered

capital• Local authority (such as Beijing MOFCOM) seldom approves the contribution of technology

into the registered capital• At least 25% of equity capital must be held by foreign party (in form of cash, equipment,

technology, land use right); otherwise, entity will be considered a domestic enterprise

The termination of EJV must be approved by the original foreign investment approval authority


Choice of Legal Entities - EJV

A good EJV local partner offers the following potential advantages to foreign investors:

• The use of local partner’s marketing and distribution network and expertise

• The ability to offer after-sale services

• Access to the local partner’s government relationships


Choice of Legal Entities - Wholly Foreign Owned Enterprise (WFOE)

An entity formed by two foreign entities in China qualify as a WFOE• WOFE is an independent PRC legal entity with limited liability• Types of business in which they may engage in are narrower

than those permissible for EJV and CJV

Legal minimum requirement for registered capital is RMB 30,000 (must be sufficient in light of size of FIE’s operations)• Capital contributions of technology can account for no more than

20% of the WFOE’s total registered capital• Required to sign separate contracts with government authorities

or Chinese business entities for land use rights, buildings, and utilities


Choice of Legal Entities – Representative Office

A Representative Office is not considered a legal person under Chinese law due to the following:

• Does not require any registered capital• Business scope is limited to non-revenue generating activities as mentioned

above• May facilitate business transactions, but may not consummate its final deals (i.e.,

receiving payment for products sold, or signing a sales contract)

The main benefit of a Representative Office is to serve as a stepping stone in establishing a permanent presence in China, before committing a large capital investment

The main function of a Representative Office is confined by Chinese law to the following activities:

• Hiring a chief representative who may be a foreign national or Chinese national• Conducting market surveys and research• Acting as a liaison office between the home office and its (potential) Chinese

clients / government authorities


Location Selection Currently, there are at least eight major types of special investment zones and areas in China:• Special Economic Zones• Shanghai Pudong New Area and Hainan Province• More than 40 Economic and Technology Development Zones

(ETDZs)• Coastal Open Economic Zones• 5 bonded/free trade areas• Provincial Capitals• More than 50 High Technology Development Zones (HTDZs)• Western and central regions of China that the government

recently introduced preferential policies aimed at encouraging investment


Case Study – Education Technology

Karl EngkvistCampus Direct


Education Technology Company Experience

Blackboard Background CERNET Background Higher Education Enrollment Growth China Market Entry Strategy

Master Distributor or Joint Venture? “Cerbibo” created in 2003, and joined

together• The world’s most popular eLearning platform, the

Blackboard Learning System, and

• A proven Chinese sales channel, CERNET Corporation, which has achieved 95% market share


Higher Education• 2,800 universities• Enrollment Growth

- 1998: 8 million students- 2003: 18 million students- 2008: 27 million students

• Project 211• Project 586• “Go West”

K-12• 300 million students• 600,000 schools

E-Learning Solution• Address growth in demand• Enable growth without

physical infrastructure• Encourage interaction• Provide personalization• Centralized administration

and access

Market Opportunity


“GMT +5” Perspective (DC)

Intellectual Property Protection

Accounting Procedures• The GAAP gap

Pricing Models

Guanxi – hao bu hao?

“GMT -8” Perspective (Beijing)

American Software for Chinese Education?

Software wants to be free

Taiwanese translators

The Mountain is High and the Emperor is Far Away

Obstacles and Mitigation Strategies

My first business trip with our partners ….

American Institute of CPAs 17

One Successful Approach

James Cook University (澳大利亚 )

Kyoto Seita University (日本 )

Temasek Polytechnic (新加坡 )

University of Northumbria (英国 .)

Freie Universitaet Berlin (德国 )

Universitat Ghent (比利时 )

University of Oregon (美国 )

University of South Florida (美国 )

San Francisco State University (美国 )

中国海洋大学亚太地区

欧洲

美洲


Market leader with more than 250 universities

Top universities leading the way

Dynamic and Engaged User Group in China

Adapted to local market• “KFC” model

Local Decision Making• 24 hour lag time not an

issue

Correct partner for the market stage

Results and Success Factors


Lessons Learned

“Desire to Modernize” is not a “Desire to Westernize”

Scale cannot be overemphasized• Numbers• Distances• Timelines

Ancillary Benefits for US companies• Global impact

5,000 Years of Culture offers a lot of precedent• There is a reason why things are the way that they are


Intellectual Property Protection and Enforcement in China

Trademarks

Eric T. FingerhutDykema Gossett PLLC


Counterfeits and Obvious Imitation Color the U.S. View of Chinese IP Law and Enforcement



US Media Loves to Report China’s Failure to Protect IP But……..

China’s Long History of Innovation• Paper – Silk -- Gunpowder

The World’s Second Largest Economy (behind USA)

Problem is Not the Lack of IP Laws

Chinese TM Law Fairly Simple and Effective if Understood and Followed

The Key to Doing Business Successfully is Understanding Chinese Culture and Etiquette

An Evolutionary Process


If You Remember One Thing about Protecting Brands in China, Let it Be This:

File First and As Broadly as You Can!• China is a “First to File” Country• The right to use a mark unimpeded is dependent on having a registered

trademark• Exception for well-known marks almost impossible to attain

All US Companies Doing Business in China Should Register their Trademarks in China Before Entering• Even companies which only source and export• Cheaper for company to register its trademarks than litigate its right to

continue using them• Contrary to media reports, China does a fairly good job of registering

trademarks• 830,000 TM Applications filed in 2009• 1,007,000 TM Applications filed in 2010 (first in the world)


TM Registration Process

Filing Considerations• Whether to register English and Mandarin Translations? Yes.• Other dialects? Perhaps• Be sure to work with a Chinese linguist to ensure the best translation or

transliteration for your brand!• File Defensively for as many mark variations and in as many classes as

you can afford

Protection for Goods, Services, Collective Marks and Certification Marks, 3D Marks (configurations and trade dress)

Applications examined on absolute and relative grounds• Absolute – distinctiveness• Relative – does the mark conflict with a prior right?


TM Registration Process (Continued)

Applications screened and published for opposition purposes (3 months)

If no oppositions, the mark is registered

If opposed and Chinese TM Office (TMO) supports objection, application is denied.

Denied applications may be appealed to SAIC TM Review and Approval Board (TRAB) and then to the People’s Court (e.g., Beijing High Court).

Objections to trademarks are rare.


The Power of a Chinese TM Registration

Defensive Right to Use

Offensive Right to Enforce• Suits for infringement, seeking damages and an injunction• Chinese courts in more commercialized parts of China are

willing to enforce China’s TM laws, even for foreign companies

Trademark Infringement is a Crime• Complaints to the office of the public prosecutor may result in

criminal prosecution of infringer• Chinese police help with seizures and shut downs• Court can impose fines and imprisonment• Customs notified to prevent export of counterfeit goods


Enforcement Options

Administrative Litigation• Effective, Quick and Cheap• No Jail; No Compensatory Damages• Not much of a Deterrent

Civil Litigation• 2-Year Statute of Limitations• Statutory Damages Available where Actual Damages Cannot be

Proven• Statutory Damages Limited – 500,00 Yuan - $65,009 US

Criminal Prosecution• Criminal prosecution results in fines but prison sentences are

difficult to execute


Third Amendment to China TM Law (Draft 2009)

First Law Came in Force in 1983 and Amended Twice in 1993 (US Pressure) and 2001 (WTO)

Eliminate Visibility Requirement• Enables registration of smell and sound marks

Allow Multi-Class Applications

Uniform Standard for Domestic and Foreign Geographic Names• Now, secondary meaning for Chinese geographic names and well-

known requirement for foreign

Require Chinese Nationals to Prove Business Interest With Applications

Elimination of Relative Grounds Examination

Allowing Applicants to Resond to Preliminary Refusals


Third Amendment to China TM Law (Draft 2009) - Continued

Oppositions to be Filed Directly with TRAB instead of TMO**Attorneys Fees and Costs Available in TRAB Proceedings**Express Prohibition of Parallel Imports• One non-binding case holds parallel imports are infringements

because they are unauthorized by TM holder; but lots of debate

Defensive Registration SystemDamages • Changing from Plaintiff’s choice between losses and profits to

requiring court to try to determine losses and, if not possible, assessing lost profits in an amount capped at $144,000 (up from current $72,000)


Other IssuesDelays: • TM Application Examination Can Take Up to Three (3) Years• Opposition and Cancellation Resolution Can Take as Long as

Eight (8) Years

Lack of Resources• TM Owners Must Do All the Work; No Help from Local Police Who

are Resource Strapped

Favoritism – Indigenous Innovation• Indigenous innovation policies require U.S. Companies to cede

ownership of IP to Chinese companies• Chinese government procurement linked to IP location/ownership

During Most Recent Visit, President Hu says China Government will use only Licensed Software


Patents

Christopher ShaoweiNTD Law Office

Copyright NTD Intellectual Property Attorneys


Enforcement Maze



Complaints from Outside

No Discovery

Lack of Transparency

Unpredictability

Local Protectionism

Insufficient damages award



Enormous Amount of Patents Filed



Statutory Subject Matters Protected by Patent Laws

Invention Patents: 20 years• Manufactures• Machines• Processes

- Computer-related Invention and Business Method• Compositions

Utility Models (comparing with “Gebrauchsmuster”): 10 years• Manufacturers （ Products)• Machines

Design Patents: 10 years• Shapes• Patterns• Colors with the combination of shape and/or pattern



Different Features from U.S. Patent Statute

First Filing Rule: Everywhere except US

No Duty to Disclosure

Utility Model System: EPO

National Priority vs. Provisional Application



Legal Framework and Others

Patent Laws

Trademark Laws

Laws Protecting Trade Secrets

GUANXI: Indigenous Rules



? Question ?

Can your IP get protection automatically in China without your care?

Answer:


http://images.google.com/imgres?imgurl=http://www.cesmet.com/img/alert.gif&imgrefurl=http://www.idonet.org/index.php?option=com_content&task=view&id=208&Itemid=1&usg=__1Uv3WDYPxVSZU-oKNOMw_CwFCvc=&h=221&w=250&sz=5&hl=en&start=15&itbs=1&tbnid=OuWddvDMLYR72M:&tbnh=98&tbnw=111&prev=/images?q=alert&hl=en&gbv=2&tbs=isch:1


? Question ?

Can you use the same strategies to enforce your IP in China as you use in the United States?

Answer:



Enforcement Framework

Parallel Enforcement System: Administrative Authorities vs. Judicial System

Criminal Proceedings and Civil Proceedings

Market Share vs. Compensation



No Filing No Protection

GM Daewoo vs. Chery



Good Filing Good Protection

Neoplan vs. Zonda etc., design patent of Starliner bus

Beijing First Intermediate Court

January 2009

RMB 21,160,000 (USD 3,1M )



A Utility Model Infringement Case


http://www.schneider-electric.com.cn/

http://applications.inta.org/apps/cgs_presentation/full_report_results/


July 2006, Chint accused Schneider Electric of selling products on the basis of Chint’s technology

April 2007, Chint’s utility model was confirmed valid

September 2007, Schneider Electric lost a patent infringement lawsuit and was ordered to pay $48 million in damages.

April 16, 2009, Schneider settled the case by the payment of $22 Million

A Utility Model Infringement Case



Don’t Let Mistakes Happen

There are no international prior user rights

Register your patents as early as possible

Be careful in dealing with local partners

Patent search

Freedom to operate



This is a Pro-Genuine Products Country



Resources

U.S. Department of Commerce and EC Directorate General for Enterprise and Industry – China Toolkit• http://beijing.usembassy-china.org.cn/ipr.html

International Trademark Association (INTA) Country Guides• http://applications.inta.org/apps/cgs_presentation/full_report_results/

Etiquette Guide to China – Boye Lafayette De Mente – Tuttle Publishing (2008)Guanxi (The Art of Relationships) Microsoft, China and Bill Gates’s Plan to Win the Road Ahead – Robert Buderi and Gregory T. Huang – Simon & Shuster (2006)

http://beijing.usembassy-china.org.cn/ipr.html

http://applications.inta.org/apps/cgs_presentation/full_report_results/


Speaker BiographiesJing S. Vivatrat

Co-Founder, American Learning Network

Washington, D.C.

Jing S. Vivatrat was most recently the Director of Workforce Development at the Federal Communications Commission. Jing is also the founder and Principal of JSVI, an international strategy consultancy. Prior to forming JSVI, she served as the Executive Director of Mergers & Acquisitions at AOL's International Division where she structured and negotiated strategic partnerships for AOL in Greater China, Japan, Australia, Canada, and Latin America.

While at AOL International, Jing played a major role in negotiating AOL's joint venture with Lenovo Holdings and thereafter spent one year in China to set up AOL's China joint venture operations and run the Business and Legal Affairs department for the joint venture. Jing left AOL to join Blackboard Inc., a leading education platform software company, to serve as the Executive Director of International Operations, where she developed and managed Blackboard's international expansion strategy. Prior to AOL and Blackboard, Jing spent several years as an investment banker structuring telecommunications and infrastructure M&A transactions in Southeast Asia. Before working in Asia, Jing was a consultant with Accenture.

Jing is a graduate of Wellesley College and commands native fluency in Mandarin Chinese.


Karl Engkvist

Chief Operating Officer, Campus Direct

Bethesda, MD

Karl Engkvist has deep expertise in online education technology development and operations. For 11 years, he advanced through a series of leadership positions at Blackboard, Inc., the global leader in education technology. After directing business development, operations and strategic development for the fast-growing company, Karl moved to China, where he served as Chief Operating Officer in charge of Cerbibo, Blackboard's joint venture with the Chinese Ministry of Education. Cerbibo became the market leader among e-learning providers in mainland China, and today counts more than 250 mainland Chinese universities as its clients.

Karl returned to the U.S. in 2006 to spearhead Blackboard's integration with WebCT. He then served as Senior Vice President of International Strategy and Operations, finally Executive Vice President of Blackboard Connect, and focused on communication services for education institutions. Prior to joining Blackboard, Karl spent 10 years with Princeton Review, managing marketing and operations of the test preparation business unit and implementing partnership programs with Fortune 500 companies to propel growth.

Today, he is Chief Operating Officer of Campus Direct, a global provider of e-learning solutions to universities. Karl holds a bachelor's degree in history from Dartmouth College.


Eric T. Fingerhut

Member, Trademark Practice Group Leader,

Dykema Gossett PLLC

Washington, D.C.

Eric Fingerhut's practice covers all aspects of intellectual property law, particularly trademarks. He has helped protect the brand identities and managed the reputations of many of the world's best known names in the automotive, clothing, food, hospitality and technology industries. Eric's experience includes legal clearance, procurement, protection and enforcement programs, and managing extensive domestic and foreign trademark registration portfolios. His transaction experience includes trademark licensing.

Prior to joining Dykema, Mr. Fingerhut was an intellectual property law partner at Howrey LLP, where he provided cost-effective business-oriented legal advice in all aspects of brand identity and reputation management, including trademark, copyright, right of publicity, advertising, marketing, domain name and new media law.

Eric is a graduate of Boston University (Bachelor of Science degree) and holds a Juris Doctor degree from Benjamin N. Cardozo School of Law. He is admitted to practice in Virginia and the District of Columbia.


Christopher Shaowei

Attorney at Law, Patent Attorney

NTD Law Office

Palo Alto, CA

Christopher Shaowei is a partner at NTD Law Office and NTD Patent & Trademark Agency Ltd. He has served as the vice general president of LES China and is Vice Chairman of the China Trademark Association.

Christopher is an intellectual property attorney from China. In his more than twenty years of practice, he counsels international clients on patent transaction works including licensing, R&D collaboration and patent portfolio management. He has also litigated many complex cases and has frequently represented his clients before administrative agencies in China.

Christopher has been honored by Asialaw in the Leading Lawyers 2005 Survey. In an editorial summary provided by Managing Intellectual Property on his nomination as a leading practitioner of 2009, he received recommendations: “Christopher Shaowei from NTD Patent & Trademark Agency is a well-respected patent litigator. Clients like his execution, pro-activeness and creativity. ‘He consistently comes up with new and creative approaches to resolving our issues. These kinds of skills and acumen are so lacking in typical Chinese firms,’ says one client.”


For additional information, please contact

Thomas Louthan, Vice President,

American Learning Network, via e-mail:

[email protected]

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Doing Business in China – Part 2 AICPA & ALN Executive International Business Conference June 15, 2011 (11:25am to 12:55pm) New York, NY