China Law Practice Blog A blog about Chinese law

I.                   Introduction

On January 1, 2008, the Labor Contract Law of the People’s Republic of China (LCL) became effective, resulting in widespread changes in labor policy for all companies and other affected organizations. As is the case with legislating in China, many details were left for resolution in implementing regulations, which, in this case, the Implementation Regulations for the Labor Contract Law of the People’s Republic of China (Implementation Regulations) were issued for comment in May, and then promulgated and effective (in modified form) on September 18, 2008.

a.       Scope of Application: Applicability to Partnerships and Foundations (Art. 3)

In the LCL, Employers were defined as “enterprises, individual economic organizations, non-enterprise private entities and other entities”.

The Regulations further clarify “partnerships such as accounting firms and law firms, and foundations”, and branches and offices of companies which have obtained a business license or registration certificate, as part of the definition of Employers.

II.                Conclusion of Labor Contracts

a.       Failure to Conclude Written Labor Contracts

                                                  i.      Onus on Employer: Written Contract or Termination (Art. 5)

If a labor contract is not concluded within one month of commencement of the employment relationship, then within this time, the employer must both: i) serve written notice of this requirement, and ii) terminate the employment in writing should the employee fail to sign the relevant labor contract after written notice by employer.

That is, the onus is placed on employer to:

i)                    generally comply with the LCL;

ii)                  serve written notice to employee of requirement to comply with the LCL’s requirement for written labor contracts; and

iii)                if employee fails to comply, then terminate the labor relationship in writing;

subject to further liabilities on its part (discussed below).

If the employer terminates the employee in accordance with this term, it will not be liable for severance payment.

                                                ii.      Double Wage Liability: One Month to One Year (Art. 6)

If an employer fails to conclude a written contract 1 month after commencement of employment, then it will be liable to employee for double the wages due between the period of 1 month to the day subsequent to the date on which an employment contract is signed.

If the employee refuses to sign an employment contract within this timeframe (more than one month but less than one year), the employer is entitled to terminate, subject to the additional requirement for severance.

                                              iii.      Deemed Open-ended Labor Contract: More than One Year (Art. 7)

If an employer fails to sign a written employment contract with an employee within one year of commencement, it shall be deemed to have concluded an open-ended labor contract with the employee. The relevant starting date (of the open-ended labor contract) will be the day after the term of one year after commencement of employment, and the employer shall still be required to sign a labor contract with the employee.

b.      10-Year Deemed Open-ended Labor Contracts: Calculation of Time

                                                  i.      Prior to Implementation of LCL (Art. 9, 10)

Generally, the LCL prescribes that if an employee works for an employer for an uninterrupted term of ten years, then the employer, upon proposal by employee, must agree to conclude an open-ended labor contract.

In this regard, the Regulations clarify that the time for calculation of such ten-year period commences before the effective date of the LCL, on the date of commencement of employment.

The Regulations additionally, in an effort to prevent, inter-company transfers designed to avoid this rule, includes time worked for the original employer, where the employee is not transferred due to reasons attributable to him/her.

                                                ii.      Proposal for Open-ended Labor Contracts (Art. 11)

Presumably in an effort to prevent abuses by employers when an employee requests a new open-ended contract under the: i) consecutive ten-year rule, ii) SOE restructuring when an employee has worked for the employer for ten years and is ten years or less from retirement age; or iii) conclusion of two fixed-term labor contracts, the Regulations provide that the contract negotiations in such instances must be on the basis of “lawfulness, fairness, equality, free will, negotiated consensus and good faith”.

c.        Termination Clauses Outside LCL Void (Art. 13)

The Regulations state that the employer and employee may not stipulate termination events outside of those provided in Article 44 of the LCL. Given that Article 44 contains a very wide ‘basket clause’ including ‘as provided by laws or other regulations’, this clause is rather ambiguous. Unless such a clause is meant to be extraneous, we can infer that the legislative intent was to ensure strict compliance with the LCL and Labor Law and other supporting regulations, so that any termination clauses outside of their scope will be void or unenforceable.

d.       Minimum Wage: Place of Registration and Performance (Art. 14)

If labor regulations and policies (minimum wage, labor protection, working conditions, protection from occupational hazards, etc.) differ from place of registration and performance, then the place of performance shall govern the contract.

If, however, the place of registration is more favorable to the employee, and the employer and employee agree to use such regulations, then the policies in that region will be applicable. (Obviously, the inclusion of the latter option of utilizing the policies more favorable to the employee point to the legislative preference for utilizing such favorable standards.)

e.        Wages During Probation Period (Art. 15)

The LCL stipulates that wages during the probation period may not be less than the: i) minimum wage for the same position with the same employer; ii) 80% of the post-probation wages; and iii) minimum wage in the area in which the employer is located.

The Regulations clarify that wages during the probation period may not be less than 80% of the minimum wage for the same position with the same employer, in addition to repeating the same requirements set out in Items ii) and iii) above.

f.        Training: Calculation of Training Expenses (Art. 16, 17)

Special training expenses are defined in the Regulations as “training expenses, travel expenses during the training period, and other direct expenses of the training, as evidenced by receipts”.

If the original labor contract expires prior to the supplemental training agreement’s required term of service, then the labor contract will be extended accordingly.

III.             Termination and Expiration of Labor Contracts

a.       Employee Termination of Labor Contract (Art. 18)

[No changes from LCL.]

b.       Employer Termination of Labor Contract (Art. 19)

[No changes from LCL.]

c.        Calculation of One Month’s Wages in Lieu of Notice (Art. 20)

If an employer opts to pay one month’s wages in lieu of notice upon its termination, the wage will be determined based on the wage paid in the preceding month.

d.       Expiration of Labor Contract on Reaching Legal Retirement Age (Art. 21)

The Regulations state that labor contracts expire upon employee reaching legal retirement age. Read in conjunction with the requirement for written labor contracts and the associated liabilities, employers must be mindful of retirement-age employees, and must re-sign labor contracts with those who have reached retirement age. 

e.        Termination Notice: Contents (Art. 24)

The Regulations stipulate that the termination notice should contain the following: term of employment contract, date of termination or expiration, position held, and employee’s years of service.

f.        Mutual Exclusivity: Penalty or Severance Compensation (Art. 25)

If employer terminates the employment in violation of the LCL and pays compensation to the employee according to Article 87 (LCL) (two times severance pay due to the employee), then they will not be required to pay severance compensation to the employee.

g.        Liquidated Damages: Expansion of Applicability (Art. 26)

Under Article 25 of the LCL, liquidated damages are relegated to situations involving breach of labor/service contract after special training is provided to the employee, and situations in which there is a breach of confidentiality and non-competition obligations.

Article 26 of the Regulations state that liquidated damages will be payable in the following situations where labor contracts which contains term of service must be terminated by the employer because:

1.      the employee materially breaches the Employer’s rules and regulations;

2.      the employee commits serious dereliction of duty or practices graft, causing substantial damage to the Employer;

3.      the employee has established a labor relationship with another Employer which materially affects the completion of his tasks with the original Employer, or he refuses to rectify the matter after the same is brought to his attention by the Employer;

4.      the labor contract is established or modified against the true intention of the Employer as a result of deception, coercion or exploitation of the favorable position of employee; or

5.      the employee is charged criminally in accordance with the law.

h.       Calculation of Severance (Art. 27)

The Regulations provide that the basis for calculation of the monthly wage will be total compensation, including standard wages, bonuses, allowances and subsidies over the twelve months immediately preceding termination. (If the employee has worked less than twelve months, the total compensation during the actual time worked will be used to determine severance.) Further, if the wage paid was less than the applicable minimum wage, then the month’s salary must be in compliance with this amount.

Employers must now carefully calculate severance payable, by taking into account all aspects of monetary compensation.

IV.              Liabilities

a.       Failure to Maintain Register of Employees (Art. 33)

Employers which fail to maintain a register of employees may be ordered by labor administration authorities to establish or update such a register within a set period of time. If the employer fails to do so, they may be fined between RMB 2,000 to RMB 20,000.

b.       Double Wages (Art. 34)

Employers which fail to pay double wages (for failure to conclude a written labor contract with employees) may be ordered by the labor administration to do so.

c.        Placement Companies (Art. 35)

If Accepting Units violate the law under placement arrangements, the labor administration authority may order rectification. If the circumstances are serious, then the Accepting Unit will be fined between RMB 1,000 to RMB 5,000 for each placed employee. If the employee suffers harm, then the staffing firm and the Accepting Unit will be held jointly and severally liable for the damages.

A colleague of mine drafted the below article, which very succintly summarizes many of the important aspects to consider in order to protect your brand in China.

 How a trademark owner’s proactive initiative is the most effective tool to protect IP rights in China

January 2, 2009

By Luis D. Acuña

While Chinese Intellectual Property laws have seen considerable improvements over the years, they can do little to supplement the lack of initiative on behalf of businesses that fail to timely register their trademark rights. The most effective protection that trademark holders can achieve over their rights begins by exercising proper diligence and care.  Being able to take full advantage of the possibilities offered by the legal framework governing this discipline in order to achieve the most adequate level of security is based upon this fundamental assumption.  This is a rule valid worldwide and China is most certainly not the exception.  However, a sad series of common misperceptions often distort this reality.

With this in mind, this article delves into some of the fundamentals of securing trademark protection in the country.

WHERE TO START

It is important to note from the outset that China essentially follows standard international practice in terms of the cost, the complexity, and the steps entailed in securing trademark protection and registration. It is in no small part thanks to China’s participation and accession to the World Trade Organization. There are certainly a few particularities that are not present in other countries –particularly Western ones-, but most negative can be easily overcome with adequate preparation and, most importantly, having well-versed local counsel.

Registration is naturally the first and most basic step that needs to be undertaken. Nevertheless, it never ceases to amaze how foreign entities initially neglect this crucial aspect while misguided by fabled notions that wrongly override their common business sense. In fact, many –if not most- of the best practices that guide business decisions in the rest of the world apply equally to China. No emphasis can be spared in highlighting that this is the key to overcoming some of the obstacles in the field.

Wisdom accrued through past experiences dictates that the ideal time to proceed with registration is even before entering the Mainland’s market. It is best to begin as early as possible; a philosophy underlined by the fact that the mere use or adoption of a trademark in connection with a particular commercial activity does not grant the holder exclusive rights or a priority for their acquisition.

Indeed, China uses a “first-to-file” system, meaning that under most circumstances a prior registrant’s claim is more likely to succeed over that of a prior user. There are many tales of competitors or sadly even employees or local trade partners that have come to realize that this is a fact that can be used to leverage, take advantage of, or pressure foreign entities that have not proceeded to timely address the necessity of securing their trademark rights. This is not the case, however, for well-known marks thanks to the extended privileges granted to them under the Paris Convention.

REGISTRATION WITH CHINESE CHARACTERISTICS

While beginning the process of registration is a positive first step in the right track to commence a successful trademark enforcement strategy, it is important to consider that branding and localization not only play an important role, but also are a necessity to account for the cultural and practical considerations that arise due to the language barrier.

Some of the most successful cases of entities conducting business in China are tied to masterful local branding. Take for instance the case of the “Coca-Cola” or “Pepsi” trademarks. Despite the language differences, they have cleverly managed to phonetically tie their valuable local and global brands, while also giving Chinese consumers a meaning that they can relate to in their own language. Respectively, both trademarks arguably sound somewhat similar in Chinese and Western pronunciations, thus being able to take advantage of their associated worldwide goodwill, but also –through a clever play of words- adopt a completely new meaning when written in Chinese characters, which makes them far more appealing locally.[1]

While these may be extreme examples in the sense that considerable branding effort was undertaken by the owners to come up with an optimal marketing strategy, they serve to exemplify a basic fact when it comes to Chinese trademarks. That is, most consumers have difficulty reading or understanding the Latin alphabet. This can be overcome by employing the services of a branding agency or the assistance of local counsel fluent in the language to help adapt the mark and the name of the owner to the market.

However, it should be noted that the Chinese Trademarks Office can register marks written both in the Latin alphabet and in Chinese characters. In fact, a single application can cover both instances. However, to ensure that the rights holder gets the broadest possible scope of protection, it is advisable to secure each registration in as many forms and variations as deemed convenient. Of course, this entails additional work when applying for registration and during the process of conducting searches to clear the mark for availability, but not doing this may entail the risk of crippling the registration’s effectiveness.

While obtaining the corresponding registration is as simple as in most jurisdictions, a not-so-desirable characteristic of the Chinese process is its duration. Obtaining approval can take several years under normal conditions.  However, this is no cause to despair, as senior applicants are granted protection against junior applicants for conflicting trademarks as of the date of filing, provided that all substantive requirements for registration are complied with.

THE BORDERS OF PROTECTION

One final fact that should be noted, while not strictly related to the registration of trademarks rights in China, but it does have significant importance over their enforcement, is that customs authorities have been empowered with their own monitoring system to help prevent the export of counterfeited goods. Trademark owners, provided they are registered in China, can now apply for protection of their trademark rights directly at the borders, by having customs agents actively check for potentially infringing exports. Product samples, packaging and even suspected instances of piracy can be submitted before their consideration, which causes them to, ex officio, take measures to curb and stop these kinds of practices when detected.

Simple cares such as the ones mentioned in this article can help prevent some common pitfalls when entering the Chinese market. In the trademarks field, many problems can be avoided by taking simple precautionary measures that go a long way in avoiding the need to engage in costly and uncertain litigation.

To view a .pdf copy of the translated Regulations, please click here (http://www.grandall-profile.com/Implementing_Regulations_for_LCL_(UnofficialTranslation)_(GLG).pdf).
 
CHAPTER ONE   GENERAL PRINCIPLES

Article 1 These Implementing Regulations for the Labor Contract Law of the People’s Republic of China (the “Regulations”) are formulated in order to implement the Labor Contract Law of the People’s Republic of China (the “Labor Contract Law”).

Article 2 Governments at all levels and the labor administrative departments and labor unions at the county level and above, and other organizations shall take measures to promote the implementation of the Labor Contract Law and enhance the harmony of labor relationships.

Article 3 Partnerships such as accounting firms, law firms and foundations, established legally, are “Employers” under the Labor Contract Law.

CHAPTER TWO   CONCLUSION OF LABOR CONTRACTS

Article 4 Branches and offices established by an Employer, as defined in the Labor Contract Law, which have obtained a business license or registration certificate may enter into labor contracts with employees as their Employer. Branches and offices which have not obtained a business license or registration certificate may conclude labor contracts with employees upon authorization by Employer.

Article 5 Where the employee, upon written notice by Employer, refuses to conclude a written labor contract within one (1) month after the date on which the employee commences work for the Employer, Employer shall, in writing, terminate the labor relationship, without requirement for payment of severance. However, compensation for actual services should be paid to employee according to laws and regulations.

Article 6 In the event that the Employer fails to conclude a labor contract with the employee more than one (1) month but less than one (1) year from the date employee commences work for Employer, the Employer shall pay double salary per month to the employee in accordance with Article 82 of the Labor Contract Law, and shall conclude a written labor contract with Employee. In the aforesaid circumstance, if the employee refuses to conclude a written labor contract with Employer, Employer shall, in writing, terminate the labor relationship and pay severance to the employee in accordance with Article 47 of the Labor Contract Law.

The duration in which the Employer must pay double salary stated in the aforesaid paragraph shall begin from the subsequent day after the one (1) month period from the commencement date, and conclude on the day subsequent to the date on which the written labor contract is concluded.

Article 7 Where the Employer fails to conclude a written labor contract with the employee within one (1) year from the commencement date, the Employer shall pay double salary per month to Employee in accordance with Article 82 of the Labor Contract Law, and shall be deemed to have concluded an open-ended labor contract with employee on the day preceding the last day of the one (1) year term, and Employer should enter into a written labor contract with employee immediately.

Article 8 The “Employee Register” provided in Article 7 of the Labor Contract Law shall include such items as: name, gender, ID number, domicile address and current residential address, contact details, form of employment, the commencement date of employment, and the labor contract term, etc.

Article 9 The consecutive ten (10) year working period stated in Paragraph 2 of Article 14 of the Labor Contract Law shall commence from the date on which the employee commences work for the Employer, including the service term prior to the effective date of the Labor Contract Law.

Article 10 Where the employee is arranged to work for a new Employer due to reasons not attributable to himself/herself, the service term with the former Employer shall be counted towards the service term with the new Employer. Where the former Employer has paid severance to the employee for the relevant service term, the new Employer shall not take such service term into consideration when calculating the total service term for the purposes of severance compensation on termination or expiration of the labor contract.

Article 11 Except as otherwise agreed upon by the employee and Employer, when the employee requests the conclusion of an open-ended labor contract in accordance with Paragraph 2 of Article 14 of the Labor Contract Law, the Employer should enter into an open-ended labor contract with such employee. The terms and conditions of the labor contract shall be decided based on the principles of legality, equality, willingness, negotiation, and good faith. The contents which cannot agreed upon through negotiation shall be decided in accordance with Article 18 of the Labor Contract Law.

Article 12 The provisions on open-ended labor contracts and severance under the Labor Contract Law will not be applicable to those posts which are established and offered by governments at all levels and relevant departments at the county-level and higher for the difficult-to-employ and for which subsidies and insurance are provided.

Article 13 Except for the circumstances set out in Article 44 of the Labor Contract Law, Employer and employee may not agree on other conditions under which the labor contract may be terminated.

Article 14 Where the labor contract is performed in a place other than the registered address of the Employer, the minimum wage standards, labor protection, working conditions, prevention of occupational hazards and monthly average salary of the previous year of the region, shall be decided based on the relevant regulations in the location where the labor contract is performed. In the event that the policies in the registered location of the Employer are higher than that of the place of performance, and the Employer and employee have agreed that the standards in the registered location are to be applicable, their agreement will prevail.

Article 15 The salary during the probation period shall not be lower than 80% of the lowest salary for the same position offered by the same Employer or 80% of the salary provided by labor contract, or the minimum wage standard in the region where the Employer is located.

Article 16 The “Training Expense” provided by Paragraph 2 of Article 22 of the Labor Contract Law shall include: the actual training fees, travel expenses and other direct expenses incurred as a result of training, as supported by receipts.

Article 17 If a labor contract expires prior to conclusion of the service term agreed upon by the Employer and employee in accordance with Article 22 of the Labor Contract Law, the labor contract is to be extended until the service term is performed, provided that no other agreement is made between Employer and employee.

CHAPTER THREE   EXPIRATION AND TERMINATION OF LABOR CONTRACTS

Article 18 The employee may terminate a fixed-term labor contract, open-ended labor contract or labor contract to expire upon completion of a certain task, in accordance with the conditions and procedures provided by the Labor Contract Law, under any of the following circumstances:

1. where the employee and Employer, based on negotiation, have agreed to do so;
2. where the employee notifies the Employer in writing thirty (30) days in advance;
3. where the employee notifies the Employer in writing three (3) days in advance, during the probation period;
4. where the Employer fails to provide labor protection and conditions as specified in the labor contract;
5. where the Employer fails to pay compensation fully and in a timely manner;
6. where the Employer fails to pay social insurance premiums for employee in accordance with the law;
7. where the rules and systems of the Employer violate the laws and regulations and infringe upon the rights and interests of the employee;
8. where the labor contract is established or modified against the true intention of the employee as a result of deception, coercion or exploitation due to the favorable position of Employer;
9. where the Employer exempts himself from legal liability and denies the employees’ rights in the labor contract;
10. where the Employer breaches the mandatory provisions of laws or administrative regulations;
11. where the Employer forces the employee to work through violence, threats or other means which illegally deprives the employee of freedom of person;
12. where the Employer gives instructions against regulations to compel employee to work in situations which put the employee at risk and places the employee in danger; and
13. other circumstances provided by laws and regulations under which the employee is entitled to terminate the labor contract.

Article 19 The Employer may terminate a fixed-term labor contract, open-ended labor contract or labor contract to expire upon completion of a certain, in accordance with the conditions and procedures provided by the Labor Contract Law, under any of the following circumstances:

1. where the employee and Employer, based on negotiations, have agreed to do so;
2. where the employee is proved to be unqualified during the probation period;
3. where the employee commits a serious breach of the Employer’s rules and systems;
4. where the employee commits a serious dereliction of duty or practices graft, causing substantial damage to the Employer;
5. where the Employee has established a labor relationship with another Employer, which materially affects the completion of his tasks with the original Employer, or he refuses to rectify the matter after the same is brought to his attention by the Employer;
6. where the labor contract is established or modified against the true intention of the Employer as a result of deception, coercion or exploitation due to the favorable position of Employer;
7. where the Employee is charged with criminal liability;
8. the employee cannot be employed in his original position or another position arranged by the Employer after the medical care term for an illness or non-work-related injury;
9. where the employee is incompetent and remains incompetent after training or adjustment of position;
10. where a major change in the objective circumstances upon which the labor contract is based results in its inability to perform and, after consultations, the Employer and employee are unable to reach agreement on modifying the labor contract;
11. where the Employer is undergoing restructuring pursuant to laws and regulations on enterprise bankruptcy;
12. where the Employer is experiencing serious difficulties in production or business operations;
13. where the Employer, as a result of switching production, introducing a major technological innovation or revising its business methods, must still reduce its workforce after amending the relevant labor contracts; or
14. any other major change in the objective economic circumstances under which the labor contract was concluded and results in the inability to perform the labor contract.

Article 20 Where the Employer intends to terminate the labor contract by giving the employee one (1) month salary in lieu of notice, in accordance with Article 40 of the Labor Contract Law, the abovementioned salary shall be determined based on the employee’s salary for the preceding month.

Article 21 A labor contract shall be terminated when the employee reaches legal retirement age.

Article 22 In the event that a labor contract with a term to expire upon completion of a certain task expires due to the completion of the task, the Employer shall pay the employee severance in accordance with Article 47 of the Labor Contract Law.

Article 23 Where Employer terminates a labor contract with an employee who has sustained a work-related injury, it shall, in addition to paying the employee severance pursuant to Article 47 of the Labor Contract Law, pay the employee work-related injury medical subsidy and disability subsidy in a lump sum, in accordance with state regulations on work-related injury insurance.

Article 24 The certificate of expiration or termination of a labor contract issued by the Employer shall specify: the labor contract term, date of termination or expiration, employee’s position, and the actual service term with Employer.

Article 25 Where the Employer terminates or ends a labor contract in violation of the Labor Contract Law and has paid the employee a penalty pursuant to Article 87 of the Labor Contract Law, Employer shall not be liable to pay severance. The number of years on which the penalty is to be calculated shall be counted as of the date on which the employee commenced work.

Article 26 In the event that the Employer and the employee have agreed on a service term, it will not be considered a breach where the employee terminates the labor contract in accordance with Article 38 of the Labor Contract Law, and the Employer shall not be entitled to claim liquidated damages against employee.

Where the labor contract with a stipulated service term is terminated by Employer, the employee shall pay the Employer liquidated damage in accordance with the labor contract, if:

1. the employee materially breaches the Employer’s rules and regulations;
2. the employee commits serious dereliction of duty or practices graft, causing substantial damage to the Employer;
3. the employee has established a labor relationship with another Employer which materially affects the completion of his tasks with the original Employer, or he refuses to rectify the matter after the same is brought to his attention by the Employer;
4. the labor contract is established or modified against the true intention of the Employer as a result of deception, coercion or exploitation of the favorable position of employee; or
5. the employee is charged criminally in accordance with the law.

Article 27 The monthly salary as calculation for severance stipulated in Article 47 of the Labor Contract Law shall mean the total compensation to employee, which includes hourly or piece wages, bonuses, allowances and subsidies. Should the average salary of the employee during the 12 months prior to termination or expiration of the labor contract be less than the local minimum wage, the minimum wage shall prevail. If the actual service term of the employee is less than 12 months, the average salary shall be calculated in accordance with the actual service months.

CHAPTER FOUR   SPECIAL PROVISIONS ON PLACEMENT

Article 28 Staffing Firms, where established with capital contributions from an Employer or its subsidiaries, or established in partnership between the said two entities, placement of employees to the said Employer or its subsidiaries, may not occur, as provided in Article 67 of the Labor Contract Law.

Article 29 Accepting Units shall perform the obligations provided for in Article 62 of the Labor Contract Law and protect the lawful rights and interests of placed employees.

Article 30 Staffing Firms shall not hire employees for placement based on part-time employment.

Article 31 Where a labor contract is terminated or ended by a Staffing Firm or placed employee, severance shall be handled in accordance with Articles 46 and 47 of the Labor Contract Law.

Article 32 In the event that the Staffing Firm terminates or ends the labor contract in violation of laws, relevant affairs shall be handled in accordance with Article 48 of the Labor Contract Law.

CHAPTER FIVE   LIABILITIES

Article 33 In the event that an Employer violates the provisions concerning the Employee Register in the Labor Contract Law, the labor administrative departments shall order rectification. If the Employer fails to make rectification within the stipulated period, the labor administrative departments shall impose a fine on the Employer of not less than RMB 2,000 and not more than RMB 20,000.

Article 34 Where an Employer fails to pay an employee twice his salary each month or fails to pay an employee penalties in accordance with the provisions of the Labor Contract Law, the labor administrative departments shall order the Employer to make such payment.

Article 35 Where an Accepting Unit violates the provisions of the Labor Contract Law or these Regulations concerning placement, the labor administrative departments or other relevant supervisory authorities shall order rectification. Should the circumstances be serious, the Accepting Units shall be fined in the amount of not less than RMB 1,000 and not more than RMB 5,000 for each placed employee. If the said conduct causes damages to the placed employees, the Staffing Firm and the Accepting Unit shall be jointly and severally liable for damages.

CHAPTER SIX   SUPPLEMENTARY PROVISIONS

Article 36 The labor administrative departments at the county level or higher shall handle any complaints or reports on violations of the Labor Contract Law and the Regulations in accordance with the Regulations for Monitoring Labor Security.

Article 37 Any disputes arising from the conclusion, execution, amendment, termination or expiration of the labor contract between Employer and employee shall be handled in accordance with the Law of the People’s Republic of China on the Mediation and Arbitration of Employment Disputes.

Article 38 These Regulations shall be implemented as of the date of their promulgation.

May 2008 marked the one year anniversary of China’s “Regulations on Administration of Commercial Franchise” (Franchise Regulations) coming into effect. Though earlier measures have been in place, the Regulations allowed for the first comprehensive and standardized set of detailed rules to govern franchising in China.

July 31, 2008, The Ministry of Commerce (MOFCOM) published its answers to questions and comments regarding the Regulations since its one-year implementation.

In answering how the Regulations have made an impact on the franchising market since its implementation, MOFCOM explained that the Regulations have greatly increased the publicity of franchising in China, with both foreign and domestic franchisors looking to franchise in China.   MOCFOM added that it has also improved its information disclosure and trademark protections, allowing for more protection to both the franchisor and franchisee.

The Regulations require for more stringent disclosure rules and the showing of operational resources, and better record keeping - all of which have lead to more transparency giving more effective protection to investors.

Since May 1, MOFCOM’s administration department has developed an information management system available online listing all registered franchisors with records of any complaints, notices, enquiries and other areas.

In commenting on the legal system the Regulations established, MOFCOM set forth the 5 primary legal principles the Regulation dictates that have been put in place; namely, 1) setting forth clear conditions of acceptance for franchisors; 2) establishment of an oversight and management system for the record filing process; 3) establishment of an information disclosure system; 4) establishment of a clearly defined penalty and violation system; 5) establishment of a complaint and notice system.

Asked what the consequences will be if the enterprises engaged in franchising activities do not make required record filing, MOFCOM was sensitive to the fact that some enterprises are just not yet familiar with the new Regulations and be given assistance and grace period to comply with the required record filing. However, those who knowingly refuse to file after the time limit, a fine of more than RMB 50,000 yuan and less than RMB 100,000 yuan may be imposed and it shall be publicly announced.

MOFCOM was confident that the recording of complaints and violations of franchisors online will help to deter those from violating the regulations.

In 2007, 707,948 trademarks were filed in China, which ranks China’s Trademark Office (CTMO) among the busiest in the world. During the same period, 17,747 oppositions were filed. Evidently, with the large number of filings, it is increasingly important that foreign trademark holders both file their marks in China, along with constantly monitor other filings so as to protect their brands in the market. In this article, we set out the procedure and requirements to file an opposition in China.

1. Important Timelines and Procedures

Article 30 of the Trademark Law states:

Any person may, within three months from the date of the publication, file an opposition against the trademark that has, after examination, been preliminarily approved. If no opposition has been filed after the expiration of the time limit from the publication, the registration shall be approved, a certificate of trademark registration shall be issued and the trademark shall be published.

Like virtually all trademark systems, China’s CTMO publishes a Trademark Gazette (online: http://sbj.saic.gov.cn/sbgg/sbgg2.asp) with all preliminarily approved marks.

A trademark holder will then have three months to file an Application for Trademark Opposition with CTMO, including evidence substantiating its request. From there, CTMO will then send a copy of the Application to the applicant, who will have 30 days to respond. Both parties will then have three months from the date of submission of the Application to provide supplementary evidence.

Generally, CTMO will issue its decision through a notice within two to three years of the Application. Thereafter, either party may institute review proceedings with the Trademark Review and Adjudication Board (TRAB) within fifteen days. Subsequently, if a party is still dissatisfied with TRAB’s decision, it can then file a suit against TRAB in the People’s Court within thirty days of the review decision.

2. Legal Basis

There are numerous grounds for cancellation of marks:

1) Lack of distinctiveness (Art. 9, Trademark Law);
2) Identical or similar to name, national flag, national emblem, or other decorations of the People’s Republic of China (Art. 10, Trademark Law);
3) Identical or similar to name, national flag, national emblem, or other decorations of foreign countries (Art. 10, Trademark Law);
4) Identical or similar to name, flag, emblem, or other decorations of international organizations (Art. 10, Trademark Law);
5) Identical or similar to official signs, demonstrating official control or warranty (Art. 10, Trademark Law);
6) Identical or similar to the symbols or names of the Red Cross or Red Crescent (Art. 10, Trademark Law);
7) Discriminatory against nationality (Art. 10, Trademark Law);
Exaggeration or fraud (Art. 10, Trademark Law);
9) Detrimental to socialist morals or customs, or having other unhealthy influences (Art. 10, Trademark Law);
10) Directly referencing quality, main raw materials, function, use, weight, quantity, or other features of the goods (Art. 11, Trademark Law);
11) 3-D marks whose shape is derived from the goods itself, required for technical effect or obtaining substantive value (Art. 12, Trademark Law);
12) Geographic indications for goods which are not, in fat, from the region indicated (Art. 16, Trademark Law);
13) An agent or representative registers, in its own name, the trademark for whom he acts as agent or representative, without authorization (Art. 15, Trademark Law);
14) The mark, registered in the same or similar class of goods, is a reproduction, imitation, or translation of another person’s trademark not registered in China and is likely to cause confusion (Art. 13, Trademark Law); and
15) The mark, registered in non-identical or dissimilar class of goods, is a reproduction, imitation, or translation of another person’s well-known trademark registered in China, misleads the public and is likely to harm the interests of the holder (Art. 13, Trademark Law).

3. Conclusion

Again, any interested party will have three months from the date of publication to file an Application for Opposition. Should the deadline pass, the trademark will be granted, and the only available remedy would then be an application for cancellation of the mark. Though the grounds are the same, procedures are somewhat protracted and, obviously, the holder will now enjoy the rights of the granted mark during the period of grant and cancellation. As a result, it is extremely important to constantly monitor and quickly react in order to protect trademark rights in China.

Due to increasing market pressures and other situation-specific factors, employers are often required to terminate employees in China. This article briefly outlines some of the issues that must be addressed by employers before and after employee termination, including matters to consider during the hiring of prospective employees, from the perspective of the employer.

1. Grounds for Termination:

a. Immediate Termination

An employer may terminate an employee without requirement for notice in the following situations:

1. During the probation period, if the employee is determined to be unfit for the position;
2. The employee materially breaches the rules and regulations provided by the employer;
3. The employee is in serious dereliction of duty, graft or corruption causing substantial damage to the employer’s interests;
4. The employee has established an employment relationship with another employer and that relationship affects the completion of his tasks and he refuses to appropriately remedy the situation after notification from the employer;
5. The employee was fraudulent in concluding the labour contract; or
6. The employee is subject to criminal investigation.

Practical Considerations:

1. As termination during the probationary period is virtually at the will of the employer (an employee is required to give a minimum of 3 days notice to the employer), a prudent employer will, in the employment agreement, select the longest probationary period under the law (labour contracts of less than 3 months: no probation period; 3 months to 1 year: 1 month; 1 year to 3 years: 2 months; and, 3 years or more or open-ended: 6 months);
2. Employers should clearly (in writing) define the rules and regulations of the workplace and what, both specifically and generally, constitutes a serious or material breach resulting in employer’s option to terminate (this can be accomplished through the distribution of employment handbooks or other more extensive policy guides); and
3. Employers should carefully document any breach of the rules and regulations and serve written notice thereof.

b. 30-Day Notice

An employer must give 30 days’ prior written notice or payment in lieu thereof, if it terminates the labour contract under the following situations:

1. The employee is unable to perform his original duties or re-assigned duties, after returning from medical leave or non-work-related injury;
2. The employee is incompetent and remains incompetent after training or adjustment of position; or,
3. There has been a major change in ‘objective’ circumstances which were relied upon in the signing of the labour contract, and the employee and employer are unable to agree upon the modified terms of the labour contract.

Practical Considerations:

1. Document any and all performance, particularly when the employee fails to perform or underperforms; and
2. Provide training to employees so as to ensure they are updated with the skills required of their position.

2. Severance Compensation:

Severance compensation is due in a number of situations, which are summarized below:

1. The employer terminates the employee under situations requiring 30 days’ prior written notice (as previously mentioned);
2. The employee is terminated due to restructuring or difficulties in business operations;
3. Termination of the labour contract is proposed by employer and there is mutual agreement with regards to the termination thereof;
4. Expiration of a fixed-term labour contract (except where the employee refuses to renew the contract on terms equal to or better than that previously concluded);
5. Termination of the labour contract is due to the revocation of the employer’s business license; or, bankruptcy.

Employers must pay severance, in the amount of one month’s salary for each year of service, with half a month’s salary for each partial year. If the employee earns more than 3 times the average monthly wage of the locality, then the compensation will be capped at 3 times the average monthly wage and up to a maximum of 12 months.

Practical Considerations:

1. Accurately calculate the severance compensation due and determine the ‘bottom line’ or the highest amount of severance compensation to be offered;
2. Prepare and sign an agreement in which the employee waives or releases his rights to further compensation upon agreement of the settlement amount offered;
3. Clearly define in the employment contract what documents and other properties of the employer are to be returned upon termination (notwithstanding any disagreements to the grounds of termination or severance compensation due); and
4. Related to Point 1: be firm with regards to the calculated ‘bottom line’ (if the ex-employee refuses to agree to the amount of severance compensation offered, be prepared to refuse further discussion and negotiation).

3. Limitations Period:

The limitation period is 1 year after the employee knew or should have known that their rights have been violated. However, where the dispute has occured under an existing labour contract, the limitation period does not start until the labour contract has expired or has been terminated.

Practical Considerations:

1. Maintain on file all records, documentation and other forms of evidence for a suggested minimum period of 5 years, so as to ensure the presence of proper records in the event of a dispute.

Evidently, there are a number of practical steps which can be taken in order to ensure that business interruptions are minimized on termination of employees. However, as with many things in China, things are often more complex than they seem, though the best advice is simply (not unlike how we would act in our home jurisdictions) use common sense and carefully document all agreements/contracts, emails, written/oral communications, work product, and any other potentially relevant information before, during and after the employment relationship.

1. INTRODUCTION

For all of us (foreign) ‘locals’ in Beijing, we have seen the massive growth in foreign-owned restaurants over the past several years. Not only are such establishments popular (and very profitable), they are adding to the international cuisine and outlook of the nation’s capital. In this article, we outline the various procedures required to establish a restaurant. (There are alternatives in establishing a management office first, then a restaurant as a branch of the office; however, we will discuss this in later articles.)

2. BUSINESS ENTITY

In order to establish a restaurant, the owner must decide what type of entity will own and operate the establishment. In China, this is much more difficult than in other markets such as the US, where individuals can own and operate businesses. Fortunately, the restaurant industry is quite open and the operating entity may be either a Wholly Foreign Owned Enterprise (WFOE) (owned by a company or individual) or a Joint Venture (JV) (if partnering up with a Chinese national), though it is not possible for a foreigner to own the restaurant business directly as a sole proprietorship. Further, to open a restaurant, there are additional licenses and approvals that are necessary in addition to the traditional requirements of a limited liability company. However, once the company is set up with the proper business scope and registered capital, it can be used to open additional branches, though, of course, each branch will require certain approvals for that specific location (see below Health and Hygiene, Environmental Impact, etc.)
Unless there are compelling reasons otherwise, such as locating and trusting a suitable Chinese partner, the WFOE, a limited liability company wholly owned by the investor, is the likely choice for foreigners, as it offers the most autonomy. Although previously quite common and unfortunately still prevalent, for the sake of simplicity, many foreigners opt to allow Chinese partners to open the restaurant as a domestic (Chinese) company. In this case, the Chinese partner(s) will be sole shareholder(s) of the company, leaving the foreign investor with no legal ownership rights. (Given the often very large upfront personal investment, we caution investors to consider the appropriateness of such an ownership structure.)

3. INITIAL PROCEDURES (UNIQUE TO RESTAURANTS)

In chronological order, the following procedures must take place prior to establishment of the business entity, itself:

i) Apply and obtain company name approval notification with the Beijing Administration of Industry and Commerce (BAIC)

The name (in Chinese) will be in composed of, and in the following order:
Part 1 - City of WFOE: In this case it would be: Beijing; Part 2 – Company name (i.e. Bill’s BBQ); Part 3 - Business type (i.e. Restaurant); Part 4 - Form of organization (i.e. Limited Liability Company).
All together, the Registered Chinese name would read: Beijing Bill’s BBQ Restaurant Co., Ltd.
It is advisable that the applicant chooses at least three names to be checked for availability. The company name should be consistent with the actual business type, and should not explicitly or implicitly step beyond the scope of business.

ii) Selecting a Restaurant Location
The location of the restaurant is obviously important from a business standpoint, but based on the Beijing Municipal Environmental Protection Bureau’s (BMEPB) regulations if the restaurant is located near residential areas (within 50 meters), the residents will need to approve. At this point there are no regulations defining “approval by the residents”, and, currently, the BMEPB has found the following to be sufficient (depending on the circumstances): survey or completed questionnaire of residents, and approval letter by the local residents association.

iii) Apply and Obtain Health and Food Hygiene License with the Municipal Health Bureau
Various documentation must be furnished, including but not limited to the location and site map of the restaurant and the restaurant’s internal health and safety rules. Within 10 days of the documents submission, the Health Bureau will notify applicant and arrange the on-site inspection. The primary areas of inspection will include the hygiene and safety of; 1) raw foods preparation area; 2) kitchen area; 3) employee changing area; 4) faucet and sink area; and 5) waste disposal area. Inspectors should provide an on-the-spot list of non-compliance and recommendations to remedy the situation. For certain minor problems, a submission of a photo by the applicant of the modified area should suffice, so as to not require a second visit by the inspector. Notification of approval, assuming all areas of inspection do not require repeat visits, should be within 20 days.

iv) Alcohol Permit Registration

Though the registration of Alcohol Permit will not be completed until after issuance of the business license, Tax Registration Permit, and Health and Food Hygiene License, the applicant will need to reflect its intent to sell alcohol in the Health and Hygiene application. The Health and Food Hygiene License application will need to include the approved wording in the business scope to note that it will sell alcohol. 

v) Environmental Protections (EP) Examination and Approval (District Level)

Restaurant applications do not require a separate EP Impact Report. The two forms required include: 1) Environmental Impact Application form – to be completed by the applicant; and 2) Environmental Impact Report Form – to be completed and stamped by an authorized environmental evaluation entity.
The Report Form shall primarily examine, among others, the following: an environmental evaluation of the indoor and outdoor surroundings and near by building, an environmental analysis of the site, potential and future environmental impact of the surroundings, and recommendations for environmental protection. The primary focus of the environmental impact application is to assess potential and actual noise and water pollution, fire protection, and waste disposal of the site.
In selecting a restaurant location (see above) it is important to note that the outdoor smoke ventilation exhaust fixture shall be located at least 20 meters from any residence or above any residential area.

vi) No Tobacco Permits

As of March 2007, the laws state that foreign commercial enterprises are not allowed to sell tobacco related products. Those foreign enterprises currently selling tobacco will not be permitted to sell these products after their permits expire in late 2008.

4. ESTABLISHING THE ENTITY: WFOE OR JV

i) Apply for Approval Certificate

Once all the above approvals are obtained, they shall be submitted with the articles of incorporation, and feasibility report (along with supporting documentation) in order to obtain the Letter of Approval with the Beijing Municipal Bureau of Commerce.

ii) Registered Capital

The registered capital is the stated amount of capital that will be invested in the business. The registered capital will be reflected in the company’s articles of association, and recorded with the relevant government authorities. Since the entire amount of the registered capital must be invested (subject to cancellation), it is a very important legal and business decision. 
Though the minimum amount of registered capital, based on the Company Law, may be as low as RMB 30,000, this will definitely not be applicable for restaurant companies. 
Note that the investor is allowed to contribute non-monetary registered capital, among other things, in the form of technology/intellectual property rights. Cash contribution to registered capital may not be less than 30%.

iii) Capital Contribution

Capital contribution may be made through a lump sum payment or by installments. The lump sum shall be paid within 90 days from the issuance of the temporary business license. If paying by installments, a minimum 20% shall be paid within 90 days. The total amount shall be paid off within 1 year from the date of the est

With China’s opening of its market and recent succession into the WTO, it has undergone rapid development in the past two decades. Due in part to such growth and in combination with its massive 1.3 billion population (330 million in its middle-class alone as compared to America’s total population of 300 million), it represents the world’s largest yet ‘untapped’ consumer market. For many franchisors seeking to market reliability associated with brand recognition and systematic organizational structures to the oftentimes chaotic and fragmented consumer sector (particularly the food and personal service industries), China will be both the largest yet most challenging opportunity in the 21st century. 

Fortunately for both consumers and those in the franchising industry, 2007 arguably brought about the largest liberalization of this sector since the “Opening Up” reforms of 1979. 
That being said, however, foreign franchisors have, in the past, seen their share of successes and failures, many of whom have ‘stuck it out’ throughout China’s market changes to become a consumer household name, such as McDonald’s, KFC and Pizza Hut.    

I. Development of the franchise market in China

In 1997, China’s Ministry of Internal Trade promulgated the Administration of Commercial Franchise Procedures (Trial Implementation and hereinafter “Franchise Procedures”) representing the first set of regulations directed at specifically addressing issues pertaining to the franchise sector. The Franchise Procedures introduced two types of franchises: i) direct franchising and ii) sub-franchising. The Franchise Procedures provided for the basic structure of current franchising laws, which requires the disclosure of material information to prospective franchisees and includes the following: basic information about the franchisor; operational results of the franchisor; financial results of its franchise outlets; fees and payment obligations; and, terms and conditions for goods and services provided to franchisees. The Franchise Procedures also established the quasi-governmental China Chain Store and Franchise Association (“CCFA”). (Note that the Franchise Procedures were interpreted as not being applicable to cross-border franchise operations.)

In 2004, as part of China’s accession into the World Trade Organization (WTO) and  commitment to the principles therein, the Ministry of Commerce issued the Measures for the Administration of Franchise Operations (“Franchise Measures”) effective February 1st, 2005.  The Franchise Measures were promulgated shortly after the Measures on the Administration of Foreign Investment in the Commercial Sector, which liberalized foreign investment in the retail and wholesale distribution industry. Unlike the Franchise Procedures, the Franchise Measures not only permit foreign investment in the franchising sector but also contain an entire chapter drafted exclusively for this purpose. 
Much like the Franchise Procedures, the Franchise Measures focused largely on franchisor disclosure, but also included the “two-plus-one” requirement, which mandated franchisors to operate two company-owned stores in China prior to commencing franchising activities. Obviously, this has prevented many start-up franchisors from immediately commencing operations in China and was a disincentive for market entry. Moreover, the promulgation of the Franchise Measures and the requirement that all franchising operations be conducted only by PRC entities has effectively removed the alternative measures being used by foreign franchisors for many years, including licensing arrangements and international franchising agreements.  

There have, however, been recent modifications to the franchising framework with the promulgation of a number of new laws in 2007 which will be further discussed below.

II. Current Legal Framework and Franchising Structures in China

In May of 2007, MOFCOM replaced the Franchise Measures (2005) with the Regulations on the Administration of Commercial Franchises (“Franchise Regulations”). The Franchise Regulations, together with the MOFCOM-issued Administrative Measures for the Information Disclosure of Commercial Franchises (“Information Disclosure Measures”) and the Administrative Measures for Archival Filing of Commercial Franchises (“Archival Filing Measures”) currently govern franchising structures in China and set out the following requirements:

1. Definition and Applicability Scope of Commercial Franchises

Article 2 of the Franchise Regulations states that the regulations are applicable to all investors engaged in commercial franchise operations in China
“Commercial Franchise” is defined in the Franchise Regulations as “business activities whereby a franchisor, through execution of agreements, allows a franchisee to use operational resources, such as a trademark, logo, patent, know-how and others which are owned by the franchisor [refers to legal (not natural) persons], and the franchisee conducts business under the unified business model in accordance with the provisions of the contract and pays franchise fees to the franchisor .

2. Qualifications and the Two-Plus-One RuleFranchisors must own a well-developed business model, and be capable of providing continued operational management, technical support, business training and other services to the franchisee. 
Additionally, franchisors must own at least two company-owned stores for a period of at least one year . Noticeably missing is the phrase “in China”, which allows for new foreign entrants to immediately commence franchising activities in China.

3. Filing Requirements

Within fifteen days from executing the first franchise agreement, the franchisor must file with MOFCOM , specifically i) if the franchising activities take place within a single province, autonomous region or municipality under the central government (Beijing, Shanghai, and other major cities), then with the MOFCOM of that province, autonomous region or municipality under the central government; or ii) if franchising activities take place in more than one province, autonomous region or municipality, then at the national level MOFCOM.

Thereafter, the relevant MOFCOM will have ten days to properly file all completed filings , and publish them on its website .

However, it is necessary to note that the franchisor must, within 30 days of any change potentially impacting the filing, apply for an alteration of its filings. 

Franchisors must file the following: 

1. Basic information about the commercial franchise;
2. Distribution information of franchised stores in China;
3. Franchisor’s Commercial Prospectus;
4. Copy of business license or enterprise registration;
5. Copies of certificates of trademarks, patents and other business resources related to franchise activities;
6. Sample franchise agreement;
7. Franchise operational manuals;
8. Marketing plan;
9. Written undertaking evidencing franchisor’s complies with the Qualifications and the Two-Plus-One Rule;
10. Certificate evidencing compliance with the Two-Plus-One rule, issued by the city level in China and, for franchisors using space outside of China, business certificates translated, notarized and authenticated by the Chinese embassy; and,
11. Other documents as required .

Completed filings may be cancelled in the event of any of the following occurrences:

1. Franchisor’s business license was cancelled by the competent registration authority because of illegal operations;
2. MOFCOM receives a court order regarding the cancellation of the filing due to illegal operations of the franchisor;
3. Franchisor was discovered to have failed to disclose material information or provided false information; and,
4. Franchisor itself cancels the filing.  
5. Disclosure of Information

The following materials must be provided to the prospective franchisee  a minimum of thirty days prior to the signing of the Franchise Agreement:

1. Basic information on the franchisor and franchise activities:
a. Franchisor’s name, address, contacts, legal representative, general manager, registered capital, scope of business, and the number of regular chains including their addresses and phone numbers;
b. A brief introduction to the commercial franchise activities of the franchisor;
c. Basic information on the archival filing of the franchisor;
d. If the franchisor’s associated company provides products and services to the franchisee, the associated company’s basic information must also be disclosed; and,
e. Information on any bankruptcy and/or application for bankruptcy of the franchisor or of its associated company in the preceding five years.

2. Basic information on the business resources of the franchisor
a. Information available on registered trademarks, company logos, patents, proprietary technologies, and business methods, etc;
b. If the owner of any of the above-mentioned business resources is the associated company of the franchisor, then the basic information of the associated company must also be disclosed (the franchisor is also required to explain how to manage the franchise system upon termination fo the license contract); and,
c. Information on the business resources of the franchisor (or its associated company) in relation to litigation or arbitration. 

3. Basic information on franchise expenses:
a. If the type, amount, criteria and payment method of fees collected by the franchisor or on behalf of a third party cannot be disclosed, then the franchisor must explain the reason for the non-disclosure; if the fee collection standards are inconsistent, then the franchisor is required to disclose both the maximum and minimum standards, and explain the reason thereto;
b. The collection thereof, return conditions, return time, and return on investment; and,,
c. If the franchisee is required to pay a fee before the Franchise Agreement is concluded, then the franchisor must explain in writing the use of the fee and the conditions and method of return. 

4. Information on the prices and conditions of the products, services and equipment provided to the franchisee.
a. Whether the franchisee must purchase products, services or equipment from the franchisor (or its associated company), including the prices and conditions thereof;
b. Whether the franchisee must purchase products, services or equipment from the suppliers appointed or approved by the franchisor; and,
c. Whether the franchisee has the discretion to choose its own suppliers and the standards for the selection of its suppliers. 

5. Information on the continuous provision of services to the franchisee.
a. Detailed content, manner of provision and implementation plans for professional training, including the training location, approach and duration; and,
b. Details regarding technical support and a catalogue of the operation manual of the franchise including the number of pages therein. 

6. Methods and content of guidance and supervision over the franchise activities of the franchisee:
a. The franchisor’s methods and content of guidance and supervision over the franchise activities of the franchisee, the franchisee’s obligations and consequences for failing to fulfill them.
b. Whether the franchisor is jointly liabile with the franchisee for complaints by and compensation to consumers, and how to share such liability. 

7. Information on the investment budget of the franchise:
a. The expenditure fpr the investment budget may include the following: initial fee; training fee; real estate and decoration fee, procurement fee fpr equipment, office supplies, furniture, etc; initial inventory; water, electricity and gas fees; fees needed to obtain licenses and other governmental approvals; and working capital; and,
b. The statistical source and estimation basis for the above-mentioned fees.

8. Information on franchisees within China:
a. Information on the present and estimated number of franchisees, geographical distribution, scope of license, and as to whether or not they are subject to an exclusive regional license (if so, details of the scope thereof must also be explained)
b. Information on the evaluation of the performance of the franchisee, the actual or estimated average sales volume, costs, gross and net profits of the franchisee, the source of the above-mentioned informationduration of and franchise networks involved (if the information is speculative, then the franchisor shall explain the basis for its speculation, and specify that the actual performance of the franchisee may differ from its speculation. 

9. Abstracts of the franchisor’s financial and accounting reports and of the audit reports in the last two years audited by the accounting or auditing firms.

10. Information on any major litigation or arbitration involving any franchises of the franchisor in the last five years.
a. Major litigation or arbitration refers to litigation and arbitration involving litigation fees of more than RMB 500, 000; and,
b. Basic information as to the location of the litigation or arbitration and the judgment or award must also be disclosed. 

11. Information on any record of major illegal operations of the franchisor and its legal representative.
a. Where either the franchisor or its legal representative has been imposed with a fine, by the competent administrative law enforcement authorities, exceeding not less than 300, 000 but more than 500, 000; and,
b. Where the franchisor and its legal representative have been subject to criminal penalization. 

12. Franchise Contract

a. Sample franchise contract; and
b. If the franchisor requires its franchisee to sign with the franchisor (or its associated company), other franchise contracts (sample contract shall be provided at the time of contracting). 
Note that where the franchisor is found to have concealed or provided false information, the franchisee may rescind the Franchise Agreement. 

5. Franchise Agreement

Although franchise contracts are in practice comprehensive and lengthy, the Franchise Regulations require certain clauses be provided in the relevant franchise agreement:

1. basic information on the franchisor and franchisee;
2. content and term of the franchise;
3. types, amounts and payments of franchise fees;
4. specific content and manner of provision of operational guidance, business training, technical and other services to franchisee;
5. quality standards, quality control measures for the provision of products and services by franchise operations;
6. promotions and advertisements of products and services of franchise operations;
7. arrangements for consumer rights, and assignment of liability in franchise operations;
8. amendment, rescission and termination of the franchise agreement;
9. liability for breach;
10. dispute resolution; and
11. other matters as agreed upon between the franchisor and franchisee.  

The Franchise Regulations also require the contract contain a clause setting out the time period during which the franchisee may rescind the agreement (post- execution of the contract) .  Unless otherwise specified, the initial term of the contract must not be less than two years. 

Further, where deposits or other fees are required prior to execution of the franchising agreement, provisions for the use and refund of the same must be expressly stated therein .

Advertising and promotional fees collected by the franchisor must be used specifically for such stated purposes and accounting thereof should be provided to the franchisee within a timely basis .

The franchisor is required to report annually, by March 31, the status of each franchise agreement.

6. International/Cross-Border Franchising

International or cross-border franchisors must file, in accordance with the Archival Filing Measures.

7. Penalties

Penalties for the violation of the Regulations are as follows:

1. Failure to meet Qualifications (see Item 2): confiscation of illegal income, and fine of RMB 100,000 to RMB 500,000;
2. Franchising by individuals (natural person): confiscation of illegal income, and fine of RMB 100,000 to RMB 500,000;
3. Failure to complete Filing Requirements: order time limit for rectification and fine of RMB 10,000 to RMB 50,000, and where franchisor fails to file within the time limit a fine of RMB 50,000 to RMB 100,000 and public announcement; and,
4. Failure to provide Franchise Agreement thirty days prior to the signing or failure to disclose or concealing information relevant to the franchisee: fine of RMB 10,000 to RMB 50,000, or where serious RMB 50,000 to RMB 100,000 and public announcement thereof.

8. ‘Grandfathering’ Provisions

Companies already conducting franchising activities have one year to file according to the Franchise Regulation. 

III. Conclusion

China represents a tremendous opportunity for international franchise operations. Although there are numerous challenges and complexities in establishment and operations, the recent legal changes have largely liberalized the franchising market for foreign investors. In combination with the current rates of economic growth, the timing is ideal for foreign franchisors to explore opportunities in the Chinese market.

Needless to say, China has become the world’s leading manufacturing base. However, with the recent product safety scares and the constant media attention, “Made in China” has become a high-profile issue for consumers and retailers. So how does a foreign company minimize the risks of tainted/substandard products manufactured in China? In this article, we discuss contract terms which foreign companies should consider when entering into OEM relationships with Chinese suppliers. (While we highlight some of what we feel are the main issues to be covered by the agreement, we recognize that each case is unique and there is no such thing as a ‘typical’ OEM arrangement.)

Standard Form Agreements

Generally, an OEM will have a standard form agreement which they are more than willing to provide to foreign companies who wish to use their services. While this may lower costs at the outset and allow the foreign company to ‘build favor’ with their Chinese counterpart, using such an agreement is almost never advisable, and foreign companies would be wise to consult counsel, who will assist the foreign company to properly negotiate and prepare agreements.

Note that we often advise that the written agreement is preceded by preparation and negotiation on the basis of a business term sheet, which will outline the major terms of cooperation. The agreed points in the term sheet then serve as the basis for the written agreement.

Major Terms of Agreement

Below, we highlight several major (though non-exhaustive) terms which should be included in an OEM Agreement:

1. Products and Specifications: The products to be manufactured should be well-defined in the agreement, along with product specifications which should be described in detail in appendix(es).

2. Forecasts and Binding Purchase/Supply Commitments: As OEM Agreements often require that firm orders are placed through Purchase Orders, in order to ensure that there is a binding supply/purchase commitment in the agreement itself, the parties will often designate a certain minimum commitment on both sides, to produce and purchase a certain amount of product within a given time period. Aside from the minimum requirement, the buyer will often provide a non-binding forecast to supplier, such that supplier can plan and allocate adequate resources (often 6-, 12-, 18-, 24- month terms).

3. Price: For those products designated as described previously, the parties should determine firm prices, which will either be effective throughout the term of the agreement, or at least a portion thereof, subject to (we recommend) maximum periodic price increases. Further, it is beneficial to include for discounts upon meeting certain pre-determined purchase volumes.

4. Quality Control: Buyer and supplier will agree on certain terms afforded to buyer/required of seller for conducting quality control on production. Typical terms include i) access (often on short or no notice) to production sites, and ii) random testing of each batch of products. Further, the parties may, depending on the value of the contract, provide for a representative of the buyer to be on-site on a full-time/regular basis, for the purpose of assisting in quality control. (The buyer’s representative may also monitor supplier’s use of intellectual property and other improper dealings, though their effectiveness will invariably depend on his/her loyalty to the buyer.)
 
5. Term: The parties will determine an appropriate term for their contract, and may make the agreement renewable on request by buyer. This term should be sufficiently long so as to ensure that buyer’s initial investment can be adequately recovered.

6. Termination: Termination events, as in most agreements, will include those events which give rise to immediate termination rights (for example, unauthorized use of buyer’s intellectual property and violation of non-compete terms), and those which require a notice period and the breaching party’s right to remedy the breach (failure to supply products meeting specifications).

7. Consequences of Termination: In the event of termination, it is important for buyer specify those procedures necessary to protect its rights in the event of such occurrence. Often terms will include: sale of completed products to buyer, allowance for completion of partially completed products and sale to buyer, destruction or return of confidential information, and destruction or return of trademarks, logos, brochures, and other advertising materials.

8. Examination and Acceptance: Upon delivery of the products to buyer, it will be afforded a certain period to conduct inspection, subject to deemed acceptance in the event that a claim is not made within a certain period. Further, it is common for suppliers to require that upon buyer’s acceptance of the products, they will be absolved of all further liabilities. Note that we do not recommend that buyers wholly accept such terms (and provide a minimum carve-out and continued warranty), as buyer, after acceptance, will have little grounds for a claim (even for the use of sub-standard materials which are often difficult to visually detect).

9. Raw Materials/Components: As part of the quality control process, buyer should require that supplier provide a list of its suppliers along with purchase orders over a pre-set period to ensure that the agreed upon raw materials/components are being used.

10. Insurance: Due to the relatively unsophisticated nature of manufacturers/insurance industry in China, factories are often severely underinsured from risks. As a result, it is advisable for buyer to require that supplier obtain a minimum level of insurance.
 
11. Intellectual Property: All intellectual property used to manufacture the product, including trademarks, patents, copyrights, and other business secrets should be licensed to supplier, for the limited purposes of complying with its obligations under the agreement. Further, buyer should carefully draft related terms so as to restrict supplier from exercising any rights of ownership to the licensed IP.

12. Non-compete: As an OEM relationship necessarily involves substantial transfer of intellectual property and confidential information, buyer must not only be careful to ensure that additional products are not produced by the supplier, but also by its affiliated companies and senior directors and management. (Note that the implications of failing to adequately provide for such terms may result in not only the product being sold in China but more importantly in the same markets as buyer, and at significantly lower costs.)

13. Arbitration: As manufacturing tends to be concentrated in lesser-developed regions in China in addition to cost/time/reliability benefits often associated with arbitration, we advise clients to select arbitration for dispute resolution. Arbitration can be conducted in China or internationally (in any New York Convention signatory state), though domestic arbitration allows buyer access to Chinese courts for injunctive relief.

Arguably more or at least equally important as negotiating and concluding a strong contract, buyer must be carefully monitor and enforce of its terms when necessary.

Finally, although long-term relations are often desirable and we encourage buyers to find and work with reliable suppliers, as a practical matter it is imperative that buyers ensure that they have one or more alternative suppliers, in the event of required termination of the primary OEM supply arrangement.

China Legal Daily reported on June 16^th that China’s Supreme Court released its first set of judicial interpretations on the PRC Real Property Law for public comment on June 15^th, 2008 – namely, the “Interpretation by the Supreme People’s Court of Several Issues Relating to Application of Law to Trial Disputes on Building (property) Ownership Division” and the “Interpretation by the Supreme People’s Court of Several Issues Relating to Application of Law to Trial Disputes on real property services”. The released Supreme Court Interpretations regarding property disputes are the first of its kind.

In recent years, China’s reforms regarding its residential system have continued to develop in response to China’s continuing improvement of the people’s living standards. As such, disputes on the division on the ownership of property and real property services have also increased in number and the problems have become more serious. The judicial interpretations allow for the correct and accurate implementation of relevant provisions of the Real Property Law. It also provides for the equal protection of the parties in accordance with their respective legitimate rights and interests.

China’s 2007 Real Property Law set forth a comprehensive framework for the protection of real and movable property rights, giving rights of private individuals to own property. With such a major shift in the notion of property ownership in China, ambiguities in ownership rights are inevitable. With the release of the Supreme Court’s first set of judicial interpretations, further clarifications will be made regarding individual ownership rights; namely, the division of ownership of property.

The public is open to express their views online or in writing, and put forward specific amendment proposals to the judicial interpretation until July 16.