Dissertation Legal Conflicts in China

涉及在华外国直接投资的法律纠纷：

比较法研究

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B

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指导教师

蔡从燕

厦门大学

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学兮：129 201 001 542 87 UDC______

厦门大学

博士学位论文

涉及在华外国直接投资的法律纠纷

—比较法研究LEGAL DISPUTES INVOLVING FOREIGN DIRECT INVESTMENT IN

CHINA: A STUDY IN COMPARATIVE LAW

YURI BUTAEV

指导教师姓名: 蔡从燕专业名称: 国际法学论文提交日期: 2012 年 4 月论文答辩时间: 2013 年 6 月学位授予曰期: 2013 年 8 月

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2013 年 6 月

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内容摘要

本文致力于研究中国关于外商直接投资法律制度的易变性。本文试图从减少全人类社会法律成本的角度，分析和描述中国大陆及其岛屿在外商直接投资监管制度方面与三大法律体系的区别，这三大法律体系分别是国际法、欧盟法律和普通法国家的法律。本文参考一系列的法律新闻资料、法律文本、法学家的研究观点，这些参考文献包括欧洲文本和中文文本。本文研究方法为描述和实证分析，以描述和实证分析归纳出法律层面的发现——从比较分析四个法律体系基本层面开始，然后到对四个法律体系外商直接投资法律的细节分析、程序事项、法律风险评估，最后是司法判例的研习。此外本文还将关注互惠原则、共生性、双边投资协定的定义和世界贸易组织成员身份的含义。

笔者对法律学科现有体系的原创性贡献在于，为外商直接投资者提供法律风险的全貌以便其规避法律风险、为外商直接投资立法者提供减少立法中包含法律风险的完整路径，以及提出外商直接投资的新定义。笔者还基于一种全新的研究路径，以审视全球法律领域中各国法律制度的竞争。一方面，一国敌视另一国法律制度的入侵；另一方面，一国通过对另一国施加其价值观和影响而入侵该国的法律制度。通过对中国的研究，笔者意外地发现，双边投资协定数目的增长和法律的移植不但没有降低外商直接投资的风险，相反却增加了风险。此外，笔者还按照资金流动自由度和投资者的知识产权资产对抗法律风险能力大小为标准，对外商直接投资者进行新的分类。

在中国，这些法律风险包括一些原始的概念，例如掠夺性立法、剽窃知识产权财产立法，当境外投资者拥有的知识产权被人在中国境内注册后，而知识产权盗版者将对投资者提起侵权之诉。一种公开和直观的研究也是一种创新的贡献，帮助我们发现中国法律体制中固有的对外商直接投资的偏见。当初始方法提出后，就解释了由多种因素共同驱动下的比较法的发展，首要因素是限于特殊比较法理论内部的单一民族国家的政治经济学，其次是单一民族国家流行的服务自我的意识形态。应用这个理论意味着中国法律体制中存在固有的对外商投资者的法律偏见，但笔者在可行范围内为消除这种偏见提出了建议。

作为对法律知识原始和实质性的贡献，本文致力于为现在和将来投资者提供实用的法律指南，以便他们的现实中认识自我和发现在中国产生法律争议的可能性。本文对中国现行法学理论也有所贡献。本文为中国立法者在法律发展方面提出了建议，最后，本文还在知识产权和跨境法律责任等新领域提出了外商直接投资概念的哲学思考。

关键词：比较法；在华外国直接投资；法律风险

ABSTRACT

This dissertation undertakes a study into a fast-paced fluidity of the Chinese legal system regulating Foreign Direct Investments (FDI) on the Chinese soil. This effort is an attempt to analyze and describe how the Chinese system on mainland and its insular territories differs in its FDI-regulating aspects from those of the three largest legal families – namely: International Law, European Union Law and the laws of the common law countries– with a view to minimizing the legal costs burden for the human society as a whole. The dissertation draws on wide array of legal news sources, legal texts and jurists’ opinions for its analyses both in European and Chinese languages.

The research method is that of descriptive and essentialist analysis, applied to pursuing inductive discovery of the legal strata - starting from the brief comparison of the four legal systems above in their general aspects and then, proceeding to the detailed analysis of individual FDI laws, the processual steps, the estimates of the legal risks and finally, the analysis of the legal precedents. An attention is paid to the concept of reciprocity, harmonization, bilateral investment treaties (BIT) and the World Trade Organization (WTO) membership implications.

My original contribution to the extant body of legal knowledge is providing a coherent picture of the legal risks for the FDI investors to evade and for the law-makers that make FDI-related laws to minimize; as well as proposing a new FDI definition. This picture is based on the novel approach to viewing the global legal field as competition of the national legal systems hostile to any encroachment on its legal turf while attempting to encroach on the turf of the other national legal systems via imposing its own values and influence. Unexpected findings that this approach yields in case of China, include discovery that existence of large number of BITs and legal transplants do not, as expected decrease FDI legal risks, but on the contrary, do actually increase those. Further, I provide a new categorization of FDI investors as a formula that correlates cash flows and IP-assets of the investors with their vulnerability to the legal risks.

These legal risks in China include such original concepts as “predatory litigation” and “stolen IP asset litigations”, where an IP asset belonging to the investor outside China is registered in China and the investor is then sued by the IP-pirate for the rights violation. An open and straightforward discussion of those is also a novel contribution which leads to discovery of an legal bias against FDI inherent in the Chinese legal system. Methodologically an original approach is proposed, which explains the development of comparative law as driven by the joint factors of, first, political economy of the nation- state domestic to the particular comparative law theory, and second, the self-serving ideology prevalent in that nation-state. Applying this

approach indicates an inherent legal bias existing in Chinese legal system against the FDI investors and recommendations are given as to how neutralize it to a possible extent.

As an original and substantial contribution to the legal knowledge this dissertation endeavors to be a useful legal manual for the present and future investors finding themselves in the actuality or a possibility of a legal dispute in China; it contributes to the extant body of the legal scholarship on Chinese jurisprudence; it provides recommendations on the legal evolution for the Chinese lawmakers and lastly, it adds to the philosophical understanding of FDI concept in the new era of Intellectual Property and cross-border legal responsibility.

Keywords: comparative law; foreign direct investment in China; legal risks.

LIST OF CASES

Apple Inc. v. Proview Technology (Southern China Intermediate People’s Court 2011)

Apple v. New Apple Concept (Shenyang Intermediate People's Court 2008)

Aquaculture farmers v. the China unit of ConocoPhillips, (Tianjin Maritime Court, 2011)

Chinese fishermen v. Conoco (US District Court Southern District Of Texas, Houston Div. 2012)

Chint Group v. Schneider Electric (Wenzhou Intermediate Court of Zhejiang 2009)

Hubei Gezhouba Sanlian Industrial Co., Ltd. et. al. v. Robinson Helicopter Co., Inc., 06-01798 (C.D. Cal 2009)

International Federation of Spirits Producers' v. Guan Yuanqing (Gulou District Court 2011)

International Federation of Spirits Producers' v. Liu (Beijing Daxing District People's Court 2010)

Motorola v. Guangzhou Weierwei, (First Intermediate People's Court of Beijing 2007)

Pfizer v. Welman, (Beijing No.1 Intermediate People's Court 2007)

Pfizer v. Hongtaomao Pharmaceutical Co. Ltd., Lianxiang Pharmaceutical Co. Ltd., Shuanglong Hi-tech Development Co. Ltd et al., (various courts 2002 – 2007)

Sam Sinay et al. v. CNOOC Limited (US District Court Southern District Of New York 2012)

Starbucks v. Xingbake Coffee (Shanghai No. 2 Intermediate Court 2005)

Zhejiang Holley Communications v. Samsung (Intermediate People's Court of Hangzhou 2008)

ABBREVIATIONS

BITs – Bilateral Investment Treaties

BOS – Board of Supervisors

BRIC - Brazil, Russia, India, China

CLC – Criminal Law of China, 1997

CHS – Controlling Chinese Share Holder

FIE – Foreign Invested Enterprise

FDI – Foreign Direct Investment

JV – Joint Venture

IP – Intellectual Property

LOC – Library of Congress

OECD - Organization for Economic Co-operation and Development

PPE – Property, Plant and Equipment

UNCTAD – United Nations Conference on Trade and Development

WTO – World Trade Organization

目录

引言........................................................................1第一章比较法学及其在中国外商直接投资中的方法论............................1第一节比较法学的起源和发展.........................................1一、古典时期.............................................................1二、中世纪...............................................................2三、现代.................................................................9第二节比较法学的现代方法论........................................11第三节中国外商直接投资的批准程序和限制............................18第四节中国外商直接投资比较法方法论之建议..........................19第五节 21世纪的外商直接投资：一种新定义............................20

第一章小结............................................22第二章中国法律、国际法和西方法律：三大并列法律体系系统性的相互影响........24第一节中国法律制度概述...................................................24第二节中国法律制度下外商直接投资待遇的历史沿革...........................26

一、1949 年以前.............................................................26

二、1949 年以后.............................................................27

第三节关于外商直接投资限制：其他国家比较.................................29第四节双边投资协定的作用.................................................31第五节作为外商直接投资潜在法律风险因素的中国劳工问题.....................33第六节中国劳动法：与“金砖四国”两个成员的比较...........................35

一、中国劳动法..........................................................36二、中国劳动法与印度和巴西劳动法的比较..................................38

第二章小结.................................................................40第三章案例分析...........................................................41

第一节新定义的法律风险...................................................41

第二节苹果公司在中国发生的知识产权财产之争：一个比较案例..................42一、唯冠公司与苹果公司..................................................42二、唯冠公司与苹果公司分析..............................................43

第三节辉瑞公司关于伟哥商标之争：一种复合式专利侵权.......................44一、涉及辉瑞公司的两个诉讼的背景........................................44二、辉瑞公司的先例的法律后果............................................46

第四节关于苹果公司于辉瑞公司的案例分析：与北美判例的比较..................47第五节中美商标法之比较：从西方的角度看中国的商标法公平吗？................50

一、分配正义............................................................50二、美国商标法移植到中国................................................50三、中国法院裁判的判决结果低于诉求的案例................................52

第六节两个专利案件：专利侵权人被授予专利.................................55一、正泰集团公司诉 Schneider Electric案....................................56二、浙江华立通信系统技术有限公司诉三星公司案............................57

第七节几个专利案件：外商直接投资者受到保护...............................59一、案情................................................................59二、中国法院对外国直接投资商标的保护....................................59

第八节关于假冒知名商标酒类的案件.........................................61一、案情................................................................61二、对于突出的可比较点的讨论............................................61三、西方可比较的先例和法律框架：以英国为例..............................62四、程序和法律比较......................................................62五、结论关于假冒知名商标酒类的案件......................................64

第九节中国劳动纠纷概述与富士康案件.......................................65一、统计数据和法律环境..................................................65二、富士康案............................................................65三、可以支持苹果的法律责任的法律理论....................................68

第十节康菲石油漏油事件：结果以及应当吸取的教训...........................73一、案情................................................................73二、随之而来的法律行动..................................................73三、中海油公司案........................................................82

第十一节产品责任与中国法院判决在外国法院的执行.............................83一、RHC案背景与事实...................................................83二、RHC案讨论.........................................................86

第三章小结.............................................................94第四章针对立法者和外商直接投资者的建议：基于案例分析和法律风险评估.........................................................................95第一节案例比较背后的当代学术.........................................................................95

一、源自于西方法律制度的定义............................................95二、法律地位（诉权）(locus standi)......................................95

第二节法律制度比较和隐性法律风险陷阱.....................................96一、比较与文化..........................................................96

二、法律移植............................................................97第三节由于腐败而产生的国别法律风险......................................101第四节根据法律风险水平对中国外商直接投资者进行的分类....................107第五节向外商直接投资者提出的降低公司特定法律风险的建议........................................................................108第六节向中国立法者提出的降低国家特定法律风险的建议......................110第四章小结................................................................111结论......................................................................111附件1 中国——国际金融公司认定其易于从事经营............................112附件2 经合组织关于外商直接投资术语的定义................................115附件3 中华人民共和国的国家结构..........................................123附件4 中华人民共和国刑法，1997..........................................124附件5 外商直接投资-中国限制类和禁止类产业领域...........................158附件6 中国有关涉外民事诉讼程序法律......................................164附件7 知识产权审判程序..................................................168参考文献..................................................................178

Table of ContentsIntroduction......................................................................................................................................1

Chapter 1. The science of comparative law and its methodology in the context of FDI in China..1

Subchapter 1. The origin and development of the comparative law...........................................1

Section 1. Classical times........................................................................................................1

Section 2. Middle ages.............................................................................................................2

Section 3. Modern times..........................................................................................................9

Subchapter 2. Modern methodology of the comparative law....................................................11

Subchapter 3. Approval process and restrictions on the FDI in China......................................18

Subchapter 4. Proposed comparative law methodology for the FDI in China..........................19

Subchapter 5. The FDI in the twenty-first century: a new definition........................................20

Subchapter 6. Preliminary conclusions to Chapter 1.................................................................22

Chapter 2. Systemic interplay of three juxtaposing legal systems: Chinese, International and “Western Domestic”......................................................................................................................24

Subchapter 1. General overview of the Chinese legal system...................................................24

Subchapter 2. Historical development of FDI treatment by the Chinese legal system............26

Section 1. Pre-1949................................................................................................................26

Section 2. Post-1949..............................................................................................................27

Subchapter 3 Comparison to FDI Restrictions in other countries.............................................29

Subchapter 4. The role of BIT...................................................................................................31

Subchapter 5. Chinese labor issues as a potential generator of FDI legal risks........................33

Subchapter 6. Chinese labor laws: comparison to two BRIC countries....................................35

Section 1. Chinese labor laws................................................................................................36

Section 2. Comparison to India and Brazil............................................................................38

Subchapter 7. Preliminary conclusions to Chapter 2.................................................................40

Chapter 3. Case analysis................................................................................................................41

Subchapter 1. New definition of a legal risk.............................................................................41

Subchapter 2. Apple disputes over IP property in China as a comparative case.......................42

Section 1. Proview v. Apple..................................................................................................42

Section 2. Analysis of Proview v. Apple...............................................................................43

Subchapter 3. Pfizer dispute over Viagra trademark as a coordinated patent attack.................44

Section 1. Background to two Pfizer litigation......................................................................44

Section 2. Legal consequences of Pfizer precedent...............................................................46

Subchapter 4. Analysis of Apple and Pfizer cases as comparison to Northern American precedents..................................................................................................................................47

Subchapter 5. Comparison of US and China Trademark Law: is the Chinese trademark law unfair from the western perspective?.........................................................................................50

Section 1. Distributive justice................................................................................................50

Section 2. Chinese trademark law as a legal transplant from the USA.................................52

Section 3. Examples of less-than-claimed compensation by the Chinese courts..................54

Subchapter 6. Two patent cases of patent pirates rewarded......................................................55

Section 1. Chint Group v. Schneider Electric........................................................................56

Section 2. Zhejiang Holley Communications v Samsung.....................................................57

Subchapter 7. Examples of FDI investors protected.................................................................59

Section 1. Facts of the cases..................................................................................................59

Section 2. FDI trademarks protection by the Chinese courts................................................59

Subchapter 8. The cases of counterfeit brand name alcohol.....................................................61

Section 1. Facts of the cases..................................................................................................61

Section 2. Discussion of salient comparison points...............................................................61

Section 3. Comparable precedents and legal framework in the West: a UK example..........62

Section 4. Procedural and legal comparison..........................................................................62

Section 5. Conclusion to comparison of alcohol counterfeiting offenses between China and the UK....................................................................................................................................64

Subchapter 9. Overview of the labor conflicts in China and Foxconn case..............................65

Section 1. Statistics and legal environment...........................................................................65

Section 2. Case of Foxconn...................................................................................................65

Section 3. The legal doctrines that could support Apple’s legal liability..............................68

Subchapter 10. ConocoPhillips oil spill as case of environmental legal risks...........................73

Section 1. The facts of the case.............................................................................................73

Section 2. The ensuing legal actions......................................................................................73

Section 3. Discussion of the CNOOC Ltd case.....................................................................82

Subchapter 11. Product liability and enforcement of Chinese judgments in foreign courts.....83

Section 1. Background and facts of the RHC case................................................................83

Section 2. Discussion of the RHC case.................................................................................86

Subchapter 12. Preliminary conclusions to Chapter 3...............................................................94

Chapter 4. Recommendations to the lawmakers and FDI investors based on case analysis and legal risk estimates.........................................................................................................................95

Subchapter 1. Contemporary scholarship behind case comparison...........................................95

Section 1. Definitions from Western legal systems...............................................................95

Section 2. Legal standing (locus standi)................................................................................95

Subchapter 2. Legal system comparison and hidden legal risks traps.......................................96

Section 1. Comparison and the culture..................................................................................96

Section 2. Legal transplants...................................................................................................97

Subchapter 3. Country-specific legal risk due corruption in the legal system........................101

Subchapter 4. Categorization of the FDI investors in China according to the legal risk level107

Subchapter 5. Recommendations to the FDI investors on decreasing company-specific legal risk level...................................................................................................................................108

Subchapter 6. Recommendations to the Chinese law-makers on decreasing country-specific legal risk level..........................................................................................................................110

Subchapter 7. Preliminary conclusions to Chapter 4...............................................................111

Conclusion...................................................................................................................................111

Appendix 1. China – Ease of doing business as ranked by the IFC............................................112

Appendix 2. Definitions of FDI terms by OECD........................................................................115

Appendix 3. State Structure Of The People's Republic Of China...............................................123

Appendix 4. The Criminal Law of the PRC, 1997......................................................................124

Appendix 5. FDI- restricted and prohibited areas of industry in China......................................158

Appendix 6. Law of the PRC on Choice of Law for Foreign-related Civil Procedures..............164

Appendix 7. IP trial procedure.....................................................................................................168

References....................................................................................................................................177

Legal disputes involving foreign direct investment in China: a study in comparative law_____________________________________________________________________________________________

Introduction

Over the past 30 years China have skyrocketed to the position of the factory to the world, which is evidenced by the number of huge, container-laden ships passing slowly, in unending stream by the Xiamen straits which is overlooked by the towering building of the Xiamen University Law Department.

The FDI in mainland China rose to $105.7 billion in 2010 from paltry $57 million in 1980 (UNCTAD, 2011), this meteoric rise leading to a sea change in the global economy, with China being poised to overcome USA as the largest economy of the world in 2011. (Source: Euromonitor, 2010)

Currently, China is the second only to USA as the FDI target, as shown on the left: China combined with Hong Kong is obviously a rival to the United States as a target country for FDI. It

is universally understood that as present globalization trends continue, the unified China will take the prize of the first place for such.

The table below illustrates the trends and the global GDP amounts of the leading industrial countries as predicted for the new world order: it is forecast that China will overcome the United States and become the country with the largest GDP by 2020.

1

Figure 1. FDI in China in comparison. Source: UNCTAD, 2011

Subchapter 1. The origin and development of the comparative law________________________________________________________________________________________________________

Figure 2. China's GDP in comparison. Source: Euromonitor, 2010

Both the historical and the projected numbers, while impressive in their steep rise over the years are begging the following questions of a legal scholar:

1. is China well prepared for the onslaught of the inevitable legal disputes which a continuing upward trend in FDI will inevitably bring?

2. Do the FDI investors have a cohesive picture of the legal playing field and the risks contained thereof?

The perception of the interested parties is ambivalent on the first of these two counts. It is noted by the western jurists that “the enormous achievements can obscure ….the challenges” that “cannot be underestimated….. The judicial system must overcome local protectionism, governmental and legislative interference, financial dependence, ineffective enforcement and corruption.” (Lichtenstein, 2011).

In the same vein, a Chinese legal scholar notes that “A rather confusing situation has been witnessed in the Chinese ideology of the rule of law in these years.” (Peidong, 2012).

The confusion on part of legal scholars on the both sides of the Pacific is matched by the confusion in the business community which is educated by the articles with dramatic titles, such as “7 Deadly Perceptions about Doing Business with China” (Carmosky, 2008). In such articles, the emphasis is laid on the “relationship-based character of doing business in China”, while sanctity of the contract is given short shrift.

Finally, a third group of the legal players is of interest – namely the man on the Chinese street. It has been noted that:

“Generally speaking, the closer to the legal system people brought their disputes, the more negatively they assessed their experiences. Bilateral negotiation and informal relations were the most positively rated sources of help. The next most popularly rated sources of help were local community leaders: neighborhood and workplace leaders in Beijing, and village leaders in the rural areas. Higher-level government agencies followed next in the satisfaction ratings.


Significantly, at the bottom of the rankings were the police, lawyers, and courts. In both surveys, lawyers were rated more negatively than any other source of help.” (Michelson, 2010).

As if all of that was not enough another alarming trend has been reported recently: “Chinese authorities have now drastically altered course. Substantively, they are de-emphasizing the role of formal law and court adjudication. They are attempting to revive pre-1978 Maoist-style court mediation practices. Procedurally, Chinese authorities are also turning away from the law. They are relying on political, rather than legal, levers in their effort to remake the Chinese judiciary.” (Minzner, 2011).

To summarize, the current situation is complicated with discord between skyrocketing (albeit slightly slowing down in 2012) rates of FDI on one hand, and an obviously unprepared for it legal field, on the other.

Hence, the need for my dissertation which endeavors to fill the gap in the extant legal literature by comprehensively addressing the FDI-related modalities of the conflict resolution, which should be a useful addition to the legal knowledge.

This dissertation is built on the principle of proceeding from the general picture to the finer details, in expectations that the intricacies of the particular legal conflict will be clear from the previously explained large-scale systemic structure.

The first chapter deals with the notion of comparative law and its methodology, paying special attention to the earlier attempts to apply the analytical apparatus of the art and science of the comparative law to the Chinese legal system starting from its historical roots and proceeding to modern times. This historical approach is justified by the wide ambit of this work which attempts to predict and recommend the future trends in the development of the Chinese FDI-related law – something that can be only done based on the historical and ideological fundamentals of the Chinese civilization. Further in the first chapter a discussion will be given of the FDI concept itself and a new definition of FDI will be proposed.

The second chapter provides a comparative description of the four largest legal systems currently extant – namely, those of European Union, common law countries, International Law and the Chinese legal system. The general overview of those given in the second chapter will be further enhanced by the analysis and comparison of their FDI-related aspects in the subsequent sections of the chapter. The second chapter is further supplemented by the sufficient for my purposes review of the literature devoted to the comparative analysis of the Chinese law, legislation and court system.

In this manner the basis will be laid to discuss the most intricate issue of the historical and ongoing legal precedents, which, while few in numbers, provide a fertile soil for the conclusions on the practical implications of FDI conflicts; the legal risks faced by the investors and for the further, more practice-steeped exercise of the comparative methodology. So, the fourth chapter

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Subchapter 1. The origin and development of the comparative law________________________________________________________________________________________________________

will be devoted to these issues, providing a useful compendium of the legal cases and practical implications thereof.

The fifth chapter will be devoted to analysis of the global political-economical trends and concurrent changes in the global legal system. The domestic Chinese legal developments will be analyzed from the international point of view and recommendations to the law-makers. Practical recommendations for the FDI investors will be stated and legal risks will be discussed with attempt to derive a formula for the qualitative estimates of the legal risks in correlation to the FDI amount.


Chapter 1. The science of comparative law and its methodology in the context of FDI in China.

Subchapter 1. The origin and development of the comparative law

Section 1. Classical times

The origins of the comparative law are rooted in the Ancient Greece, home of the western civilization. It was Plato, (429–348 BC) who in his Laws, stated that:

“Athenian Stranger. Tell me, Strangers, is a God or some man supposed to be the author of your laws?

Cleinias. A God, Stranger; in very truth a, God: among us Cretans he is said to have been Zeus, but in Lacedaemon, whence our friend here comes, I believe they would say that Apollo is their lawgiver: would they not, Megillus?” (Plato, 360 BC)

- formulating what later has been termed “a natural law or a Divine law” – a law that is given to the Man by its Creator, or by the Nature. That is the yardstick (tertium comparationis ) that Plato uses for his subsequent comparison of the laws of different Greek states.

He proceeds with inexorable logic from the geography of the state to the nature of its armed forces and mentions as something that goes without saying “ a natural state of everlasting war between states”, not shying away from a striking verdict on the nature of man:

“…that all men are publicly one another's enemies, and each man privately his own.” (Plato, 360 BC).

Plato goes on to compare Athenian and Spartan legal systems with preference given to Spartan one, as better suitable to the his world view of perennial war of everyone against everyone. Plato’s goal in this comparative exercise was a pragmatic one – choosing a coherent set of laws for the new city-state of Magnesia.

Other Greek classical authors also contributed to the issue, with Plato’s student -Aristotle ((384–322 BC), a teacher of three illustrious kings: Alexander, Ptolemy and Cassander; comparing different legal structures of state governance in his Politics, and ranking them in terms of desirability with kingship being most preferable and democracy the most inferior one; in this treatise he also compares the regimes and therefore, laws, in three city-states – Spartan, Carthaginian and Cretan. (Aristotle, 300 BC).

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Subchapter 6. Preliminary conclusions to Chapter 1________________________________________________________________________________________________________

Further historical tides have moved the center of the ancient Europe to Roman Empire, where:

“In Rome jurists’ interest in foreign law was more practical, particularly with the creation of the office of praetor peregrinus in 242 BC. This official supervised jurisdiction over disputes involving non-Romans. It was here that the mixture of a less formalistic Roman ius civile, Greek law, and other foreign legal norms led to an internationalized ius gentium. Roman jurists did not have a philosophical interest in studying and classifying foreign legal systems because they believed in the superiority of their own law.” ( Kermit L. Hall., 2002)

One of the important compendiums of the Roman Law, the Institutes of the Roman jurist Gaius (130–180) stated:

““Every people, ..that is governed by statutes and customs observes partly its own peculiar law and partly the law common to all mankind. That law which a people establishes for itself is peculiar to it, and is called ius civile as being the special law of that state, while the law that natural reason establishes among all mankind is followed by all peoples alike, and is called ius gentium as being the law observed by all mankind” (Gaius, 1904)

This quotation shows that the Roman jurist again made use of the natural law as a yardstick (tertium comparationis ) by which the laws of different nations are to be generalized and compared.

Section 2. Middle ages

The concept of ius gentium has gained currency in the medieval times and was used for the inchoate science of the comparative laws by several prominent medieval jurists who seem to be intent on finding a comparative distinction between ius gentium and the ius civile on one hand and ius gentium from the natural law and the positive law, on the other:

“Thomas Aquinas (1225-1274) agreed with Gaius’s distinction between ius civile and ius gentium, Aquinas’ scattered references to the ius gentium specified that the ius gentium was that aspect of positive law that was immediately derived by deduction from the natural law and which was universally applicable across jurisdictional boundaries” (Gregg, 2012)

The explanation for this dichotomizing by the medieval theorists is simple: being theologians first, the Christian philosophers second and, only distant third – the legal scholars, they viewed with distrust both the positive law and the ius civile, for those being as Nietzsche have famously said “being human, too much human”. Their overarching goal was ultimately not a legal one but the ultimate goal of all theology, namely finding God in all human endeavors, particularly in the human laws since laws were always (as Plato stated above, were believed to have a Divine origin).


That is why, further down the medieval timeline, two other prominent Spanish theologians cum jurists have emphasized the distinctions above,

“Francisco Suárez (1548-1617) maintained that the ius gentium was somewhere between natural and positive law. It was “a mean between natural and human law, and very much closer to the former”. Suárez then ..divided it into two groups. The first group was those laws that were part of the domestic law of most commonwealths, ... These intrinsically belonged to the civil law. The second group was those laws that were common in the way they coordinated relationships between peoples and commonwealths (laws inter nationes). ..These, Suárez held, were most worthy of the title of ius gentium.” (Gregg, 2012)

Also,

“Francisco de Vitoria (1483/1486-1546) had tentatively made a similar point when he shifted the emphasis of ius gentium from inter omnes hominess to inter omnes gentes” (Gregg, 2012).

The Spanish theologians also, of course, have another reason as to why to engage in the comparative law, trying to find the underlying basis for the Divine Law common to all mankind – the reason was the discovery and claim for the Spain the new world of the Americas by Cristobal Colon, Almirante de la Mar Océana, in 1492, and the bloody Conquista of the South America, started in 1519 by Hernán Cortés de Monroy y Pizarro, Marqués del Valle de Oaxaca.

The new worlds to be conquered and the new people to be subjugated and converted into Christianity by the Spanish empire must have weighed heavily on the minds of those Spanish theologian jurists. Since one of the most significant debates in the area of international law was held in

“1550, when the King of Spain, Charles V, ordered a junta, a group of jurists and theologians, to meet at Valladolid in order to hear the arguments in favor and against the use of force to incorporate the Indians into Spanish America. On the one side was one Juan Ginés de Sepúlveda, a prominent humanist and Greek scholar who justified conquest and evangelization by war. His opponent, fray Bartolomé de Las Casas, in contrast, was a staunch advocate of peaceful and persuasive conversion. So it was that the most powerful man, Charles V, leader of the most powerful nation in the world, Spain, suspended all wars of conquest until a group of intellectuals grappled with the morality of Spain’s presence and enterprises in America.” (Hernandez B. L., 2001)

Analyzing this debate three curious circumstances engage an inquisitive mind: firstly, what arguments could a “prominent humanist” de Sepúlveda possibly employ to justify a conquest of a far-off land? Secondly, was really the king Charles V so righteous as to stop a conquest that was promising the Spanish crown untold glory and riches? And, thirdly, were the theologians-jurists of the famous Salamancan school represented by de Las Casas so righteous and

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disinterested in new converts and donations for the Catholic Church that they were willing to stand up to the king and Pope on high moral grounds?

That would be an interesting countering fact, which could undermine my theory of comparative law scholarship being driven by personal and national self-interest. Alas, the reality proved to be in support of my theory, as we will see soon. Returning to the questions posited above:

1. True to his fame of a humanist, de Sepulveda employed perhaps one of the first human rights arguments in support of a bloody conquest and subjugation of the innocent natives: “.. .with the barbarous and inhumane peoples [the Indians] who have no civil life and peaceful customs. It will always be just and in conformity with natural law that such people submit to the rule of more cultured and humane princes' and nations. Thanks to their virtues and the practical wisdom of their laws, the latter can destroy barbarism and educate these [inferior] people to a more humane and virtuous life. And if the latter reject such rule, it can be imposed upon them by force of arms. Such a war will be just according to natural law….”1 (Sepúlveda, 1547).

2. And what about the king who was willing to obey the decision of the learned doctors even if it meant foregoing fabulous riches? Well, apparently his motives were ulterior ones: “Lewis Hanke, in his analysis of the Las Casas-Sepúlveda controversy, writes that crown and church united with one main purpose, that of centralizing, and thus, wresting power away from the encomenderos2. As he asserts, “Probably never before, or since, has a mighty emperor...ordered his conquests to cease until it was decided if they were just.” (Hernandez B. L., 2001)

3. From the above it is obvious that the good doctor de Las Casas was actually doing the Pope’s and especially the King’s bidding, rather than standing up courageously to them, since it transpires that: “From the Caribbean phase of the conquest at the turn of the sixteenth century to the 1540s, the Spanish crown sought to prevent the encomenderos from becoming a powerful nobility. In the process, the monarchy drew a temporal and convenient alliance with the Catholic Church, which effectively served to diminish the influence of the encomenderos at the royal court.” (Hernandez B. L., 2001)

But he tides of times were rolling forward and the next generation of comparativists stepped to the fore:

“In the early modern era some natural law jurists such as Hugo Grotius (1583–1645), Samuel Pufendorf (1632–94), .. used the comparative law method to provide empirical backing for natural-law principles.” ( Kermit L. Hall., 2002)

1 Sepúlveda defended the Spanish Conquest by condemning the Indians as savages who should serve the Spanish Conquistadors as slaves. An excerpt from his 1547 tract, The Second Democrates2 Spanish colonies with Indian slave labor

http://www.digitalhistory.uh.edu/learning_history/spain/spain_sepulveda.cfm

http://www.digitalhistory.uh.edu/learning_history/spain/spain_sepulveda.cfm


Turning to Grotius, who was one of the many fathers of the modern international law we find that he have compared the maritime laws of several nations in one of his seminal works: Mare Liberum (first published in Leiden in 1609) (Grotius H. , 2004).

Interestingly, he did it with very pragmatic goals in mind, as this book was written concurrently with his involvement in not one but two court case of piracy committed against Portuguese and Spanish merchant ships by Dutch ships; naturally Grotius was defending the Dutch actions. (Ittersum, 2007)

As a natural law theorist, Grotius argued in favor of the attack, paradoxically, justifying it by the natural law that gives all human beings the right to enjoy the free passage and trade on all seas. That position was, of course contrary to ambitions of England and Spain to possess most or all of the Ocean, a monopolistic position supported initially by Roman Popes. Here, the pragmatic interests of the nascent sea power – Holland, which was struggling against occupational claims of Spain and against the colonial competitor – England, - was given a legalistic backing, rooted in the comparative law and in the concept of natural law. Sadly, the legal talents of Grotius were used to justify piracy as in his another work De Jure Praedae (On the Right of Capture).

Be as it may and whatever unsavory goals the famous jurist was pursuing his theoretical methodology was that of a natural law, a legal ideal with which other legal system must be compared in order for any meaningful conclusions to be deduced. In his own words:

“But this question like many others that follow, must in the first place be compared with the rights of nature.” (Grotius, 2001)

And further:

“What God has shown to be His Will, that is law. This axiom points directly to the cause of law, and is rightly laid down as the primary principle” (Grotius, 2001)

This two meaningful citations when put together show conclusively that Grotius still belongs to the species of theologians-cum-jurists who deemed natural law to be the Divine law.

To further prove my thesis of the legal theory being driven by the politico-economical profit seeking it is worthwhile to look at works of Baron Samuel von Pufendorf (January 8, 1632 – October 13, 1694) a German jurist and a statesman. The Germany at that time, while ostensibly a part of the Holy Roman Empire was divided into several independent kingdoms or electorates but the new European order was applying inchoate pressure on the German intellect demanding rationale for unifications. So it is notable that Pufendorf who was writing works with titles such as Elementa jurisprudentiae universalis, De jure naturae et gentium, and De statu imperii Germanici, signifying the urge for reunification of Germany under strong sovereign rule. Also, despite the fact of coming from a religious family – Pufendorf was perhaps first of the

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comparative legal scholars who was not explicitly a theologian and defined the natural law as something that

“…does not extend beyond the limits of this life and that it confines itself to regulating external acts. He combated Hobbes's conception of the state of nature and concluded that the state of nature is not one of war but of peace. ... As regards public law Pufendorf, while recognizing in the state (civitas) a moral person (persona moralis), teaches that the will of the state is but the sum of the individual wills that constitute it, and that this association explains the state. … as one of the precursors of J. J. Rousseau and of the Contrat Social. Pufendorf powerfully defends the idea that international law is not restricted to Christendom, but constitutes a common bond between all nations because all nations form part of humanity.” (Encyclopædia Britannica, 1911)

In other words, Pufendorf was one of first true legal humanitarians, dissociating the natural law from Divine providence (which is explained by the prevalence of Protestantism in Germany) and from limitations to Christendom and Christian religion. That is also explained on politico-economical grounds since Germany at that time was not a colonial power and thus had no vested interest in assuming that the aborigines are beyond the pale of the natural laws. The current tendencies of the German nation were centripetal ones so it’s no wonder that Pufendorf also advocated religious tolerance and dominion of state over all and any confessions, as pronounced in his theory of Kollegialsystem.

Across the English channel similar developments were taking place in the legal science, again driven by politico-economical developments and ideological considerations, - the rise of the colonial might of England required suitable justifications from the legal standpoint as well, so:

“.. William Blackstone (1723–80) had the additional objective of providing prestige for their national law: Blackstone’s four-volume Commentaries on the Laws of England (1765–69) emphasized the similarities in English common law, Roman law, and natural law.” ( Kermit L. Hall., 2002)

However the ideology that Blackstone espoused was obviously suited to please his royal patron Prince George and to assert the sovereign’s unique legal standing (the sovereign immunity) with his famous statement that “the King can do no wrong”. The implicit comparativism is also noted in Blackstone’s rueful mention that

"It is a melancholy truth, that among the variety of actions which men are daily liable to commit, no less than an hundred and sixty have been declared by Act of Parliament to be felonious without benefit of clergy; or, in other words, to be worthy of instant death" (Sheppard, 2007)

Despite such cruelty of the existing English laws, Blackstone did not waiver in his praise of the English legal system:


"[W]e must not carry our veneration [of the civil law] so far as to sacrifice our Alfred and Edward to the manes of Theodosius and Justinian, we must not prefer the edict of the praetor, or the rescript of the roman emperor, to our own immemorial customs, or the sanctions of an English parliament; unless we can also prefer the despotic monarchy of Rome and Byzantium, for whose meridians the former were calculated, to the free constitution of Britain, which the latter are adapted to perpetuate" (Sheppard, 2007)

Again, such position is fully in line with expectations toward views of a legal ideologue and a statesman, in the era of waxing colonial might of England and further reduction of human rights of her population being the precursor to the Dickensian era of industrial slums of England.

Once again returning to the European mainland , we turn to the era of Enlightenment in France, and to the figure of the prominent French philosopher Charles-Louis de Secondat, baron de La Brède et de Montesquieu (18 January 1689 – 10 February 1755),who is widely credited with first positing the need for the comparative law and a formulation of its goals. According to his seminal work , which served as one of the cornerstones of the Enlightenment, De l'esprit des lois :

“The political and civil laws of each nation] should be adapted in such a manner to the people for whom they are framed that it should be a great chance if those of one nation suit another.” (Montesquieu, 1752)

So his stated goal for the yet to be created science of comparative law was what would be nowadays termed a “harmonization of laws”. Developing that notion farther he was the first to propose a methodology for comparative law:

“…to determine which of those systems [i.e. the French and English systems for the punishment of false witnesses] is most agreeable to reason, we must take them each as a whole and compare them in their entirety.” (Montesquieu, 1752)

The era of Enlightenment, that was helped to be ushered in by Montesquieu was the departing time period for what we call “a globalization” now. This inescapable avalanche has a become a global tsunami that, starting with the 15h century discovery of Americas and maritime routes to East Asia, have overflowed the national boards and created a vast global ocean of interconnected legal system, with seas of the national systems being intertwined by the undercurrent notions of the “conflict of laws”, “legal transplants” and “reciprocity”, while the upper strata of that ocean is represented by the ever-fluid International Law.

With that hydrographic model in mind, it is only apt that tracing the development of comparative laws further down the time line will bring us to the year 1756 and yet another curious case of piracy on the high seas, which have happened immediately next year after Montesquieu’s demise.

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That was the year of an important legal precedent, which, similarly to Montesquieu’s treatise has also involved the England and France, the two countries which have become the cradle of the European civilization. The precedent was created by in 1756, the first year of the Seven Year War, the war of birth pangs of the new Europe, by the decision and legal reasoning of the Chief Justice of the King's Bench, Lord Mansfield.

Let us recall, that the important source for the International Law was the medieval Maritime Law in its different parochial avatars around the medieval Europe from 8th century BC to 17th century AD:

“from the ancient Lex Rhodia through the medieval maritime laws of the Catalan Llibre del Consolat de Mar and the French Rôles d'Oléron to the Hanseatic maritime laws and King Louis XIV's Ordonnance de Commerce” (Cordes, 2003)

So it stands to reason, that the first important precedent pertaining to comparative law was made on a case of a disputed reward for the English freighter “Sarah”, seized by French pirates and recaptured by an English privateer. While the litigants based their claims and defenses on different legal systems but the ensuing decision was made based on Maritime Law’s fundamental norms by

“…one of the most renowned jurists in English legal history, the recently appointed Chief Justice of the King's Bench, Lord Mansfield ... Lord Mansfield concluded that Maritime Law was not the law of one particular country but instead a general law of nations: “Non erit alia lex Romae alia Athenis; alia nunc alia posthac; sed et apud omnes gentes et omni tempore una eademque Lex obtinebit”- Neither Rome nor Athens had any other law, neither today nor previously; but in all countries and at all times the same rule would did apply.” (Cordes, 2003)

Thus, the first axiom of the comparative law was formulated and when expanded and rewarded can be summed up as: “the national laws should be compared between themselves by using a yardstick (tertium comparationis) of reasonableness”.

The two centuries following that seminal decision were marked by the concurrent and mutually-driving European colonialism, Industrial Revolution and establishment of Peace of Westphalia (1648); and saw agglomeration of the previously non-existent coherent Maritime Law which has developed into a stand-alone body of law from its parochial avatars into an English-language/legal culture dominated code of legal practice3.

Another legal development, driven by the triplicate engine of European colonialism, Industrial Revolution and establishment of the Westphalian Peace, - was a need to classify the extant legal system of the world into a categorization, which, first, - would make possible the intellectual comprehension of it by the European thinking class, and second- would facilitate the nascent need for harmonization of the national laws.

3 (Cordes, 2003)


During the two centuries between the quaint times of 17th century and the progressive 20th were marked by the works of authors who, while quite disdainful of the cultures around the world, have developed the historical comparativism, that is, comparative studies of the old law versus the modern one with a view to understand how the modern society (and its laws in particular) came about.

Section 3. Modern times

Several prominent figures must also be noted in that line of research:

- Sir Henry James Sumner Maine, KCSI (15 August 1822 – 3 February 1888) a British statesman, have wrote on development of the modern legal paradigm of “contract” from the ancient one, especially that of Roman Law, of “status”. (Maine, Ancient Law, its connection with the early history of the society and its relation with the modern ideas., 1861). He also briefly touched upon on general comparison of Western and Eastern societies (Maine, Village Communities in the East and the West, 1871)

- Friedrich Carl von Savigny, (21 February 1779 – 25 October 1861) "Grosskanzler" (High Chancellor of the Prussian legal system) undertook a similar direction in research, critically studying Roman Law in his Das Recht des Besitzes ("The law of possession"). (Savigny, 1803). His main comparative theses was that the historical study of the positive law was a condition necessary for the right understanding of the science of all law.

The further progress of history necessitated subsequent development of the comparative law and its supporting academic infrastructure (e.g there was Paris International Congress of Comparative Law in 1900, St. Louis Universal Congress of Lawyers and Jurists in 1904 etc.). Also,

“John Henry Wigmore published the three-volume A Panorama of the World’s Legal Systems (1928). He covered sixteen historic and contemporary legal systems .. these systems included the Egyptian, Mesopotamian, Chinese, Hindu, Hebrew, Greek, maritime, Roman, Celtic, Germanic, canon, Japanese, Mohammedan (Islam), Slavic, Romanesque (civil law), and Anglican.” ( Kermit L. Hall., 2002)

Having reached its apogee in the first half of the 20th century, the colonial system of the Western states have collapsed in the wake of the devastation caused by the second World War; the views of the comparative law jurists have changed accordingly. The main change was recognition of the rights of the formerly colonial people, and recognition of the existence of non-European legal systems, such as Islamic law.

Thus, the first earliest modern classifications of the world’s legal systems were made in 1950’s; the period of crumbling colonial systems, which might be more than a chronological

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coincidence, as suddenly the legal systems of the rest of the world have become relevant to the receding European powers.

In particular, Arminjon, Nolde, and Wolff divided the world into 7 families or groups: French (countries with Spanish or French languages, influenced by the Napoleonic le code civil); German; Scandinavian; English (Commonwealth countries); Russian; Islamic; and Hindu. (Arminjon, 1952).

Similar classification was proposed by Rene David who was using the Judeo-Christian ideology as a criterion of categorization: Western Laws (including Romano-Germanic and Anglo-Saxon subgroups); Soviet Law; Muslim Law; Hindu Law; and the Chinese Law. (David, 1950)

Here we see the world divided according to ideology, (which tries unsuccessfully to masquerade itself as linguistics and history) as opposed to binary division of Christian vs. heathen division of Spanish theologian jurists; the unitary world view of the natural law lay jurists and so on. This evolution of the comparative law can be best summarized in the chronological table below:

Table 1. Legal Systems. Source: own research

Time Frame

Nation Prevalent social-economic system

Origin of Own Laws

Attitude towards laws of other nations

Classical world

Ancient Greece

City state democracy peacefully colonizing in the Mediterranean

Divine Indifferent

Classical world

Ancient Rome

Aggressive colonization

Divine Pragmatic/indifferent

Late medieval

Spain Aggressive colonization

Divine Hostile rejection

Post-medieval

Holland Commercial and aggressive colonization

Natural Law Inclusive

Post medieval

England Commercial and aggressive colonization

Divine/Historical Hostile/patronizing

Post-WWII

Western world

Commercial colonization

Human Rights Pragmatic/expansionist

Present Western world

Globalization Human rights Multiculturalism

Present Muslim world

Export of resources Divine/sharia Hostile/expansionist

Present China Industrialization Will of the people

Pragmatic/legal transplantation


Subchapter 2. Modern methodology of the comparative law

One has to start any discourse on the subject of this section with a surprised observation: there is no single universally accepted methodology for the comparative law. However, two widely accepted quasi-methodologies do exist

1. the first one, “the essentialism” can be defined as a “descriptive comparison” and could be formulated as brief description of two or more legal system put side by side for educational purposes and left at that; and,

2. the “functional comparison” whereas it is not the legal systems are compared per se, but rather the functions and outcomes of those.

While the descriptive comparison is simple and straightforward, albeit lacking in conclusions; the functional methodology is more diverse, with some authors listing no less than eight subtypes of such:

“In fact, one can distinguish at least seven different concepts of functionalism across disciplines: (1) finalism, a neo-Aristotelian functionalism based on inherent teleology, (2) adaptionism, an evolutionary functionalism in a Darwinian tradition, (3) classical (Durkheimian) functionalism, explaining institutions through their usefulness for society, (4) instrumentalism, a normative theory of using law for social engineering, (5) refined functionalism, a functionalist method that replaces certain postulates of classical functionalism with empirically testable hypotheses, (6)epistemological functionalism, an epistemology that focuses on functional relations rather than on the ontology of things, and (7) equivalence functionalism, building on these concepts but emphasizing the non-teleological, non-causal aspect of functional relations. Largely oblivious of incompatibilities, functionalist comparative law (8) uses all of these.” (Michaels)

Nevertheless this contemporarily sophisticated view stems from a comprehensive statement made back in 1971, by Konrad Zweigert who postulated the axiom of the functionalism:

‘The basic methodological principle of all comparative law is that of functionality.” (Konrad Zweigert and Hein Kötz, 1998)

Unfortunately the historic-social developments happening since the simpler times of 1970s have run counter both of the simplification of Zweigert and of the nit-picking of his more discerning followers in functionalism.

Similar to well-known paradigm of the “end of history” by Fukuyama, a well-substantiated argument is now presented in favor of the end not just any particular methodology but to the end of the comparative law itself!

“there are at least four trends which give rise to pessimism: ‘the disregard’, ‘the complexity’, ‘the simplicity’, and ‘the irrelevance’ of comparative law.” (Siems, 2007)

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While the denominations for the trends are perhaps ill-advisedly chosen since the last trend apparently overlaps the former three, but it is still possible to make use of them in order to keep epistemology in line with the quoted research.

For the rest of this chapter my purpose in using these categories is to shed light on what is understood so far to be the goals of the comparative law, to provide broader arguments proving existence of inherent flaws of the previous approach to that science and finally to propose a novel methodology to compensate for the flaws.

Any novel approach requires starting anew, so let’s posit the basic question: what were the end uses of comparative law, so far?

The helpful start would be to note who are the jurists crafting that science? What were their goals besides earning a living?

From the literature written by the jurists enumerated in the previous section in the we see that their pursuit was not a “a pure science”, science just for the sake of an abstract knowledge, science which by the very definition of it does not have any pragmatic goal.

Au contraire, and far from it, the earlier comparativists have pursued very pragmatic goals in their comparative studies, goals that were vitally important in terms of profit seeking for them personally and for their nation states generally.

To wit-

- Plato and his student Aristotle were statesmen and teachers to the kings; Plato in his Laws was proposing the best possible legal system for a Greek colony in the Mediterranean – and peaceful colonization of the Mediterranean was the modus operandi for the Greek ethnos at those times; therefore their studies were an exercise in profit-seeking on both personal and national levels;

- the Spanish theologian-jurists were functionaries of a secular power- the Catholic Church, and the church, as an institution, stood to gain new converts and donated riches from the plunder of newly discovered Americas, also their nation-state of Spain stood to profit immensely , so it is no surprise that their studies were an apology for the conquests. Because, if indeed:. the source of all laws is the divine Christian law, the Amerindians are “not beasts but just inferior people” then they not only can be baptized forcefully but in fact must be done so, in one of first “responsibility to protect” arguments made by de Sepulveda, despite the small altercation at Valladolid; and contemporary extolling of Salamancans Vitoria and Soto notwithstanding. “Vitoria provided natural right and jus gentium justification for Spanish sovereignty over the Indies” (Hernandez R. , 1991). The Spain got her ideological support for the conquest and de Vitoria was rewarded with the chair at Salamanca.


- Moving on to less controversial examples of profit seeking - Blackstone was a prominent statesman, a top judge and an apologist for the British colonialism who asserted the sovereign immunity of his king.

- What about Montesquieu? Was he perhaps a disinterested advocate of pure reason and universal brotherhood, as the Enlightenment writers often are presented? Hardly. “As feudal landowner, magistrate, and president of the Parlement of Bordeaux, he was a complete member of the ancien régime establishment…In the modern world, Montesquieu preferred monarchy” (Slevin, 1996). In fact, the Montesquieu’s case is so illustrative that it is worth our while to belabor the point with another quote “Montesquieu was a member of the military and legal nobility of the Bordeaux region. His rank was important to him; indeed, much of his political writing is devoted to a defense of the privileges and functions of his caste.” (France, 1995)

The examples of profit seeking above could have been extended in number, but I believe that these are enough to prove that the legal writers are vested interests parties with goal of personal and national profit seeking.

The above point might be obvious to any cynical (or pragmatically-minded) outsider, who is not a part of the legal profession (and perhaps to many insiders as well) but to my knowledge this has never been stated directly before, and moreover was never stated with a view to create a cohesive comparativist methodology using the motive of profit seeking as one of the factors in the equation.

The reasons for this silence are largely two-fold – first the corporate taboo of noblesse oblige, conduct becoming kind that forbids any member of a profession to say something that may lead the innocent laymen to ever suspect the profession to have any ulterior motives. Needless to say that taboo amongst lawyers is even stronger. However the members of the naïve public might have been alerted to the fact that legal scholars might be on the take by the famous Shakespearian quote

“DICK. The first thing we do, let's kill all the lawyers.

CADE. Nay, that I mean to do. Is not this a lamentable thing, that of the skin of an innocent lamb should be made parchment? that parchment, being scribbled o'er, should undo a man? Some say the bee stings: but I say, 'tis the bee's wax; for I did but seal once to a thing, and I was never mine own man since. How now! who's there?”4

Luckily (or unluckily) there nothing professionally unethical in profit seeking either for oneself personally or for one’s nation on the national level. So leaving ethical considerations aside I will make an educated assumption that profit-seeking is an inevitable human behavior and use it as one of the building blocks of my comparative methodology as shown below.

4 Shakespeare, ''Henry VI,'' Part II, act IV, Scene II, Line 73.

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http://shakespeare.mit.edu/2henryvi/2henryvi.4.2.html


The profit seeking behavior being assumed as to be taken for granted on the personal level of legal scholarship, let me turn to the issue of profit seeking by the nation-state – the said profit seeking being the driving motive in creation and functioning of the international legal system in this given country.

And, the definition for an international legal system of a country, which can be stated as follows: it is a comprehensive array of laws, regulations, courts, judges, and counsel that is dealing with foreigners on domestic forums.

While the term “international legal system” has been used as a name for the global regulations that deal with the conflict of laws, I propose to use it with a country qualifier to designate a structure that is either designed to deal with foreigners or is used by necessity by the foreigners in the country in question.

This broad definition will be used for time to time in this work, but for more frequent use I intend to use a more specific term: a part, or an aspect of the legal system of a country that is either designed or is used perforce by the Foreign Direct Investors in the country will be called an FDI jurisdiction.

Now, the reader might wander where am I going with this and what is the purpose of introducing the new terminology?

The answer is that, scientifically speaking – the science of the comparative law is currently at a loss as how even to begin explaining not only the subject matter of its research but even what is the subject matter consists of, which naturally leads to doubts as to whether the comparative law is relevant at all and what is its raison d’être .

Consider:

“Meaningful comparison requires understanding the historical, social, economic, political, cultural, religious, and psychological context of legal rules. In particular, different mentalities have to be taken into account. Thus, the comparative lawyer has to understand the cognitive structure of the law as well as the epistemological foundations of that cognitive structure...Every legal system is singular. Similarities are only superficial, convergence impossible and people from different legal systems cannot understand each other because of irreconcilable differences in mentalities. The result of this approach is that comparative law becomes impossible. .. ‘if you do not fully understand something, you do not understand anything’. The comparative lawyer is therefore ‘lost’..” (Siems, 2007)

Such strong language indeed suggests that if we do not want to be lost we better start from scratch so new terminology and new methodology is in order. The article quoted above has a telling title: “The End of Comparative Law”, which seem to suggest that a new beginning is required.


However, the reader shall rest assured that no complete upheaval of the legal science is envisaged in this work. I will only concern myself with the methodology that is applicable to FDI – related aspects of the legal comparison.

This proposed methodology should follow the model of the investment decision making as is only natural for the FDI-related comparisons.

Significant work has been done in this area both in terms of theory and practice. Based on the methodology developed in the works by La Porta et al (La Porta, R et al, 1996) the World Bank/IFC publishes an annual report ranking the legal systems on ease of doing business, the findings of which for 2012 are summarized in the diagram below:

Figure 3. Rankings of legal institutions and property rights protections (Source: IFC)5

The methodology used in developing these legal rankings and sources of the data are presented in the Appendix 1. China – Ease of doing business as ranked by the IFC.

5 “Note: Strength of legal institutions refers to the average ranking in getting credit, protecting investors, enforcing contracts and resolving insolvency. Complexity and cost of regulatory processes refers to the average ranking in starting a business, dealing with construction permits, getting electricity, registering property, paying taxes and trading across borders. The size of the bubble reflects the number of economies in each region and the number is the average ranking on the ease of doing business for the region. Correlation results for individual economies are significant at the 1% level after controlling for income per capita. Source: Doing Business database.” (International Financial Corporation, 2012)

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Also the appendix contains the list of firms and individuals who were the source of information on legal ranking of China compared to other nations. Even a cursory look at that list proves that 70% (60 out of 84) of those are lawyers, accountants and business consultants, - which are not disinterested parties but are in fact, parties vitally interested in over-reporting the legal difficulties, hence implying the necessity of more business for them. While is impossible to prove whether there was in fact a consistent over-reporting bias, but it stands to reason that this is a clear conflicts of interests case, so the buyer should beware.

The IFC rankings have also been criticized in the legal literature, as well:

“.. the results proposed in Doing Business’ reports are actually quite disappointing, particularly when it comes to the significance of their global index (“ease of doing business”). The explanatory power of the variables appears to be quite low…” (Claude Ménard and Bertrand du Marais, 2006)

Also, from a point of view of an investor, this ranking is skewed in favor of just one legal aspect of conducting a business – namely, establishing a company in China. All other legal issues that may arise down the line are under-represented.

So, in addition to issues listed in the two articles above, we propose to posit an another question that is not being answered by Doing Business rankings, but one that lies heavy of the mind of any astute investor – is the FDI legal system of the investment target country unfair towards the foreign investor?

That question has not been answered by the Doing Business report.

However, another multinational organization undertook to answer that vital question. For the past 6 years the OECD have developed a FDI Regulatory Restrictiveness Index (RR Index) see Error: Reference source not foundFigure 4. RR Index (OECD, 2012), which measures statutory restrictions on foreign direct investment in 55 countries, including all OECD and G20 countries, and covers 22 sectors. As of 2012, the FDI Index covers 6 years: 1997, 2003, 2006, 2010, 2011 and 2012. (OECD, 2012).

It is both ironic and educational that the country with second-highest inflow of foreign investment in the world is also ranked the first in its restrictiveness. Given that China’s skyrocketing to the position of the “factory to the world” could not happen without massive investment, we see an intriguing contradiction – how and why those investment could have been made and recouped in such a restrictive climate?

One way to answer that question is to look at the total industrial investment in China and to see which percentage part of it is constituted by the FDI. According to last year’s data the new total industrial investment in China was approximately RMB10 trillion (USD1, 600 billion)6, of which

6 Source:Ministry of Industry and Information Technology, my adjustments.

http://www.miit.gov.cn/n11293472/index.html


the FDI constituted around 10% only, being in amount of USD160 billion (mainland and Hong Kong combined, forecasted the same from last available data of 2010).

So, the FDI in China, while huge in absolute terms and exceeding that of the other countries, constitutes an insignificant amount relative to domestic investment. That consideration alone can give a FDI investor a pause: if FDI is not vital for a country and is limited to 10% only of the total is this not a circumstantial evidence that the Chinese legal system might be rigged against the FDI? Is not the Error: Reference source not foundFigure 4. RR Index (OECD, 2012)a further proof of it?

Figure 4. RR Index (OECD, 2012)7

7 he FDI Index gauges the restrictiveness of a country’s FDI rules by looking at the four main types of restrictions on FDI: Foreign equity limitations, screening or approval mechanisms, restrictions on the employment of foreigners as key personnel, Operational restrictions, e.g. restrictions on branching and on capital repatriation or on land ownership. The FDI Index is not a full measure of a country’s investment climate. A range of other factors come into play, including how FDI rules are implemented. Entry barriers can also arise for other reasons, including state ownership in key sectors. A country’s ability to attract FDI will be affected by factors such as the size of its market, the extent of its integration with neighbors and even geography Nonetheless, FDI rules are a critical determinant of a country’s attractiveness to foreign investors. Furthermore, unlike geography, FDI rules are something over which governments have control. (OECD, 2012) .

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Other rankings exist as well and two of the most authoritative ones are shown below in comparison with the Doing Business score.

Table 2. China investment climate. (BEBA USDS, 2012)

Indicator Year Score RankTransparency International Corruption Perceptions Index 2011 3.6/10 75/183Heritage Foundation and Wall Street Journal Index of Economic Freedom

2011 52/100 135/183

World Bank Ease of Doing Business Index 2012 - 91/183

Subchapter 3. Approval process and restrictions on the FDI in China

The government of China defines its broad economic goals through five-year macro-economic plans. The most significant of these for foreign investors is China's Five-Year Plan on Foreign Capital Utilization. The most recent version was released in November 2006 and promised greater scrutiny of foreign investment projects. The next update of it was expected in 2012.

The plan called on China to:

- realize a "fundamental shift" from quantity to quality in foreign investment by 2010; - focus on introducing advanced technology, management expertise and talent; - pay attention to the environment and energy efficiency when evaluating investments for

government approval; - restrict foreigners' acquisition of "dragon head" enterprises (i.e., premier Chinese firms); - prevent the "emergence or expansion of foreign capital monopolies;" - protect "national economic security," particularly "industrial security;" - prevent the "abuse of intellectual property rights protection not favorable to the indigenous

innovation of Chinese enterprises."

The next main document in the hierarchy that provides the official policy on the FDI areas in

China is the Foreign Investment Industrial Guidance Catalogue (外商投资产业指导目录, 2011

年修订). The catalogue lists sectors of the economy where foreign investment is "encouraged,"

"restricted" and "prohibited." Investment in sectors not listed in the catalogue is considered permitted.

These categories are summarized in a table (see (Adopted by the Second Session of the Fifth National People's Congress on July 1, 1979, amended by the Fifth Session of the Eighth NationalPeople's Congress on March 14, 1997, promulgated by Order No.83 of the President of the People's Republic of China on March 14, 1997, and effective from October 1, 1997)), and can be broadly defined as encouraging FDI investment in high-tech industries, discouraging in low-tech and highly-profitable areas, and forbidding in politically sensitive areas.


Another regulatory tool for restriction and control by the Government is the approval process for the FDI:

“According to the Interim Measures for the Administration of Examining and Approving Foreign Investment Projects, issued in October 2004 and still in effect, all proposed foreign investments in China must be submitted for approval to the National Development and Reform Commission (NDRC) or to provincial or local Development and Reform Commissions, depending on the sector and value of the investment.

NDRC's approval process includes assessing the project's compliance with China's laws and regulations, its national security implications, and its economic development ramifications. In some cases, NDRC also solicits the opinions of relevant Chinese industrial regulators and "consulting agencies," which may include industry associations that represent domestic firms. The State Council may also weigh in for high-value projects in "restricted" sectors.

Once NDRC approves a project, investors apply to the Ministry of Commerce (MOFCOM) for approval to legally establish a company. MOFCOM (or, depending on the sector and value of the investment, the provincial or local Department of Commerce) is responsible for three reviews: 1) a review of all foreign investment in China; 2) an anti-monopoly review of certain mergers and acquisitions; and 3) a security review of certain mergers and acquisitions.

Foreign investors next apply for a business license from the State Administration of Industry and Commerce (SAIC), which allows the firm to operate. Once a license is obtained, the investor registers with China's tax and foreign exchange agencies. Greenfield investment projects must also seek approval from China's Environmental Protection Ministry and its Ministry of Land Resources.” (BEBA USDS, 2012)

Subchapter 4. Proposed comparative law methodology for the FDI in China

With the above findings in mind we propose a new methodology for the comparative law research on FDI in China. That methodology is based on the FDI investment project management process and is outlined below and will be used in the subsequent chapters to compare and analyze the Chinese FDI laws vs. three or four main legal families – US and UK, EU, Russian and post-soviet countries. This comparison will be informative on the global scope as well, since all the other countries viewed as investment countries largely fall into the three families above, if not by geographic proximity then by the characteristics of their legal systems. Also these legal families are the largest investment targets by amounts so this selection is informative from the investor’s point of view.

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So, the direct investment management and operation process might be broken down chronologically and from the lawful operational standpoint as the following checklist:

1. Selecting a target country2. Incorporating in the target country3. Acquiring physical assets (Property, Plant and Equipment (PPE)) in the target country4. Importing necessary PPE into the target country5. Establishing contract supply lines6. Establishing contractual relationships with the domestic workforce7. Establishing legal employment of the foreign employees in the target country8. Day-to-day management and operation of the business9. import of the cash flow, proceeds and profits from the target country10. Exit and repatriation8

Since the legal conflicts can arise at each of those stages with various probability I will try to estimate a probability of such conflict from the reports in the business and legal press, and will try to assign a dollar amount to the cost of the corresponding legal conflict, as well as to identify the domestic remedies for resolving the conflict. This stage then will be compared to the corresponding project management stage in other legal families.

In the concluding phase of the research the findings will be summarized as a sum total of the possible legal costs for the FDI project in China and the total amount will be compared to that resulting in the other legal project families.

This methodology is designed with a view to answer the three main questions that an FDI investor have to answer while planning a decision to invest in China:

- Is the FDI legal system in China is biased against the FDI?- How much are the possible legal costs in China over the life of the project?- How these legal costs compare to such costs in other legal family countries?

Subchapter 5. The FDI in the twenty-first century: a new definition

The conventional definition of the FDI is given by OECD as:

“A foreign direct investor is an entity (an institutional unit) resident in one economy that has acquired, either directly or indirectly, at least 10% of the voting power of a corporation

8For types of investments and other definitions see the glossary in Appendix 2. Definitions of FDI terms by OECD


(enterprise), or equivalent for an unincorporated enterprise, resident in another economy.”(Appendix 2. Definitions of FDI terms by OECD)

Is this, however an adequate definition for the new realities? Is a formal equity holding necessary for creation of a direct investment?

From classic accounting point of view an investment is property rights in an asset that will generate either revenue or a loss. From a classic legal point of view, property rights are valid when they are upheld by the legal system or they can be a source of legal liability (and, hence costs) when they are contested in court.

Keeping that in mind, let us consider another definition which is proposed in a publication by the Bank for International Settlements (BIS):

“…direct investment reflects the aim of obtaining a lasting interest by a resident entity of one economy (direct investor) in an enterprise that is resident in another economy (the direct investment enterprise). The “lasting interest” implies the existence of a long-term relationship between the direct investor and the direct investment enterprise and a significant degree of influence on the management of the latter.” (Duce, 2003)

Here, the emphasis is shifted from formal equity holding to creation of a “lasting interest”, which is one step closer to a definition we are searching for.

What could be the nature of the lasting interest?

Lets analyze the case of a global software maker whose software is marketed in China. The maker intends to exploit Chinese market for years to come, – has been a lasting interest created and present for the maker, above and beyond any holdings in physical and equity holdings he might have in China? In case of a legal conflict over the software piracy would not be the maker motivated to protect his copyrights and would not such rights considered a direct investment?

Or, let us look at a the case of a manufacturer of a high-tech equipment who sells the equipment to the end-users in China. Would not be the market share, the brand recognition and other intangibles be a direct accounting asset to the manufacturer’s balance sheet? If so – then it is an investment and in case of a legal liability stemming from the equipment’s malfunction there will be legal costs accruing to the manufacturer.

And indeed, a wider definition, that appears to take into account non-equity forms of investment be supported by UNCTAD:

“Defining a controlling interest and treatment of non-equity forms of investment

Other than having an equity stake in an enterprise, there are many other ways in which foreign investors may acquire an effective voice. Those include subcontracting, management contracts, turnkey arrangements, franchising, leasing, licensing and production-sharing. A franchise (a firm

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to which business is subcontracted) or a company which sells most of its production to a foreign firm through means other than an equity stake are not usually collected, some countries have begun to contemplate doing so. For example, the OECD treats financial leases between direct investors and their branches, subsidiaries or associates as if they were conventional loans; such relationships will therefore be included in its revised definition of FDI.”9

To summarize: for the purpose of comparative law research I will use an expanded definition of the FDI:

FDI is a cross-border investment which in addition to the equity holdings includes Intellectual Property rights and manufacturers liability.

This definition is more suitable for the new economic realities; it is appropriate part of the comparative law methodology proposed above and it is also part of the trend to expand the definition of the FDI, as demonstrated above.

Subchapter 6. Preliminary conclusions to Chapter 1

As was demonstrated in the above Chapter, the science of the comparative law is primarily driven by self-interest, it is embodied in writings of the legal scholars and is codified in the law of nations which later on take shape in the form of international treaties which are never a contract between equal parties.

The hard look at the international realities proves that, the UN-inspired political correctness notwithstanding. In fact, the definitions of “unequal treaties” was coined in relation to China’s treaties with the western powers in 19th century.

“Unequal Treaty, in Chinese history, any of a series of treaties in which China was forced to concede many of its territorial and sovereignty rights. They were negotiated during the 19th and early 20th centuries between China and foreign imperialist powers, especially Great Britain, France, Germany, the United States, Russia, and Japan. Patterned largely on the terms of an accord in 1835 between China and the khanate of Kokand, the Unequal Treaties were initiated by the trading conflict between Britain and China known as the first Opium War (1839–42), which was terminated by the Treaty of Nanking (Aug. 29, 1842).” (Encyclopaedia Britannica, 2013)

So the trade conflicts and national interests bring about a “legal war” in which the vested interests of a nation form a single front proving and enforcing a notion that one’s legal system is more efficient and fair than the others, that concepts of justice unique to that nation shall prevail in the international arena as well. From that observation it is only but a logical suspicion that the domestic legal system could be informally slanted against a foreign investment to protect

9 UNCTAD, 2012

http://archive.unctad.org/Templates/Page.asp?intItemID=3147&lang=1


domestic commerce from foreign completion. For example it has been noted that while responding to an international arbitration:

“It is quite common in investment arbitration for the respondent State to include in its defense to treaty claims one or more criticisms of the investor’s underlying conduct. Such “counterattacks” may include arguments that the investment was illegal from the start, that its operations in due course violated local law, or that the investor breached its direct obligations to the State under a contract. Yet while such arguments feature prominently in State defenses, they are rarely framed as counterclaims seeking affirmative relief. The reason may lie in an instinctive preference by States to pursue any affirmative claims in their own courts.” (Kalicki, 2013)

This can mean only one thing – the home playing turf in for an FDI investor is unfairly slanted against him. And why it should be otherwise now when it always been so?

From Plato that took for granted that the humanity exists in state of perpetual war of all against all; to Sepulveda and de Las Casas who were differing on methods of conquest and conversion of American tribes but agreeing in principle that it was a right thing to do; and to the protector of pirates, Grotius all jurists were more or less openly supporting their national self-interests against other nations.

The existence, or at least a possibility of such a slant is further proven by the very notion of bilateral investment treaties. Why to have the BIT at all if the FDI investor is supposed to be treated fairly? Obviously the parties to BIT tacitly agree that this is not always the case.

Another circumstantial evidence suggesting the existence of a anti-foreign basis are the above-listed restrictions on FDI (see Subchapter 3. Approval process and restrictions on the FDI ). Of course the question of “whether the anti-foreign legal bias exist in China?” will be on the heaviest on the mind of any FDI investor pondering upon which country to chose for investment.

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Chapter 2. Systemic interplay of three juxtaposing legal systems: Chinese, International and “Western Domestic”

Subchapter 1. General overview of the Chinese legal system

The Chinese state is defined by the National People's Congress (the highest seat of power in China) as

“… the National People's Congress, the President, the State Council, the Central Military Commission, local people's congresses and local people's governments at various levels, organs of self-government in national autonomous regions, the people's courts and the people's procuratorates.” (NPC, 2012)

Significantly from the FDI view point, the Constitution provides that land is property of the people:

“Article 9. All mineral resources, waters, forests, mountains, grasslands, unreclaimed land, beaches and other natural resources are owned by the State, that is, by the whole people, with the exception of the forests, mountains, grasslands, unreclaimed land and beaches that are owned by collectives as prescribed by law. The State ensures the rational use of natural resources and protects rare animals and plants. Appropriation or damaging of natural resources by any organization or individual by whatever means is prohibited.

Article 10. Land in the cities is owned by the State. Land in the rural and suburban areas is owned by collectives except for those portions which belong to the State as prescribed by law; house sites and privately farmed plots of cropland and hilly land are also owned by collectives. The State may, in the public interest and in accordance with law, expropriate or requisition land for its use and make compensation for the land expropriated or requisitioned. No organization or individual may appropriate, buy, sell or otherwise engage in the transfer of land by unlawful means. The right to the use of land may be transferred according to law.” (Constitution of PRC, 2004)

Law-making in China: The legal system of the People’s Republic of China (PRC) is referred to officially as a “socialist legal system” which is a variant of Civil Law. The Constitution of the People’s Republic of China is the highest law within China, the current version was adopted in 1982 with last revision in 2004.

The court system of the PRC is represented on the Figure 5. Court system in China. Source: LOC.


Figure 5. Court system in China. Source: LOC.

There are four levels of the court system in China: the grassroots, intermediate, higher and supreme people's courts, in addition to special courts such as the military, maritime, railway and forestry courts.

Official Sources of Law: being a Civil Law country, the PRC’s law is based on codified

Statutory Laws (法律 fa lü) issued by the National People’s Congress (全国人民代表大会quánguó rénmín dàibiǎo dàhuì NPC) and its Standing Committee.

These laws are supplemented by the Administrative Regulations (行政法规 xing zheng fa güi):

issued by the State Council (the Cabinet); and by the local Regulations (地方法规 di fang fa

güi) issued by local People’s Congress (hereinafter Local NPC) and its standing committee.

Further down the state executive branch the hierarchy of regulations is comprised of

Administrative Rules (行正规章 xingzheng güizhang) that include Local Rules (地方政府规章difang zhengfu güizhang): set by the local governments; Departmental Rules (部门规章 bumen

güizhang) determined by the ministries and commissions under the State Council, the People’s Bank of China, the Auditing Office, and administrative departments reporting to the State Council.

A separate executive set of rules are the Military Regulations issued by the Central Military

Commission (中央军事委员会 zhōngyāng jūnshì wěiyuánhuì, equivalent of Ministry of

Defense) in accordance with the Constitution and the Laws, and Military Rules enacted by the lower level military authorities according to the scope of their responsibilities

Judicial Interpretation: Judicial precedents are not enforceable in China. The Supreme People’s

Court (最高人民法院 zui gao renmin fayuan SPC), however, has the authority to issue Judicial

25

http://www.loc.gov/law/help/china.p


Interpretations (司法解释 sifa jieshi) as guidelines to the trials, which are nationally

recommended for enforcement.

Treaties: The treaties (条约 tiao yue) China has entered are also legally valid documents.

However, in a constitutionally moot situation, he PRC Constitution and the Law of Legislation do not provide the explanation of the relationship between treaties and domestic law.

Subchapter 2. Historical development of FDI treatment by the Chinese legal system

Section 1. Pre-1949

The FDI system of modern China begins with the system of extraterritoriality for the foreign citizens and by extension, the FDI investors of those early times.

After the Treaty of Nanjing between Great Britain and China (concluded on August 29, 1842, and which ended the Opium War) , the Western powers imposed upon China a number of unilateral treaties granting land and trading concessions in various parts of China.

This effectively dismembered China and parceled her off into spheres of influence. The unequal treaties—as they are referred to by the Chinese—established a system of extraterritorial privileges10 under which foreign subjects were exempt from local jurisdiction while physically present in China. These privileges included an exemption from jurisdiction of local courts, freedom from arrest by local officials, and the right to a criminal or civil trial by consular or national courts.

Prior to the establishment of extraterritorial privileges, China exercised jurisdiction over foreigners. But starting in 1820ies and codified, as one important example, by such treaties as h the United States-China Treaty of 1844 which provided for “citizens of the United States who may commit any crime in China shall be subject to be tried and punished only by the consul..” and that “all questions in regard to rights, whether of property or person, arising between citizens of the United States in China, shall be subject to the jurisdiction of and regulated by the authorities of their own Government.”

10 “the scope of extraterritorial privilege included, in addition to the court systems, treaty provisions binding China to a fixed and low ad valorem tariff; foreign-administered customs, postal, and tax agencies; provision for foreign warships at coastal ports; foreign-controlled Legation Quarter guards; foreign troops stationed along the train route between Tianjin and Beijing; the right of missionaries to settle, acquire real property, and proselytize throughout the country without hindrance; the right of coastal and inland navigation; and the right to establish educational institutions free from Chinese supervision” (Zimmerman, 2010)


At one time, at least 19 Western powers were imposing the system of extraterritoriality which was ideologically justified by the alleged lack of justice in the Chinese legal system.

So, the justice to the foreigners was administered by almost 100 consular courts throughout China with the largest number established by Japan (44), followed by Great Britain (25), the United States (18), and France (16).

Each consular court applied the law of its own state with some addition of the Chinese law, for example: the four sources of law of the U.S. consular courts and the United States Court for China included acts of Congress, common law, special decrees and regulations, and Chinese law. (Zimmerman, 2010)

The fact that the Chinese law was included at all is a significant circumstance which served as a bridge to later legal developments, particularly the legal transplant of the western civil code..

Another layer that was insulated the foreigner from the Chinese law was a twin system to the extraterritorial courts system (n which the Chinese were obligated to file claims against the foreigners) – namely the Chinese mixed courts established for the purpose of foreigners bringing claims against the Chinese defendants; by all accounts both forums were severely biased against the Chinese citizens on their own soil.

Given such historical injustice the question which was postulated by me earlier is presenting itself again – could it be that, in some sort of karmic vengeance, the Chinese FDI legal system is now biased against the foreigners?

And indeed to quote the seminal work on FDI law in China:

“Extraterritorial privileges forced upon successive Chinese regimes left the victorious Communists bitter and hostile toward the West in general.” (Zimmerman, 2010)

It only stands to reason to suspect that such attitude of lasting memories of the 100-year long humiliation would be translated into an understandable but an unfair bias in the subsequent home-grown legislation.

Despite the numerous attempts by the successive Chinese government to abolish the system of extraterritoriality, it survived in various shapes for almost 100 years and was finally relinquished by the Western Powers only in 1943, while all the previous laws were abolished in 1949 by the PRC.

Section 2. Post-1949

The further historical developments of the Chinese legal field were marked by the milestones of: adoption of Soviet- style civil law system in 1949 to 1957, with first PRC Constitution adopted in 1954; by the period of Cultural Revolution of 1966 to 1976 which destroyed the legal system

27


and the profession; and by resurgence of legal profession in years following the Four Modernization of 1978.

Currently, under China’s current Constitution, all foreign enterprises and individuals are of course bound by China’s laws exclusively. Two relevant articles of the Constitution are:

“Article 18. The People’s Republic of China permits foreign enterprises, other foreign economic organizations and individual foreigners to invest in China and to enter into various forms of economic cooperation with Chinese enterprises and other Chinese economic organizations in accordance with the provisions of the laws of the People’s Republic of China.

All foreign enterprises, other foreign economic organizations as well as Chinese-foreign joint ventures within Chinese territory shall abide by the laws of the People’s Republic of China. Their lawful rights and interests are protected by the laws of the People’s Republic of China.

Article 32 The People’s Republic of China protects the lawful rights and interests of foreigners within Chinese territory; foreigners on Chinese territory must abide by the laws of the People’s Republic of China” (NPC, 2012)

Notice that the equal treatment of the foreigners have not been explicitly spelled out in these two articles.

The most important FDI –related law remains the Criminal Law of PRC (CLC) 中华人民共和国刑法 (transl. by OECD, 1997). For articles of the law directly pertaining to the FDI activity see

Appendix 4. The Criminal Law of the PRC, 1997. This Law enumerates crimes that can be broadly defined as crimes against public administration.

These articles are summarized in the table below following the natural order of establishing, operating and dissolving a FIE (Foreign Invested Enterprise)

Table 3. Officer's liability. Source: CLC

Crimes of direct personal liability by the officers

Article Imprisonment, years, up to

Fine

False capital declaration 158 3 1%-5% of falsely declared capital

Failure to pay, surreptitious withdrawal of capital

159 5 2%-10% of involved capital

False or incomplete reporting at securities issuance

160 5 1%-5% of falsely declared capital

False or incomplete financial reporting

161 3 RMB 20,000 – 200,000


Crimes of direct personal liability by the officers

Article Imprisonment, years, up to

Fine

Extortion and acceptance of bribes

163 5 Property confiscation

Bribe giving 164 5-10 Undefined fineRe-lending bank loans 175 3-7 1-5 times the gainsInsider trading 180 5-10 1-5 times the gainsFalse stock market information

181 5 RMB10,000-100,000

Securities price manipulation

182 5 1-5 times the gains

Tax evasion 201 3-7 1-5 times the gainsFalse advertisement 222 2 Undefined fineIllegal transfer of land-use rights

228 3-7 5%-20% of gains

Evasion of customs inspection

230 3 Undefined fine

Environmental pollution in violation of regulations

338 3-10 Undefined fine

Illegal mining 343 3-7 Undefined fineIllegal forest harvesting 344 3-7 Undefined fineAsset stripping at liquidation

162 5 RMB 20,000 – 200,000

Statute of limitations is defined by the CLC as 5 years.

“Additional Laws Related to Foreign Investment :China's State Secrets Law gives the government broad authority to classify information as a “state secret,” creating uncertainty and potential risk for investors negotiating with SOEs or operating in sensitive sectors. The Contract Law encourages contractual compliance by providing legal recourse, although enforcement of judgments continues to be a problem. Additional investment-related laws include but are not limited to:

- the Administrative Permissions Law; the Arbitration Law; the Corporate Income Tax Law; the Enterprise Bankruptcy Law; the Foreign Trade Law; the Government Procurement Law; the Insurance Law; the Labor Contract Law; the Law on Import and Export of Goods; and the Securities Law.” (BEBA USDS, 2012)

Subchapter 3 Comparison to FDI Restrictions in other countries

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The numerous FDI restrictions in China provide stark contrast to permissive EU FDI regime which also however is marked by some restrictions:

“EU Treaty Articles 43 (establishment) and 56/57 (capital movements) helped the EU to create one of the most hospitable legal frameworks for U.S. and other foreign investment in the world. However, restrictions on foreign direct investment do exist.

Under EU law, the right to provide aviation transport services within the EU is reserved to firms majority-owned and controlled by EU nationals.

The right to provide maritime transport services within certain EU Member States is also restricted. Currently, EU banking, insurance and investment services directives include "reciprocal" national treatment clauses, under which financial services firms from a third country may be denied the right to establish a new business in the EU if the EU determines that the investor's home country denies national treatment to EU service providers. In addition, as with the United States, a number of regulatory measures, particularly in the financial sector, are also subject to “prudential exceptions” and thus are not guaranteed national and most favored nation treatment under the EU’s GATS and other international commitments.” (BEBA USDS, 2012)

The conditions in China can also be compared to other developing countries, taking Russia as example, we see, that:

“The 1991 Investment Code and 1999 Law on Foreign Investment guarantee that foreign investors enjoy rights equal to those of Russian investors,.. the Strategic Sectors Law – specifying 42 activities that have strategic significance for national defense and state security – and established an approval process for foreign investment in these areas. According to the law, investors wishing to increase or gain ownership above certain thresholds need to seek prior approval from a government commission headed by Russia's Prime Minister. … With respect to the extractive industries, previously, government approval was required for foreign ownership above .. 25%, ..Since 2008, however, the commission has approved 128 of 136 applications for foreign investment.” (BEBA USDS, 2012)

In the United States, the restriction are mainly designed to keep the foreign governments from acquiring undue domestic influence:

“…sectors with specific restrictions on foreign investments include transportation, communications, and energy.

For example, foreign governments may not be issued radio communications licenses and foreign entities are not allowed to own or control more than 25 percent of the voting interest of any U.S. airline.

In other cases, foreign investors can purchase companies or assets in a sector but face restrictions on their activities once they invest. For example, foreign companies can invest in U.S. banks, but


if a company's stake exceeds 25 percent or the company would control the bank, the company must receive prior approval and become regulated by banking regulators and would be limited in the types of nonbanking activities in which it can also invest.

Foreign investors can generally invest in U.S. agricultural land, but must disclose purchases above certain thresholds to the Department of Agriculture (Agriculture). In addition, while not specifically a restriction on foreign investment, a recently strengthened U.S. law authorizes interagency reviews of certain foreign investments, potentially in any sector, for national security considerations.

… GAO's analysis of state-level restrictions on foreign investment indicated that some states had restrictions on foreign entities' ability to invest in real estate, including agricultural land, and some had restrictions on foreign government ownership of insurance companies. The agencies responsible for enforcing the U.S. laws affecting foreign investment--Agriculture, Department of Transportation (DOT), Federal Reserve Board, Federal Communications Commission (FCC), Nuclear Regulatory Commission, and Department of the Interior--have processes for addressing key elements of enforcement, including those for (1) identifying all transactions subject to the law, (2) verifying the identity and amount of foreign ownership, and (3) monitoring changes in ownership.” (US GAO, 2009)

All in all, the FDI restrictions in China are obviously more stringent than those in the USA, EU or Russia.

Subchapter 4. The role of BIT

The BIT is a unique instrument in a sense of its orientation:

“BITs are signed by pairs of rich and poor states (there are almost no developed-developed country BITs)” (Tobin, 2010)

Therefore it’s a legal tool specific to the relations between “rich” and “poor” countries, its orientation is West-East, or North-South, but almost never West-West. The BIT regulates the investment flow from capital-rich countries to the countries that are defined as “developing” ones, and it has a specific legal goal in its design- namely to grant an investor protection that it would be lacking in the domestic legal remedies of the host country.

As was noted in the literature:

“…BITs notably grant foreign investors direct legal personality under international law. Without being obliged to submit a claim to domestic courts, foreign investors may sue host countries directly before a transnational tribunal and thus limit national legal sovereignty: “once in force, the role played by non-state actors in the regime’s enforcement mechanisms can be of greater significance than the role played by states.”” (Berger, 2008)

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China follows the admission model BIT that has been adopted by European countries and which provides investment protection only after the admission of the FDI project, leaving the screening power of the government in place.

To date the UNCTAD database lists 88 China BITs with the actual number reported as close to 150, and what is most noteworthy in these BIT that they are biased away from the national treatment by China:

“Remarkably, China is able to make developed partner countries to bear more obligations than it is willing to do. While Chinese authorities are still allowed to discriminate foreign investors, Chinese investors can rely on national treatment in the respective partner country. The declaration of intent to reduce discriminatory rules and regulations is a weak legal obligation.” (Berger, 2008)

It is even more remarkable that no private FDI investor up to date, according to my knowledge, have not took advantage of suing China before a transnational tribunal. It is hard to imagine any other motive for this but the fear of reprisal from the regulatory system in China.

What this means in practical terms is that the large number of BIT’s (app. 150 as above) may serve as a reassurance to the investor but in practice these BITs are useless since their “teeth”, that is, the ability to sue the Chinese government in an international tribunal have been voluntarily defanged by the investors. This in turn signifies, that existence of a BIT’s with China, per se can serve as a false reassurance for the investors.

Also, it is worth taking a step back and looking at larger picture: is there an empirical evidence that BIT’s do in fact serve as an investment-attracting factor?

On this, as on everything, there is two distinct points of view: that of the world governments and that of objective facts.

From the governmental, that is political and ideological point of view, it is believed that

“BITs do, in fact, attract FDI. According to the United Nations Conference on Trade and Development (UNCTAD), the number of BITs rose from 385 in 1990 to 2,392 in 1999; by 2005, no fewer than 177 countries had signed at least one investment treaty, with most negotiating far more. Just as telling, providers of political-risk insurance, including the governments of France and Germany, will not underwrite an investment unless a BIT is in place. Similarly, the Multilateral Investment Guarantee Agency encourages countries to adopt BITs to ensure that all investments are sufficiently safeguarded.” (Tobin, 2010)

However, the view from academia, based on statistics are quite different:

“Fundamentally, the hope for BITs is that, if they boost investor confidence, they are likely to result in greater inflows of FDI. And yet, however compelling this logic, the empirical evidence


is mixed. Indeed, while some scholars find that these investment treaties do attract footloose capital, others disagree, insisting that additional factors….are also at play.” (Tobin, 2010)

Therefore the views of the economists and the scholars is that there is no direct, unanimous and compelling evidence that BITs do increase significantly the inflow of capital, it is suggested instead that other common sense factors are at play – namely the availability of natural resources, political stability, labor considerations, location etc. are playing the overwhelming role in the process selection of targets for the FDI.

So, if the attraction of capital is inconclusive what is it that the existence of a BIT signifies firstly and fore-mostly? The following quote clarifies:

“Despite debuting to little fanfare in the late 1950s, bilateral investment treaties are all the rage today. They obligate a host country to abide by international rules on investment and are backed by third-party enforcement. Among their many provisions, BITs require that countries not expropriate foreign investment without prompt, adequate, and effective compensation; grant foreign investors treatment that is no less favorable than that given to others abroad or at home; and facilitate the entry and exit of a multinational’s funds. Perhaps most centrally, BITs provide for dispute settlement before a third-party arbitral body, the aim being to ease foreign investors’ concerns about having to make recourse to what they often perceive to be a developing country’s underperforming— or underdeveloped—judiciary.” (Tobin, 2010)

To put it differently the BIT is a red flag indicating that the legal system in a given country is not functioning properly; and ironically, the large number of BITs concluded with the given host country means that more governments are de-facto believing that the legal system of the host country is not up to the task of protecting investors, or, perhaps is biased against such.

Subchapter 5. Chinese labor issues as a potential generator of FDI legal risks

One source of potential legal risks for the FDI investor, which albeit not materialized yet, still shows signs of becoming a future legal problem is existence of ongoing labor tensions between FDI employers and the domestic work-force. There is two traps that the investor can fall to due to its erroneous estimates of workforce supply and its unfamiliarity with the labor laws in China. the first trap in relation to legal risk is assuming that Chinese labor supply is past its glory days as being cheap and available and therefore overpaying for labor which might lead to risk of being sued for decreasing wages or wrongful termination when that mistake is attempted to be corrected; and second is a wrongful assumption that the Chinese labor force is a throng voiceless obedient work-drones who have no legal recourse. These two point of views are erroneous. The first one, which I term a “scarce labor supply fallacy” is analyzed below. For comparison of Chinese labor laws to other developing countries see Subchapter 6. Chinese labor laws:

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comparison to two BRIC countries. For example of labor-related legal risks still in a bud see Subchapter 9. Overview of the labor conflicts in China and Foxconn case.

Now I will proceed with labor supply analysis using the article The End of Cheap Chinese Labor by Hongbin Li, Lei Li, Binzhen Wu, and Yanyan Xiong (Hongbin Li, 2012), which contains all one needs to know about the situation on the Chinese labor market and about how it did get into its present state. It’s an informative read and well worth summarizing it in a few paragraph as to make it better understood for an FDI investor and perhaps exposing some flaws in the authors way of thinking along the way.

The assumption that the authors start with is that “cheap labor has played a central role in the Chinese model”, which might be true, leaving aside the definitions of the “model” and for the moment forgetting that this is too much of a conventional wisdom, which is suspicious. Starting from 1978 when the average Chinese urban annual wage was only $1,000 (3% of the USA’s) it grew to $5,500 in 2010. The article then proceeds to tell that wages rise across the board for all sectors of labor and that the period of slow increase up to 1990s have been changed by the relatively high speed of growth afterwards. That is explained by the reforms in the nineties. Those reforms allegedly established a flexible labor market, again whatever is meant by “flexible”, which were “enabling the firms to pay workers according to productivity.” – a very dubious and vague proposition, which again sounds tritely correct.

The current structural framework is presented as a split between urban residents and rural migrants both with their corresponding registration (hukou) although the relevance of differences in types of hukou to the larger topic of the article is left unexplained. The article then proceeds to the detailed historical trends in Chinese wages and comparison of such to the competitor economies of Philippines, India, Thailand and Indonesia.

Afterwards, for some reason an attempt is made to find out whether the rise of the wages was or was not confined to certain “sectors “of … what? Population, labor market, geography? No strict definition is given again. The conclusion is that wage increases exist across the board which is a non-discovery anyway.

After finding the obvious, the article segues into “wages vs. productivity” discussion where productivity is calculated by dividing gross GDP by the wages. The authors do admit that this is an oversimplification but insists that it is a “revealing” one. After that they stack “Pelion on Ossa” by using a derivative measure of “unit labor costs”, apparently gratuitously

Further, they note that since wage growth is leading the GDP growth then the labor becomes more expensive. Well in cash terms sure, but expensive is a relative notion so the question begs itself: expensive than what? No answer again.

Now I will attempt to present my view and understanding of the issue.


I will attempt to draw reader’s attention to three main arguments that were overlooked by the authors of the article. First there is the issue of the China model, second the issue of the divers for the growth of Chinese GDP, and third the whole notion of labor pricing for which a concept of fair price will be utilized.

Firstly, and starting with China model it should be stated that the comparison to the poor countries of the South-Asian region as picked by the authors is meaningless. Thailand, Indonesia, Philippines and even India do not have anything even approaching China model in terms of infrastructure, cultural values, government spending, level of literacy and education. Also the authors have conveniently forgotten the government established prices for the main energy formats such as fuel and electricity, naturally the issue of locally sourced raw material prices also were left unconsidered. My understanding is that these considerations were what actually created the starting condition for the GDP growth, with labor costs being a secondary consideration.

Secondly, my explanation for the wages growth is different from what is presented in the article: since China is an export-oriented country then it stands to reason that what caused growth of wages was not the scarcity of labor as a primary cause, but rather the increase in the consumer demand for the Chinese goods in the West, which in its turn was fueled by the credit expansion (money printing) by the western central banks.

Thirdly, I have an issue with the entire notion of Chinese labor getting to become more expensive. The question is – expensive in relation to what exactly? Competitors? But there are no competition in terms of comparability: for the reasons stated above none of the south-asian countries can vie with China for the top exporter position now and will not be able to in the predictable future. So while one can agree that in purely monetary sense and vis-à-vis historical number Chinese labor has become more expensive, however such an observation would be simplistic, naïve and pointless. The entire point of this article would be allegedly to tell us whether the China will keep its competitive edge of the cheap labor, but after we touched on the illusion of such a concept the point is still moot as to whether the labor gets more expensive and therefore China could lose its competitiveness.

While the all aspects of the China model might be impossible to quantify and therefore be able to compare to the competition my understanding is that it’s the entire structure of the Chinese nation is what it makes China such a unique player, with cheap labor costs being a secondary issue.

This analysis is helpful for understanding the current tendencies of supply and demand in the Chinese labor market, and therefore, better evaluation of the legal structure regulating such.

Subchapter 6. Chinese labor laws: comparison to two BRIC countries

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Section 1. Chinese labor laws

The main law regulating labor relations in China include but are not limited to the following strategic legislation:

Labor Law of the People’s Republic of China (中华人民共和国劳动合同法) (1995)

Law on Employment Contracts (中华人民共和国劳动合同法)(2008)

Law on Safe Production (中华人民共和国安全生产) (2002)

Law on the Prevention and Treatment of Occupational Diseases (中华人民共和国职业病防治法) (2002)

Regulations Concerning the Handling of Employment Disputes in Enterprises (中华人民共和国企业劳动争议处理条例) (1993)

Regulations on Work-related Injury Insurance (中华人民共和国国务院令) (2011) .

As early as in 2008, the government imposed a Labor Contract Law that rolled back some of the permissive approaches to the workforce that the government introduced in the 1990s. This new law abolished the system of at-will employment for most full-time employees and required employers to provide employees with written contracts. Since 2008, the government has also changed its policy of tight control over the All-China Federation of Trade Unions (ACFTU). While all unions must still be approved by and affiliated with ACFTU, it appears that the government is allowing the ACFTU greater freedom to advocate for the rights of workers than it did just a few years ago. (Jackson, 2011)

This Law apparently supplements the previous Labor Law of the People's Republic of China of 1995 that provides for minimal wages, overtime regulations, and safety rules. The minimal wage depends on the locality ranging from RMB 800 to RMB 1200 per month. As a general rule, an employer cannot require overtime of more than one hour per day, or three hours per day under special circumstances, and no more than 36 hours per month.

The Labor Law requires employers to inform employees of occupational hazards during the hiring process. The law also requires that employers provide workers with safe and hygienic working conditions. The Safe Production law requires some large manufacturers to establish full-time safety supervisors and training for employees. Other important safety regulations include the Occupational Diseases Law and the Administrative Penalties for the Violation of Production Safety Laws.


Each province in China has its own Work-Related Injury Insurance Regulations that require employers to pay the medical expenses of injuries, disability, and occupational diseases. The regulations cover all companies, including unregistered companies and those that illegally avoid paying the premiums. The insurance fund is financed through employer-paid premiums that the government determines by gauging the dangerousness of the workplace. For example, an employer with low risk work like accounting pays 0.5 percent of total payroll expenses into the insurance fund, while an employer with high risk work like shipbuilding pays 2 percent of total payroll into the fund.

The law prohibits employers and employees from contractually opting out of the Work-Related Injury Insurance systems. Employees are allowed to refuse to perform risky work and they have the right to resign summarily when the employer gives them an order to do unsafe work. In such cases employers must pay the employee severance in accordance with the Labor Contract Law. The civil courts impose punishments like warnings, fines, and workplace closures on employers that violate health and safety regulations.

A law passed in late 1998 requires most employers to participate in the national basic medical insurance system. Under the system, employers contribute roughly 6 percent of total staff payroll, and employees contribute 2 percent of their individual wages to a pooled insurance fund and employee personal expense accounts.

Employees with between one and ten years of work experience are to receive a minimum of five days annual leave per year. Employees with between ten and twenty years of work experience receive a minimum of ten days per year. For more than twenty years of work experience, the employee receives a minimum of fifteen days per year.

Female employees are entitled to a minimum of 90 days of maternity leave. Employers are prohibited from discharging or discriminating against women because of pregnancy or status as mothers. Employers may not subject pregnant women to overtime or hazardous work. China also has a maternity insurance fund that compensates a woman for any lost wages during maternity leave. The insurance fund is financed by employers that contribute roughly one percent of payroll expenses. Employers may not fire injured workers during their period of medical care, those who are pregnant, ill, or nursing, and those who are within five years of retirement.

The current unemployment regulations only cover urban residents with a proper hukou, or household registration. This means that for a worker to receive unemployment insurance payments, she or he must be working in her or his place of official registration. To receive unemployment insurance, workers must fall within a working age range, be able to work, and register with the government. These criteria filter the number of workers eligible for unemployment insurance down to 120 million out of a total workforce of 800 million people.

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Local governments in urban areas typically operate housing funds. Under these programs, the employer and employee contribute an amount each month to a fund dedicated to assisting employees in buying, refurbishing, or renting a home.

Employers and employees must contribute to a basic pension insurance fund that is administered at the provincial or municipal level. Some cities have also set up supplementary pension insurance funds that employees have the option to join. Typically, employers contribute roughly 20 percent of total wages and employees typically contribute roughly 8 percent of wages. It should be noted that most pension amounts are insufficient to support retirees. For this reason, the government offers and encourages workers to enroll in supplemental retirement plans.

The general retirement age for men is 60 and for women it is 55. Employees are not allowed to make early withdrawals from their pension accounts, but the accounts are transferrable when the employee changes employers or moves to a new city. Employer contributions are subject to strong enforcement and employer defaults can be subject to very large fines. When an employer defaults on pension payments, the local government is permitted to garnish the payments from the employer’s property. This is typically done through the largely state-run banking system. (Jackson, 2011)

Section 2. Comparison to India and Brazil

As we see the labor laws in China are extensive, well-developed and aimed at protection of worker’s rights. In that aspect they compare favorably to the closest possible comparable countries for the western FDI: Brazil and India.

The comparison will be made on following points: mandated minimal wages; policies towards trade unions; workplace hazards and insurance; annual and maternity leaves; unemployment benefits; mandatory pension insurance.

Table 4. Comparison of China, Brazil, India labor laws. Source: own research.

Legal obligations of an employer

China Brazil India

Mandated minimal wages

Yes Yes No

Workplace hazards prevention

Yes Yes No

Workplace injury insurance

Yes Yes No

Mandatory annual leave

Yes Yes No

Paid maternity leave Yes Yes NoPension insurance Yes Yes No


Legal obligations of an employer

China Brazil India

Trade union policy Mandatory trade unionism

Wide trade unionism No

In Brazil, the labor law litigations constitute a major legal risk for an employer, since Brazil has a well-developed labor law structures which are vigorously enforced by the courts . As the practicing Brazilian lawyer puts it:

“Overtime is a major source of labor litigation in Brazil… Similar to the risks related to consumer litigation matters, labor lawsuits are costly, lengthy and, as mentioned above, tend to go the way of the employee. Whether you are planning on merging or acquiring an already established company in Brazil or establishing a brand new entity, conducting a due diligence into the labor practices department and familiarizing yourself with how your industry and operations may be affected by the intricate labor laws in Brazil will make a big difference to your company’s bottom line.” (Diaz, 2011)

In India the situation is quite different from that in China and Brazil due to two facts:

a) existence of enormously complex system of labor laws and regulations:

It was reported that India's complex web of legislation leads to a system of dispute resolution that is incredibly slow. Data from the Ministry of Labour reveal that in the year 2000 there were 533,038 disputes pending in India's labour courts; and of these 28,864 had been pending for over 10 years. According to recent World Bank estimates, in 2004, there were 482 cases of major work stoppages, resulting in 15 million human days of work loss. Between 1995 and 2001 around 9% of factory workers were involved in these stoppages. The figure for China is close to zero. (Basu, 2006)

b) very small ratio of employees to which these law practically apply to: less than 10 million workers are employed in the formal private sector, with total number of Indian workforce estimated at 470 mln the percentage of labor to which the labor laws are applicable is under 1% of the total; that contrasts with China’s 25% (Source: Gov. of India statistics, own estimates). Some commentators (Basu, 2006) have argued that India's labor laws could not have had much of a consequence since most of them apply to only the formal sector, and that’s the reason why in the table above labor protection laws are marked as practically non-existent on a country-wide scale.

These two countries may show what lies ahead for China with the further development of the labor laws and ongoing strengthening of its court system. With much higher percentage of workforce liable for labor protection on one hand (as in Brazil) and with much more effective legal system (than in India) the FDI investor might be faced with very substantial labor-related legal risks in the very near future.

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The contemporary Chinese FDI system is based on western values and is designed on the model of western civil law. However the long historical train of injustices committed by western powers (including those in the legal field) have bred a motivation in the Chinese policies to redress this injustice by regulatory means, which led to a creation of a severely restricted FDI regime. That in turn, makes possible to posit a question “is the Chinese legal system biased (formally or not) against the FDI investors?”

The answer to such a complex question is bound to be multidimensional and must include a number of qualifiers, “ifs” and “buts”, for it to have any meaning, just a simple “yes” or “no” will not suffice.

However, some outlines of the answer and basis for its formulation begin to take shape after reading through the analysis of the Chapter 2.

It was demonstrated, that China boasts a much larger number of industrial areas that are excluded from foreign ownership (see Appendix 5. FDI- restricted and prohibited areas of industry in China). Further, it was noted that China has around 150 BITs concluded with developing countries and that fact is representing a cause for alarm on behalf of an investor, since a mere fact of existence of a BIT is a tacit admittance of an inadequate (from the FDI investor point of view) legal system.

The issue of the access to the legal system was left to be analyzed in the subsequent chapters, however some restrictions must be noted, e.g. only Chinese nationals are allowed to represent before the courts. More insidious are fundamental tenets of the ideology of dealing with the foreigners: the right to equal treatment is not stated explicitly in the in the constitution; the private ownership of land is not a right but is rather a privilege granted by the government; officers of the companies are subject to severe personal liabilities; most officer responsibilities in relation to financial reporting is classified as criminal rather than administrative offences and so on.

All of these factors constitute additional FDI risks.


Chapter 3. Case analysis

Subchapter 1. New definition of a legal risk

This chapter deals with legal precedents that involved legal risks and costs for FDI investors in China. Simply speaking the legal risks are defined as probability of legal proceedings being adjudicated unfairly to the defendant in case of being sued or to the claimant when suing.

Many other definitions of legal risk are not quite correct from my point of view, considering that if legal case is adjudicated fairly in an ideal economic and financial environment then the parties are simply being restored to their previous positions with no residual cost to any party (Restitutio In Integrum).

From that follows that the only (real vs. perceived) component of the legal risk is that of unfair adjudication. In the example of China and FDI investor that definition can be paraphrased as “the risk of being sued in China or seeking legal redress in China and being adjudicated unfairly”.

Court procedures in China are defined by the Law of Civil Procedures. One important development in further evolution of legal system designed to serve the legal needs of the foreigners is the Law on Choice of Laws for the Civil Proceedings (see Appendix 6. Law of the PRC on Choice of Law for Foreign-related Civil Procedures).

With that view this chapter will look at several high-profile cases in China involving FDI and make an attempt to evaluate the fairness of the outcome.

But that begs the question: what is a fair legal judgment? And are there factors, external to justice, that may influence the fair legal judgment?

The goddess of justice Justitia, the Roman goddess of Justice, who is equivalent to the Greek goddess Dike represents “the judicial system … intended to be apolitical, its symbol being that of a blindfolded Lady Justice holding balanced scales.” (Fabri, 2000)

The blindfold represents objectivity, in that justice is or should be meted out objectively, without fear or favor, regardless of identity, money, power, or weakness; blind justice and impartiality.

That is the moral ideal of the justice but it is obvious that in this imperfect world the political clout, money and sheer size will not hurt one’s case either. Another external (to the notion of justice) factor is culture. It is commonplace now to say that Chinese prefer win-win settlement to a court-room opposition, but does this degenerate at times into denial of justice by the courts?

Will a powerful entity prevail in a dispute due to its power and not due to the merit of its case?

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These questions need to be examined comprehensively, and it will be done using the material from two case studies below, those of Apple and Pfizer, both large international companies, both coming under attack using the legal system as a tool, with different outcomes to the cases.

To that end I will compare these two companies on the counts of investment into China, number of workplaces created, and the purpose of the legal attack, this analysis will follow the presentation and dissection of these two cases below (see Subchapter 2. Apple disputes over IP property in China as a comparative case, and Subchapter 3. Pfizer dispute over Viagra trademarkas a coordinated patent attack)

Subchapter 2. Apple disputes over IP property in China as a comparative case

Section 1. Proview v. Apple

Facts of the dispute: Apple had bought the global rights to the "iPad" from Proview's Taiwanese affiliate for $55,000. However, the Chinese firm had argued that its affiliate did not have the rights to sell the iPad name rights for China, which is one of the fastest-growing markets for Apple's products. Proview had claimed that it owned the rights to the iPad name in the Chinese market after registering it in 2000 seeking damages of $1.6 billion. (BBC, 2012)

In response, Apple had insisted that it had acquired the worldwide rights for the name in 2009.

Intermediate consequences of the case: Proview had even sought a ban on the sales of the product in Shanghai as part of the dispute, a move that was rejected by the courts; but as a consequence some of the local industry and commerce bureaus in north China ordered that iPads be taken off the shelves thereafter. Thus, the dispute between the two firms resulted in Apple's iPads being pulled off the shelves in some parts of China.

Court decision: A court in Guangdong had asked the two firms to try to reach a settlement. Upon settlement "The iPad dispute resolution is ended," the Guangdong High People's Court said in a statement. "Apple Inc. has transferred $60m to the account of the Guangdong High Court as requested in the mediation letter." After the court announced the settlement on Monday, Proview confirmed to the BBC that the firm had agreed to the settlement. It must be noted that the dispute between the two firms over the rights to "iPad" name was not limited to China.

Comparison to the litigation in the US: Proview had also lodged a case against Apple in the US. In February 2012, Proview sued Apple in the Santa Clara Superior Court, Proview claimed Apple set up a special company in Roydon, Essex to acquire the rights to iPad name. It had accused Apple of deceiving it into selling the rights to the name by setting up a company, IP Application Development Ltd (IPADL) in the UK. It claimed that Apple said the trademark was


"an abbreviation for the company name". However, that case was dismissed by the Santa Clara Superior Court.(LOC)

Section 2. Analysis of Proview v. Apple

Apple countersued in China but lost in the first instance, that loss and an obvious premonition of further losing on appeal made Apple to settle out of court. The sum of settlement is a mere 0.37% of the damages claimed, however it is a significant amount of money even for Apple, so what made Apple to settle if the earlier US court decision was a summary dismissal of the case?

Obviously Apple understood that the system was rigged not in its favor, confirming the perception by the investor of the inherent riskiness of the Chinese FDI legal system.

Currently three more litigations are pending against Apple in China:

- A Chinese household chemical company Jiangsu Xuebao is suing Apple for allegedly infringing on its "Snow Leopard" trademark. The company doesn't own the "Snow Leopard" trademark, but it does own the Chinese translation - "Xuenbao." Xuebao might have a case if its coverage matches up with Apple's usage. If its coverage includes software, obviously, then Apple would have a problem using the 'Snow Leopard' mark on its operating system," argued Beijing-based law professor Stan Abrams. Jiangsu Xuebao is seeking RMB 500,000 (about $78,000) and an apology from Apple. According to the

CEO of Jiangsu Xuebao, Apple attempted to register “Xuebao (雪豹)” trademark for its

Snow Leopard in 2008, however it had been rejected by the Chinese trademark office. He believes the rejection was because his company had already registered the trademark.

This also means Apple has obviously violated the ownership of the “Xuebao (雪豹)”’s

trademark. (CBS News, 2012)- A Taiwanese man in a Zhenjiang court filed a lawsuit against Cupertino-based Apple,

claiming the company is infringing on his patent with its FaceTime technology that is present in many iOS and OS X products. (CBS News, 2012)

- Shanghai-based voice assistant developer Zhizhen Network Technology has filed a lawsuit against Apple and its Shanghai subsidiary Apple Computer Trading, alleging that Apple's Siri voice assistant app infringes on one of Zhizhen's patents (ZL200410053749.9). According to the patent database of China's State Intellectual Property Office (SIPO), the patent, for "a type of instant messaging chat bot system" called Xiaoi Bot, was filed on August 13, 2004, and approved on February 15, 2006.

- Zhizhen claims that it sent a legal notice to Apple in May 2012 seeking to resolve the patent dispute through mediation, but Apple did not respond after receiving the letter. Zhizhen filed the suit on June 21 and the Shanghai courts announced on June 26 that they will hear the case. A source within the court system confirmed that the lawsuit is currently in pre-trial negotiations. Though the case at this point does not involve any

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request for compensation, a Zhizhen representative said that if the court rules Apple did infringe on Zhizhen's patent or if Apple agrees to a settlement, the amount of compensation will likely exceed the USD 60 mln settlement in Apple's recent iPad trademark dispute. (China Business News, 2012)

While these three last cases involve obviously insignificant amounts and might be even considered frivolous in nature, they represent a dangerous trends for the FDI investors, whose perception would be that they are always open to a litigation attack. Even if this attack is frivolous in nature but allowed to proceed in the Chinese courts the defendant will be faced with a prospect of the protracted court battle on a foreign turf and perhaps with a necessity of the out-of-court pay-off.

That misgiving might be shared by The Hong Kong High Court ..Judge Hon Poon: here, the conduct of all the defendants demonstrates that they have combined together with the common intention of injuring Apple ..” (The Register, 2012)

As the following developments have shown this intention was realized with the help of the mainland China judicial system, hinting at its perceived bias.

Subchapter 3. Pfizer dispute over Viagra trademark as a coordinated patent attack

Section 1. Background to two Pfizer litigation

Following a six year legal battle, Pfizer Inc. (NYSE: PFE) has successfully defended its Chinese patent on the erectile dysfunction drug Viagra. As reported in Chinese in the 21st Century Economic Report on Nov. 1 of 2007, the Beijing High People's Court has issued a final judgment on the patent dispute.

Rejecting a patent challenge from 12 domestic drug manufacturers, the high court's final judgment grants Pfizer patent protection on Viagra until 2014.

Pfizer initially filed a Chinese patent application in May 1994 for the use of Sildenafil (Viagra) in the treatment of erectile dysfunction treatment. After seven years of investigation, the China State Intellectual Property Office [SIPO] granted the patent in 2001. The patent was challenged by 12 domestic Chinese drug companies that claimed to have invested over US$12 million to produce generic versions of the drug. In July of 2004, SIPO's Patent Review Bureau invalidated Pfizer's patent. The rejection was based on a claimed lack of data in the application to support Viagra's specific therapeutic effect. The ruling sparked international attention and became a high profile test case for China's commitment to the protection of intellectual property rights.


The 12 companies from Jilin, Shanghai, Anhui, Jiangsu, Guangdong, Chongqing, Sichuan and Tianjin claim to have invested over 100 million yuan (US$12 million) in less expensive forms of the famous blue pill. Pfizer filed a patent application in May 1994 for the use of Sildenafil in China. SIPO granted the patent after seven years of examination but the 12 Chinese companies challenged the validity of that decision. As a result SIPO's review board invalidated the patent in July 2004 on the grounds of "insufficient disclosure" of the treatment but the decision never took effect as Pfizer launched an immediate legal challenge. Pfizer's legal action against SIPO reached court in October 2004.

Pfizer immediately challenged the decision, and in June 2006 the Beijing Intermediate People's Court ruled in favor of Pfizer after one and half years of review. This ruling was appealed by the domestic drug manufacturers to the Beijing High People's Court.

The High Court rejected the appeal and instructed SIPO to withdraw its opposition to the drug. The decision have reaffirmed Viagra's position in the Chinese market for erectile dysfunction drugs. It is estimated that the combined legitimate and underground markets for ED drugs in China is RMB 20 billion (US$2.7 billion), since t is estimated that about 80 million Chinese men suffer from impotency problems. (21st Century Economic Report, 2007)

However, in a separate but related proceedings, earlier in 2007 the company lost a trademark infringement case with a domestic maker of Sildenafil over the usage of the brand "Wei Ge" or "Mighty Brother". "

“Although the precise source and date is unclear, sometime in the period between the first flurry of international media attention given to Viagra in the mid-1990s and shortly after the official launch of Viagra in the United States, the Chinese media coined the transliteration Weige for Viagra.” (Chow, 2012)

Pfizer sued the Guangzhou-based drug company Welman for allegedly copying the appearance of the blue, diamond tablets and also for maliciously registering "Wei Ge" before Pfizer, saying the Chinese translation had been directly linked to Viagra in media reports since the drug was invented in 1998.

However the prior facts were such that Pfizer eventually obtained trademark registrations for Weige in Hong Kong and in Taiwan, but in China, Pfizer was faced with many prior competing applications. One month after Pfizer’s launch of Viagra in the United States in April 1998, several Chinese companies filed trademark registrations for Weige with the CTMO. (Chow, 2012)

The Beijing No.1 Intermediate People's Court upheld Pfizer's ownership of the medicine design but rejected the other claim in December 2006. The court said the company was unable to prove it had used the name "Wei Ge" in promoting Viagra or that the word was an unregistered but widely-recognized name for Viagra in China, according to an official website for China's

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Supreme Court11. The case was among more than 670 foreign-related law cases involving intellectual property rights handled by the court from 2002 to 2006. About 60 percent of them were won by foreign parties, according to the website.

The Beijing court ruled that Welman, which applied to register "Wei Ge" (伟哥) as its brand

name before Pfizer in 1998 and passed government examinations in 2002, had acted legally, according to chinacourt.org. It said that two other Chinese companies which used the name had also acted lawfully. Pfizer had demanded that Welman and two other Chinese drug companies stop using the brand name and pay 500,000 yuan (US$ 62,500) in compensation.

Section 2. Legal consequences of Pfizer precedent

Reaction of the Chinese competitors was somewhat melancholic:

“The battle has hurt both Pfizer and Welman," Sun Mingjie, chairman of Welman, was quoted as saying by the Guangzhou-based Information Times. "We've lost market opportunities to less reputable producers by spending so much energy on the trademark disputes since 1998," said Sun. Two of the earliest producers of anti-impotency drugs, Pfizer and Welman have less than 2 percent of the estimated 10 billion-yuan Chinese market, said Sun. "If we had cooperated in fighting substandard products at the very beginning, we'd have increased our sales by 500 million yuan,” Sun said, adding that Welman expected future cooperation with Pfizer.” (Xinhua News Agency, 2007)

The Chinese lawyers also could not come to an unambiguous conclusion on the meaning of these two Pfizer disputes:

“The final ruling does not provide new reasoning for why the Viagra Patent application satisfies the requirements set forth in the Patent Law, it simply repeats the Intermediate Court’s previous ruling and leaves me unconvinced. Although the Guidelines on Patent Examination ("Guidelines") provides no specific provisions regarding the necessity of identifying specific compounds used in the pharmacology tests in a patent application, a clear and complete description of an invention is the basic requirement for the patent specifications. At the very least, the specifications should be consistent and self-explanatory. In this case, the applicants only provided one pharmacology test result and failed to specify the specific compound used in performing the test. It is impossible for the technicians in the industry to identify the relevant compounds to be used. If tests cannot be reproduced, then there are serious issues with the patent.

It is reasonable to say that the specification of the subject patent application did not satisfy the requirements of "providing clear and complete description of invention features". The final judgment reflects more or less a compromise between the Chinese and the US governments. As

11 chinacourt.org. (The source for official decisions of the Supreme Court.)


China is not a country that follows precedent, this has no practical significance for future patent drafting and examinations. I recommend that patent applicants, especially foreign applicants, should not be influenced too much by this court decision. Instead, patent applicants shall always provide clear specifications regarding the compounds applied in the pharmacology test in their patent specifications, as there won’t be political compromises between governments for every patent. The Viagra decision should be considered a stand-alone ruling.” (King and Wood, 2008)

However for our purposes of estimating the legal risk for the FDI in China is the outcome of the case is less important than the motives behind it:

“Under Chinese law, once an announcement of a grant of patent rights is made, any interested entity or individual can petition the Patent Reexamination Board to reexamine the patent and declare the patent invalid. The challenging coalition included Hongtaomao Pharmaceutical Co. Ltd., Lianxiang Pharmaceutical Co. Ltd., and Shuanglong Hi-tech Development Co. Ltd. Some reports indicated that the mid-size companies had been refused patent protection for their own erectile-dysfunction drugs with a chemical composition similar to Viagra. The strategy to challenge the patent in the Patent Reexamination Board, rather than to simply counterfeit the drug or otherwise infringe the patent, was a new approach to competing with foreign products. The relatively small Chinese pharmaceutical companies filing the re-examination petition view the procedure as an opportunity to "leapfrog" the long and costly research, development, and approval process that is required to bring a new drug to market.” (Andrews, 2008)

In other words it was a coordinated patent attack made possible by imperfection of the Chinese legal system and by the cooperation with the SIPO.

That this was a planned strategy is further confirmed by the new organizational structures built on purpose to exploit and take advantage of a new trademark brought onto the Chinese market:

“Shortly after news of the SIPO decision became public, a group of seventeen Chinese pharmaceutical manufacturers announced their plan to establish a joint-stock company to produce an erectile dysfunction drug similar to Viagra. By early October, 2004, the joint venture had established an office in Beijing and had invested the shareholders' capital in the new company. The primary goal of this joint venture, according to Zhang Yucai, chairman of Tonghua Hongtaomao Pharmaceutical Co. Ltd., was to jointly promote the domestic "Viagra" while avoiding a price war with each other.” (Andrews, 2008)

Subchapter 4. Analysis of Apple and Pfizer cases as comparison to Northern American precedents

So what exactly happened in case of Apple? To recapitulate: the company was sued for wrongful use of a trademarked name for which it has already paid $55,000 and damages were requested in the amount of $1.6 bln. On request of the claimant unfavorable to Apple administrative measures

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in north China were taken, which have disrupted Apple sales. A court in Guangdong had asked the two firms to try to reach a settlement. Apple folded and paid $60 mln to the claimant. The same claims filed in the USA against Apple were thrown out of court.

It is obvious that on the face of things the claim was frivolous. Legal Information Institute at Cornell University defines damages as

“Damages, in a legal sense, is the sum of money the law imposes for a breach of some duty or violation of some right. Generally, there are two types of damages: compensatory and punitive. (The term "damages" typically includes both categories, but the term, "actual damages" is synonymous with compensatory damages, and excludes punitive damages.)

Compensatory damages, like the name suggests, are intended to compensate the injured party for his loss or injury. Punitive damages are awarded to punish a wrongdoer.”

It is known that the claimant had no sales or operations that could have been damaged by the Apple’s wrongful use of the trademark, therefore the damages were meant to be punitive. What then is the amount of punitive damages in Chinese law?

It turns out that:

“Liability for infringement can be compensatory or punitive, depending on the purpose of the compensation to be granted. According to the current Patent Law, Trademark Law and Copyright Law of the P.R.C., the amount of compensation is determined by the basis of compensation and is calculated in accordance with the actual losses suffered by the rights owner or the benefits obtained by the infringer (and by reference to the reasonable multiples of the royalties in a patent infringement case), and while neither of the two elements could be determined, a People’s Court can award a statutory compensation amount within the scope provided by the law.” (China Law Insight, 2012)

It means that the basis for calculation of the punitive damages are again the actual losses that the claimant have had suffered, which again, having no operations – it did not.

However let’s look at the statutory amounts for the sake of the argument, the article 56 of the PRC Trademark Law states:

“Article 56 The amount of compensation for infringement of the exclusive right to the use of a trademark shall be the amount of the profits that the infringer has earned as a result of the infringement during the period of the infringement, or the amount of the losses that the infringed has suffered as a result of the infringement during the period of the infringement, including any reasonable expenses the infringed has paid in its effort to put an end to the infringement.

Where the profits earned by the infringer or the losses suffered by the infringed as a result of the infringement, as mentioned in the preceding paragraph, are hard to determine, the People's Court


shall, on the basis of the circumstances of the infringement, decide to make it not more than RMB 500,000 yuan.” (Trademark Law of the People's Republic of China, 2001)

At approximate RMB6 to $1 this upper limit of the statutory compensation makes no more than $85,000. In this prospective the $60 mln paid by Apple looks like highway robbery. So why did Apple caved in and paid it? We will return to this question after looking at Pfizer case.

What was the Pfizer case in a nutshell? To summarize it in a chronological succession the developments were as follows: the Viagra was made first available in 1989 in the USA and was met with the world-wide demand. After 5 years of successfully expanding its global sales Pfizer filed a patent application in May 1994 for the use of Sildenafil in China. SIPO granted the patent after seven years of examination but the 12 Chinese companies challenged the validity of that decision, in other words Chinese “patent-squatters”, producers of the generic (pirated) versions of the drug were successful in stalling the introduction of the patented drug for 7 years and then they mounted a legal defense to protect the pirated version’s market in China. Finally, in 2007 the Chinese market was legally open to the developer of the drug after mere 12 years of battling regulatory and legal barriers; but it still had to compete with the pirated versions of its drug.

To add insult to injury, the Chinese pirates pounced on the Chinese media-coined transliteration of the Viagra trademark name immediately after it become popular: One month after Pfizer’s launch of Viagra in the United States in April 1998, several Chinese companies filed trademark registrations for Weige with the CTMO. (Chow, 2012). Not one - several. So The Beijing court

ruled that Welman, which applied to register "Wei Ge" (伟哥) as its brand name before Pfizer in

1998 and passed government examinations in 2002, had acted legally, according to chinacourt.org. In effect the Chinese court gave the Chinese name for the patented medicine to the Chinese pirates.

It is interesting to note that development these two cases in China can be compared to what have transpired in the North American courts: in case of Apple the same plaintiff has sued Apple for the same trademark violation. As was noted earlier Proview had also filed a case against Apple in the US. In February 2012, Proview sued Apple in the Santa Clara Superior Court, Proview claimed Apple set up a special company in Roydon, Essex to acquire the rights to iPad name. It had accused Apple of deceiving it into selling the rights to the name by setting up a company, IP Application Development Ltd (IPADL) in the UK. It claimed that Apple said the trademark was "an abbreviation for the company name". However, that case was dismissed by the Santa Clara Superior Court Judge Mark Pierce of the Superior Court of the State of California in Santa Clara County has approved a motion filed by Apple on May 4th, 2012 to dismiss Proview’s lawsuit. “After Proview took its legal case to the U.S., Apple argued for the case to be dismissed on the grounds that the parties had agreed to settle any legal disagreements in Hong Kong. Judge Pierce upheld that view, writing that Proview failed to provide evidence that the selection of Hong Kong was “unreasonable or unfair,”.(LOC).

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Again, the case was dismissed on technicality and not litigated merits, while this short-term defense tactic worked for Apple, but evasion of the law suit in US meant shifting the battle onto the plaintiff’s home turf, where it have backfired.

In the mean time, in 2012 The Canadian Supreme Court has ruled 7-0 the company should have its patent taken away because the drug company attempted to "game" the system, grabbing a patent without disclosing what their invention really was. Pfizer was able to acquire its Canadian patent without naming the compound required to make Viagra, namely, sildenafil citrate. The Canadian patent system, like all patent systems, is a kind of bargain between patentees, who are given a limited monopoly on a particular product or process, and the public, which is supposed to benefit from the disclosure of a new invention, the justices noted in their opinion.

"Pfizer had the information needed to disclose the useful compound and chose not to release it," the ruling said. "As a matter of policy and sound statutory interpretation, patentees cannot be allowed to 'game' the system in this way." (Supreme Court Of Canada, 2012)

“The company that successfully litigated the Pfizer patent is Israel-based Teva Pharmaceuticals, the world's largest generic drug company. Generic Viagra will probably hit the Canadian market in short order and cut Pfizer's profit in that country to almost nothing.” (Mullin, 2012)

From these examples it can be deduced that a viable trademark or an original patent can be stripped away from a rightful owner on mere technicality as in Pfizer case; the Apple was able to protect itself in the domestic court but was defeated on the plaintiff’s home turf. That again underscores the legal risks that IP owners face abroad where they become FDI investors and expose their world-wide assets to the legal risk.

To put these two cases side by side: Apple was forced to pay additional $60 mln to a Chinese party for the previously purchased trademark; Pfizer was denied entry to the Chinese market for 13 years and then denied rights to the name for his patented drug in pirates’ favor.

The fairness of these legal judgments is doubtful. So what have caused those? It was proposed that the cause was ideological and can be termed as “redistributive justice”. This concept is further explored in the next section.

Subchapter 5. Comparison of US and China Trademark Law: is the Chinese trademark law unfair from the western perspective?

Section 1. Distributive justice


As stated by an insightful article, the main difference between American (Western) understanding of trademark property rights can be summed as:

“….“..the basic ideological commitment of American intellectual property is actually heavily utilitarian, not Lockean or Hegelian. The Supreme Court has held consistently and unanimously that American law explicitly treats intellectual property rights in utilitarian terms, as limited monopolies granted to the extent necessary to create incentives for production.”…the United States has approached the issue with arguments based on its theoretical framework for trademark law: utilitarianism. Such an approach has ignored that China has adopted a social planning theory for its trademark laws, embodying consumer welfare and distributive concepts.” (Grinvald, 2008)

What is the meaning of the distributive concept? It is such a redistribution of wealth that appears to be “fair” from the Chinese prospective. Naturally that prospective clashes with the American one.

“Wealth redistribution is one way that the Chinese government is attempting to foster its economic development vision, which is to “eliminate poverty without polarizing society into rich and poor strata.” Chinese policymakers firmly believe that trademarks are one of the keys to economic success. First, providing some trademark protection lures foreign investment into China (through manufacturing and other business investment). This foreign investment, in turn, creates a positive effect on industrial development in China. Redistribution of the wealth stemming from trademark protection provides a base to Chinese entities to build up their own brands and create its own domestic businesses.” (Grinvald, 2008)

Notice the language of distrust in the quote above by the American jurist. This reinforces my insight that the Chinese FDI legal system is perceived by the foreigners as part of the lure intended to trap and to take advantage of the investment.

It is useful to recapitulate the three western theories of the trademark protection:

“….as applied to trademark law, utilitarianism in American legal jurisprudence justifies legal protection because the protection of trademarks maximizes a benefit to society, namely, reduced search costs associated with the purchase of products….A Lockean theory of intellectual property rights premises protection on the natural right to the product of one’s efforts. Locke’s famous proviso states, “The Labor of one’s Body, and the Work of his Hands, we may say, are properly his.”… Hegelian theory, which premises protection on the reasoning that “an idea belongs to its creator because the idea is a manifestation of the creator's personality or self.”” (Grinvald, 2008)

In contrast to these three it was proposed that the Chinese state is utilizing the social planning theory both in lawmaking and in legal practice.

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“The term “social planning theory” was coined by Professor William Fisher as a way to solidify various ideas proposing that intellectual property rights “can and should be shaped so as to help foster the achievement of a just and attractive culture.” These various ideas include “Consumer Welfare”, “A Cornucopia of Information and Ideas”, a “Rich Artistic Tradition”, “Distributive Justice”, “Semiotic Democracy”, “Sociability” and “Respect.” Social planning theory primarily differs from utilitarianism “in its willingness to deploy visions of a desirable society richer than the conceptions of ‘social welfare’ deployed by utilitarians.”” (Grinvald, 2008)

However the perception that the Chinese government is promoting such policies is also viewed with suspicion by the westerners

“The Chinese tradition of paternalism, augmented by the socialist ideals of the current Chinese government, has created an environment where the government is not averse to imposing its vision of a better Chinese society.” (Grinvald, 2008)

In this context “imposing” of course means imposing on the FDI investors. Such imposition means that:

“Application of a redistributive theory of trademark law would continue to grant these (trademark) rights but temper them to allow as much access (to competition) as possible, while still maintaining the trademark” (Grinvald, 2008)

This suggest that in ruling on the Proview v Apple case the Chinese High Court have applied the redistributive theory, agreeing that the Apple payment will be a just repayment to the (Chinese) society in exchange for profiting from the Chinese market.

Section 2. Chinese trademark law as a legal transplant from the USA

It is important to note that the Chinese trademark law evolved as a combination of legal transplantation and direct influence by the American pressure.

The historical evolvement of American and Chinese trademark law, in a nutshell was as follows:

“U.S. trademark laws are organic to the United States: American individuals and businesses wanted and sought trademark protection. In the United States, the earliest call for government legislation providing for trademark protection was a petition to the House of Representatives from Boston sail-cloth manufacturers in 1791. The first federal trademark law was passed in 1870, … culminated in the Lanham Act in 1946, which remains the basis for federal trademark

protection today. In contrast, the first official Chinese trademark legislation (enacted in 1923) was the result of China’s concessions in the treaties of 1903 and 1904 after losing in the Boxer Uprising. However, the passage of this law did not provide real improvement in trademark protection. With the victory by the Communist party in 1949, trademark protection became


minimal and was eventually repealed altogether. It was not until the late 1970s that protection for trademarks was re-established, due in part to American influences. The United States entered into the 1979 Agreement on Trade Relations with China, leading to China’s enactment of the 1982 Trademark Law. The subsequent revisions to China’s statutory and intellectual property framework are due in large part to American activism in China since the 1980s…(but) the goals of the law remained Chinese. The 1982Trademark Law embodied the goals of consumer protection and redistribution..” (Grinvald, 2008)

The table below shows the salient comparative points between the US and the China trademark laws:

Table 5. Comparison of US and China Trademark Law. Source: own research.

US Trademark Law (Lanham Act, 1946)

China Trademark Law(Trademark Law of the People's Republic of China, 1982)

Legal theory foundation

Utilitarianism Social planning

Stated legislative purpose

The intent of this chapter is to regulate commerce within the control of Congress by making actionable the deceptive and misleading use of marks ...; to protect registered marks used ... from interference by State… legislation; to protect...against unfair competition; to prevent fraud .. by the use of … imitations of registered marks; and to provide rights and remedies stipulated by treaties …respecting trademarks, trade names, and unfair competition … between the United States and foreign nations

This Law is enacted for the purposes of improving the administration of trademarks, protecting the exclusive right to use a trademark, and encouraging producers and traders to guarantee the quality of their goods and services and maintain the reputation of their trademarks, with a view to protect the interests of consumers, producers and traders and promote the development of the socialist market economy.

Consumer purpose “The fundamental purpose of a trademark is to reduce consumersearch costs by providing a concise and unequivocal identifier ofthe particular source of particular goods.” (Grinvald, 2008)

To protect the interests of consumers

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US Trademark Law (Lanham Act, 1946)

China Trademark Law(Trademark Law of the People's Republic of China, 1982)

Administrative extra-judicial injunction and seizure

None Where a registered trademark is used.. so as to deceive consumers, the administrative authorities for industry and commerce at different levels shall, … order rectification of the situation within a specified time limit, and may in addition circulate a notice of criticism or impose a fine, and the Trademark Office may cancel the registered trademark.

Judicial penalties: ceiling on damages

In any civil action arising under this chapter, the plaintiff shall be entitled, … subject to the principles of equity, to recover (1) defendant’s profits,(2) any damages sustained by the plaintiff, and (3) the costs of the action. Treble damages for use of counterfeit mark. Statutory damages for use of counterfeit marks.

The amount of damages for infringement ..shall be the profit that the infringer has earned through the infringement during the period of the infringement or the losses that the infringee has suffered … including any reasonable expenses the infringee has incurred in his effort to stop the infringement.Where the profit earned by the infringer or losses suffered by the infringee through the infringement … cannot be determined, the people's court shall grant a compensation not exceeding RMB 500,000

Disposal of seized counterfeit goods

Goods are destroyed Label removed, goods sold or donated

One important vulnerability for the foreign trademark is the right for a domestic contestant to contest it: under Chinese law, once an announcement of a grant of patent rights is made, any interested entity or individual can petition the Patent Reexamination Board to reexamine the patent and declare the patent invalid.

Section 3. Examples of less-than-claimed compensation by the Chinese courts


- Italian Gucci Wins lawsuit Against Chinese Shoes Maker: a well known Chinese shoe manufacturer was ordered by the People’s Court of Shanghai Pudong District to pay Gucci RMB 180,000 for manufacturing a line of shoes that infringed upon Gucci’s trademarked pattern, although Gucci had requested RMB 610,000 in compensation from the shoe company and the department store that sold them (Xinhua, Apr.14, 2008)

- Louis Vuitton Wins Counterfeit, Patent Dispute Cases in China: the Dongguan Intermediate People’s Court ordered a five-star hotel liable for the counterfeit sales of one of the stores located in the hotel, awarding RMB 100,000 to Louis Vuitton, although Louis Vuitton had requested RMB 500,000 in compensation (Xinhua, Mar. 18, 2008)

- Puma Awarded 70,000 Yuan Over Trademark Case: that three defendants were ordered to pay Puma an aggregate of RMB 70,000 by the Zhuhai People’s Intermediate Court, even though Puma had requested RMB 150,000 (SIPO, Dec. 12, 2007,www.sipo.gov.cn/sipo_English)

- U.S. Outdoor Clothing Maker Wins Lawsuit Against Beijing Clothes Market: the Beijing No. 2 Intermediate Court ordered the Beijing Silk Market landlord, the Beijing Xiushui Clothing Company, to pay North Face RMB 40,000 for allowing sales of counterfeit product, although North Face had requested RMB 500,000 in compensation ((Xinhua, Oct. 30,2007)

- Nike Wins Compensation for Trademark Infringement Case, IPR in China: Nike was awarded a total of RMB 340,000 from the three defendants it had sued in the Shanghai No. 2 Intermediate People’s Court, although it had requested RMB 500,000 (Aug. 24, 2007, ttp://english.ipr.gov.cn)

What springs to the eye in all those cases is that the Chinese courts decided not to exercise their right to fine the guilty Chinese party up to the statutory limit of RMB500,000 according to the Trademark Law of the PRC, article 156, which states:

“Article 56 …Where the profits earned by the infringer or the losses suffered by the infringed as a result of the infringement, as mentioned in the preceding paragraph, are hard to determine, the People's Court shall, on the basis of the circumstances of the infringement, decide to make it not more than RMB500,000 yuan.” (Trademark Law of the People's Republic of China, 2001)

In all of the sample cases above the damages awarded by the court were much less than the statutory amount ranging from 3/4ths of the amount (highest) to the 1/10th (lowest). That suggests the redistributive justice concept embodied and at work (see Subchapter 5. Comparison of US and China Trademark Law: is the Chinese trademark law unfair from the western perspective?)

Subchapter 6. Two patent cases of patent pirates rewarded

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Section 1. Chint Group v. Schneider Electric

Background: Chint (a Chinese company) and Schneider (French) had been litigating patents covering low-voltage electrical equipment worldwide since 1999. At least some of the Chint patents in dispute were “utility model patents”—in function somewhat akin to U.S. design patents. Such patents are not carefully examined by the Chinese Patent Office, and their protection is narrower than a traditional utility patents. Under Chinese patent law, infringement and invalidations are bifurcated. Although Schneider attempted to invalidate the Chint’s patent, they can only plead non-infringement in the infringement proceedings. Schneider’s trial before the Wenzhou Intermediate Court of Zhejiang (in Western China) held that Chint’s patents were infringed, and awarded a whopping $45 million. Damages in the Chint case were calculated using a disgorgement-of profits analysis, as is typical in Chinese IP cases. Under Article 60 of the Patent Law, a patentee may elect to recover either the losses it has suffered (using a straightforward lost-profits analysis assuming it would have made all infringing sales) or else recover all of the infringer’s profits. The Court relied on Schneider’s licensing arrangements with other parties and the amount Schneider paid in Chinese taxes to fix the disgorgement amount. This implies a fairly high profit margin—some 37% of sales. Schneider is appealing verdict and has belatedly challenged the patents before the Patent Reexamination Board. In April 2009, Chint and Schneider settled their dispute for approximately $22 million (150 million RMB). (David S. Bloch et al., 2010)

The patent owned by Schneider was used against the company itself by its Chinese competitors:

“Regrettably for Schneider, it patented the technology-at-issue in France, but failed to do so in China. Not having a Chinese patent to enforce against Chint cost Schneider dearly.” (Lim, 2008)

This cases is marked by several unusual features: high damages assessed by the court, a Chinese company claiming patent infringement by a large western corporation, and a large actual settlement funds paid by the western investor. Let’s look at two more similar cases sharing the same features.

“Schneider says the case involves an inadequately-reviewed “junk patent” on a device the French company invented 20 years ago.

If the ruling is upheld, “the whole [intellectual property (IP) rights] environment in China would be compromised,” Schneider warned in a statement. “This could slow down the technology transfer to China, limit the innovation and development of new technologies by Chinese companies and impact the overall foreign and local investment in China, thus hurting all innovation-based companies throughout the world.”

Douglas Clark of Lovells’ Shanghai office, … said a number of prominent Chinese legal academics have in recent years argued for different treatment in Chinese courts of foreign and


domestic IP.“The main argument is that China cannot move beyond its current state of development when a small number of Western companies control so much in terms of IP,” said Clark. Thus, Chinese companies’ infringements should be dealt with lightly; those by foreign companies, more harshly.” (Lin, 2009)

Section 2. Zhejiang Holley Communications v Samsung

According to the decision announced by the Intermediate People's Court of Hangzhou on December 19, 2008, the Korean electronics maker Samsung was ordered to pay RMB50 million (around US$8m) in compensation to the Zhejiang-based Holley Communications for infringing the patent of Holley's GSM/CDMA dual-mode handsets. (Han, 2011)

Now, it behooves to compare these two companies.

Samsung Electronics Co., Ltd. (Korean: 삼성전자) is a South Korean multinational electronics

company headquartered in Suwon, South Korea. It is the flagship subsidiary of the Samsung Group and the world's largest information technology company by revenues since 2009.Samsung Electronics has assembly plants and sales networks in 61 countries and employs around 221,000 people.

Samsung Electronics is the world's largest mobile phone maker by 2011 unit sales and world's second-largest semiconductor chip maker by 2011 revenues (after Intel Corporation). It has been the world's largest television manufacturer since 2006 and the world's largest maker of LCD panels for eight consecutive years. It has the largest market share worldwide in memory chips. The company is the world's largest vendor of smart-phones since 2011. (Samsung, 2013)

It stands to reason that such a company is more probable to be a rightful owner of a such a complex hi-tech patent as “GSM/CDMA dual-mode handsets”. Apparently, Samsung does design and produce handsets for 20 years now.

Let us take a look at Holley claims.

Established in 1970, Holley Group is a trans-regional, multi-industry and export-oriented enterprise. With more than RMB 8 billion total assets and over 10000 staff around the world. Holley ranked No.22 among China top 100 electronic industry enterprise (year 2005) with holdings of 4 public listed companies (3 domestic ones and 1 NASDAQ). After many years of R&D focus on GSM, CDMA, TD-SCDMA and other 3G technologies, Holley becomes one of the largest wireless communication technology application and integrated solutions provider in China. (Holley Communications, 2008)

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Before applying for the contested patent in 2002 Holley was a manufacturer of the low-tech electrical devices and assorted products: “Electricity/gas/water meter and metering system; MV/HV electrical products (lightening arrester, isolator, fuse cut-out);LV electrical product (MCB, switch panel and other accessories);Pharmaceutical product (all kinds of medicine and drugs);Medical care product (blood pressure, thermometers);DVB products (digital satellite receiver, terrestrial receiver);Lightening products (energy saving lamp, lamp fittings);Wireless communication module (zigbee module)”.

But after awarded the patent in 2007, Holley got Chinese premier’s endorsement in a way of a photo-op with a caption: “Premier Wen Jiabao inspected the TD-SCDMA trial network and Holley mobile phones”.

In its triumphant report Holley lists his possession of the contested patent as one of its prized possession, yet until winning that patent from Samsung Holley never produced any handsets with that future, or any handsets at all; but after winning the patent Holley moved aggressively into handset production with such sudden success as securing contracts with the largest telecom operators in China. This naturally cut into market share of Samsung.

This shows that possession of a patent won over from FDI investors is a strategic advantage for a Chinese party and constitutes one of the largest legal risks faced by the investor in China.

Discussion of the Zhejiang Holley Communications v Samsung, and Chint Group v. Schneider Electric.

These two cases is a combination of the previously seen features in the Apple and Pfizer cases. The model of the patent attack employed by the Chinese parties is the same in all these cases:

1. Plagiarize a foreign-registered patent held by the FDI investor in China2. Patent it in own name in China3. Litigate in China the rightful owner of the patent for infringement of the stolen patent4. With collaboration of the courts shake down the patent owner for inordinate amounts

From the legal psychology point of view it is educational to look at the reaction of the legal writers, while commenting on these two cases:

“Chinese courts have shown a marked tendency to award damages in the millions to deserving companies…” (David S. Bloch et al., 2010)

In other wards the legalized patent piracy and subsequent extortion is hailed as a positive development by a western publication named “Doing business in China”. What is the meaning of this obvious irony? Again it’s the redistributive justice at play, it is the price of doing business in China.


The correct and much more realistic prospective is summarized in this pithy warning:

“IP Theft in China – Cost of Doing Business or Barrier to Entry? IP theft in China is not going away, and Western firms doing business in China have to plan accordingly. Westerners considering doing business in China have to plan on someone making a play for your IP. It’s not a matter of “if”, but “when” – and “who”.” (Hupert, 2013)

To be fair, there were instances where the rights of the foreign companies were protected by the Chinese courts, two of such are presented below.

Subchapter 7. Examples of FDI investors protected

Section 1. Facts of the cases

Motorola v Guangzhou Weierwei Electronic Science. In 2007, Motorola filed suit against Guangzhou Weierwei Electronic Science and Technology Company because Weierwei's two-way radio model number VEV 3188 was claimed to fall within the scope of a Motorola Chinese design patent. In December, 2007, the First Intermediate People's Court of Beijing determined that the VEV 3188 two-way radio infringed Motorola's design patent, and Weierwei was ordered to cease the manufacture and sale of the VEV 3188 two-way radios and to compensate Motorola several hundred thousand dollars. (Han, 2011)

Apple v New Apple Concept.New Apple Concept Digital Technology started using an apple device adorned with wings as its logo in 2005, and Apple asked the company to stop in 2006. When the company refused, Apple filed a trademark infringement suit in April 2008. The Intermediate People's Court in Shenyang agreed with Apple’s submissions and ordered New Apple Concept Digital Technology to pay RMB400,000 in compensation to Apple. (Han, 2011)

Starbucks v Xingbake Coffee. On December 31, 2005, the Shanghai No. 2 Intermediate Court ordered Shanghai Xingbake Coffee Shop to pay Starbucks RMB500,000 (approximately US$80,000) in damages for compensation for trademark infringement, despite evidence as to losses suffered or accounts of profit being vague. This decision related to the use of a Chinese translation of Starbucks. In 2007, Shanghai High People’ court affirmed the decision and damages award. (Han, 2011)

Section 2. FDI trademarks protection by the Chinese courts

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In cases presented above of Motorola v Guangzhou Weierwei Electronic Science; Apple v New Apple Concept; and Starbucks v Xingbake Coffee used as the sample cases for the discussion as to how the trademarks of the western investors have been protected. To understand why they were not in the previously discussed cases we need to look at the extra-legal situation of the players. These extra-legalities combine the general balance of power, the assets invested, the number of employees, the potential for expansion in China and so on. Below I will attempt to present the balance of power matrix for these three cases.

Motorola v Guangzhou Weierwei Electronic Science: in 2007 Motorola was an employer to at least 12,000 personnel in China with facilities in 90 offices around the country. In addition Motorola is a global hi-tech firm with wealth of IP and investment capital. (TNW, 2012)

On the other hand, Guangzhou Weierwei Electronic Science is a small, local outfit with no prospects or particular political clout as gleaned from its website12. It is a manufacturer of outdated walkie-talkies and while it is an employer but so is a Motorola so in the political balance of power, the courts were neutral and gave Motorola victory based on it’s case merits; upholding the justice but not hurting the Chinese economy or pragmatic ideology.

Apple v New Apple Concept: Apple is a huge employer in China through its sub-contractor Foxconn. The Chinese opponent is a small firm with no power, the balance of power being heavily tipped in favor of Apple it was granted the trademark protection on the case merit. Again the justice was upheld in favor of the more powerful party and it is not a coincidence.

Starbucks v Xingbake Coffee: the western fast food chains such as McDonalds, KFC, Subway, Burger King etc were inordinately successful in China combined employing hundreds of thousands of Chinese employees. It was noted that “The country’s food service industry has recorded double-digit annual growth since 2003 but is still only half the size of the US market, ... The industry, estimated at about Rmb2,000bn ($303bn) in 2009, is forecast to grow to about Rmb3,000 bn by 2014, according to industry estimates.” (FT, 2011)

Starbucks is a global coffee catering empire and a part of that trend in China. It has said recently that it “expects to more than double its number of employees in the Asian-Pacific region to 40,000 people over the next five years… Starbucks posted revenue of $214.1 million in China and the Asian-Pacific region combined in the quarter through December, up 28% from a year earlier. Starbucks stores in China now average $886,000 in annual sales, up from $507,000 in 2008. The company expects China to become its largest market outside the U.S. in 2014.” (Wall Street Journal, 2012)

Against such might a small Chinese outfit, Xingbake Coffee, did not have a chance. Again justice was upheld in favor of the more powerful party. This seem like a trend.

12 http://www.gzwew.com/eDefault.asp


The overall analysis of all cases in this chapter will be carried over in the conclusion to this chapter and finalized in the Chapter 4. It will utilize the power balance matrix outlined here.

Subchapter 8. The cases of counterfeit brand name alcohol

Section 1. Facts of the cases.

Case 1. In March 2009 certain Liu Zhaolong purchased a supply of empty, branded secondhand bottles, along with raw materials, labels, packaging, and a capping machine He refilled the bottles with appropriately colored generic grain alcohol, and where the original labels had been damaged, attached counterfeit labels reproducing major brands: Remy Martin, Martell, Hennessy, Royal Salute, Chivas and Johnnie Walker. The product was distributed and sold in the main cities of several provinces, including but not limited to Zhengzhou, Shijiazhuang and Xining from March to September 2009, with total sales up to Rmb201,507 (US$31,500).

On September 12 2009. the Daxing Branch of the Beijing Public Security Bureau raided the workshop, seizing the counterfeit materials and tools. After a full investigation, the case was referred to the Beijing Daxing District People's Procuratorate for prosecution. The Procuratorate subsequently agreed to prosecute Liu, and on May 21, 2010 Beijing Daxing District People's Court held that he had committed the crime of counterfeiting registered trademarks. He was sentenced to four years' imprisonment, and fined Rmb150,000 (US$23,500) (Matthias and Jiang, 2011).

Case 2. In December 2010, the International Federation of Spirits Producers' investigators that act on behalf of several foreign alcohol brand owners found a factory located in the Jinan District of Fuzhou City and seized, with the Fuzhou Municipal Public Security Bureau, more than 1,400 bottles bearing foreign famous brands. The value of seized goods added up to Rmb575,635. Two suspects were arrested on the spot. Wan Hui Da, representing the collective interests of several foreign brand owners, followed up the case before the PSB, the Procuratorate and represented the brand owners before the Criminal Court, and provided legal opinion on the case to the authority. On December 2011, the Fuzhou Gulou District Court rendered its judgment. The court held that, the act of the defendants constituted crime of counterfeiting a registered trademark; the principal defendant, Guan Yuanqing, is sentenced to a fixed term of 5 years in prison and a fine of Rmb290,000. (Wan Hui Da, 2010)

Section 2. Discussion of salient comparison points

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What jumps to the fore is the administrative recourse available to the claimant: a raid by the executive authorities, in absence of a court decision allowing seizure. Second, a punishment by imprisonment and the number of years of such indicating that the counterfeiting is considered a serious criminal offense in China. Lastly, the swiftness of proceedings is impressive – 1 year from apprehension to sentencing. Also it is worth noting the definition of the offence: “a crime of counterfeiting a registered trademark”.

Section 3. Comparable precedents and legal framework in the West: a UK example

I select different countries for comparison with intent to provide a broad, comprehensive, yet coherent comparison and in this instance, the UK example is particularly telling. It is obvious that bootleg alcohol represents a large part of the shadow economy in the UK:

“Alcohol fraud costs the UK around £1bn a year in lost revenue, according to government estimates. In a series of raids of licensed premises at the end of last year, 26% of outlets were found to be selling counterfeit alcohol in south west England, 17% were doing so in Manchester and around 10% in West Yorkshire. …Over the past year there have also been several discoveries of illegal alcohol production and bottling factories across the country. In October, Her Majesty's Revenue and Customs (HMRC) officers seized 25,000 liters of counterfeit vodka, along with bottling and labeling equipment in Cheetham Hill, Manchester.” (BBC, 2011)

Section 4. Procedural and legal comparison

In China the pre-emptive raids and seizure are conducted by the local authorities. As reported by the law practitioners:

“In China, a law enforcement force consisting of the State Administration for Industry and Commerce (SAIC), the Public Security Bureau, the Copyright Office and Sipo Intellectual Property Office is designated to separately or jointly enforce intellectual property rights, depending on the complexity of the case. Because there is no meaningful discovery procedure in China, …. After evaluating the amount and value of goods seized during a raid, the rights holder will be in a position to determine whether to pursue administrative procedures, litigation, or settlement... if the rights holder identifies production of counterfeit products, he can request that China's customs officers monitor exports of such products in an effort to prevent their export. To apply for border action by Customs, the rights holder must file a recordation of copyrights and trademarks with the Customs General Office. The record can be filed either prior to the application for the border action or concurrently with the application itself. Following a raid in China, law enforcement will hold administrative proceedings. The proceedings usually last two to three months. Hearings are not public….a claim for damages or injunction should be issued by the civil courts. A plaintiff institutes a suit by filing a written complaint with the local court of the appropriate level. The evidence at trial may be presented either by the parties to the


action or by the court itself. A trial is conducted as a series of hearings usually occurring over three to six months. Appeals are conducted by the next higher level of court, as a trial de novo.

If the rights holder seeks criminal remedies against infringers, we recommend that a complaint be filed directly with the public prosecutor's office. The prosecutor has discretion to initiate a raid or may do so upon a rights holder's request. Following a raid, the prosecutor will hold a set of hearings. The proceedings usually last two to three months before the Prosecutor files an indictment. The criminal penalties with respect to counterfeiting are as follows: (a) for use or sale resulting in substantial gains, not more than three years imprisonment and/or fine; (b) for use or sales where illegal income is enormous, not less than three years or more than seven years imprisonment and fine. All kinds of appropriate evidence discovered in inspections or searches that may be used to prove the guilt or innocence of a defendant may be seized. Products other than those named in a warrant may be seized at the discretion of law enforcement officials.” (Wang and Wang, 2012)

In a fair similarity to China, in the UK there is also a quasi-governmental organization in charge or preliminary discovery, raids and seizure of the counterfeit consumer goods: The Trading Standards Institute; as its website informs, it is a professional membership association formed in 1881. It represents trading standards professionals in the UK and overseas - in local authorities, the business and consumer sectors and in central government13.

The penalties meted out by the UK courts for selling and manufacturing counterfeit alcohol seem to be in line with punishment ruled on by the Chinese court in the case above:

“A South Oxfordshire shopkeeper who endangered people’s health by selling counterfeit alcohol has been fined around £12,000.Paramjit Singh Khiali of Ansh Food and Wine in Chinnor pleaded guilty to eight charges under food safety and trade mark laws at Oxford Magistrates Court ….The 47-year-old was caught after a member of the public alerted Oxfordshire County Council’s Trading Standards Team to the fake goods after buying some counterfeit wine. Following an investigation carried out by Oxfordshire Trading Standards, Mr Singh Khiali was found to be stocking 147 bottles of counterfeit Blossom Hill wine, 28 bottles of counterfeit Jacob’s Creek wine and four bottles of Vodka at his store.” (Oxfordshire County Council, 2012)

A spectacularly illustrative case of an underground alcohol factory in the UK is a good counterpart to Mr. Liu’s criminal enterprise:

“The ringleader of a bootleg alcohol gang which produced more than a million litres of illegal vodka costing the taxman £10 million in lost revenue was jailed for 12 years today. Harvey Conroy ran a 'determined and professional' outfit which produced fake vodka and tobacco without paying excise duty or VAT, defrauding the state of millions of pounds. Richard Christie QC, for the prosecution, said Conroy orchestrated the fraud in a bid to make massive profits, with the factories working 24 hours-a-day. Conroy was convicted of three counts of conspiracy 13 http://www.tradingstandards.gov.uk

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to cheat HMRC along with Michael Oliver, 62, of Cae Brynton Road, Newport, Gwent, who was jailed for 10 years. Alan Saunderson, 59, of Linden Close, west Kensington, London, was jailed for eight years. Steven Davis, 46, of South Quay Square, Poplar, east London, who was jailed for 10 years; and Geoffrey Hall, 51, of Town End Crescent, Stoke Goddington, Newport Pagnell, Buckinghamshire, who was jailed for 11 years. A sixth man - Christopher Hill, 60, of Glenroy Court, Magor, Monmouthshire - was convicted of two count of conspiracy to cheat HMRC by evading duty and VAT on alcoholic products. He was jailed for six-and-a-half years.” (Daily Mail, 2010)

The UK perpetrators were jailed for terms ranging from 12 to 6 years, while the Chinese statutes of the PRC Criminal Law (art. 213-215)(see Appendix 4. The Criminal Law of the PRC, 1997.) limits the maximal prison term to 7 years.

Another difference is the criminal offence for which the defendants were prosecuted. The Chinese ones were prosecuted for “a crime of counterfeiting a registered trademark”. While the initial prosecuting party in the Chinese case were the rights holder to the trademark (Diageo) in the UK case it was the Crown Prosecution Service, the counterpart of the PRC’s Procuratorate. This is explained by the fact that the discovery was made by the Trading Standards Institute and not by the right’s holder.

Moreover, the defendants were convicted not for trademark counterfeiting as in China, but rather for the tax evasion. The trademark counterfeiting in the UK is governed by the Trade Marks Act 1994 (UK, 1994), which does make a trademark infringement a criminal offence:

“Section 92 of the Trademarks Act provides protection through criminal penalties aimed at deliberate counterfeit use of trademarks (including Community trademarks). The penalties on indictment include imprisonment for up to 10 years, an unlimited fine or both. The activities caught are wide and include selling, offering for sale and distributing counterfeit goods, or applying signs to goods or packaging which could be confused with a rights holder’s trademark. … Criminal prosecutions are usually brought by the state, through Trading Standards. Local Trading Standards offices have a statutory duty to enforce the criminal provisions of Trademarks Act.” (Dickerson, 2012)

However the defendants were convicted under the Fraud Act 2006 ( (UK, 2006) which provides for maximum imprisonment of ten years, it is worth noting, that the ringleader in the UK case above was sentenced to total of 12 years which exceeds the maximum punishment of the Fraud Act 2006.

Section 5. Conclusion to comparison of alcohol counterfeiting offenses between China and the UK


In China the initial discovery, seizing and arrests lies with the local governmental authorities which is fairly similar to the role the Trading Standards Institute is playing in the UK. Also in China the prosecution seems to prefer accusing the defendants for statutory crimes, rather than leaving the role of the plaintiffs to the wronged party.

Subchapter 9. Overview of the labor conflicts in China and Foxconn case

Section 1. Statistics and legal environment

Before the Labor Contract Law of 2008 went into effect, it was estimated that 40 percent of full-time workers did not have written contracts. The 2008 Labor Contract Law requires employers to provide full-time employees with written contracts that contain the term of employment, job description, place of work, working hours, rest and leave periods, wages, social insurance, labor protections, and description of working conditions. Part-time employees must have at least an oral contract. After the Labor Contract Law of 2008 was passed, the number of labor disputes in court jumped by more than 90 percent over the previous year. In some developed cities, the number of labor-related court hearings tripled.

Workers in China do not have the right to organize independently of the ACFTU and strike. However, in the summer of 2010, workers at several factories in Guangdong province organized independently and went on strike for better wages and working conditions. Although the workers did not have the right to take such actions, the government sided with the employees and allowed their organization and strike to continue. The strikes of the summer of 2010 were a break with previous labor unrest because until that point, most labor disputes were settled without strikes and were not covered in the media. Ultimately, the strike continued without an intervention by the ACFTU and the workers won wage increases of 24-34 percent.

A string of worker suicides at the contract electronics manufacturer Foxconn led to intense international media coverage. As a result of the embarrassment from the international coverage of worker strikes, Foxconn raised wages by 30 percent for tens of thousands of its workers. After these events, the government then intervened by significantly raising minimum wages in many of the major industrial centers of the country. As an example of the scramble to meet worker expectations, the Beijing city government raised its minimum wage twice in a six- month period. In March of 2011, the southern manufacturing hub of Shenzhen have raised its minimum wage by 20 percent. (Jackson, 2011)

Section 2. Case of Foxconn

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This section discusses persistent suicides issue as a liability to employer and to Apple under Chinese or the US law

Background: “Foxconn, which manufactures gadgets for the likes of Apple, Sony, Nintendo and HP, among many others, has had a grim history of suicides at its factories. A suicide cluster in 2010 saw 18 workers throw themselves from the tops of the company's buildings, with 14 deaths.

In the aftermath of the suicides, Foxconn installed safety nets in some of its factories and hired counselors to help its workers.

The latest protest began on January 2 after managers decided to move around 600 workers to a new production line, making computer cases for Acer, a Taiwanese computer company.

"We were put to work without any training, and paid piecemeal," said one of the protesting workers, who asked not to be named. "The assembly line ran very fast and after just one morning we all had blisters and the skin on our hand was black. The factory was also really choked with dust and no one could bear it," he said.

Around 150 Chinese workers at Foxconn, the world's largest electronics manufacturer, threatened to commit suicide by leaping from their factory roof in protest at their working conditions.

The workers were eventually coaxed down after two days on top of their three-floor plant in Wuhan by Foxconn managers and local Chinese Communist party officials.

"Because we could not cope, we went on strike," said the worker. "It was not about the money but because we felt we had no options. At first, the managers said anyone who wanted to quit could have one month's pay as compensation, but then they withdrew that offer. So we went to the roof and threatened a mass suicide".

The worker said that Foxconn initially refused to negotiate, but that the workers were treated reasonably by the local police and fire service.

A spokesman for Foxconn confirmed the protest, and said that the incident was "successfully and peacefully resolved after discussions between the workers, local Foxconn officials and representatives from the local government".

He added that 45 Foxconn employees had chosen to resign and the remainder had returned to work. "The welfare of our employees is our top priority and we are committed to ensuring that all employees are treated fairly," he said.” (The Telegraph, 2012)

I will approach this case with comparative analysis to determine an answer to two questions: granted the presence of inhuman working conditions is Apple, the largest buyer of the Foxconn products is legally responsible for suicides and mistreatment of workers under A) Chinese, and B) US laws. These questions will be further used to determine that amount of legal and


investment risk posed by the violation of the safe labor codes to the direct investors in China; since for all intents and purposes Apple is such an investor.

Of course, Apple is not the direct employer but has a large amount of influence over the working conditions at the factories of its subcontractors:

- Although the Chinese workers are employed by Foxconn and not directly by Apple itself, it is Apple that has the responsibility to ensure that working conditions are reformed. First, Apple can choose its suppliers; it does not have to contract out to a manufacturer where working conditions are so severe. Second, Apple sets the unit price for Foxconn’s products so low that Foxconn makes a profit of less than 2 percent, while Apple’s own profit exceeds 30 percent. As long as Apple refuses to pay more for its production, Foxconn will squeeze and pressure its employees.

- Apple could pay more for Foxconn’s work, and demand that these payments be passed onto the workers. The additional costs would be of little consequence to Apple. Foxconn’s assembly costs (which include non-labor costs) are approximately $15 per iPhone, a tiny fraction of the average price paid by wireless carriers of $630 and just 5 percent of Apple’s estimated $319 profit per phone. So Apple could double what it pays Foxconn and still make enormous profits or perhaps charge customers slightly more. Or it could draw on its enormous cash reserves. Or it could even pay its top officials a little less. Apple CEO Tim Cook received $378 million in pay last year. (Eisenbrey, 2012)

Comparison to other Apple and Foxconn factories:

- it almost goes without saying that exploited Foxconn workers in China have nowhere to turn for help in their country; their problems are ignored by the government, are barely covered by the Chinese media , and they have no real union to defend them. The situation is different when it comes to the new production of Apple products by Foxconn in Brazil. The government of Brazil demanded certain conditions of operation, and there is a union working actively on their behalf. The effects of this work were described by panelist Luis Carlos de Oliveira, the vice president of the Metal Workers Union of Jundiai, Brazil, which represents Foxconn/Apple employees at a factory that manufactures iPhones.

- Working a maximum of 44 hours a week (and not up to 70 hours), employees in Brazil earn twice the basic monthly salary of their Chinese counterparts, have a guarantee of 30 days paid vacation (versus five days in China), four months of paid maternity leave (none in China), as well as guaranteed severance pay and other benefits that far surpass what Apple/Foxconn offers in China. (Eisenbrey, 2012)

It is quite obvious that at least the Chinese law in regard to the workers overtime has been broken:

According to section 36 of Chinese Labour Law, “laborers shall work for no more than 8 hours a day or more than 44 hours a week on average.” For extension of working hours, section 41

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prescribes that after negotiation with the trade union and labourers, the employer may require to extend working hour for not exceeding 1 hour per day, and for special reasons, for not exceeding 3 hours a day under the condition that the health of labourers is guaranteed. “However, the total extension in a month shall not exceed 36 hours.”

In a sharp contrast, according to a questionnaire survey among Foxconn workers, 75% of them only have 4 days off per month on average, 73.3% work for more than 10 hours per day, and the average monthly extension of work is 83.2 hours, more than doubling the legal monthly extension hours . It is no defense to claim that the extension is in agreement with the labourers as a proper interpretation of section 41 suggests that the ceiling of 36 hours extension per month shall not be conditioned by any negotiation. The obvious conclusion is that Foxconn breaks the law. (Zhang, 2011)

Section 3. The legal doctrines that could support Apple’s legal liability

Apple Inc. is an American multinational corporation headquartered in Cupertino, California. That provides a good comparison situation due to existence of a well-established Privette Doctrine, which holds that owners and general contractors are not liable for injuries to the employees of subcontractors unless they have affirmatively done something by act or omission to cause the injury, which has an almost 20 year history in California.

In 1993, the California Supreme Court in Privette v Superior Court found that a homeowner was not liable for injuries when a roofing subcontractor's employee was burned by hot tar. Over the years, the doctrine has been extended to general contractors. At the same time, exceptions have been carved out of the original holding involving breach of a non delegable duty imposed by statute, for supplying defective equipment and for the failure to warn of hidden dangerous conditions. None of these exceptions undermined the primary rationale behind Privette shifting liability for injuries to subcontractor employees back to the subcontractor for policy reasons due to the availability of workers compensation benefits. In the absence of affirmative negligence of the property owner or general contractor, the courts have reasoned that the subcontractors are in the best position to protect the welfare of their own employees.

However, the pending Seabright case involves severe injuries incurred by a subcontractor employee responsible for the maintenance of certain luggage conveyors at the San Francisco Airport who became caught in a machine because of a missing guard required to be present by Cal OSHA regulations. Defendant US Airways, which leased the premises, including the conveyor in question, successfully moved the court for summary judgment arguing that, as the injured person was an employee of a subcontractor, it was allowed to delegate the responsibility and liability for his safety to his employer subcontractor, leaving workers compensation as the exclusive remedy. The opposing argument is that the Cal OSHA regulations imposed a non


delegable duty on US Airways, which in turn would defeat their Privette defense. (MacDonald, 2011)

In more detail, the Supreme Court's opinion in Privette, which generally addressed the issue of when a hirer may be held liable for injuries to an employee of a subcontractor hired by the hirer. (Privette v. Superior Court, 5 Cal. 4th 689 (1993).) The Supreme Court reaffirmed the common law rule that the hirer has no liability to someone injured by the subcontractor, because it has no right to control the safety conditions of the workplace, whereas the independent contractor is better situated to do so. The Court noted that a number of exceptions to the common law rule of no liability had developed over the years. This included the doctrine of peculiar risk/inherently dangerous work, where the hirer could expect harm from the work it had retained the independent contractor to do, and thus could not delegate responsibility for a safe work place to the contractor when an innocent third party was injured. The Court then held that the doctrine of peculiar risk did not apply where the injured party was an employee of the contractor and had workers compensation benefits.

One of Privette's progeny later set forth the theory of "retained control" as an exception to Privette's general rule of no liability of a hirer to the employee of a subcontractor. (Hooker v. Department of Transportation 27 Cal. 4th 198, 206 (2002).) Since the common law rule of no liability to the hirer was partly based on the grounds that the hirer had no control over, and thus no responsibility for, safety conditions of the workplace, Hooker held that the hirer could be held liable when it retained control over workplace safety conditions. Hooker emphasized the need for a plaintiff to prove that the hirer had affirmatively contributed to the hazardous condition. (Brainich, 2012)

Therefore the Privet doctrine is establishing the boundaries of its application by three more general doctrines: a non delegable duty due to existence of reasonable expectations, relevant laws and regulation; a peculiar risk doctrine and a retained control doctrine.

As was shown in the facts of the case all the three doctrines are applicable in Foxconn case effectively negating the Privette doctrine. To wit, - Apple was aware of the safety violations hence reasonable expectations of harm to workers; the sweatshop working environment has created a peculiar risk in the subcontractor’s factories; and Apple had control over Foxconn, sufficient to amount of a retained control needed to create a safe working environment.

Thus there is a case against Apple in California court, the place of its domicile. The next questions to be addressed is the issue of the forum non conveniens. Would a US court entertain a notion of such a litigation at all?

And indeed and ongoing legal debate in the US Supreme Court shows that such a legal framework does exist in the form of the Alien Tort Statute (US Congress, 1789) (ATS), which was a part of the Judiciary Act of 1789. The case at hand involves about a dozen Nigerians now living in the United States who allege that Royal Dutch Petroleum, the parent company of Shell

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Oil, aided and abetted the Nigerian government in torturing and killing people protesting the company’s operations in the Ogoni region during the 1990s.The debate about whether a founding-era law, the Alien Tort Statute, can be used as a vehicle for pressing human rights lawsuits still remains unresolved. This law allows federal courts to hear “any civil action by an alien for a tort only, committed in violation of the law of nations or a treaty of the United States.” (US Code, ibid.)

Several prominent cases have been litigated under ATS in lower level courts with some success, these include:

- Kiobel v. Royal Dutch Petroleum: The plaintiffs in Kiobel were citizens of Nigeria who claimed that Dutch, British, and Nigerian oil-exploration corporations aided and abetted the Nigerian government during the 1990s in committing violations of customary international law. Outcome: the Supreme Court announced on March 5, 2012, that it would hold additional argument on the case during the October 2012 term, and directed the parties to file new briefs on the question "Whether and under what circumstances the Alien Tort Statute, 28 U.S.C. § 1350, allows courts to recognize a cause of action for violations of the law of nations occurring within the territory of a sovereign other than the United States." (US Supreme Court, 2012)

- Sarei v. Rio Tinto: In 2000, residents of the island of Bougainville in Papua New Guinea brought suit against multinational mining company Rio Tinto. The lawsuit is based on a 1988 revolt against Rio Tinto, and the plaintiffs allege that the Papua New Guinea government, using Rio Tinto helicopters and vehicles, killed about 15,000 people in an effort to put down the revolt. Outcome: On October 25, 2011, the Ninth Circuit Court of Appeals, sitting en banc, issued a divided opinion holding that certain claims against a foreign corporation implicating the conduct of a foreign government on foreign soil could proceed under the ATS. (US 9th Court of Appeals, 2011)

- Kpadeh v. Emmanuel: Charles McArthur Emmanuel (also known as "Chuckie Taylor" or "Taylor Jr."), the son of Charles Taylor, former President of Liberia,was the commander of the violent Anti-Terrorist Unit (ATU), commonly known in Liberia as the "Demon Forces". In 2006, U.S. officials arrested Taylor Jr. upon entering the U.S. and the Department of Justice later charged him based on torture he committed in Liberia. He was convicted of multiple counts of torture and conspiracy to torture and was sentenced to 97 years in prison. The World Organization for Human Rights USA and the Florida International University College of Law filed a civil suit in the Southern District of Florida on behalf of five of Taylor Jr.'s victims pursuant to the Alien Tort Statute and the Torture Victim Protection Act.The plaintiffs won by default judgment on all counts, and in February 2010, the court found Taylor liable to the plaintiffs for damages of over $22 million. (Rufus Kpadeh et al. v. Charles McArthur Emmanuel, No. 09-20050-civ (S.D. Fla. Feb. 5, 2010))


- Presbyterian Church of Sudan v. Talisman Energy, Inc.: On October 2, 2009, the Court of Appeals for the Second Circuit, in Presbyterian Church of Sudan v. Talisman Energy, Inc., held that "the mens rea standard for aiding and abetting liability in Alien Tort Statute actions is purpose rather than knowledge alone." In this case, which involves allegations against a Canadian oil company concerning its purported assistance to the government in Sudan in the forced movement of civilians residing near oil facilities, the court concluded that "plaintiffs have not established Talisman's purposeful complicity in human rights abuses." In reaching that conclusion, the Second Circuit stated that "the standard for imposing accessorial liability under the Alien Tort Statute must be drawn from international law; and that under international law a claimant must show that the defendant provided substantial assistance with the purpose of facilitating the alleged offenses." (US Court of Appeals for the Second Circuit, 2009)

- Sinaltrainal v. Coca-Cola Company: On August 11, 2009, the Court of Appeals for the Eleventh Circuit issued a decision in Sinaltrainal v. Coca-Cola Company.In this case, plaintiffs alleged that Coca-Cola bottlers in Colombia collaborated with Colombian paramilitary forces in "the systematic intimidation, kidnapping, detention, torture, and murder of Colombian trade unionists." However, the district court dismissed the complaint and the Eleventh Circuit upheld that ruling. In doing so, the Eleventh Circuit relied upon the Supreme Court's Ashcroft v. Iqbal decision in addressing the adequacy of the complaint, which has must have "facial plausibility" to survive dismissal, and noted that Rule 8 of the Federal Rules of Civil Procedure demands "more than an unadorned, the-defendant-unlawfully-harmed-me accusation." The Eleventh Circuit then applied the Iqbal standard to plaintiffs' allegations against Coca-Cola and held that they were insufficient to survive dismissal. (US Court of Appeals for the 11th Circuit, 2009)

- Bowoto v. Chevron Corp.: Nigerian villagers brought claims against Chevron Corp. regarding events that occurred on a Chevron offshore drilling platform in 1998, when Nigerian soldiers suppressed a protest against Chevron's environmental and business practices. The protesters, with the help of nonprofit organizations including the Center for Constitutional Rights, the Public Interest Lawyers Group, and EarthRights International, brought claims for wrongful death, torture, assault, battery, and negligence against Chevron, alleging that the company had paid the soldiers that landed on the platform and were therefore liable for the actions that they took. In December 2008, a jury found that Chevron was not liable. (Reuters, 2008)

- Wang Xiaoning v. Yahoo!: In 2007, the World Organization for Human Rights USA filed a lawsuit against Yahoo! on behalf of Chinese dissidents Wang Xiaoning and Shi Tao (Guao Quingsheng), claiming jurisdiction under the ATS. According to the complaint, Wang and Shi Tao used Yahoo! accounts to share pro-democracy material, and a Chinese subsidiary of Yahoo! gave the Chinese government identifying information that allowed authorities to identify and arrest them. The Complaint alleges that the plaintiffs were subjected to "torture, cruel, inhuman, or other degrading treatment or punishment, arbitrary arrest and prolonged detention, and forced labor." Yahoo! settled the case in November 2007 for an undisclosed amount of money, and it agreed to cover the plaintiff's legal costs as a part of the settlement. In a statement released after

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the settlement was made public, Yahoo! said that it would "provide 'financial, humanitarian and legal support to these families' and create a separate 'humanitarian relief fund' for other dissidents and their families." (PCWorld, 2007)

- Doe v. Unocal: In September 1996, four Burmese villagers filed suit against Unocal and its parent company, the Union Oil Company of California; in October 1996, another fourteen villagers also brought suit.[54] The suits alleged various human rights violations, including forced labor, wrongful death, false imprisonment, assault, intentional infliction of emotional distress and negligence, all relating to the construction of the Yadana gas pipeline project in Myanmar, formerly Burma.

In 2000, the district court dismissed the case on the grounds that Unocal could not be held liable unless Unocal wanted the military to commit abuses, and that plaintiffs had not made this showing. Plaintiffs appealed and ultimately, shortly prior to when the case was to be argued before the Ninth Circuit en banc court in December 2004, the parties announced that they had reached a tentative settlement. Once the settlement was finalized in March 2005, the appeal was withdrawn and the district court opinion from 2000 was also vacated. According to a joint statement released by the parties, while the specific terms were confidential, "the settlement will compensate plaintiffs and provide funds enabling plaintiffs and their representatives to develop programs to improve living conditions, health care and education and protect the rights of people from the pipeline region. These initiatives will provide substantial assistance to people who may have suffered hardships in the region." (ERI, 2005)

Conclusions to the Foxconn case: as the analyzed precedents above demonstrate, the Alien Torts Statute is a viable albeit a tenuous jurisdiction to proceed under the US law. It is true that currently the judicial opinion in the US is tipped against corporate responsibility under ATS however the court decisions point to a certain controversy among American judges that can be exploited: As of 2011, there was a circuit split regarding whether corporations, as opposed to natural people, could be held liable under the ATS. In 2010 the Second Circuit Court of Appeals held in Kiobel v. Royal Dutch Petroleum Co. that "customary international law has steadfastly rejected the notion of corporate liability for international crimes" and thus that "insofar as plaintiffs bring claims under the ATS against corporations, plaintiffs fail to allege violations of the law of nations, and plaintiffs' claims fall outside the limited jurisdiction provided by the ATS." However, in 2011, the Seventh Circuit Court of Appeals, the Ninth Circuit Court of Appeals, and the D.C. Circuit Court of Appeals all ruled that corporate liability is possible under the statute.

Given the previous cases that were either successfully litigated or settled out of courts, especially the Yahoo! Case above, one has all the reasons to think that the motion in US against Apple could be successful. This hypothetical case has a direct tie to the US, it is allegedly an exception to the Privette doctrine, and it is arguably within the jurisdiction of ATS.


We leave the reader with this succinct impression left by the Foxconn suicide case on a UC Berkeley University sociology professor:

“China’s development strategy throughout these more than 30 years not only accomplished an economic miracle. It deepened regional inequalities, prolonged stagnation of wages, and deprived migrant workers’ citizenship and human rights. To ensure decent conditions at the workplace level, a genuine workers’ democratic participation system is indispensable. Without effective channels of expression and association, the suicide jumpers chose to use their own flesh and life as a means of accusation. In our society, no one should have to make this kind of sacrifice. Was it suicide or murder? In this case, the evidence suggests that suicide was tantamount to murder.” (Burawoy, 2012)

Subchapter 10. ConocoPhillips oil spill as case of environmental legal risks

Section 1. The facts of the case

ConocoPhillips (康菲石油)is an integrated energy company with interests around the world.

Headquartered in Houston, the company had approximately 29,900 employees, $160 billion of assets, and $244 billion of annualized revenues as of June 30, 2011.

ConocoPhillips China, a wholly owned subsidiary of ConocoPhillips (NYSE:COP). As operator of the field, ConocoPhillips China has been leading the response to two incidents that occurred on June 4 and June 17 and resulted in the release of approximately 700 barrels of oil into Bohai Bay and 2,500 barrels of mineral oil-based drilling mud onto the seabed. It has been ordered by China’s State Oceanic Administration (SOA) to suspend production activities at the Peng Lai 19-3 field in Bohai Bay, China, pending certain steps

The Peng Lai 19-3 field has been operating at reduced rates since the incidents occurred in June. The shutdown will have an impact on production from the field, which averaged approximately 56,000 net barrels of crude oil per day in 2010. ConocoPhillips holds a 49 percent interest in the Peng Lai 19-3 field which represents approximately 3 percent of the company’s total annual production. (ConocoPhillips, 2011)

Section 2. The ensuing legal actions

I will follow several legal actions brought or contemplated against ConocoPhillips and its Chinese counterpart in the aftermath of this incident. The goals of this exercise would be to observe the outcomes and to compare those to the precedents abroad, in order to learn about the differences and similarities in the procedural paths taken and amounts of compensation (if any)

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granted by the courts, with a view to better assess legal risks faced in China by the FDI investors. This small flurry of actual and putative lawsuits is as follows:

1. In December of 2011 a maritime court in the northern coastal city of Tianjin accepted a case of compensation claims from aquaculture farmers against the China unit of ConocoPhillips in compensation for dead clams killed by a spill from an oilfield operated by ConocoPhillips. The claims as stated in the official court notification to Conoco were: “1. The two defendants shall be ordered to compensate for the losses incurred to the plaintiffs due to pollution of the environment, a total of RMB 234,574,600 Yuan; 2. The two defendants shall be ordered to pay the appraisal cost paid in advance by the plaintiffs, which is a total of RMB 7,037,200 Yuan” (Tianjin Maritime Court, 2012)

2. A putative lawsuit that was never brought to court was contemplated by the Chinese government represented by its unit, China’s maritime authority which was preparing to sue U.S. firm ConocoPhillips over an oil spill in China's northern Bohai Bay once it appoints a team of lawyers. It intended to select a team of eight law firms to file the suit, from a group of 49 companies that have expressed interest in representing China in the case. (Reuters, 2012)

3. A class action of 30 Chinese fishermen was brought in the US District Court Southern District Of Texas, Houston Division against Conoco in 2012. The jurisdiction was claimed as: “Because some of these claims arise under federal law and international treaties, this Court has subject matter jurisdiction over these claims as a federal question, 28 U.S.C. § 1331, and diversity of citizenship, 28 U.S.C. § 1332(a)(2). Plaintiffs are citizens of China. Defendant ConocoPhillips is a citizen of Texas. The matter in controversy for each plaintiff, exclusive of interest and costs, exceeds the sum or value of $50,000. 4. Because some of these claims are brought by aliens under tort law, where the tort was committed in violation of the law of nations or a treaty of the United States, this Court has jurisdiction under the Alien Tort Claims Act, 28 U.S.C. § 1350” (US District Court of Texas, 2012)

4. A class action was brought in 2012 by a certain Sam Sinay et al. against top executives of CNOOC Limited in United States District Court Southern District Of New York. The charges were directed against CNOOC Limited, and its officers Yang Hua and Zhong Hua. CNOOC Limited, along with its subsidiaries, is a producer of offshore crude oil and natural gas and an independent oil and gas exploration and production company. CNOOC is China’s biggest offshore state oil company. The Company co-owns the Penglai 19-3 (“PL19-3”) oilfield in northern Bohai Bay with ConocoPhillips China Inc. (“ConocoPhillips”) as its operator. The PL19-3 is an oilfield operated under a production sharing contract. This was a securities class action on behalf of all persons who purchased or otherwise acquired the American Depositary Shares (“ADSs”) of CNOOC Limited between January 27, 2011 and September 16, 2011, inclusive (the “Class Period”), against CNOOC and certain of its officers and/or directors for violations of the Securities Exchange Act of 1934 (“1934 Act”). These claims are asserted against


CNOOC Ltd and certain of its officers and/or directors who made materially false and misleading statements during the Class Period in press releases, analyst conference calls, and filings with the Securities and Exchange Commission (“SEC”). (US District Court of New York, 2012)

Let’s look first at the reaction of the Chinese jurists to the issue of criminal responsibility for the incident.

The Chinese legal experts have suggested China's maritime authorities file a criminal case against ConocoPhillips China, as the operator of the two leaking platforms in Northeast China's Bohai Bay. “The United States energy company could face charges over severe environmental pollution, causing a major accident and illegal mining” - said Jia Fangyi, an attorney at the Beijing-based Great Wall Law Firm. Jia wrote to the State Oceanic Administration to suggest the authority, as the direct victim, files a criminal lawsuit against ConocoPhillips. According to China's Criminal Law, if a manmade error causes a loss of 300,000 yuan ($47,000) or casualties and the operator has a negative attitude before and after the accident, charges can be brought on the grounds of severe environmental pollution. (China Daily, 2011)

Obviously the legal community was certain that a crime has took place and legal proceedings are in order. However the Chinese government has reasoned differently, after hinting that it might take the legal route (see number 2 in the list of the lawsuit above). The Chinese government have chosen the route of out-of-the-court settlement eventually.

The eventual settlement was constructed as a deal whereas Conoco and the CNOOC reimburses the government for the spill in a lump sum which is then doled out to the farmers. These have caused repercussions as reported in the media: while on one hand ConocoPhillips have agreed on January 2012 to pay 1 billion yuan ($158 million) to settle compensation claims arising from the oil leaks from its Penglai 19-3 oilfield in Bohai Bay in June 2011, on the other hand its Chinese government owned counterpart was also drawn in the aftermath to ameliorate the consequences, since ConocoPhillips, China National Offshore Oil Corp (CNOOC), the Ministry of Agriculture and the governments of Hebei and Liaoning, the two provinces most affected by the environmental disaster, have reached an agreement on the compensation claims, which meant that ConocoPhillips and the CNOOC will also pay 100 million yuan and 250 million yuan to restore the marine, especially fishing, environment in the Bohai Bay and monitor the situation, with the Hebei and Liaoning provincial governments to distribute the compensation among affected fishermen. (China Daily, 2012)

In this way the conflict was settled on the Chinese government side with Conoco accepting the losses as just an additional cost of conducting spill-prone maritime oil drilling business, and duly reporting it to the shareholders:

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“The compensation and environmental funds have been established in response to two separate accidents in Bohai Bay, China. The funds, first announced in September, recognize the company’s responsibility for the accidents and demonstrate its commitment to the people and government of China. "ConocoPhillips takes responsibility for the two incidents in June," said Jim Mulva, ConocoPhillips chairman and chief executive officer. "These funds can help address the challenges of those who have been affected and promote the environmental sustainability of Bohai Bay." Since ConocoPhillips announced the Bohai Bay Compensation Fund on September 6 and an environmental fund on September 18, the company has worked to design both funds to meet the long-term needs of communities in the Bohai Bay region. The Bohai Bay Compensation Fund will provide reasonable compensation for any damages caused by the June 2011 accidents that occurred at the Peng Lai 19-3 field in Bohai Bay. The fund will be independently administered and will provide compensation to affected people, communities and industries near Bohai Bay. The separate environmental fund will support research, restoration and other initiatives that enhance the marine environment and bring long-term benefit to the bay environment and its nearby communities. The environmental fund could support projects such as wetlands preservation, water quality improvement, fishery resources, marine ecosystems and risk management. ConocoPhillips is identifying leading independent experts who will provide guidance for the selection process and subsequent monitoring of the projects. ConocoPhillips [NYSE:COP] today announced they and the China National Offshore Oil Corp. (CNOOC) have reached an agreement with China's Ministry of Agriculture to resolve issues related to the June 2011 incidents at the Peng Lai 19-3 field in Bohai Bay. Under this agreement, RMB 1 billion (approximately $160 million) will be paid as compensation to settle public and private claims of potentially affected fishermen in relevant Bohai Bay communities. The agreement fulfills the objectives of the compensation fund announced in September 2011 by ConocoPhillips. ConocoPhillips will also designate a portion, RMB 100 million (approximately $16 million), of the company's previously announced environmental fund to be used to improve fishery resources. The Bohai Bay Compensation Fund and the environmental fund will function in accordance with applicable laws and regulations of the People’s Republic of China and international standards. Periodic updates on the progress of the Bohai Bay Compensation Fund and environmental fund will be provided.” (ConocoPhillips, 2012)

This settlement have concluded the tripartite deal between the government, CNOOC and the Conoco. However, one very concerned party felt that it was left out of the immediate deal – the fishermen.

“Zhao Jingwei, a lawyer from Yingke Law Firm that represents 107 fishermen from Hebei who filed a lawsuit against ConocoPhillips China in December, said he is worried that the fishermen might not get proper compensation. "Since the agreement has been reached through private negotiations, the method to calculate the compensation and the distributing standard are not transparent," he said. "Besides, there is also a question mark over who will be entrusted to supervise the allocation." Tian Jiguang, director of a non-governmental organization in Liaoning


dedicated to protecting marine life, echoed Zhao's concern, saying he fears that the local government might not distribute the compensation amount properly among the affected fishermen. “Since the economic loss can be evaluated in many ways, it could lead to different compensation methods," he said. "Also, the oil spill polluted the waters off the coasts of at least two provinces where fishermen's annual incomes are different. So proper coordination is needed to determine how much compensation they should be paid."Most of the fishermen are "relatively isolated" from the outside world and, hence, don't realize that their catch has diminished because of the oil spill, Tian said. They don't even know that they can seek damages. A fisherman, surnamed Ma, in Panjin city of Liaoning said his catch has diminished significantly this year and he is not sure whether the compensation could help improve his livelihood.” (China Daily, 2012)

This ill satisfaction of the fishermen with the settlement had brought on the most unusual litigation in the US courts (number 3 in the list above). The pre-history of that litigation is as follows: in 2011 Jia Fangyi of Beijing Huacheng law firm was was the first lawyer who brought to court complaints on behalf of the fishermen. He submitted the fishermen's environmental commonweal complaints to three courts: Hainan Provincial Higher People's Court, Qingdao Maritime Court and Tianjin Maritime Court. However, the courts refused to entertain the suits, citing insufficient evidences, which gave greater burden to the fishermen to adduce evidences themselves. "Victims only have the responsibility to testify basic facts such as water pollution and marine products dead. But the information on oil spill volume and scales should have been provided by the polluter," Jia said. This is in accordance with article 66 of the Tort Liability Law of China, where any dispute arises over an environmental pollution, the polluter shall assume the burden to prove that it should not be liable or its liability could be mitigated under certain circumstances as provided for by law, or to prove that there is no causation between its conduct and the harm.

Further, Yin Fuqiang, a PRC lawyer told China Economic Weekly that the environmental agencies such as the North China Sea branch of the State Oceanic Administration must publish pollution statistics. Fishermen can appeal to the courts for the data, but the premise to retrieve the information for sufficient evidence is that courts had first decided to take up the case creating a malevolent circle. "The deadline of [whether to file the case] the case has passed at the beginning of December, but the Qingdao Maritime Court didn't give me any response," Jia Fangyi told China Economic Weekly.

On Dec. 12 of 2012, 107 fishermen submitted a lawsuit at the Tianjin Maritime Court against ConocoPhillips China. They asked the oil company to pay 490 million yuan (US$77 million) for economic damages to the 107 affected fishermen in Laoting County, Hebei Province. But ConocoPhillips denied the pollution before the court had decided whether to take up the case.

Jia said that the court did not take up the case or make a ruling because it said this was a new type of case and they had to turn it over to a higher court. "Neither keeping silent nor discussing

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it with their leaders is in accordance with court procedural law," Jia said. "I call this process a 'Silence Gate.'"

Yin Fuqiang said that if courts do not take up the case, it must announce its decision. The formal rejection allows plaintiffs to appeal to higher courts. Without it, the fishermen are in a legal limbo. Furthermore, because court proceedings are not recorded or videotaped, the fishermen cannot even make complaint about the judges. (China.org.cn, 2012)

This conundrum was reported in an article with a title that sums up the situation: “Oil spill compensation suits blocked in courts”, meaning that joint obfuscation on part of ConocoPhillips and the Chinese courts have left the fishermen with no legal recourse in China, and it was this lack of domestic remedies which prompted the fishermen to turn to the US Courts.

The demand for jury trial was filed in the US district court of Texas with the justification as follows:

“7. This suit is the only chance a group of fishermen has to get justice for the devastating effect on their lives of a series of massive oil spills. The oil spill damage covers an area six times the size of Singapore, and was caused by an American company’s oil extraction operations in China’s Bohai Sea.

8. Plaintiffs enter this American court only because the Chinese government has blocked access to its own court system. Initially, the Chinese government’s State Oceanic Administration tried to conceal the Bohai Sea spills, but after a month suppressing the information, the government was forced to admit the leak when the public was tipped off anonymously. Even after that, the defendant has been unable to stop the leak; as a result, for months, oil and waste have continued to gush into the Sea. For the poor and relatively powerless Shandong fishermen, there is no meaningful opportunity to challenge the polluting by the American company in Chinese courts. In China’s court system, an injured party must ask a Chinese government court for permission to bring a suit. The Shandong fishermen asked for permission to sue, but unsurprisingly, the Chinese government court has blocked the suit. A U.S. State Department report previously commented on the “lack of due process in [Chinese] judicial proceedings, [and] political control of courts and judges.” Interestingly, the Chinese court neither officially accepted nor rejected the suit, in spite of Chinese law’s requirement that a court do so within seven days of the suit’s filing, and this locks the fishermen out of the courthouse without even giving them the dignity of a perfunctory consideration.

9. The Chinese fishermen have one last recourse: the robust American justice system, which—in stark contrast to the Chinese court system—elevates personal rights over government caprice. Here, the Chinese fishermen have been injured by an American company, which made critical decisions in America, and which led to the fishermen’s damages. The fishermen pray that the open, principled, rights-based court system in the United States will trump the closed, capricious


character of the Chinese courts, and prevent the American company from getting away scot-free.” (US District Court of Texas, 2012)

This formulation was clearly intended to provide comparison between the Chinese and the US legal system, while eliciting the sympathy (perhaps politically motivated) of the judge and jury while doing so. The jurisdiction was again claimed under the Alien Tort Claims Act, 28 U.S.C. § 1350.

Further the obfuscation by the Chinese courts was documented in more detail in the demand for jury trial as follows:

- On November 18, 2011, Jia Fangyi filed suit in Quingdao Marine Court on behalf of fishermen from the Shandong province. In China, a court has the discretion to accept or reject a case. The fishermen’s petition asked the court “to accept the case according to the laws, to hear the case openly, fairly and impartially, to accept the 30 plaintiffs’ requests, and to protect the legitimate rights and interest of the fishermen who suffered damages of pollution.” The Quingdao Marine Court has not accepted or rejected the suit, even though the court is supposed to reject or accept the case within seven days under Chinese civil procedure law. The Quingdao Marine Court is notorious for blocking lawsuits.

- Mr. Jia submitted a request to the Quindao Marine Court asking the court to collect monitoring records and testing results from government agencies, but the court has not done so.

- Mr. Jia requested the official report produced by SOA, but was denied access.

The claimant used the doctrine of respondeat superior, stating that because ConocoPhillips China Inc. is a wholly owned subsidiary of ConocoPhillips, and because ConocoPhillips had the right and power to direct and control the means and manner of ConocoPhillips China Inc.’s actions, and because ConocoPhillips exercised this right and power, ConocoPhillips is fully liable for torts and liabilities of ConocoPhillips China Inc. under agency principles and the doctrine of respondeat superior.

The suit is still pending, the latest reported event was the Court’s January 22, 2013 Management Order, pursuant to which the defendant ConocoPhillips Company provided a description of ConocoPhillips China’s (“COPC”) settlement agreement with China’s Ministry of Agriculture (“MOA”) and the administrative process under which an affected party may petition the MOA for compensation from the fund established as part of the settlement agreement (the “Fishermen Compensation Fund”). (US District Court of Texas, 2013)

This progress in the court shows that litigation in the courts abroad remains a significant legal risk for the foreign direct investor in China. With that in mind I will turn now to the last litigation on the list above which was a consequence of the Bohai Bay oil spill.

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In 2012 a certain Mr. Sam Sinay, individually and on behalf of all others similarly situated,

plaintiff, demanded a jury trial vs. defendants CNOOC Ltd, Messrs. Yang Hua and Zhong Hua, in civil action and class action complaint for violation of the federal securities laws.

CNOOC Ltd is a subsidiary of the China National Offshore Oil Corporation (CNOOC Group- 中国海洋石油总公司) and, along with its own subsidiaries, is a producer of offshore crude oil and

natural gas and an independent oil and gas exploration and production company. CNOOC is China’s biggest offshore state oil company. The Company co-owns the Penglai 19-3 (“PL19-3”) oilfield in northern Bohai Bay with ConocoPhillips China Inc. (“ConocoPhillips”) as its operator. The PL19-3 is an oilfield operated under a production sharing contract.

The parent of the CNOOC Ltd, the CNOOC Group is a state-owned oil company, fully owned by the government of the People's Republic of China, with the State-Owned Assets Supervision and Administration Commission of the State Council (SASAC) performing the rights and obligations of shareholder on behalf of the government.

The capitalization and ownership of CNOOC Ltd is split between majority ownership by the

Chinese government, and privately owned shares traded in the USA and Hong Kong (香港)

stock exchanges.

Such dual ownership structure makes CNOOC Ltd a curious example of a company that is both a Chinese government-owned company on one hand and a foreign direct investor on the other. As such it is a good example of legal risks stemming from this dual positions, as demonstrated by this lawsuit.

In it, the plaintiffs claim that:

- during the Class Period, defendants issued materially false and misleading statements regarding the Company’s business and financial results. Specifically, defendants failed to disclose operational problems at CNOOC’s PL19-3 oilfield. As a result of defendants’ false statements, CNOOC’s ADSs traded at artificially inflated prices during the Class Period, reaching a high of US$270.64 per ADS on April 4, 2011. 4. On June 4, 2011, an oil spill occurred at the PL 19-3 oilfield in Bohai Bay. A second spill occurred at the PL 19-3 on June 17, 2011. CNOOC and ConocoPhillips failed to disclose the spills when they occurred. Nonetheless, despite CNOOC’s attempts to conceal the news, news of the spills began to leak into the market. On July 5, 2011, the State Oceanic Administration, China’s coastal regulator, officially acknowledged the spills had occurred. Thereafter, CNOOC downplayed the extent of the damage done by the oil spills and the impact it would have on CNOOC’s operations.

- On September 2, 2011, the State Oceanic Administration announced that it had ordered CNOOC and ConocoPhillips to immediately suspend all oil production at the PL 19-


3oilfield after failing to meet the August 31, 2011 deadline the agency had given to seal the leaks at the PL 19-3 and clean up after the oil spills. The authorities did not provide an indication as to when production would resume in Bohai Bay.

- On September 4, 2011, CNOOC issued a press release confirming the suspension.- On September 6, 2011, it was announced that CNOOC and ConocoPhillips would

establish a Bohai Bay fund to address the environmental impact of the oil spills. - On this news, CNOOC’s ADSs declined US$9.39 per ADS on September 6, 2011, a

one-day decline of nearly 5% on high trading volume. Thereafter, as news of the true extent of the severity of the oil spills emerged, CNOOC’s ADSs continued to decline.

- Then, on September 18, 2011, it was announced that CNOOC and ConocoPhillips would establish a second Bohai Bay fund to address the environmental impact of the oil spills.

- On this news, CNOOC’s ADSs declined US$6.85 per ADS on September 19, 2011, a one-day decline of nearly 4% on high trading volume.

- The true facts, which were known by the defendants but concealed from the investing public during the Class Period, were as follows:

(a) The Company was not in compliance with environmental laws and regulations.

(b) As news of the oil spills emerged, the Company concealed the extent and severity of the oil spills.

(c) As news of the oil spills emerged, the Company downplayed its responsibility to effect the cleanup of the oil spills as it portrayed itself as being the “non-operator” of the oilfield. Nonetheless, the Company hindered the cleanup by requiring the operator of the oilfield to use a CNOOC-affiliated company for the cleanup.

(d) The Company improperly accounted for its contingent liabilities in violation of Generally Accepted Accounting Principles (“GAAP”).

(e) Based on the foregoing, defendants lacked a reasonable basis for their positive statements about the Company’s operations and its expected oil production.

As a result of defendants’ false statements, CNOOC ADSs traded at artificially inflated levels during the Class Period. However, after the above revelations seeped into the market, the Company’s ADSs were hammered by massive sales, sending them down over 37% from their Class Period high.

The filing in the US court concludes with this PRAYER FOR RELIEF, WHEREFORE, plaintiff prays for judgment as follows:

A. Declaring this action to be a proper class action pursuant to Fed. R. Civ. P. 23;

B. Awarding plaintiff and the members of the Class damages, including interest;

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C. Awarding plaintiff’s reasonable costs and attorneys’ fees; and

D. Awarding such equitable/injunctive or other relief as the Court may deem just and

proper. (US District Court of New York, 2012)

Section 3. Discussion of the CNOOC Ltd case

As I demonstrated above CNOOC Ltd, once it has been capitalized on the foreign stock exchange and conducts operations in China for all intents and purposes can be considered a FDI investor in its own country. As such it is subject to litigation abroad, if not for polluting waters then for violation of the foreign securities laws.

As seen above one of the points alleged by the plaintiff was “(d) The Company improperly accounted for its contingent liabilities in violation of Generally Accepted Accounting Principles (“GAAP”).”

According to the Section 906 of the Sarbanes-Oxley Act of 2002 requires CEOs and CFOs to certify that their company’s periodic financial reports comply with applicable requirements and fairly present, in all material respects, the financial condition and results of operations of the company. (18 U.S.C. § 1350(a), (b)). Any person who “knowingly” provides a false certification can be fined up to $1,000,000 and/or imprisoned for not more than ten years. (18 U.S.C. § 1350(c)(1)). Any person who “willfully” provides a false certification can be fined up to $5,000,000 and/or imprisoned for not more than twenty years. (18 U.S.C. § 1350(c)(2)). (SEC, 2002)

It is informative to compare this case with the recent case of large-scale oil pollution in the USA, the case of Deep Horizon oil spill with British Petroleum as a defendant.

In circumstances similar to CNOOC Ltd oil spill, but two years before it, in April 20, 2010, there was a blowout that sank the Deepwater Horizon oil platform in the Gulf of Mexico, killed 11 men aboard and uncapped an undersea gusher that spewed for nearly three months. The spill's effects on the environment are still being cataloged.

As of last month, BP already pleaded guilty to criminal charges and agreed to a record-setting $4 billion fine for the spill. But it could face more than $20 billion in additional environmental penalties if found to have committed gross negligence in the disaster. (CNN, 2013)

These personal penalties of the guilty officers, when combined with the company-specific claims by the affected fishermen can add to a very heavy overall liability for the FDI investor in China, if the claims against such are brought in a foreign court. As was demonstrated above the primary legal tool for such transposition of claims to the US are available in the US legal system, those


are the Alien Tort Statute, if the defendant is a US person; and the federal securities laws, if the defendant’s shares are traded on the US stock exchanges.

Subchapter 11. Product liability and enforcement of Chinese judgments in foreign courts

For illustration of this relatively novel topic I have selected the case of Hubei Gezhouba Sanlian Industrial Co., Ltd. et. al. v. Robinson Helicopter Co., Inc., 06-01798 (C.D. Cal 2009). This case shows that, as the globalization era is in full swing the cross-border justice can and will be enforced even between legal systems as far apart as the Chinese (enforcer) and the US one (enforcee).

This judicial matter raises many processual and general jurisprudence questions, so it will be informative to analyze it in detail. To my knowledge this is the first ever United States appellate ruling that affirms enforcement of a PRC court judgment in the United States. (All factual data unless otherwise noted are taken from United States District Court, Central District Of California Case 2:06-cv-01798-FMC-SS Document 95 Filed 07/22/09.) (US District Court Central District of California, 2009)

Section 1. Background and facts of the RHC case

The defendant in the case was Robinson Helicopter Company (RHC), a USA business founded in 1973, Robinson Helicopter employs approximately 1,000 employees and is currently the world's leading manufacturer of civil helicopters. In addition, Robinson has a factory overhaul program for older aircraft and conducts monthly safety courses for helicopter flight instructors and maintenance technicians. A network of more than 400 service centers of which 126 are authorized dealers provide world-wide service and support.

Robinson is an engineering company that places great emphasis on research and development. Located in Southern California, Robinson's factory was designed and built for helicopter manufacturing. The facility is equipped with the latest state-of-the-art machinery, including CNC (computer numerically controlled) machining centers and CMM (coordinate measuring machines). The company's total manufacturing space is 617,000 sq feet. (RHC, 2013)

RHC is a privately owned family business with no financial reports published, but the industry estimates put its total revenue` at $100 mln in 2001. Currently, it is the world's leading producer of civil helicopters. (Funding Universe, 2013)

The plaintiffs were Sanlian and Pinghu, Chinese sight-seeing boats tour operators doing business in Hubei Province. Pinghu and the predecessor (“Sanlian Industries”) of Sanlian filed an action on March 14, 1995 in the Los Angeles Superior Court entitled China Gezhouba United

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Indus. Co., et al. v. Robinson Helicopter Co., Inc., et al., case number YC022805 (“California State Action”). The complaint alleged RHC had designed and manufactured a model R-44 helicopter that crashed into the Yangtze River in the PRC on March 22, 1994,causing the death of three people. The crash was alleged to be the result of a manufacturing defect in the particular Robinson R-44 model.

The complaint in the California State Action alleged damages from the crash against RHC based on theories of negligence, strict liability, and breach of implied warranty.

Robinson, as its first line of defense sought to stay the action on forum non conveniens grounds, arguing that the Chinese courts would afford it with due process of law and agreeing to toll the statute of limitations, (Tolling is a legal doctrine which allows for the pausing or delaying of the running of the period of time set forth by a statute of limitations. ), and promising to “submit to the jurisdiction of the appropriate court in China” and to “abide by any final judgment rendered in China.” The Superior Court granted Robinson’s motion, and Sanlian and Pingu then sued Robinson in the Higher People’s Court of Hubei Province: On January 14, 2001, Sanlian and Pinghu filed an action against RHC in the Higher People’s Court of Hubei Province (“Higher Court”) in the PRC, Hubei Gezhouba Sanlian Indus. Co., Ltd., et al. v. Robinson Helicopter Co., Inc., Case No. (2001) E-Min-Si-Chu-1 (“PRC Action”), in which they sought damages against RHC based on the March 22, 1994 crash of the R-44 helicopter into the Yangtze River

A three-judge panel was formed, and among other things, it properly notified Robinson of the date set down for trial, - March 25, 2004, in accordance with the provisions of the PRC Civil Procedure Law. Robinson failed (sic) to appear on that date but the trial continued. After assessing the evidence submitted in due course by the plaintiffs, the three-judge panel found that the fatal helicopter crash had indeed been the result of manufacturing defects in the Robinson R-44. Finally, in December 2004, the Hubei Higher Court issued a judgment awarding the equivalent of US $ 6.5 million in favor of Gezhouba and Pinghu (Hubei Gezhouba Sanlian Industrial Co., Ltd., et.al. v. Robinson Helicopter Company Inc., Case No (2001) E-Min-Si-Chu-1), (the “PRC Judgment”). and Article 5(a) of the Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters (“Hague Convention”).

Since the PRC Judgment was rendered by a court of first instance, Robinson had an automatic right of appeal under the PRC Civil Procedure Law which, as a party without domicile in the PRC, it had to exercise within 30 days of service. However, Robinson did not exercise its right of appeal in the PRC courts, and as a consequence the PRC Judgment became final and enforceable under PRC law. Because Robinson was a party without domicile in the PRC, the plaintiffs were entitled, in principle, in accordance with the PRC Civil Procedure Law, to apply for recognition and enforcement of the PRC Judgment directly to the foreign court with jurisdiction over Robinson’s assets. (China Law Insight, 2012)

However, it seems that RHC was precluded from due procedure in China. To quote:


“On February 17, 2004, RHC was served with a Summons, Statement of Complaint, Notification of Appearance, and related papers in the PRC Action (Exs. 3A, 3C, 3E, 3K, 3M, 3O), which notified RHC of a trial or hearing set for 9:00 a.m. on March 25, 2004, before the Higher Court. …. Mr. Goetz saw the English-language documents (Exs. 3A, 3C, 3E,3K, 3M, and 3O) after they had been placed on his desk, and he was aware in February of 2004 of the PRC Action and the trial or hearing in the PRC Action set for March 25, 2004. Mr. Goetz sent copies of the documents he received to some attorneys in Hong Kong. He discussed the documents with those attorneys. Mr. Goetz also sent the documents to RHC’s Chinese dealer, and they told Mr. Goetz they would send a representative to the trial or hearing. The representative was barred from the hearing because she was not a party.” (US District Court Central District of California, 2009)

The following developments also unfolded in a puzzling manner:

The (Chinese) Higher Court held a trial on March 25, 2004. RHC did not appear in the PRC Action and it failed to take any other steps to participate in it or to request a continuance of the trial. At the trial, a three-judge panel considered extensive evidence submitted by the plaintiffs as well as evidence collected by the Higher Court itself. On December 10, 2004, the Higher Court issued its judgment (“PRC Judgment”) in favor of Sanlian and Pinghu and against RHC.

The relevant portions of the PRC judgment, which is 36 pages long, provide as follows: a. Sanlian is the transferee of the substantive and procedural rights of Sanlian Industries, which purchased the R-44 helicopter that crashed into the Yangtze River on March 22, 1994. Sanlian acquired its rights in this matter through a capital transfer from Sanlian Industries, under which it acquired all substantive and procedural rights concerning the subject matter of the claims in the PRC Action. Pinghu was the owner of the tourist boat, the “excursion steamer ‘Pinghu 2000,’” from which the R-44 helicopter was operating on March 22, 1994.

Sanlian was awarded damages against RHC in the amount of $261,000 (U.S.) with interest from March 23, 1993 (later corrected to the day after the accident, see infra) “according to interest rates of loans for U.S. dollars of the corresponding period of the People’s Bank of China.” Sanlian was also awarded damages for economic losses in the additional amount of $628,463.56, with interest to be calculated from the day after the accident according to interest rates of loans for U.S. dollars of the corresponding period of the People’s Bank of China. RHC was also ordered to compensate Sanlian within 15 days of the effective date of the PRC judgment for attorney’s fees in the sum of $37,000(U.S.).

Pinghu was awarded damages against RHC for economic losses in the amount of RMB 15,083,100 Yuan with interest from September 26, 1994 (the date Pinghu was ordered by the PRC government to suspend its business operations as a result of the crash) to be calculated according to interest rates for loans for RMB of the corresponding period by the People’s Bank of China. The award of economic losses to Pinghu was for the period from September 26, 1994

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through December 31, 1995. The PRC Judgment denied Pinghu’s request for economic losses for the years 1996 and 1997. It also denied Pinghu’s request for attorney’s fees and punitive damages against RHC.

RHC did not challenge personal jurisdiction or the adequacy of service of process. RHC did not appeal from the PRC judgment. On April 20, 2005, RHC was served with Chinese and English translations of the PRC Judgment. On May 11, 2005, Mr. Goetz wrote to the Chinese Ministry of Justice objecting to the PRC Judgment (Ex. 16), but he filed no appeal. Mr. Goetz also did not request an extension of time in which to file an appeal.

On March 24, 2006, Sanlian and Pinghu filed their complaint in this action seeking to enforce the PRC Judgment against RHC pursuant to the Uniform Foreign Money-Judgments Recognition Act (“UFMJRA”), codified at former California Code of Civil Procedure sections 1713-1713.8.1

On March 22, 2007, this Court granted Summary Judgment in favor of defendant on the grounds that the statute of limitations had expired before the Chinese lawsuit was filed.

On July 22, 2008, the United States Court of Appeals for the Ninth Circuit issued its memorandum decision in this case. It ruled Sanlian and Pinghu’s action against RHC in the PRC was not barred by the statute of limitations. It held RHC’s agreement to toll the statute of limitations as a condition to the forum non conveniens stay of the California State Action remained in place, and “there was no basis for finding that enforcement of the PRC Judgment would violate California’s public policy against stale claims.”

So, the US California Central District Court in its “Conclusions of Law” decided that:

Service of process was proper under Federal Rule 4, the 9th Circuit Direct Mail ruling, and the Hague Convention. The PRC Judgment was final, conclusive, and enforceable under the laws of the PRC and involved the granting of recovery of a sum of money. California’s UFMJRA applies to this action seeking recognition of the PRC Judgment, and none of the stated exceptions to recognition in the UFMJRA are applicable on the facts presented. Plaintiffs are entitled to the issuance of a domestic judgment in this action in the amount of the PRC Judgment, with interest calculated as set forth in the PRC Judgment, for purposes of enforcement. Plaintiffs are directed to prepare a Judgment for the Court’s signature consistent with these rulings.

Section 2. Discussion of the RHC case

The ambit of this discussion is broad. It will take an overview of the general doctrine of enforcing a foreign judgment and then will move onto the territory of the merits of this case, concluding with a foray into political factors at play as well as general tendencies of the interacting legal systems germane to this case. The main purpose of this discussion is the same as


of this entire dissertation: to evaluate the possible risks for the FDI investors in China and to mark the legal venues through which this risk can become a reality.

This case has been unique back in 1995 and remains unique as a first ever case of product liability of the USA manufacturer adjudicated in China and enforced by the US court. I will address it in a comprehensive manner looking not only on the legal issues but also on the background and political forces at play. The list of questions that remain unanswered is numerous and can be summarized as follows:

1. Are the US courts supposed to rubber-stamp the decisions by the foreign (in these case Chinese courts) or they are supposed to rule on the fairness of the decision before doing that?

2. How and why was the amount of damages determined by the Chinese courts?3. What were the reasons for awkward handling of the defense and passivity by the

defendant?4. Was the defendant in fact guilty as charged?5. Why no loss of life was pled?6. Did the Chinese statute of limitations in fact expired as claimed by the defendant?7. Why the decision to dismiss the case on statute of limitations reversed by the appellate

court?8. What were the political tendencies on both sides of the border and did they influence the

court’s decisions and behavior of the litigants?

Starting in the order above, let’s first address the legal theory behind the enforcement of foreign judgments in the US.

That theory was first formulated by Dutch authors, in particular Voet and Huber, who developed two such principles that are still relevant today. The first of these principles is comity, defined much later by the United States Supreme Court in a decision denying recognition to a French judgment (159 U.S. 113) in 1895 as “..neither a matter of absolute obligation on the one hand nor of mere courtesy and good will… it is the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another… (Hilton v Guyot)”. The other principle is reciprocity, the idea that States will and should grant others recognition of judicial decisions only if, and to the extent that, their own decisions would be recognized. (Max Planck Encyclopedia of Public International Law, 2013)

While comity is a mandatory principle towards a nation with which diplomatic and trade are established, the principle of reciprocity is more narrow.

It is unequivocally stated in the legal literature that no reciprocity exists between USA and China, from the Chinese point of view:

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As the practicing lawyers, the MMLC Group testifies: according to Article 265 of the PRC Law of Civil Procedure, the parties to a judgment and the foreign court who made the judgment can apply for recognition and enforcement of the judgment. If a foreign court is applying, it shall be either based on an international agreement that the PRC has entered into, or in accordance with the so-called principle of reciprocity.

Principle of reciprocity hereby means that a Chinese court shall examine whether there is precedent of recognition and enforcement of judgments from the other between the foreign country and China. If no such precedent exists, application by a foreign court recognition and enforcement of its judgments will be rejected. When the parties to a judgment submit an application, the Chinese court will still check the relevant international agreement and precedent of recognition and enforcement. Thus, in effect, a precedent of recognition and enforcement or an international agreement between the foreign country and China shall be in existence in order to have judgments from that foreign country recognized and enforced in China.

If the foregoing conditions are satisfied, the Chinese court will further substantially examine the judgment in accordance with Article 266 of the PRC Law of Civil Procedure. In case that the judgment violates basic principles of the laws of the PRC or it conflicts with the state sovereignty, security or social public interests, it will not be recognized or enforced.

Due to these thresholds, large international companies doing business in China have to turn to alternatives to settle their disputes. (MMLC Group , 2011)

This general analysis of the reciprocity situation is leading to a grim conclusion: US judgments are unenforceable in China, since China has not entered into an agreement regarding the recognition and enforcement of foreign judgments with the US, and therefore recognition and enforcement of a US judgment in China is impossible. If the either party submits the case to a Chinese court, the Chinese court will judge the entire case from its own view and the US judgment will be of limited importance and influence.

This un-enforceability of the USA judgments is discriminatory since although judgments from the US may not be directly enforceable, judgments from many other countries can be recognized and enforced in China. China has entered into bilateral judicial cooperation agreements, which contain regulations regarding the recognition and enforcement of foreign commercial judgments, with many countries, including Uzbekistan, Kazakhstan, Kirghizia, Tajikistan, Turkey, Cyprus, Laos, Vietnam, Mongolia, Bulgaria, Belarus, Poland, Russia, Romania, Ukraine, Hungary, Lithuania, Spain, Italy, France, Greece, Argentina, Cuba, Egypt, Morocco, and Tunisia. Only commercial judgments from these countries will be recognized and enforced in China. (MMLC Group , 2011)

As we see no reciprocity towards the USA is afforded in China by the Chinese courts; also the testing threshold is much higher in China than in the USA. Namely, the Chinese court will


examine the USA decision on counts of basic principles of the laws of the PRC; whether it conflicts with the state sovereignty; or security; or social public interests.

But what is the general situation with the foreign judgments in the USA?

As the American practicing lawyer puts it: a foreign judgment is not considered enforceable if it was ordered under a system that does not provide impartial tribunals or procedures compatible with the requirements of due process of law. In today’s world, the courts of one country are going to be loathe to declare the courts of another country as not “impartial,” but that is always a possibility. This issue can only be presented by expert testimony …The next question is whether the foreign court had personal jurisdiction over the defendant and the subject matter. Most courts of general jurisdiction are presumed to have subject matter jurisdiction. Questions about personal jurisdiction are within the experience of most general practitioners and beyond the scope of this article. If service was made in accordance with the 1965 Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters, it will likely be considered effective within the United States, so the judgment can be enforced.

Some states have enacted a non-uniform provision that imposes a reciprocity requirement. This requires expert testimony. If the foreign country’s law is silent on the issue (perhaps because a U.S. judgment has never been taken there for enforcement), there will be a battle of the experts. If there is no settled law on this point, the U.S. court will have to decide if it will presume a U.S. judgment will be enforced, or if it will presume a U.S. judgment will not be enforced. (Houston Putnam Lowry, 2011)

In other words the USA courts are using a much lower testing threshold, meaning that they automatically assume existence of due process, reciprocity and comity. Only test they apply is that of proper service.

That, in turn means existence of a huge breach in the legal defense of any USA investor in China, indeed however unfair is the decision of the Chinese court – the USA court will enforce it almost in rubber-stamp fashion nowadays, which is far cry from the Hilton v Guyot time, where the US court rejected the enforcement of the French court’s decision.

Now we turn many irregularities with the decision made by the Chinese court. First the amount of the damages: as we saw above, Sanlian (the transferee of the substantive and procedural rights of Sanlian Industries, which purchased the R-44 helicopter that crashed into the Yangtze River on March 22, 1994). Sanlian acquired its rights in this matter through a capital transfer from Sanlian Industries, under which it acquired all substantive and procedural rights concerning the subject matter of the claims in the PRC Action. Pinghu was the owner of the tourist boat, the “excursion steamer ‘Pinghu 2000,’” from which the R-44 helicopter was operating on March 22, 1994.

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Sanlian was awarded damages against RHC in the amount of $261,000 (U.S.) with interest from March 23, 1993, Sanlian was also awarded damages for economic losses in the additional amount of $628,463.56, with interest to be calculated from the day after the accident; RHC was also ordered to compensate Sanlian within 15 days of the effective date of the PRC judgment for attorney’s fees in the sum of $37,000(U.S.).

Pinghu was awarded damages against RHC for economic losses in the amount of RMB 15,083,100 Yuan with interest from September 26, 1994 (the date Pinghu was ordered by the PRC government to suspend its business operations as a result of the crash).

Questions:

-why was RHC be liable at all for the order of the PRC government to suspend operations of Pinghu altogether, as opposed to an order to stop flying the helicopters if they have any left?

-where the amount of Sanlian damages come from? If the amount of the $261,000 is the replacement cost of the helicopter, then the amount of $628,000 is the net after-tax income for at most 10 years, which is the longest reasonable period under which it possibly could be under warranty.

At a rough calculation that means annual net return on investment of almost 40%, which looks highly suspect.

Further, the entire issue of RHC’s guilt is under suspicion. First, in its court brief RHC claimed that a violent storm was the reason for the crash and not a manufacturing defect. The nature of the defect was never specified. The materials of the independent technical investigation were not considered or presented to the US court, moreover it is not clear if such investigation was ever conducted. The database for the R-44 helicopters shows only 89 fatal incidents while there were 5,324 of those flown around the globe since 1990 to 2011. (Wikipedia, 2011)

The legal strategy of the RHC was not to admit or deny any liability but rather to fight the litigation on processual grounds. While this choice can be explained by their unwillingness to participate in Chinese court proceedings and wariness of the perceived unfairness of the general unfairness of the Chinese legal system, but the larger question is whether the manufacturer should be liable for the malfunctioning of a high-risk, specialized aviation vehicle, the helicopter?

The legal grounds under which the plaintiffs sued was based on theories of negligence, strict liability, and breach of implied warranty. If the warranty is implied it means that it was not specified in the contract, hence no liability by manufacturer was assumed by the manufacturer and no liability was expected by the purchaser. If the theory of negligence is utilized then the negligence must be proven which of course was not done. Thus conflicting theories was utilized and the case should have been dismissed summarily by the Chinese and US courts.


Next question would be: what is the Chinese law under which strict liability by manufacturer was adjudicated? That would be the PRC Product Quality Law, last amended in 2000.

Article 41. If a personal injury or damage to a property other than the defective product itself (hereinafter cited as the other's property) is caused by the defect of a product, the producer shall be liable for the injury or damage. The producer is not liable for damage if he can prove any of the following circumstances: 1. The product is not put into circulation; 2. The defect causing the damage did not exist at the time when the product was put into circulation; or 3. The science and technology at the time when the product was put into circulation was at a level incapable of detecting the defect. (PRC, 2000)

The law is not adequate in a sense that it is not discriminating between hi-tech, high risk products although it makes a discrimination towards other products. he Product Quality Law defines products as all manufactured or processed goods intended for sale. Agricultural products, non-processed products and raw materials do not fall within its scope. Buildings are also expressly excluded from the scope of the law.

It means that this Chinese law is a very crude tool to apply for an aviation product. To contrast the Chinese approach with the US one: an Aviation Product is Deemed Defective and a manufacturer may be held strictly liable for a defective product if the product is "unreasonably dangerous" for use by an ordinary consumer. This is a poor test for aviation products because it is highly subjective, and because aircraft are not consumer products — aviation products are made for use by highly trained and licensed professionals. In a growing majority of states, a different test for product liability is used. A product manufacturer may be held strictly liable if the product fails to perform as safely as an ordinary consumer would expect when it is used in an intended or reasonably foreseeable manner. Alternatively, these states use a "risk-benefit" analysis test which requires the jury to decide if the risk associated with the design of the product outweighs the benefits of the design. (Kolczynski, 2001)

Now, what were the reasons for the seemingly awkward handling of the defense and passivity by the defendant? In my speculative opinion, when the RHC chose the Chinese forum over the US one it was pursuing two goals: first to escaped the overly litigious US legal system and secondly, it has probably received assurances from the Chinese powers to be that the case will be fairly tried and dismissed. The second factor explains why the plaintiffs were unsuccessful for 7 years in starting a litigation in China and finally resorted to bringing it to the USA 7 years after the event.

According to the Product Quality Law of the People’s Republic of China:

Article 45 The limitation period for bringing an action for damages arising from the defect of a product is two years, counting from the day when the party concerned knew or should have known the infringement of his rights and interests. The right to claim damages from defective products shall be lost upon completion of ten years from the day when the defective product

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causing the damage is delivered to the first consumer, except that the explicitly stated period for safe use has not expired.

Thus, the first limitation statute have expired by 2001, the year of the first lawsuit in China, and the first and second one have expired by by 2004 the year of the Chinese court decision. Although the defendant agreed to toll the limitation and was later estopped by the courts to plead the statute of limitations, but RHC agreed toll the statute of limitations in 1995 during the pendency of the California State Action only. Surely that pendency was not supposed to last forever? It was reasonable to expect it to be terminated upon expiration of two years which is the Chinese statute of limitation, and certainly by the year 2001. The prove of that is the California court’s decision to dismiss the lawsuit: on March 22, 2007, California Court granted Summary Judgment in favor of defendant on the grounds that the statute of limitations had expired before the Chinese lawsuit was filed.

This reasonable decision was later overruled: On July 22, 2008, the United States Court of Appeals for the Ninth Circuit issued its memorandum decision in this case. It ruled Sanlian and Pinghu’s action against RHC in the PRC was not barred by the statute of limitations. It held RHC’s agreement to toll the statute of limitations as a condition to the forum non conveniens stay of the California State Action remained in place, and “there was no basis for finding that enforcement of the PRC Judgment would violate California’s public policy against stale claims.”

One is tempted to ask: if a 10 year old claim is not stale then what is? Thus, RHC was wronged by the Chinese legal system and failed by the USA one.

As we remember from above, a representative from RHC was not allowed to participate in the first hearing in 2004, and RHC made a decision not to participate in the consequent hearing. This decision is reasonable because by that time RHC surely must have realized that the cards are stacked against it and decided not to waste any money on Chinese attorneys.

Another, curious fact from this case is that no criminal investigation was opened by PRC prosecution into the loss of three human lives in this incident. Certainly if the manufacturer was negligent, then it constitutes an involuntary manslaughter under the Criminal Law of China. So why no loss of life was prosecuted? Under Article 233 of the PRC Criminal Law:

Whoever negligently causes the death of another is to be sentenced to not less than three years and not more than seven years of fixed-term imprisonment; when the circumstances are relatively minor, he is to be sentenced to not more than three years of fixed-term imprisonment. Where this Law has other stipulations, matters are to be handled in accordance with such stipulations. (see Appendix 4. The Criminal Law of the PRC, 1997.)

However no criminal prosecution is known to be started and concluded. That again suggests that RHC is not guilty of any of the charges brought to tort trial.


So why RHC first agreed to litigation in China and later did not participate in the subsequent hearings? The answer is found in the RHC newsletter: in 2002 Robinson delivered its first R44 Police Helicopter in China to the Zheng Zhou Public Security Bureau and later, in 2009 Shanghai King Wing General Aviation Company purchased ten R22s for training purposes, through PTE Systems, Robinson's dealer in China. With only an estimated 125 civil helicopters in China, compared with more than 10,000 in the U.S., the acquisition of ten R22s represents significant momentum in the helicopter training market and should promote overall growth in China's general aviation. General aviation is in its infancy in China with about 800 general aviation airplanes. In comparison, the U.S. has approximately 220,000 general aviation airplanes. China's demand for helicopters is expected to surge in coming years. (RHC, 2013)

With average price of the machine at $420,000, China represents a huge and lucrative market for RHC, with the last shipments at total of $5 mln. It is obvious that the company decided to grit its corporate teeth and write off the unfair damages of $6.5 mln as the price of doing business in China, perhaps as a long-term investment even.

And what were the political tendencies on both sides of the border and did they influence the court’s decisions and behavior of the litigants?

Let us recall that years of this incident were the epoch when the China was dynamically reform its legal system to deal with the changing realities of globalization, the courts had new power and aggressively wielded it, also as we see on the international scale, in that sense Chinese legal system was an aggressor seeking to impose its newly formed standards and influence onto the global domain. On the other hand American legal system was the passive recipient of the new international agreement and did not have the will or motivation to withstand the prevalence of the foreign legal systems made possible through the doctrine that makes a foreign treaty a law of the land, which is quite opposite to the situation in China where the Chinese law is paramount.

As explained in The American Society of International Law Insights:

“All treaties are the law of the land, but only a self-executing treaty would prevail in a domestic court over a prior, inconsistent act of Congress. A non-self-executing treaty could not supersede a prior inconsistent act of Congress in a U. S. court. A non-self-executing treaty nevertheless would be the supreme law of the land in the sense that--as long as the treaty is consistent with the Bill of Rights--the President could not constitutionally ignore or contravene it.

Even if a treaty or other international agreement is non-self-executing, it may have an indirect effect in U. S. courts. The courts' practice, mentioned above, of interpreting acts of Congress as consistent with earlier international agreements applies to earlier non-self-executing agreements as well as to self-executing ones, since in either case the agreement is binding internationally and courts are slow to place the United States in breach of its international obligations. In addition, if state or local law is inconsistent with an international agreement of the United States, the courts will not allow the law to stand. The reason, if the international agreement is a self-executing

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treaty, is that such a treaty has the same effect in domestic courts as an act of Congress and therefore directly supersedes any inconsistent state or local law. If the international agreement is a non-self-executing treaty, it would not supersede inconsistent state or local law in the same way a federal statute would, but the courts nevertheless would not permit a state of the union to force the United States to breach its international obligation to other countries under the agreement. The state or local law would be struck down as an interference with the federal government's power over foreign affairs.” (Kirgis, 1997)

Or, as it is stated in The Supremacy Clause in the U.S. Constitution “Treaties made, or which shall be made, under the Authority of the United States, shall be supreme Law of the Land.”.

Therefore, this changing balance of the global legal power was the ultimate reason behind the

defeat of the RHC in this informative case, as stated by famous words of Chairman Mao (毛泽东): “the wind from the East will overcome the wind from the West” (东风压倒西风). As

witnessed by this case the enforcement a Chinese court decision in the West have overcome the legal defense of the Western defendant.


To summarize the analysis of the cases in this chapter, I propose the following model of two forces at work.

The first one is the distributive justice – a legal system mechanism that distributes the IP assets and the excessive gains of the FDI investors on the Chinese soil to the Chinese organizations, in accordance with the Chinese social ideology. That can be put as “the more cash- and IP-rich is the FDI corporation the larger is the likelihood of it being subject to the distributive justice”.

The second one is the balance of power, which can be formulated as “the more powerful is the FDI corporation the less are the legal risks it is facing in China”

The second one of these countervailing forces at work can be presented as a two-dimensional matrix where the cases analyzed in this chapter can be tabulated as follows:

Table 6. Tabulation of a legal risk against power of the company. Source: own research.

Less powerful Average power More powerful

Small legal risk Apple, CNOOC Ltd

Average legal riskProducers of brand name alcohol and luxury goods


Large legal riskPfizer, Shchneider,. RHC

Thus, the FDI investor must be realistic in assessing its legal risks in China, taking into account not only its legal standing but also the extra-legal balance of power created by its activities in China.

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Chapter 4. Recommendations to the lawmakers and FDI investors based on case analysis and legal risk estimates

Subchapter 1. Contemporary scholarship behind case comparison

There are indications that despite the centuries of legal scholarships, something as basic as comparison of two cases remains a controversial process, hence ongoing attempts by jurists to define it and to turn it into a usable legal tool. This is even more true for a comparison of the cross-border cases.

Section 1. Definitions from Western legal systems

One definition runs as follows:

“Legal case-based reasoning is an argumentation strategy in which a legal claim is supported by citing a favorable precedent and subsequently comparing it to the current fact situation. If one is able to establish a ‘sufficiently good’ analogy between a precedent and the present case, then according to the principle of stare decisis the past case should be followed and the same conclusion should hold. For this reason a legal debate will often focus on the issue how good the analogy between the past and present case actually is. The party who has cited the precedent will try to support the analogy by emphasizing the similarities between the past and the present case, a move that is often called ‘analogizing’. The other party will instead attack the analogy by pointing out relevant differences, and this is usually called ‘distinguishing’.” (Roth, 2012)

Using this definition of the case-based reasoning as a departure point, one would like to proceed further to case modeling, i.e a theoretical reconstruction of legal proceedings if they would be held in a different country and if they would be based on a precedent that already took place in that country or, as an inferior choice, elsewhere.

Some issues need to be considered to make such modeling possible, which are enumerated below-

Section 2. Legal standing (locus standi)

A useful opinion was issued by the Canadian Supreme Court reviewing the legal standing approach in the USA and Commonwealth nations.

“It may be illuminating to consider by way of comparison the position taken in other common law jurisdictions on this issue of standing. The highest Courts of the United Kingdom, Australia,


and the United States have struggled with the problem. They have all recognized the need to balance the access of public interest groups to the Courts against the need to conserve scarce judicial resources.” (Lefler, 2012)

In stark difference between positions adopted by the Australia, UK and USA,

“The Canadian Supreme Court next addressed the issue of standing in Canada, ultimately rejecting all three foreign positions it articulated. The Court refused to adopt the types of restrictions placed upon standing in the United States and Australia:

The Charter enshrines the rights and freedoms of Canadians. It is the courts which have the jurisdiction to preserve and to enforce those Charter rights. This is achieved, in part, by ensuring that legislation does not infringe the provisions of the Charter. By its terms, the Charter indicates that a generous and liberal approach should be taken to the issue of standing. If that were not done, Charter rights might be unenforced and Charter freedoms shackled. The Constitution Act, 1982 does not of course affect the discretion courts possess to grant standing to public litigants. What it does is entrench the fundamental right of the public to government in accordance with the law.” (Lefler, 2012)

On other words, it means that in present global legal environment the one factors that was making moot the comparison of two foreign cases is removed, namely the issue of standing, this is true mostly for the western hemisphere. Indeed it would be pointless to analyze a case say, which took place in the USA and try to make apply the same legal reasoning to the Chinese proceedings if the participants will be denied Chinese legal standing to begin with.

Once the issue of legal standing is clarified, the next one is the issue of comparability between legal system built on different legal and ideological principles. E.g. how one can compare the civil code law and the precedent law; how one can compare the legal system of a communist country and one of the capitalist one?

Subchapter 2. Legal system comparison and hidden legal risks traps

Section 1. Comparison and the culture

The Chinese point of view on these matters was recently overviewed in an important article “Comparative law in China: over 30 years’ development and paradigm shift in research”, by Zhaoxing Liu and Jinyuan Su, while we are somewhat interested in development, it’s the paradigm shift that draws our attention. What has changed and what is the present view of the Chinese legal community on comparative law?

“On the nature of comparative law, three views have emerged in Chinese academic circles in recent years. The first view is that to debate over the nature of comparative law makes no sense.

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The second is that comparative law is not an independent branch in the legal sciences but, rather, a method of legal research. The third view is that comparative law is not only a method of legal research but also an independent branch in the legal sciences. Moreover, it is held that two aspects of the nature of comparative law are tightly interlinked - the comparative approach is a means for scientific research, while comparative law is a distinct domain within the legal sciences. Among these three views, the latter has been the most widely accepted in Chinese academic circles of comparative law.” (Zhaoxing Liu and Jinyuan Su, 2013)

So it is a science. But what is the Chinese twist on the notion of legal science, then? Apparently it’s the culture. The Chinese hold that law is not only a social mechanism for regulating the notion of property and property within a society but it is more of a culture. Thus the law transforms (in their minds) not into a societal tool with definite goals, but into a culture, something that is a goal in itself, first and, unique to each society, second. To bring this thought to a logical conclusion means recognizing that the notions of justice are different between western and Chinese societies.

“Echoing some Western scholars in the discussion of legal culture since the 1970s, some Chinese scholars have voiced their opinions on cultural comparisons of law. It has been argued that law is deemed to be a cultural phenomenon when the method of cultural comparison is applied. From the perspective of culture, law is not merely a tool for solving social problems or meeting social needs but also a symbol for expressing or conveying meaningful messages, including people’s opinions, attitudes, emotions, beliefs, and ideals towards the world, society, order, and justice. Law therefore reflects different nations’ diverse views on these issues. Hiding below the seemingly same or similar laws in terms of form and function are profound and deep cultural diversities. For this reason, to understand a legal system, it is significant to grasp the cultural context behind it. According to cultural comparison, comparative law is the comparison of legal culture. As for the relationship between law and culture, some Chinese comparative lawyers’ views are different from those of their Western counterparts. From the viewpoint of Chinese comparative lawyers, culture is a key factor in the operation of law and comparative research, considering its influence on the establishment and development of laws and legal systems.” (Zhaoxing Liu and Jinyuan Su, 2013)

Probably, it goes without saying that Chinese culture is vastly different from other world cultures, recognizing that legal systems of the most of the world are nowadays bearing the imprint of the western law, it means that Chinese legal system is unique in the world, exhibiting, in the words above “Hiding below the seemingly same or similar laws in terms of form and function are profound and deep cultural diversities.”In practical terms that signifies a grave danger for an FDI investor, who could be lulled into false security by the legal language that looks familiar to what he used to see in his country but would mean something radically different when applied in court.


Section 2. Legal transplants

After the false similarity, the second notion that might mislead the FDI investor or the lawyer representing such is the notion of a legal transplant. The argument might run as follows: “the Chinese have transplanted entire blocks of legislation, previously absent in China to the Chinese soil and made those an integral part of their legal system. Ergo, one can rely on the transplants working in the same way as the original”.

However, the quote below counters this view as well:

“There exist three views among Chinese scholars concerning the transplantability of law. First, law does not possess transplantability and cannot be transplanted arbitrarily, for the reason that it is made at a given temporal and spatial setting. Second, law can be transplanted into a specific region owing to its universality that different laws have some of the same or similar qualities. Third, law has elements of universality as well as particularity. Thus, legal transplant is selective and conditional. In recent years, the majority of Chinese scholars are of the view that in order to improve China’s legal system, it is essential to selectively borrow, assimilate, or transplant the experience of foreign countries in legal development. Moreover, it is also important to have a more sophisticated understanding of the concept of legal transplant. Among them, some scholars have held that legal transplant is the immigration of law from one country or region into another, which is akin to the migration and cultivation of a whole plant, which is an analogy to wholeness transplantation in botany. Others have argued that legal transplant should be understood as partial transplantation, which is in resemblance to medical organ transplantation. Some have deemed it as the cross-state absorption, borrowing, synchronization, and assimilation of law.” (Zhaoxing Liu and Jinyuan Su, 2013)

To put it directly, the Chinese scholars deny that transplant can be made en masse, as a solid block of legal tools that will be functioning in the same way as while on the native soil. They assert that it will, and must be, digested, absorbed and made going native, all the while perhaps keeping its appearance of a transplant, but being in fact, such only skin-deep. Again, from that follows that no FDI is safe in China because it can hope to operate in the legal field made up by foreign transplant to which it is used in its domestic environment, since, as supported by the quote of the Chinese scholars above, the transplant mutates into a Chinese construct once it is transplanted onto the Chinese soil and is the same no more.

What are examples of legal transplants to China? First lets confirm my suspicion that misconception about law transplanting does exist:

“What laws are pressed on China and what laws are imported by China, are often kept shrouded on the pretext of increasing the so-called mutual economic benefits. In the process, politicians, Western and Chinese alike, seem to be labouring under the misconception that if a law works in the US, then it will work likewise in China, irrespective of the different historical, social and

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legal contexts in which it is supposed to function; and that if a law is borrowed from a land of economic prosperity, then it will be bound to bring about the same prosperity, irrespective of other, and maybe more relevant, factors that may have contributed more to that prosperity.” (Liu, 2006)

Naturally the big FDI investors, the decision makers in the large western corporations, who are divorced from the negative consequences of their decisions tend to follow the political trends and heed assurances by the politicians. So a misleading beliefs of the politicians will translate into additional legal risks for the corporations. One of the most important legal risks for FDI, as shown in the Chapter 3, is the patent law. To quote:

“..the transplant effect of the Chinese patent law. .. as transplanted from the West… is appalling and the law does not achieve its proclaimed objectives. Chinese societal structures and traditions … goes against a patent; cultural factors stand in the way and a legal culture favorable to its function has not been developed. In concluding the article, a gloomy picture is depicted for the future of law transplant in China.” (Liu, 2006)

Again, what does it mean for the FDI investor? That even in the most vital area of its assets in China it is wide open to various kinds of abuse, including usage of legal system for an attack. Both these attacks and condoning of such on the part of the legal system supposed to prevent exactly such attacks stem from the ideology and the culture norms that can be formulated as “distributive justice”

Other examples of legal transplants include the corporate governance rules that do not work quite as intended and might be misleading for an investors. Indeed, it seems that categories and concepts of corporate governance while being direct transplants from the West and designated by the terms, similar in Chinese to their Western progenitors have legal functions that are different from the former.

One of the popular modes of FDI is creation of the joint ventures with domestic companies. Naturally , the investor is hoping to have extra layer for minimizing its risks in the sound corporate governance structure of its Chinese partner. Large Chinese companies are obligated to have corporate governance as formulated in China’s Company Law (Zhonghua Renmin

Gongheguo Gongsi Fa 中华人民共和国公司法 Company Law of the People’s Republic of

China 2006), which was being designed in the early 1990s, when the drafters looked to copy both American and continental models.

Two most important features of the sound corporate governance from the Western point of view are the dual-board system taken from the continental law and independent directors, an American transplant.


The Board of Supervisors (jianshi hui 监事会) (BOS), is explicitly modeled on, and often

compared to, the upper board in the German dual-board system for large public corporations. However,

“Under German law, each such corporation has an elected supervisory board (Aufsichtsrat),which appoints a managing board (Vorstand) composed of senior corporate managers. The role of the supervisory board is that of overseeing the management of the company, but its role is limited to just that. Its major powers are the power to appoint and dismiss members of the managing board and the power to represent the company in its dealings with members of the management board; the law explicitly allocates managerial power to the managing board. It seems universally acknowledged in the Chinese academic and policy community that this transplant has not taken. … The Company Law expects that the BOS will perform a supervisory role by simply saying that it will, without actually giving the BOS any significant powers. Nor does the Company Law provide structurally for the independence of BOS members from those that they supervise. As a formal matter, they are elected by shareholders… In reality, its members tend to be administrative cadres who are the subordinates of the enterprise’s leadership. In many cases, they are representatives of the union and of the congress of staff and workers, two employee bodies in the enterprise that are controlled by the Party organization” (Clarke, 2006)

So, if a German FDI investor is doing a due diligence on a partner company in China with which a joint-venture is intended and upon finding out that the partner company has BOS in place, he may felt reassured, knowing that there is a BOS, which sounds similar to Aufsichtsrat in Germany; he even might feel that in case of any major dispute he can apply to it with a a complaint and have the management fired. But nothing is farther from the reality. The Chinese BOS does not have any powers and is actually subordinate to the management de-facto. It’s a de-jure legal transplant that have lost its meaning.

Another concept that have general meaning different than that from other legislatures is the general concept of a public company. In the West, the very idea of the public company management is intertwined with the concept of fiduciary duty, which is spelled out in the corporate laws. Not so in China: whereas the 2006 Company Law mentions a duty of loyalty, no duty of care—whether derived from common law fiduciary duty principles or from civil law mandate principles such as the duty of good management (shanguanyiwu 善管義務)—can be

found. A duty of diligence (qinmian 勤勉) owed to the company is added in Article 148 of the new Company Law, but whether and how this could be enforced is very unclear. Regardless of the doctrine, there are no generally known actual precedents enforcing anything resembling fiduciary duties as such, and therefore those notions still remain vague legal constructs, or partial transplants that a FDI investor must not be misled by.

Now we can return to the paradigm shift as understood by the Chinese scholars:

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“…the paradigm shift in the research of comparative law is urgently needed in order to ensure that the common value and common needs of mankind in the age of legal globalization are preserved. This paradigm shift should be conducted in the following ways… the voice of jurists from China, as well as other northeastern and south Asian countries, must be strengthened… Comparative law should step out of the traditional range of Europe and the limitation of ‘Western prejudice’ for a multi-polar and multi-perspective research scope…Such a goal will also serve the integration of China’s laws, legal systems, and comparative law throughout the world.” (Zhaoxing Liu and Jinyuan Su, 2013)

So globalization brings along legal harmonization, but what principles it will be based on? The Chinese scholars insist on the Chinese ones. That is another trend to watch for a legal counsel of the FDI investor.

Subchapter 3. Country-specific legal risk due corruption in the legal system

However thorny the corruption issue is both for the foreign and Chinese jurists, it is still gets some coverage in the scholarship. While both of these types of jurists are reluctant to rock the boat or to offend their partners or to hinder their own careers, still the subject matter of legal corruption is here to stay and might as well be discussed.

As Xiao Yang, the president of the Supreme People’s Court, said in 2002, bribe-taking andother forms of corruption persisted within the Chinese courts. (Liu, 2006)

In the same year, in his report to the National People's Congress (NPC) the Head of the Supreme People's Procuratorate (SPP) Han Zhubin also disclosed that growing problems with the probity of law-enforcement officials. 406 officials at various levels of the Procuratorate were last year subject to investigation for corruption and other reasons. 56 Procuratorate cadres were put on trial for criminal offences. Among them, head of the Shenyang Procuratorate, Liu Shi, was given a jail term of 20 years for corruption and leaking state secrets. (CNN, 2002)

As we know the Procuratorate is the state prosecution organ, an integral part of the Chinese legal system, intended, among other things to prosecute the graft-takers, so who is watching the watchers? If the state prosecution is tainted by bribery to such an extent, it surely means that the entire legal system is affected by corruption.

Also , in 2004 the President of China Hu Jintao (胡錦濤) lamented, ‘‘Local protectionism, power

abuse and corruption have greatly impaired the image of the Party and the state, and harmed the interests of the state and the people’’. (Liu, 2006). It is indicative that in the same speech marking the 50th anniversary of the National People's Congress (NPC), Hu urged legislators to crack down harder on corruption and abuse of power. Hu said that no Western democratic practices -- such as separating the powers of the executive, the legislature and the judiciary and direct multi-party and multi-candidate elections at the top levels of government -- would be


implemented: "history indicates that indiscriminately copying Western political systems is a blind alley for China". (Taipei Times, 2004)

Hu’s speech is indicative since the President of China has recognized the problem with the judiciary corruption on one hand, but on the other, refused to implement one Western mechanism that is believed to be effective in battling corruption, namely, the division of powers, or “checks and balances”. While the courts remain, whether formally or not, under the control of the government, the corruption is bound to persist, and no independent judiciary can be hoped for, so that is adding another layer of the legal risk for the FDI investor.

Moving along the timelines closer to present shows that the problem persist from the time of it being acknowledged in 2002.

In 2008, a view was provided from Xianggang (香港), wherein a Hong Kong legal scholar Eric

Chi-yeung Ip who is with the Faculty of Law at The University of Hong Kong (香港), published

a comprehensive article in JOAAG (The Journal of Administration & Governance), titled “Judicial Corruption and its Threats to National Governance in China”. In his paper, he argued that corruption in the judiciary is an eminent threat to good governance in the PRC because it obstructs the governance goal of establishing a state which rules in accordance with the law (yifa

zhiguo 依法治国).

His, quite enlightening, findings are focused on judges who are integrated in the judicial system which includes people’s courts, the people’s procuratorates, the public safety agencies, the state security, the judicial administration, the legal profession, the notaries, the mediation and arbitration systems and the system of labor re-education. Collectively, the members of the ‘judicial system’ are called ‘political-legal cadres’ who number 200,000 and hear approximately 6,000,000 cases per year. Judges, who must uphold and protect the socialist system’s interests, play a predominant role in the administration of justice, in the absence of juries, judges are entitled to proactively manage the trying of cases, questioning of witnesses and ordering of evidence to be brought by the parties.

Judicial corruption can be defined as misconduct which deviates from professional ethics and undermines the reputation of justice, including embezzlement and bribery, abuse of fair procedures and misuse of power for personal gains among judicial personnel in their official and social course of conduct.

Mishandling of cases and unlawful judgments, which led to the reversal of more than 85,000 cases in 1998, were also closely connected with judicial corruption. Court corruption usually takes the form of judges accepting invitation from attorneys to dine and wine together, and receiving valuable gifts such as televisions, watches, cars and gold from litigants. Illegal activities between judges and lawyers cover a wide range of misbehavior such as money laundering, inappropriate granting of special privileges and commercial sexual transactions.

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There are instances when lawyers o settle a bill for judges at restaurants late at night, and pay for the shopping expenditures of female judges. Other judges go farther by collecting small fees, going to sauna bathrooms with attorneys and leak confidential details of cases in return for benefits. Some law firms even publicize that some of their employees are relatives of serving judges as an attraction to potential clients. (Ip, 2008)

To battle the problem Ip proposes to strengthen the judicial independence, to create the corporate structure for the judges, to provide independent and sufficient funding for the courts, to unify the conflicting rules governing conduct of judges14 and to provide education for the judges, who for now are not require to have a legal degree or in some cases, any degree for that matter.

As stated in the PRC Judge Law of 1995 (amended in 2001): Chapter IV Qualifications for a Judge, Article 9, “ A judge shall possess the following qualifications: …(6) to have worked in law for at least two years in the case of a graduate from a four-year course in the law specialty of an institution of higher education or a graduate from a four-year course in a non-law specialty of such an institution who possesses the professional knowledge of law, and to have worked in law for at least three years in the case of the said graduate to be appointed judge of a Higher People’s Court or the Supreme People’s Court; to have worked in law for at least one year in the case of a person holding a Master of Law degree or Doctor of Law degree; or a person holding a master’s degree or doctor’s degree of non-law specialty who possesses the professional knowledge of law, and to have worked in law for at least two years in the case of the said person to be appointed judge of a Higher People’s Court or the Supreme People’s Court. The judicial persons who, before this Law is implemented, do not possess the qualifications as provided by sub-paragraph (6) of the preceding paragraph shall receive training. The specific measures shall be formulated by the Supreme People’s Court. Where it is really difficult to apply the provisions in sub-paragraph (6) of the first paragraph regarding the academic qualifications, such qualifications for judges may, upon examination and approval by the Supreme People’s Court and within a limited period of time, be relegated to include graduates from a two-or-three-year course in the law specialty of an institution of higher education.” (NPC, 2001)

Hence, passing the bar is not required, and in some cases, a degree requirement can be replaced by a non-degree legal training. The age requirement is also quite low at 23 years of age.

14 Currently these include the Measures on the Responsibility for Unlawful Adjudication by Adjudicative Personnel of the People’s Courts (Provisional), the Measures on Adjudicative Disciplinary Sanctions of the People’sCourts (Provisional), Provisions on the Strict Implementation of the Recusal System concerningAdjudicative Personnel (2000); the Provisions of the Party Core Group of the SPC on the Engagement inRemunerative Legal Services Activities and Commercial Activities by Spouses and Children of LeadingCadres of the SPC of the Divisional Rank or Above (2000); the Basic Norms of Professional Ethics ofJudges of the PRC (2001); the Provisions on Resignation of Presidents and Vice-Presidents of LocalPeople’s Courts at Various Levels and Specialist People’s Courts to Take Responsibility for Wrongs(Provisional) (2001); and the Measures on Disciplinary Sanctions for the Execution Work of the People’sCourts (Provisional) (2002) . In addition, the Constitution, Criminal Law and the Judge’s Laware also relevant sources of law. (Ip, 2008)


Two year later after the Ip’s article, a report in the Wall Street Journal painted even grimier a picture, with its portrayal of two scandalous trials of high-level judges in 2010:

“The trial of the former judicial chief of Chongqing (重庆), part of the massive crackdown on

organized crime in one of China's biggest cities, exposes the challenges the central government

faces in its push to reform a corruption-plagued legal system. Wen Qiang(文强), the 55-year-old

former head of Chongqing's justice department and deputy police chief, stands accused of taking millions of dollars worth of bribes over the course of his career in exchange for providing a protective umbrella over the city's gangsters, including his sister-in-law, who has already been sentenced to 18 years in prison for running illegal casinos. Mr. Wen, the highest-ranking official to be snared in the Chongqing crackdown, has also been charged with raping a university student and luring young women into prostitution.

The problem of judicial corruption threatens to undermine public confidence in the legal system just as China pushes to further develop the rule of law. Foreign companies often avoid the country's court system altogether in favor of arbitration, typically conducted outside China.” (WSJ, 2010)

The case of Wen Qiang (who was promptly sentenced to death and executed the same year) is not solitary, isolated incident: several other top judges have been arrested on graft charges in the Chongqing campaign, and allegations of judicial corruption reach all the way to the top of China's legal system. (WSJ, 2010).

His case is also echoed by the case of another high-level judge from a different city: it is further reported that also in 2010, Huang Songyou (黄松有), formerly vice president of the country's highest court, the Supreme People's Court, received a life sentence for bribery and embezzlement.

He is the most senior judge here convicted on corruption charges. Mr. Huang was charged with taking bribes and diverting money from a Guandong court in southern China (广东) that he previously headed, and lawyers were said to be among those who gave Mr. Huang illegal payments in exchange for favorable outcomes in court, including one firm that allegedly paid 3.9 million yuan (about $570,000) in bribes between 2005 and 2008. (WSJ, 2010)

Obviously, the problem is getting worse as millions and hundreds of thousands dollars in outright bribes are far cry from buying dinners and gifting watches to judges described in the Ip’s research above.

Both the Chinese officials and the legal scholars, the Chinese as well as the western ones, acknowledge the gravity of the problem.

"We have to fully understand that the corruption uncovered in some courts and places is not simply isolated phenomena… The battle against corruption will be arduous, complicated and

long-term." - Wang Shengjun (王胜俊), chief justice of the Supreme People's Court (最高人民

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法院), said at a conference in May, 2010. " he stated that total of 712 officials from courts at

various levels in China were punished for breaking laws or disciplines in 2008, 105 faced criminal charges. It was also reported that in 2009 the Supreme Court set up a hotline for the public to report cases of judicial malfeasance, and nearly 25,000 "corruption supervisors" have been installed in courts around the country, including 14 full-time supervisors placed within the Supreme People's Court to oversee its judges and staff. However, at a ratio of 25 000 supervisors to 400 000 judges and court personnel in 3,000 courts nation-wide which means one supervisor to 16 personnel over far-flung Chinese nation. (WSJ, 2010). Interestingly, Wang has no legal training himself, being a historian by his degree.

While these uphill battle is encouraging, still the jurists remain skeptical: "Despite the few well-publicized incidents, the probability of getting punished is so low that any rational judge would demand bribes and kickbacks, most judges come to the bench straight out of college, without any prior legal experience. The salaries also remain inadequate because local governments are responsible for the administration and budgets of their courts, " says Ethan Michelson, associate professor of sociology and law at Indiana University. Mr. Michelson, who has conducted surveys of Chinese lawyers and litigants in 2000 and 2009, says perceptions of judicial corruption have largely worsened over the past decade. (WSJ, 2010)

His words are confirmed by the Chinese scholars: Pu Yongjian, a professor at the School of Economics and Business Administration of Chongqing University, says the level of corruption acts as a deterrent to the use of the courts to settle grievances. "Ordinary people are unwilling to file lawsuits," says Mr. Pu. "It costs money, and more importantly, even if they spend the money [to file a suit], the chances of winning are very small due to the corruption in the judicial system." (WSJ, 2010)

One of the most authoritative sources on global corruption pictures is Transparency International, a multi-national organization which is ranking countries of various corruption scales.

In its 2011 Bribe Payers Index it is capturing the supply side of international bribery, specifically focusing on bribes paid in the foreign country by the private sector firms of a country while operating in that different country.

On that scale China ranked the worst 28th offender out of 28 surveyed. However the organization noted that steps to mitigate the situation are taken. In particular it emphasized that in 2011, China’s National People’s Congress, the country’s parliament, passed the eighth amendment to the Criminal Law of the People’s Republic of China. The amendment, which took effect on 1 May 2011, makes it a criminal offence for Chinese companies and nationals to bribe foreign government officials.

Individuals may face criminal detention of between three and 10 years, while companies may receive fines, and managers directly responsible for an offence may also face criminal detention of up to 10 years. Previously, the country’s anti-corruption laws had no extra-territorial element;


it was only a criminal offence to bribe Chinese government officials. The new law applies to companies organized under Chinese law, which include international companies’ representative offices, joint ventures and wholly foreign-owned enterprises in China, as well as Chinese companies overseas.

In the words of Ren Jianmin, who was a Vice Chair, at Anti Corruption and Governance Research Center : “The new amendment of the penal code marks the Chinese authority’s commitment to combating corruption. However, there are tremendous challenges ahead and bottlenecks that need to be cleared. Not only does the appropriate legislation need to be put in place, but effective implementation of this provision also requires sufficient enforcement processes and resources, international cooperation and moreover, the continued willingness of the authorities to treat this issue as an important priority.” (Transparency International, 2012)

These findings are relevant since bribe-paying abroad reflects the business environment at home, as well as the degree of reliability of Chinese counterparts in terms of exposing the FDI venture in China to additional legal risks.

Another, more comprehensive index, called Corruption Perceptions Index 2012 scores countries on a scale from 0 (highly corrupt) to 100 (very clean). While no country has a perfect score, two-thirds of countries score below 50, indicating a serious corruption problem. Corruption translates into human suffering, with poor families being extorted for bribes to see doctors or to get access to clean drinking water. It leads to failure in the delivery of basic services like education or healthcare. It derails the building of essential infrastructure, as corrupt leaders skim funds. Corruption amounts to a dirty tax, and the poor and most vulnerable are its primary victims. (Transparency International, 2012)

While for a FDI investors such humanitarian concerns can be secondary, the latter however are translated directly to bottom line figures for the former: quite obviously – the higher is the corruption, the poorer is the consumer base in the target country, and the higher are hidden costs of operating a business in that country so it is significant from the purely pragmatic point of view that out of 174 countries surveyed China ranks 80th almost exactly between squeaky-clean Denmark on the first place and war-torn Somalia on 174th.

China’s judicial independence was measured by the World Economic Forum in its Global Competitiveness Report 2011-2012 which allegedly “assesses the competitiveness landscape of 144 economies, providing insight into the drivers of their productivity and prosperity. The Report series remains the most comprehensive assessment of national competitiveness worldwide.”

For China the report notes that “a number of challenges persist in the areas of corruption and judicial independence within the institutions pillar (48th). Moreover, the sentiment among businesses is that the country has become less safe over the past three years, resulting in higher costs for protection against diverse forms of crime and violence. Finally, standards of business ethics (57th) and corporate accountability (66th) are below those found in a number of other economies.” (The World Economic Forum, 2013)

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To summarize these various indicators would be to say that China is territory of the heightened legal risk due to corruption, low funding and poor business ethics. Those three areas are the areas that need to be carefully assessed by the FDI investor on all stages of its investment cycle, that is at making a country target selection, investment acquisition, investment management and divestment.

Subchapter 4. Categorization of the FDI investors in China according to the legal risk level

In the Chapter 3 above the list of the analyzed cases was further divided into 3 groups according to three criteria: the degree of the company being IP-rich, cash-rich and powerful.

The power of an FDI company is determined by the value it brings to the Chinese economy, by the political connections of its Chinese counterpart(s) and by the ideological trends prevalent at the moment, as directed by the Communist party of China (Zhōngguó gòngchǎndǎng 中国共产党). If, for example, the Party directs that supercomputers are a priority for China at the moment then it is highly unlikely that a firm like IBM will be bothered by a patent piracy attack. Further power components of a FDI company might be factors such as sheer dollar amount of its assets in China and the number of employees, however as witnessed by the case of Apple, those by itself do not guarantee a security from the trademark extortion.

Here, I repeat the legal risk matrix with providing some more detail on other dimensions of legal risks and risk-mitigating factors

Table 7. Tabulation of a legal risk against power of the company. Source: own research.

Less powerful Average power More powerful

Small legal risk Apple, CNOOC Ltd

Average legal riskProducers of brand name alcohol and luxury goods

Large legal riskPfizer, Shchneider,. RHC

With this table that shows the positive correlation of power with the legal risk in mind, it is helpful to map the correlation between cash-flow and IP assets on one hand and the legal risks on the other. I will present it in the form of a three-dimensional graph below, with height of the columns representing the level of the legal risk faced by FDI enterprises with various level of the IP assets and cash flows:


Cash poor Cash average Cash rich

IP poor

IP average

IP rich

Level of legal risk

Figure 6. Level of legal risk as a ratio of IP and cash

It portrays in a graphic format the experientially proven notion that the higher is the possession of IP assets and the more profitable is the FDI company – the more is it prone to a predatory litigation.

Apple is a textbook example that is both cash and IP-rich hence the trademark litigation attack, Shcneider and Pfizer belong to the same category. RHC and CNOOC Ltd are IP-poor but cash rich companies, and finally, the alcohol and luxury goods producers belong to IP- and cash-average category hence their legal risk can be estimated as average one based on these two criteria.

Subchapter 5. Recommendations to the FDI investors on decreasing company-specific legal risk level

Starting with the top-down approach and assuming that the investor and its legal counsel are unfamiliar with specific legal environment of the PRC, the first order of the day would be a recommendation to assess the legal risks in a country-specific manner. It remains an undisputed

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fact that China represents one of the best if not the most attractive destination for the FDI (See Chapter 1).

That means, that on whole its legal risks are acceptable and legal costs are tolerable as the part of overall “doing business” costs for most of the investors. However, the questions that a particular investor must ask himself to evaluate its legal risks and to allocate funds accordingly are as follows:

1. Is intended area of investment in accord with the PRC government encouraged areas of investment? (see Subchapter 3. Approval process and restrictions on the FDI ). If yes, then legal risks are diminished.

2. How expensive and surmountable will be the approval process (see Subchapter 3. Approval process and restrictions on the FDI ?)

3. Are the intended areas of investment in any way, shape, or form related to, depend on or resemble the prohibited areas of investment? (see Appendix 5. FDI- restricted and prohibited areas of industry in China). If the answer is yes, then that may spell doom in form of legal and administrative sanctions as Google have found recently, with the ultimate legal cost being having to abandon and write-off your country assets as sunk costs.

4. Is my assessment of legal risks overly based on such political considerations as China’s WTO membership, large number of BITs, existence of legal transplants and general westernization of Chinese legal system? If so, these assessment must be re-assed in view of findings of this dissertation (see Subchapter 4. The role of BIT and Subchapter 2. Legal system comparison and hidden legal risks traps).

5. Where is my company on the above matrices of legal risks (see Subchapter 4. Categorization of the FDI investors in China according to the legal risk level). If the company is both IP and cash rich then it makes the ultimate target for predatory litigation and legal defense funds must be earmarked in advance and factored into financial projections accordingly.

6. Could my world-wide or domestic patents be stolen, patented in China and used against me as grounds for predatory litigation ( see Subchapter 6. Two patent cases of patent pirates rewarded)? If yes, then one preventive measure would be to take inventory of all patentable features of your products sold in China and check against database of similar Chinese patents that could be used for patent attack. Concurrently, domestic and world-wide patents and trademarks must be registered in China anew in order to diminish the possibility of such an attack.

7. Is my product in any way capable of entailing a legal liability due to disruption of end-user business, or causing corporal damage or loss of life (see Subchapter 11. Product liability and enforcement of Chinese judgments in foreign courts). If so, the company must be prepared for a defensive litigation in both Chinese and domestic courts.


8. Have been vertical and horizontal ties established with extra-legal power structure on the city and province level of administrative government? Has approval and support of the communist party officials been vouched for? If not, then it must be done as a preventive measure to decrease legal risks, by timely detection of such and mitigating negotiations.

9. Have the necessary due diligence be conducted on the key Chinese counterpart(s)? The ongoing due diligence of the Chinese counterpart is key measure to ensure that his legal or financial problems do not spill-over into an attempt to take over the FDI business or otherwise abuse the partnership.

10. Is the officer’s personal liability is duly insured? If not that increases the risk of being sued by the ex-employee in case of him be found personally liable by the Chinese legal system.

These 10 points are not exhaustive but still useful for a FDI investor who is preparing to navigate the hitherto unknown Chinese legal waters.

Subchapter 6. Recommendations to the Chinese law-makers on decreasing country-specific legal risk level

In order to be realistic any recommendations must be willing to be accepted by the intended audience, better yet if the audience asks for recommendations since unwanted advice is bound to fall on deaf ears. Luckily, lately the Chinese laws are published in advance and entail ample discussions with the business and legal community.

Therefore, the first recommendations for the law-makers is to incorporate the foreign business community’s voice into these discussion. One way to do it would be to initiate creation of a consultation forum that would unite foreign business and legal representative that could work out a consultative opinion on future and present laws.

For a second recommendation, and a practical way to attract more investment it is recommended that existing court system will be further amplified by courts specifically designed and staffed by the trained professionals in order to deal with the litigations involving foreigners, or as it is termed in the Law of Civil Procedures of the People’s Republic of China 1991 (Zhong Hua Ren

Min Gong He Guo Min Shi Su Song Fa 中华民国人民的民事诉讼法) “civil cases involving

foreign elements”. These courts are needed in the special economic zones, such as Shenzhen for example, and, additionally in the provincial capitals, that would a major stride towards reassuring and encouraging FDI.

The third recommendation would be to centralize and to make freely available the legal information that pertains to actual workings of the legal mechanism in China, while translations of laws and some regulations are available from government-sponsored sites, such as

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http://www.npc.gov.cn/, (“The Web site of the National People's Congress 全國人民代表大會;:

Quánguó Rénmín Dàibiǎo Dàhuì (NPC) of the People's Republic of China, which is run by its General Office, is the major authentic access to the information on the NPC system and development of the Chinese legal system.” as stated on the site), however, the rest of the legal information, including judicial decision remains in the hands of private organization who made a cottage industry out of translating and selling Chinese legal information at exorbitant prices.

These three recommendations while not costly, will benefit greatly the openness and transparency of the Chinese legal system, and are certain to encourage more inflow of the foreign investment.


The legal system of China is currently in its maturity, however the growing pains are still felt both on its domestic and foreign fronts. The investors and law-makers alike might benefit from warnings and practical recommendations put forth in this Chapter. This Chapter is also of benefit and of an original, albeit modest contribution to the legal science due to temerity of the issues raised and a precedent analysis provided.

Conclusion

To recapitulate this dissertation: its main tenets are existence of a bias in national legal systems and its main goal was to find if a bias exist in Chinese legal system as well. The bias is formulated not as a premeditated hostility to or a discrimination against foreigners on orders from the top of its hierarchy, but rather as a congregation of obstacles and tendencies that make this particular legal system well, foreign, to foreigners in the first instance; and in the second one, make it a ready tool by which the foreign invested enterprises can be taken advantage of. This dissertation will be useful manual if not prevent it but at least to partly prepare a foreign investor for an uneasy task of navigating Chinese legal waters.

http://www.npc.gov.cn/


Appendix 1. China – Ease of doing business as ranked by the IFC

Figure 7. Source: IFC, 2012

This year’s report presents results for 2 aggregate measures: the aggregate ranking on the ease of doing business and a new measure, the “distance to frontier.” While the ease of doing business ranking compares economies with one another at a point in time, the distance to frontier measure shows how much the regulatory environment for local entrepreneurs in each economy has changed over time.

The ease of doing business index ranks economies from 1 to 183. For each economy the ranking is calculated as the simple average of the percentile rankings on each of the 10 topics included in the index in Doing Business 2012: starting a business, dealing with construction permits, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, resolving insolvency and, new this year, getting electricity. The employing workers indicators are not included in this year’s aggregate ease of doing business ranking. In addition to this year’s ranking, Doing Business presents a comparable ranking for the previous year, adjusted for any changes in methodology as well as additions of economies or topics.

Construction of the ease of doing business index . More complex aggregation methods—such as principal components and unobserved components—yield a ranking nearly identical to the simple average used by Doing Business. Thus Doing Business uses the simplest method: weighting all topics equally and, within each topic, giving equal weight to each of the topic components. If an economy has no laws or regulations covering a specific area—for example, insolvency—it receives a “no practice” mark. Similarly, an economy receives a “no practice” or “not possible” mark if regulation exists but is never used in practice or if a competing regulation prohibits such practice. Either way, a “no practice” mark puts the economy at the bottom of the ranking on the relevant indicator. The ease of doing business index is limited in scope. It does

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Appendix 7. IP trial procedure________________________________________________________________________________________________________

not account for an economy’s proximity to large markets, the quality of its infrastructure services (other than services related to trading across borders and getting electricity), the strength of its financial system, the security of property from theft and looting, macroeconomic conditions or the strength of underlying institutions. (International Financial Corporation, 2012)

Sources of IFC China rankings data (individuals and organizations):

Allen & Overy Llp

Byz Digital Technology

Russell Brown, Lehman Brown

Rico Chan, Baker & Mckenzie

Rex Chan, Pwc China

Jie Chen, Jun He Law Office, Member Of Lex Mundi

Elliott Youchun Chen, Jun Ze Jun Law Offices

Donald Chen, Ningbo Sunsea Apparel

Grace Cheng, Capital Law & Partners

Ke Deng, Ag Logistics

Robert Du, Hks

Yu Du, Mmlc Group

Xi Jun Duan, Ag Logistics

Hongtao Fan, Join way Law firm

Elwin Feng, Qinghe County Baoshida Automobile Parts Co. Ltd.

Wei Gao,Lawrence Linjun Guo

Jade & Fountain Prc Lawyers

Joanna Guo, Zhong Lun Law Firm

Jennifer He, Lehman Brown

Kian Heong Hew, Pinsent Masons

Vivian Ho, Baker & Mckenzie

Sheng Ho, Shanghai Trico Barium Salts Business Department

Jinquan Hu, King & Wood Prc Lawyers

Felix Hu, Shenzhen Eonver Co. Ltd.

Marvin Jiang, Teloon Chemicals

Liu Jing, Beijing Huanzhong & Partners

Edward E. Lehman, Lehman, Lee & Xu

Ian Lewis, Mayer Brown Jsm

Qing Li, Jun He Law Office, Member Of Lex Mundi

Jane Li, Noronha Advogados

Audry Li, Zhong Lun Law Firm

Mark Li, Zhong Lun Law Firm

Frankie Lin, Zhechem

Grace Liu, Hua-Ander Cpas, Member Of Russell Bedford International

Li Liu, Jingjiang Taigoo Import & Export, Trading Company

Jingtao Liu, Jones Lang Lasalle

Zhiqiang Liu, King & Wood Prc Lawyers

Lucy Lu, King & Wood Prc Lawyers


Hongli Ma, Jun He Law Office, Member Of Lex Mundi

Natalie Ma, Pwc China

Mark Ma, Yantai I.G. Produce Co., Ltd.

Thomas Man, Matthew Murphy, Mmlc Group

Stephen Rynhart, Jones Lang Lasalle

Han Shen, Davis Polk & Wardwell

Tina Shi, Mayer Brown Jsm

Jack Sun, Hogan Lovells

Jessie Tang, Global Star Logistics Co. Ltd.

Terence Tung, Mayer Brown Jsm

Felicity Wang,Ag Logistics

Xuehua Wang, Beijing Huanzhong & Partners

Fenghe Wang, Dacheng Law Offices

Guoqi Wang, Hua-Ander Cpas, Member Of Russell Bedford International

George Wang, Jun He Law Office, Member Of Lex Mundi

Xin Wang, Pinsent Masons

Celia Wang, Pwc China

William Wang, Pwc China

Max Wong, Jones Lang Lasalle

Chris Wong, Lehman Brown

Anthea Wong, Pwc China

Cassie Wong, Pwc China

Kent Woo, Guangda Law Firm

Christina Wu, Capital Law & Partners

Bruce Wu, Jiangsu Hongteng Food Co., Ltd.

Elisa Xiao, Hua-Ander Cpas, Member Of Russell Bedford International

Wang Xiaolei, People’s Bank Of China

Emily Xiong, Shenzhen Qifeng Stone Material Co, Ltd.

Hua Xuan, Mmlc Group

Maggie Yan, Hua-Ander Cpas, Member Of Russell, Bedford International

Frank Yang, Mayer Brown Jsm

Queenie Yip, Export /Import

Ricky Yiu, Baker & Mckenzie

Hai Yong, Baker & Mckenzie

Tian Yongsheng, Y-Axis International Trading Co.

Eugenia Yu, Hks,

Xia Yu, Mmlc Group

Natalie Yu, Shu Jin Law Firm

Yvonne Zeng, Lehman Brown

Honglei Zhang, Beijing Huanzhong & Partners

Sarah Zhang, Hogan Lovells

Yi Zhang, King & Wood Prc Lawyers

Sheng Hui Zhao, Beijing Huanzhong & Partners

Zoe Zhu, Joinway Law Firm

Judy Zhu, Mayer Brown Jsm

Alina Zhu, Zhong Lun Law Firm

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Appendix 2. Definitions of FDI terms by OECD

Source: Glossary of foreign direct investment terms and definitions, OECD, 2012

Acquisition

An acquisition is a business transaction between unrelated parties based on terms established by the market where each enterprise acts in its own interest. The acquiring enterprise purchases the assets and liabilities of the target enterprise. In some cases, the target enterprise becomes a subsidiary or part of a subsidiary of the acquiring enterprise.

Affiliated enterprises

Affiliated enterprises are enterprises in a direct investment relationship. Thus, a given direct investor, its direct investors, its subsidiaries, its associates, and its branches, including all fellow enterprises, are affiliated enterprises. It is possible for a given enterprise to be a member of two or more groups of affiliated enterprises.

All-inclusive concept

The application of the all-inclusive concept is one of the two main approaches to measuring earnings. The concept is explained in the International Accounting Standard, “Unusual and Prior Period Items and Changes in Accounting Policy”. When earnings are measured on the basis of this concept, income is considered to be the amount remaining after all items (including write-offs and capital gains and losses, and excluding dividends and any other transactions between the enterprise and its shareholders or investors) causing any increase or decrease in the shareholders‟ or investors‟ interests during the accounting period, are allowed for.

Ancillary corporation

An ancillary corporation is a wholly-owned subsidiary whose productive activities are ancillary in nature: that is, confined to providing services to the parent corporation and/or other ancillary enterprises owned by the same parent corporation. The kinds of services which may be produced by an ancillary unit are transportation, purchasing, sales and marketing, various kinds of financial or business services, computing and communications, security, maintenance, and cleaning. In some cases, the ancillary unit is located in a different economy from the companies it serves. An ancillary corporation is recognized as a separate institutional unit when it is resident in a different economy from that of any of its owners, even if it is not, in practice, autonomous.

Assets, Direct Investment

Direct investment assets can be ascribed to the following three categories: (i) investment by a resident direct investor in its non-resident direct investment enterprises (ii) reverse investment by


a resident direct investment enterprise in its non-resident direct investor(s) (iii) investment by a resident fellow enterprise in non-resident fellow enterprises.

Asset/liability principle

The asset/liability principle records all FDI financial claims on and obligations to non-residents using the normal balance sheet data showing gross assets and liabilities for positions, and net transactions for each category. The data presented on this basis, while compiled distinguishing the nature of the relationship between the counterparts (according to Framework for Direct Investment Relationships), do not incorporate any offsetting of reverse direct investment transactions or positions in equity or debt between a direct investment enterprise and its direct investor. Similarly, the asset/liability presentation does not incorporate any offsetting of any transactions or positions between fellow enterprises.

Associate, Direct Investment Enterprise

An associate is a direct investment enterprise (i) in which an investor owns directly at least 10% of the voting power and no more than 50%; (ii) where an investor and its subsidiaries combined own at least 10% of the voting power of an enterprise but no more than 50%, the enterprise is regarded as an associate of the investor for FDI purposes; (iii) where an associate, either as an individual or in combination with its subsidiaries, own more than 50% of an enterprise, this enterprise is regarded for FDI purposes as an associate of the higher level investor.

Balance of Payments

The Balance of Payments is a statistical system through which economic transactions occurring during specific time periods between an economy and the rest of the world can be summarised in a systematic way. The IMF Balance of Payments and International Investment Manual provides conceptual guidelines for compiling balance of payments statistics according to international standards.

Book value

Book value is a term that broadly encompasses many different accounting methods. It represents the values that appear on the books of an enterprise. It could represent the values on the books of direct investors or on the books of direct investment enterprises.

Branch, Direct Investment Enterprise

A branch is any unincorporated direct investment enterprise in the host country fully owned by its direct investor. Thus, this term encompasses branches as commonly defined – i.e. formally organized business operations and activities conducted by an investor in its own name – as well as other types of unincorporated operations and activities.

Business Register

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A business register is a list of enterprises or establishments maintained by countries to assist in the compilation of their business statistics generally and which can identify those enterprises involved in foreign direct investment and therefore help in the compilation of these statistics.

Centre of Predominant Economic Interest

An institutional unit has a predominant centre of economic interest in an economic territory when there exists, within the economic territory, some location, dwelling, place of production, or other premises on which or from which the unit engages and intends to continue engaging, either indefinitely or over a finite but long period of time, in economic activities and transactions on a significant scale. The location need not be fixed so long as it remains within the economic territory. In most cases, it is reasonable to assume that an institutional unit has a predominant centre of economic interest in the territory if the unit has already engaged in economic activities and transactions on a significant scale in the country for one year or more, or if the unit intends to do so.

Collective Investment Institutions

Collective investment institutions (CIIs) are incorporated investment companies and investment trusts, as well as unincorporated undertakings (mutual funds or unit trusts), that invest in financial assets (mainly marketable securities and bank deposits) and real estate using the funds collected from investors by means of issuing shares/units (other than equity). The CII can be open-ended, if there is no limit to the number of shares/units on issue, or closed-ended, where the number of shares/units on issue is fixed. The shares/units can be quoted or unquoted. The CII may pay periodic dividends, capitalize the income or a combination of those approaches, depending on the terms set out in its prospectus. Also referred to as collective investment scheme, collective investment vehicle, investment fund.

Conduit

A conduit is an enterprise that obtains or borrows funds, often from unaffiliated enterprises, and remits those funds to its direct investor or another affiliated enterprise. Some conduits and holding companies may have a substantial physical presence as evidenced by office building, equipment, employees, etc. Others may have (little) or no physical presence and may exist only as shell companies.

Confidentiality

For many countries, national statistical legislation prohibits the direct or indirect disclosure of information relating to a particular individual or entity. Many international organisations also operate statistical confidentiality regimes to ensure that confidential statistical information is not disseminated.

Foreign Direct Investor


A foreign direct investor is an entity (an institutional unit) resident in one economy that has acquired, either directly or indirectly, at least 10% of the voting power of a corporation (enterprise), or equivalent for an unincorporated enterprise, resident in another economy. A direct investor could be classified to any sector of the economy and could be any of the following: (i) an individual; (ii) a group of related individuals; (iii) an incorporated or unincorporated enterprise; (iv) a public or private enterprise; (v) a group of related enterprises; (vi) a government body; (vii) an estate, trust or other societal organisation; or (viii) any combination of the above. In the case where two enterprises each own 10% or more of each other’s voting power, each is a direct investor in the other. A direct investor has a direct investment enterprise operating in a country other than the economy of residence of the foreign direct investor

Framework for Direct Investment Relationships (FDIR)

The Framework for Direct Investment Relationships (FDIR) is a generalised methodology for identifying and determining the extent and type of direct investment relationships. The FDIR allows compilers to determine the population of direct investors and direct investment enterprises to be included in FDI statistics.

For a compiling economy, the FDIR identifies all enterprises related to a particular enterprise whether it is a direct investor or a direct investment enterprise or both. For example, within a group, it is possible that a direct investment enterprise itself owns 10% or more of the voting power of another non-resident enterprise, in which case the direct investment enterprise is itself a direct investor in a further direct investment enterprise. The question is therefore whether there is a direct investment relationship between the further enterprise and the original enterprise.

The residence of units is not a feature of the definition of subsidiaries and associates for FDI purposes. The FDIR may include within the relationship enterprises that are resident in the same economy. However, foreign direct investment is only recorded when there is a financial transaction or position between entities in different economies that are in a direct investment relationship (including fellow enterprises).

Holding Companies

A holding company is a company established to hold participation interests in other enterprises on behalf of its owner. Some holding companies may have a substantial physical presence as evidenced by, for example, office buildings, equipment, and employees. Others may have little or no physical presence and may exist only as shell companies.

Immediate host/investing country

Immediate host/investing country is the basis for geographical allocation with respect of the first counterparty.

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Income, Direct Investment

Direct investment income is part of the return on the direct investment position; that is, the return on equity and debt investment. Direct investment income consists of earnings on equity investment (for example, a resident direct investor’s share in the net income or earnings of its direct investment enterprises) plus income on debt between direct investors and direct investment enterprises and between fellow enterprises. Direct investment income payables are calculated in a similar way. Direct investment income is recorded as it accrues. However, as debt instruments involving FDI-related financial intermediaries are excluded from direct investment, so is the debt income between them.

Indirectly Owned Direct Investment Enterprises

As a matter of principle, foreign direct investment statistics cover all enterprises in which direct investors have, directly or indirectly, a direct investment interest. This group of enterprises is specified according to the Framework for Direct Investment Relationships (FDIR)

Inward Direct Investment

Inward direct investment is investment by a non-resident direct investor in a direct investment enterprise resident in the host economy; the direction of the influence by the direct investor is “inward” for the reporting economy. Also referred to as direct investment in the reporting economy.

Joint venture

A joint venture is a contractual agreement between two or more parties for the purpose of executing a business undertaking in which the parties agree to share in the profits and losses of the enterprise as well as the capital formation and contribution of operating inputs or costs. It is similar to a partnership, but typically differs in that there is generally no intention of a continuing relationship beyond the original purpose. A joint venture may not involve the creation of a new legal entity. Whether a quasi-corporation is identified for the joint venture depends on the arrangements of the parties and legal requirements. The joint venture is a quasi-corporation if it meets the requirements for an institutional unit, particularly by having its own records. Otherwise, if each of the operations is effectively undertaken by the partners individually, then the joint venture is not an institutional unit and the operations would be seen as being undertaken by the individual partners to the joint venture.

Land and buildings

Land is the ground, including the soil covering and any associated surface waters, over which ownership rights are enforced; included are major improvements that cannot be physically separated from the land itself but it excludes any buildings or other structures situated on it or running through it; cultivated crops, trees and animals; subsoil assets; non-cultivated biological


resources and water resources below the ground. Ownership of land and buildings by a non-resident is treated as an equity investment by the non-resident in a resident notional enterprise, which in turn is treated as the owner of the land and buildings. Any rent earned through leasing the land and buildings is recorded as a dividend (income on equity) paid by the notional unit to the direct investor.

Liabilities, Direct Investment

Direct investment liabilities can be ascribed to the following three categories: (i) investment of non-resident direct investor in resident direct investment enterprises (ii) reverse investment of non-resident direct investment enterprises in resident direct investors (iii) investment of non-resident fellow enterprises in resident fellow enterprises.

Market Value

Market value is the conceptually ideal basis for valuing direct investment transactions and positions. Market valuation places all assets at current prices rather than when last purchased or re-valued, and promotes consistency in the value of assets of different vintages. It also promotes consistency when comparing stocks, transactions and other flows of different enterprises, industries, and countries.

Merger

A merger occurs when two (or more) companies agree to merge into a new single company rather than remain separated for creating business synergies.

Nominee

A nominee is a legal device for holding assets for confidentiality or convenience reasons. Assets held by a nominee are treated as being owned by the beneficial owner, rather than by the nominee or by a quasi-corporation. However, for issuers of securities, it may be difficult to identify whether nominees hold claims in their own right or as nominees, and if the latter, it may be difficult to identify the beneficial owner.

Outward Direct Investment

Outward direct investment is investment by a resident direct investor in a non-resident direct investment enterprise; the direction of the influence by the direct investor is „outward‟ for the reporting economy. Also referred to as direct investment abroad.

Quasi-corporation

A quasi-corporation is an unincorporated business that operates as if it was an entity separate from its owners. Examples are branches, land ownership, partnerships (both of limited and

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Residence

The residence of an economic entity (or an institutional unit) is determined on the basis of the economic territory with which it has the strongest connection determined by its predominant centre of economic interest. While some units may have connections with more than one territory, for statistical consistency, there is a need to attribute a single economic territory based on objective and comprehensive criteria.

Reverse Investment

A direct investment enterprise may acquire financial claims in its direct investor. When such claims are not sufficient to establish a second, separate direct investment (i.e. do not qualify for the 10% ownership of voting power), the transactions/positions are referred to as reverse investment which are recorded as follows: for the economy in which the direct investment enterprise is resident: claims on direct investor; for the economy in which the direct investor is resident: liabilities to affiliated enterprises.

Round-tripping

Round-tripping refers to the channelling abroad by direct investors of local funds and the subsequent return of these funds to the local economy in the form of direct investment.

Shell Company

A shell company is a company that is formally registered, incorporated, or otherwise legally organized in an economy but which does not conduct any operations in that economy other than in a pass-through capacity. Shells tend to be conduits or holding companies and are generally included in the description of Special Purpose Entities.

Special Purpose Entities

Multinational enterprises (MNEs) often diversify their investments geographically through various organizational structures. These may include certain types of Special Purpose Entities. Examples are financing subsidiaries, conduits, holding companies, shell companies, shelf companies and brass-plate companies. Although there is no universal definition of SPEs, they do share a number of features. They are all legal entities that have little or no employment, or operations, or physical presence in the jurisdiction in which they are created by their parent enterprises which are typically located in other jurisdictions (economies). They are often used as devices to raise capital or to hold assets and liabilities and usually do not undertake significant production.

Subsidiary, Direct Investment Enterprise

A subsidiary is a direct investment enterprise: (i) in which an investor owns more than 50% of its voting power i.e. it is controlled by the investor; (ii) Where an investor and its subsidiaries


combined own more than 50% of the voting power of another enterprise, this enterprise is also regarded as a subsidiary of the investor for FDI purposes.

Trade Credit (receivables and payables)

Trade credit represents (generally) short-term credit between FDI-related enterprises in the ordinary course of business by suppliers/buyers of goods and services. These credits are registered from the time the goods or services are provided until payment is received (or vice versa).

Transactions (Direct Investment)

Direct investment transactions are financial flows and income flows between direct investors, direct investment enterprises, and/or other fellow enterprises. Transactions (flows) provide information for FDI activity within a given time period of time

Transactor Principle

According to the transactor principle, transactions resulting from changes in claims and liabilities are allocated to the country of residence of the non-resident party to the transaction (the transactor) even if this is not the country of residence of the direct investment enterprise or direct investor. This principle differs from the debtor/creditor principle that is recommended by the Benchmark Definition as the basis for geographical allocation.

Transfer Pricing

The transaction value for a good or service between related enterprises may not always reflect market values. Transfer pricing refers to this distortion between transaction values and market values. It can be motivated by income distribution or equity injections or withdrawals. Where the distortion is significant and data is available to do so, it is recommended that adjustments be made to remove the impact of transfer pricing.

Ultimate Investing Country

The ultimate investing country is a geographical allocation determining the location of the ultimate source of control of the stocks of inward FDI for a reporting economy. It is recommended to compile, on a supplemental basis, inward FDI positions according to the UIC.

Voting Power

Generally, ordinary shares provide voting power. While voting power is generally obtained through the purchase of equity, it is possible to have voting power that is not in the same proportion as the equity ownership (for example, 'golden shares' have greater voting power than other shares). It is also possible to obtain voting power without purchasing equity (for example, through swaps and repurchase agreements).

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Appendix 3. State Structure Of The People's Republic Of China

Source: The National People's Congress, 2012

The state organs of the People's Republic of China include the National People's Congress, the President, the State Council, the Central Military Commission, local people's congresses and local people's governments at various levels, organs of self-government in national autonomous regions, the people's courts and the people's procuratorates.

The National People's Congress of the People's Republic of China is the supreme organ of state power. Its permanent body is the Standing Committee of the National People's Congress. The National People's Congress is composed of deputies elected from the provinces, autonomous regions, municipalities directly under the Central Government, and special administrative regions, and of deputies elected from the armed forces. All the minority nationalities are entitled to appropriate representation.

The President and Vice-President of the People's Republic of China are elected by the National People's Congress. Citizens of the People's Republic of China who have the right to vote and to stand for election and who have reached the age of 45 are eligible for election as President or Vice-President of the People's Republic of China.

The State Council, that is, the Central People's Government, of the People's Republic of China is the executive body of the supreme organ of state power; it is the supreme organ of State administration. The State Council is composed of the Premier, the Vice-Premiers, the State Councilors, the Ministers in charge of ministries, the Ministers in charge of commissions, the Auditor-General and the Secretary-General.

The Central Military Commission of the People's Republic of China directs the armed forces of the country. The Central Military Commission is composed of the following: the Chairman; the Vice-Chairmen; and the members. The Chairman assumes overall responsibility for the work of the Central Military Commission. The term of office of the Central Military Commission is the same as that of the National People's Congress. The Chairman of the Central Military Commission is responsible to the National People's Congress and its Standing Committee.

The Supreme People's Court is the highest trial organ in the country and exercises its right of trial independently. It is also the highest supervising organ over the trial practices of local people's courts and special people's courts at various levels. It reports its work to the National People's Congress and its Standing Committee.

The people's procuratorates are State organs for legal supervision. The Supreme People's Procuratorate is the highest procuratorial organ. It is mainly responsible for supervising regional procuratorates and special procuratorates to perform legal supervision by law and protecting the


unified and proper enforcement of State laws. The Supreme People's Procuratorate has to report its work to the NPC and its Standing Committee .

People's congresses and people's governments are established in provinces, municipalities directly under the Central Government, counties, cities, municipal districts, townships, nationality townships, and towns. The organization of local people's congresses and local people's governments at various levels is prescribed by law. Organs of self-government are established in autonomous regions, autonomous prefectures and autonomous counties. The organization and working procedures of organs of self-government are prescribed by law in accordance with the basic principles laid down in Sections 5 and 6 of Chapter III of the Constitution.

The organs of self-government of national autonomous areas are the people's congresses and people's governments of autonomous regions, autonomous prefectures and autonomous counties. In the people's congress of an autonomous region, autonomous prefecture or autonomous county, in addition to the deputies of the nationality exercising regional autonomy in the administrative area, the other nationalities inhabiting the area are also entitled to appropriate representation. The chairman of an autonomous region, the prefect of an autonomous prefecture or the head of an autonomous county shall be a citizen of the nationality exercising regional autonomy in the area concerned.

Appendix 4. The Criminal Law of the PRC, 1997.

(Adopted by the Second Session of the Fifth National People's Congress on July 1, 1979, amended by the Fifth Session of the Eighth National People's Congress on March 14, 1997, promulgated by Order No.83 of the President of the People's Republic of China on March 14, 1997, and effective from October 1, 1997)

Part One General Provisions. Chapter I The Tasks, Basic Principles and Applicable Scope of the Criminal Law

Article 1 For the purposes of punishing crimes and protecting the people, in accordance with the Constitution and in the light of the concrete experience and actual conditions of our country in fighting against crimes, this Law is formulated.

Article 2 The tasks of the Criminal Law of the People's Republic of China are: to employ criminal punishments to fight against all criminal acts for the purposes of defending the state's security, political power of the people's dictatorship and socialist system, safeguarding the properties owned by the State and the properties owned collectively by the working people,

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protecting the properties owned privately by citizens, protecting the rights of the person, democratic rights and other rights of citizens, maintaining the social order and economical order, and ensuring the smooth advance of the cause of socialist construction.

Article 3 An act which is expressly defined by law as a criminal act shall be convicted of a crime and sentenced in accordance with law and; if it is not expressly defined by law as a criminal act, it may not be convicted of a crime and sentenced.

Article 4 Any person who commits a crime shall be equal in applying the law. No person is privileged to be beyond the law.

Article 5 The seriousness of punishment shall be determined in accordance with the crime committed by the criminal and his criminal responsibility.

Article 6 This Law applies where a person commits a crime in the territory of the People's Republic of China, except as specially provided by law. This Law also applies where a person commits a crime on board a ship or an aircraft of the People's Republic of China. If, among the acts or results of a crime, one of them takes place in the territory of the People's Republic of China, it shall be deemed a crime committed in the territory of the People's Republic of China.

Article 7 This Law applies where a citizen of the People's Republic of China commits a crime set forth by this Law outside the territory of the People's Republic of China; where, however, subject to the provisions of this Law, the maximum punishment of fixed-term imprisonment for his crime is not more than three years, he may be exempt from investigation.This Law applies where a public servant or serviceman of the People's Republic of China commits a crime set forth by this Law outside the territory of the People's Republic of China.

Article 8 This Law may apply where a crime against China or a citizen of the People's Republic of China committed by an alien outside the territory of the People's Republic of China and for which the minimum punishment of fixed-term imprisonment is not less than three years in accordance with the provisions of this Law, except where a crime is not punishable in accordance with the law of the place where it is committed.

Article 9 This Law applies to crimes set forth by the international treaties concluded or acceded to by the People's Republic of China and over which the People's Republic of China has criminal jurisdiction within its obligations in accordance with the treaties.

Article 10 A person who shall bear criminal responsibility according to this Law for his crime committed outside the territory of the People's Republic of China may still be investigated according to this Law, even if he has already been tried in a foreign country. Where, however, he has already received criminal punishment in a foreign country, he may be exempt from punishment or given a mitigated punishment.


Article 11 The criminal responsibility of an alien who enjoys diplomatic privileges and immunities shall be determined through the diplomatic channel.

Article 12 If an act committed after the founding of the People's Republic of China and before the entry into force of this Law was not deemed a crime under laws in force at the time, they shall apply. If the act was deemed a crime under laws in force at the time and is subject to prosecution in accordance with the provisions of Section 8 of Chapter IV of the General Provisions of this Law, criminal responsibility shall be demanded for according to laws in force at the time. Where, however, this Law does not deem it a crime or imposes a lighter punishment, this Law shall apply. The effective judgments made in accordance with the laws in force at the time before the entry into force of this Law shall continue to be effective.

Chapter II The Commission of a Crime

(excised)

Chapter III Punishments

(excised)

Chapter IV The Concrete Application of Punishments

(excised)

Chapter V Miscellaneous Provisions

(excised)

Part Two Specific Provisions

Chapter I Crime of Endangering the State Security

(excised)

Chapter II Crime of Endangering the Public Security

(excised)

Chapter III Crime of Disrupting the Order of Socialist Market Economy

Section 1 Crime of Producing or Selling Fake or Inferior Commodities

Article 140 A producer or seller who mixes impurities or imitations into a product, passes a fake product off as a genuine one, a defective product as a high-quality one or a substandard product as a standard one, if the sale amounts to not less than 50,000 yuan and not more than 200,000 yuan, shall be sentenced to fixed-term imprisonment of not more than two years or criminal detention and concurrently or independently, to a fine of not less than half and not more than two

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times of the sale; if the sale amounts to not less than 200,000 yuan and not more than 500,000 yuan, to fixed-term imprisonment of not less than two years and not more than seven years and concurrently to a fine of not less than half and not more than two times of the sale; if the sale amounts to not less than 500,000 yuan and not more than 2,000,000 yuan, to fixed-term imprisonment of not less than seven years and concurrently to a fine of not less than half and not more than two times of the sale and; if the sale amounts to not less than 2,000,000 yuan, to fixed-term imprisonment of fifteen years or life imprisonment and concurrently to a fine of not less than half and not more than two times of the sale or confiscation of property.

Article 141 A person who produces or sells fake medicine, if a serious harm to human health can be caused, shall be sentenced to fixed-term imprisonment of not more three years or criminal detention and concurrently or independently, to a fine of not less than half and not more than two times of the sale; if a serious harm to human health is caused, to fixed-term imprisonment of not less than three years and not more than ten years and concurrently to a fine of not less than half and not more than two times of the sale; and if death of a person or an especially serious harm to human health is caused, to fixed-term imprisonment of not less than ten years, life imprisonment or death and concurrently to a fine of not less than half and not more than two times of the sale or confiscation of property. Fake medicine mentioned in this Article means a medicine or a non-medical substance to be categorized or treated as fake medicine in accordance with the provisions of the Law of the People's Republic of China on Pharmaceutical Administration.

Article 142 A person who produces or sells inferior medicine, if a serious harm to human health is caused, shall be sentenced to fixed-term imprisonment of not less than three years and not more than ten years and concurrently to a fine of not less than half and not more than two times of the sale; and if the result is especially serious, to fixed-term imprisonment of not less than ten years or life imprisonment and concurrently to a fine of not less than half and not more than two times of the sale or confiscation of property.Inferior medicine mentioned in this Article means a medicine to be categorized as inferior medicine in accordance with the provisions of the Law of the People's Republic of China on Pharmaceutical Administration.

Article 143 A person who produces or sells food that does not conform to hygiene standards, if a serious food-poisoning accident or any other serious disease caused by food-borne bacteria can be caused, shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention and concurrently or independently, to a fine of not less than half and not more than two times of the sale; if a serious harm to human health is caused, to fixed-term imprisonment of not less than three years and not more than seven years and concurrently to a fine of not less than half and not more than two times of the sale; and if the result is especially serious, to fixed-term imprisonment of not less than seven years or life imprisonment and concurrently to a fine of not less than half and not more than two times of the sale or confiscation of property.


Article 144 A person who mixes the food to be produced or sold with toxic or harmful non-food stuffs, or sells the food mixed with toxic or harmful non-food stuffs that he knows clearly, shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention and concurrently or independently, to a fine of not less than half and not more than two times of the sale; if a serious food-poisoning accident or any other serious disease caused by food-borne bacteria is caused, thus seriously harming human health, to fixed-term imprisonment of not less than five years and not more than ten years and concurrently to a fine of not less than half and not more than two times of the sale; and if death of a person or an especially serious harm to human health is caused, shall be sentenced in accordance with the provisions of Article 141 of this Law.

Article 145 A person who produces medical appliances or medical hygiene materials that do not conform to the national or trade standards on safeguarding human health, or sells such appliances or materials while clearly knowing their inconformity to the national or trade standards on safeguarding human health, if a serious harm to human health is caused, shall be sentenced to fixed-term imprisonment of not more than five years and concurrently to a fine of not less than half and not more than two times of the sale; if the result is especially serious, to fixed-term imprisonment of not less than five years and not more than ten years and concurrently to a fine of not less than half and not more than two times of the sale; and if the circumstance is especially flagrant, to fixed-term imprisonment of not less than ten years or life imprisonment and concurrently to a fine of not less than half and not more than two times of the sale or confiscation of property.

Article 146 A person who produces electrical appliances, pressure containers, inflammable or explosive products or any other products, which do not conform to the national or trade standards on safeguarding the safety of person or property, or sells such products while clearly knowing their inconformity to the national or trade standards on safeguarding the safety of person or property, if a serious result is caused, shall be sentenced to fixed-term imprisonment of not more than five years and concurrently to a fine of not less than half and not more than two times of the sale; and if the result is especially serious, to fixed-term imprisonment of not less than five years and concurrently to a fine of not less than half and not more than two times of the sale.

Article 147 A person who produces fake pesticides, fake animal pharmaceuticals or fake chemical fertilizers, or sells pesticides, animal pharmaceuticals, chemical fertilizers or seeds while clearly knowing that such products are fake or no longer effective, or a producer or seller who passes substandard pesticides, animal pharmaceuticals, chemical fertilizers or seeds off as those up to standard, if a considerable loss of production is caused, shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention and concurrently or independently, to a fine of not less than half and not more than two times of the sale; if a serious loss of production is caused, to fixed-term imprisonment of not less than three years and not more than seven years and concurrently to a fine of not less than half and not more than two times of the sale; and if an especially serious loss of production is caused, to fixed-term

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imprisonment of not less than seven years or life imprisonment and concurrently to a fine of not less than half and not more than two times of the sale or confiscation of property.

Article 148 A person who produces cosmetics that do not conform to hygiene standards or sells such products while clearly knowing their inconformity to hygiene standards, if a serious result is caused, shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention and concurrently or independently, to a fine of not less than half and not more than two times of the sale.

Article 149 A person who produces or sells a product mentioned in Article 141 to 148 of this Section and does not yet commit a crime set forth in any of those Articles, if the sale amounts to not less than 50,000 yuan, shall be convicted of a crime and sentenced in accordance with the provisions of Article 140 of this Section. A person who produces or sells a product mentioned in Article 141 to 148 of this Section and commits a crime set forth in any of those Articles, and in the meantime also commits a crime set forth in Article 140 of this Section, shall be convicted of a crime and sentenced in accordance with the provisions of heavier punishment.

Article 150 If a unit commits a crime set forth in Article 140 to 148 of this Section, the unit shall be sentenced to a fine and concurrently, the person-in-charge directly responsible and other persons directly responsible of the unit shall be sentenced respectively in accordance with the provisions of the relevant article.

Section 2 Crime of Smuggling

Article 151 A person who smuggles weapons, ammunition, nuclear materials or counterfeit currency shall be sentenced to fixed-term imprisonment of not less than seven years and concurrently to a fine or confiscation of property and; if the circumstance is minor, to fixed-term imprisonment of not less than three years and not more than seven years and concurrently to a fine. A person who smuggles cultural relics, gold, silver or any other precious metals forbidden by the state from being exported, or precious and rare species of wildlife forbidden by the state from being imported and exported as well as the products thereof, shall be sentenced to fixed-term imprisonment of not less than five years and concurrently to a fine; and if the circumstance is minor, to fixed-term imprisonment of not more than five years and concurrently to a fine. A person who smuggles precious and rare species of plants forbidden by the state from being imported and exported and the products thereof shall be sentenced to fixed-term imprisonment of not more than five years and concurrently or independently, to a fine; and if the circumstance is serious, to fixed-term imprisonment of not less than five years and concurrently to a fine. A person who commits a crime under paragraph 1 or 2, if the circumstance is especially serious, shall be sentenced to life imprisonment or death and concurrently to confiscation of property. If a unit commits a crime set forth in this Article, the unit shall be sentenced to a fine and concurrently, the person-in-charge directly responsible and other persons directly responsible of


the unit shall be sentenced in accordance with the provisions of the relevant paragraph of this Article.

Article 152 A person who, with a view of profit or dissemination, smuggles pornographic movies, videotapes, magnetic tapes, pictures, publications or any other pornographic articles, shall be sentenced to fixed-term imprisonment of not less than three years and not more than ten years and concurrently to a fine; if the circumstance is serious, to fixed-term imprisonment of not less than ten years or life imprisonment and concurrently to a fine or confiscation of property; and if the circumstance is minor, to fixed-term imprisonment of not more than three years, criminal detention or public surveillance and concurrently to a fine. If a unit commits a crime under the preceding paragraph, the unit shall be sentenced to a fine and concurrently, the person-in-charge directly responsible and other persons directly responsible of the unit shall be sentenced in accordance with the provisions of the preceding paragraph.

Article 153 A person who smuggles goods or articles other than those mentioned in Article 151, 152 or 347 shall, depending on the seriousness of the circumstances, be sentenced respectively in accordance with the following provisions: 1. A person who smuggles goods or articles of which the tax payable evaded amounts to not less than 500,000 yuan shall be sentenced to fixed-term imprisonment of not less than ten years or life imprisonment and concurrently to a fine of not less than one time and not more than five times of the tax payable or confiscation of property; and if the circumstance is especially serious, shall be sentenced in accordance with the provisions of paragraph 4 of Article 151 of this Law. 2. A person who smuggles goods or articles of which the tax payable evaded amounts to not less than 150,000 yuan and not more than 500,000 yuan shall be sentenced to fixed-term imprisonment of not less than three years and not more than ten years and concurrently to a fine of not less than one time and not more than five times of the tax payable; and if the circumstance is especially serious, to fixed-term imprisonment of not less than ten years or life imprisonment and concurrently to a fine of not less than one time and not more than five times of the tax payable or confiscation of property.3. A person who smuggles goods or articles of which the tax payable evaded amounts to not less than 50,000 yuan and not more than 150,000 yuan shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention and concurrently to a fine of not less than one time and not more than five times of the tax payable.If a unit commits a crime under the preceding paragraph, the unit shall be sentenced to a fine and concurrently, the person-in-charge directly responsible and other persons directly responsible of the unit shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention; if the circumstance is serious, to fixed-term imprisonment of not less than three years and not more than ten years; and if the circumstance is especially serious, to fixed-term imprisonment of not less than ten years.A person who repeatedly smuggles and goes unpunished shall be sentenced in accordance with the accumulated tax payable of the smuggled goods and articles.

Article 154 A person who commits any of the following acts of smuggling shall, if a crime is constituted according to the provisions of this Section, be convicted of a crime and sentenced in

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accordance with the provisions of Article 153 of this Law: 1. without approval of the Customs and without having paid the tax payable, to sell in the territory of China, with a view of profit, the authorized imported bonded goods such as materials supplied by foreign clients for processing, parts supplied by them for assembly or raw or processed materials, parts, finished products or equipment for compensation trade; or 2. without approval of the Customs and without having paid the tax payable, to sell in the territory of China, with a view of profit, the imported goods or articles specially designated for the reduction of or exemption from duties.

Article 155 The following acts shall be treated as the crime of smuggling and punished in accordance with the relevant provisions of this Section: 1. to purchase from smugglers, directly and illegally, the articles forbidden by the state from being imported, or other smuggled imported goods and articles which involve relatively large quantities or values; or 2. to transport, purchase or sell, in inland seas or territorial waters, the articles forbidden by the state from being imported or exported, or the goods and articles subject to state restrictions on import and export which involve relatively large quantities and values without legal certifications; or 3. to evade the Customs control and to transport the solid waste from abroad into China.

Article 156 A person who conspires with a criminal committing smuggling by offering the latter a loan, fund, account number, invoice or certificate, or by providing the latter with such conveniences as transportation, storage or mailing, shall be treated and sentenced as an accomplice in the crime of smuggling.

Article 157 A person who shields smuggling with armed force shall be sentenced heavily in accordance with the provisions of paragraphs 1 and 4 of Article 151 of this Law. A person who, by means of violence or threat, resists the seizure of smugglers or smuggled goods shall be treated as the crime of smuggling and the crime of preventing state personnel from carrying out their functions according to law set forth in Article 277 of this Law and sentenced in accordance with the provisions on the combined punishment for several crimes.

Section 3 Crime of Disrupting the Order of Administering Companies and Enterprises

Article 158 A person who, in applying for registration of a company, reports falsely registered capital by using a false documentary evidence or any other manner of swindling, deceives the department in charge of registration of the company and obtains the registration shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention and concurrently or independently, to a fine of not less than 1% and not more than 5% of the amount of registered capital reported falsely if the amount of registered capital reported falsely is huge or the result is serious or any other serious circumstance exists. If a unit commits a crime under the preceding paragraph, the unit shall be sentenced to a fine and concurrently, the person-in-charge directly responsible and other persons directly responsible of the unit shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention.


Article 159 A company's initiator or shareholder who, in violation of the provisions of the Company Law, makes a false investment in the method of not delivering currency, material objects or not transferring property rights, or draws back the capital after a company is established, shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention and concurrently or independently, to a fine of not less than 2% and not more than 10% of the amount of the capital provided falsely or drawn back if the amount involved is huge or the result is serious or any other serious circumstance exists.If a unit commits a crime under the preceding paragraph, the unit shall be sentenced to a fine and concurrently, the person-in-charge directly responsible and other persons directly responsible of the unit shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention.

Article 160 A person who, in issuing shares or bonds, conceals important facts or fabricates major false contents in the prospectuses, documents of subscription for shares or measures on raising bonds for a company or enterprise, shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention and concurrently or independently, to a fine of not less than 1% and not more than 5% of the amount of the fund raised illegally if the amount involved is huge or the result is serious or any other serious circumstance exists. If a unit commits a crime under the preceding paragraph, the unit shall be sentenced to a fine and concurrently, the person-in-charge directly responsible and other persons directly responsible of the unit shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention.

Article 161 If a company provides the shareholders and the public with a false financial and accounting report in which it conceals important facts, thus seriously prejudicing the interests of the shareholders or other persons, the person-in-charge directly responsible and other persons directly responsible of the company shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention and concurrently or independently, to a fine of not less than 20,000 yuan and not more than 200,000 yuan.

Article 162 If a company or an enterprise, in the course of liquidation, hides property, records falsely in the balance sheet or detailed list of property, or distributes its property before payment of debts, thus seriously prejudicing the interests of the claimants or other persons, the person-in-charge directly responsible and other persons directly responsible of the company or enterprise shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention and concurrently or independently, to a fine of not less than 20,000 yuan and not more than 200,000 yuan.

Article 163 A person of a company or an enterprise who takes advantage of his post to seek or accept illegally property from another person and makes profits for the latter shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention if the amount involved is relatively huge and; if the amount involved is especially huge, to fixed-term imprisonment of not less than five years and may concurrently be sentenced to confiscation of property.A person of a company or an enterprise who, in the course of economic activities,

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accepts any rebate or commission for his own in violation of the state's regulations, shall be sentenced in accordance with the provisions of the preceding paragraph. A person of a state-owned company or enterprise who engages in public service or a person who is sent by a state-owned company or enterprise to a non-state-owned company or enterprise to engage in public service shall, if committing an act under the two preceding paragraphs, be convicted of a crime and sentenced in accordance with the provisions of Article 385 or 386 of this Law.

Article 164 A person who, with a view of illegal gains, offers property to a person of a company or an enterprise, shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention if the amount involved is huge and; if the amount involved is especially huge, to fixed-term imprisonment of not less than three years and not more than ten years and concurrently to a fine. If a unit commits a crime under the preceding paragraph, the unit shall be sentenced to a fine and concurrently, the person-in-charge directly responsible and other persons directly responsible of the unit shall be sentenced in accordance with the provisions of the preceding paragraph. A briber who confesses actively his bribery before being prosecuted may be given a mitigated punishment or be exempted from punishment.

Article 165 A director or manager of a state-owned company or enterprise who takes advantage of his post to do business which is the same as that of the company or enterprise for himself or for another person and to obtain illegally gains shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention and concurrently or independently, to a fine if the amount involved is huge and; if the amount involved is especially huge, to fixed-term imprisonment of not less than three years and not more than seven years and concurrently to a fine.

Article 166 A person of a state-owned company, enterprise or institution who takes advantage of his post to commit one of the following acts shall, if a heavy loss of state's interests is caused, be sentenced to fixed-term imprisonment of not more than three years or criminal detention and concurrently or independently, to a fine and; if an especially heavy loss of the state's interests is caused, to fixed-term imprisonment of not less than three years and not more than seven years and concurrently to a fine: 1. to let his relative or friend to do profit-making business of his unit;2. to purchase commodities at a price which is obviously higher than the market price from the unit run or managed by his relative or friend or to sell commodities at a price which is obviously lower than the market price to the unit run or managed by his relative or friend; or 3. to purchase substandard commodities from the unit run or managed by his relative or friend.

Article 167 A person-in-charge directly responsible of a state-owned company, enterprise or institution who, in the course of entering or performing a contract, is defrauded due to his serious neglect of duty, shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention if a heavy loss of the interests of the state is caused and; if an especially heavy loss of the interests of the state is caused, to fixed-term imprisonment of not less than three years and not more than seven years.


Article 168 A person-in-charge directly responsible of a state-owned company or enterprise who practices favoritism or irregularity and causes bankruptcy or serious loss to the company or enterprise, thus causing the interests of the state to suffer a heavy loss, shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention.

Article 169 A person-in-charge directly responsible of a state-owned company or enterprise or its competent department at the higher level who practices favoritism or irregularity and converts the state-owned assets into shares at a low price or sells them at a low price, shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention if a heavy loss of the state interests is caused and; if an especially heavy loss of the state interests is caused, to fixed-term imprisonment of not less than three years and not more than seven years.

Section 4 Crime of Disrupting the Order of Banking Administration

Article 170 A person who counterfeits currency shall be sentenced to fixed-term imprisonment of not less than three years and not more than ten years and concurrently to a fine of not less than 50,000 yuan and not more than 500,000 yuan; and a person who is under one of the following circumstances shall be sentenced to fixed-term imprisonment of not less than ten years, life imprisonment or death and concurrently to a fine of not less than 50,000 yuan and not more than 500,000 yuan or confiscation of property: 1. to be a principal member of a currency counterfeit group; 2. to counterfeit currency of an especially huge amount; or 3. to be under any other especially serious circumstances.

Article 171 A person who sells or purchases counterfeited currency or transports knowingly counterfeited currency shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention and concurrently to a fine of not less than 20,000 yuan and not more than 200,000 yuan if the amount involved is relatively huge; if the amount involved is huge, to fixed-term imprisonment of not less than three years and not more than ten years and concurrently to a fine of not less than 50,000 yuan and not more than 500,000 yuan; and if the amount involved is especially huge, to fixed-term imprisonment of not less than ten years or life imprisonment and concurrently to a fine of not less than 50,000 yuan and not more than 500,000 yuan or confiscation of property.

A person of a bank or any other financial institution who purchases counterfeited currency or takes advantage of his post to exchange currency with counterfeited currency shall be sentenced to fixed-term imprisonment of not less than three years and not more than ten years and concurrently to a fine of not less than 20,000 yuan and not more than 200,000 yuan; if the amount involved is especially huge or there are other serious circumstances, to fixed-term imprisonment of not less than ten years or life imprisonment and concurrently to a fine of not less than 20,000 yuan and not more than 200,000 yuan or confiscation of property; and if the circumstance is relatively minor, to fixed-term imprisonment of not more than three years or

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criminal detention and concurrently or independently, to a fine of not less than 10,000 yuan and not more than 100,000 yuan.

A person who counterfeits currency and sells or transports the counterfeited currency shall be convicted of a crime and sentenced heavily in accordance with the provisions of Article 170 of this Law.

Article 172 A person who holds or uses knowingly counterfeited currency shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention and concurrently or independently, to a fine of not less than 10,000 yuan and not more than 100,000 yuan if the amount involved is relatively huge; if the amount involved is huge, to fixed-term imprisonment of not less than three years and not more than ten years and concurrently to a fine of not less than 20,000 yuan and not more than 200,000 yuan; and if the amount involved is especially huge, to fixed-term imprisonment of not less than ten years and concurrently to a fine of not less than 50,000 yuan and not more than 500,000 yuan or confiscation of property.

Article 173 A person who alters currency shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention and concurrently or independently, to a fine of not less than 10,000 yuan and not more than 100,000 yuan if the amount involved is relatively huge and; if the amount involved is huge, to fixed-term imprisonment of not less than three years and not more than ten years and concurrently to a fine of not less than 20,000 yuan and not more than 200,000 yuan.

Article 174 A person who, without approval of the People's Bank of China, sets up a commercial bank or any other financial institution, shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention and concurrently or independently, to a fine of not less than 20,000 yuan and not more than 200,000 yuan and; if the circumstance is serious, to fixed-term imprisonment of not less than three years and not more than ten years and concurrently to a fine of not less than 50,000 yuan and not more than 500,000 yuan. A person who forges, alters or transfers a business permit of a commercial bank or any other financial institution shall be sentenced in accordance with the provisions of the preceding paragraph. If a unit commits a crime under the preceding two paragraphs, the unit shall be sentenced to a fine and concurrently, the person-in-charge directly responsible and other persons directly responsible of the unit shall be sentenced in accordance with the provisions of paragraph 1.

Article 175 A person who illegally procures a credit loan from a financial institution and transfers it to another person in high interest for the purpose of profit through transferring a loan shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention and concurrently to a fine of not less than one time and not more than five times of the illegal gains if the amount of illegal gains is relatively huge and; if the amount of illegal gains is huge, to fixed-term imprisonment of not less than three years and not more than seven years and concurrently to a fine of not less than one time and not more than five times of the illegal gains.


If a unit commits a crime under the preceding paragraph, the unit shall be sentenced to a fine and concurrently, the person-in-charge directly responsible and other persons directly responsible of the unit shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention.

Article 176 A person who, illegally or in disguised form, absorbs savings deposits from the public, thus disturbing the financial order, shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention and concurrently or independently, to a fine of not less than 20,000 yuan and not more than 200,000 yuan and; if the amount involved is huge or there are other serious circumstances, to fixed-term imprisonment of not less than three years and not more than ten years and concurrently to a fine of not less than 50,000 yuan and not more than 500,000 yuan. If a unit commits a crime under the preceding paragraph, the unit shall be sentenced to a fine and concurrently, the person-in-charge directly responsible and other persons directly responsible of the unit shall be sentenced in accordance with the provisions of the preceding paragraph.

Article 177 A person who, under any of the following circumstances, forges or alters a financial document or certificate, shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention and concurrently or independently, to a fine of not less than 20,000 yuan and not more than 200,000 yuan; if the circumstance is serious, to fixed-term imprisonment of not less than five years and not more than ten years and concurrently to a fine of not less than 50,000 yuan and not more than 500,000 yuan; and if the circumstance is especially serious, to fixed-term imprisonment of not less than ten years or life imprisonment and concurrently to a fine of not less than 50,000 yuan and not more than 500,000 yuan or confiscation of property: 1. to forge or alter a promissory note, bill of exchange or check; 2. to forge or alter any other bank settlement instruments such as commission collection receipts, remittance receipts or bank deposit receipts; 3. to forge or alter letters of credit or accompanied notes or documents; or 4. to forge credit cards. If a unit commits a crime under the preceding paragraph, the unit shall be sentenced to a fine and concurrently, the person-in-charge directly responsible and other persons directly responsible of the unit shall be sentenced in accordance with the provisions of the preceding paragraph.

Article 178 A person who forges or alters treasury bills or any other securities issued by the state shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention and concurrently or independently, to a fine of not less than 20,000 yuan and not more than 200,000 yuan if the amount involved is relatively huge; if the amount involved is huge, to fixed-term imprisonment of not less than three years and not more than ten years and concurrently to a fine of not less than 50,000 yuan and not more than 500,000 yuan; and if the amount involved is especially huge, to fixed-term imprisonment of not less than ten years or life imprisonment and concurrently to a fine of not less than 50,000 yuan and not more than 500,000 yuan or confiscation of property. A person who forges or alters stocks or bonds issued by a company or an enterprise shall be sentenced to fixed-term imprisonment of not more than three years or

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criminal detention and concurrently or independently, to a fine of not less than 10,000 yuan and not more than 100,000 yuan if the amount involved is relatively huge and; if the amount involved is huge, to fixed-term imprisonment of not less than three years and not more than ten years and concurrently to a fine of not less than 20,000 yuan and not more than 200,000 yuan. If a unit commits a crime under the preceding two paragraphs, the unit shall be sentenced to a fine and concurrently, the person-in-charge directly responsible and other persons directly responsible of the unit shall be sentenced in accordance with the provisions of the preceding two paragraphs.

Article 179 A person who, without approval of the relevant competent department, issues stocks or bonds of a company or an enterprise, shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention and concurrently or independently, to a fine of not less than 1% and not more than 5% of the capital collected illegally if the amount involved is huge or the result is serious or any other serious circumstance exists. If a unit commits a crime under the preceding paragraph, the unit shall be sentenced to a fine and concurrently, the person-in-charge directly responsible and other persons directly responsible of the unit shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention.

Article 180 A person knowing inside information of securities transaction or a person obtaining illegally inside information of securities transaction who, prior to the information concerning issue of securities, transaction of securities or other information of great impact on the price of other securities is made public, buys or sells the said securities or reveals the information, shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention and concurrently or independently, to a fine of not less than one time and not more than five times of the illegal gains therefrom if the circumstance is serious and; if the circumstance is especially serious, to fixed-term imprisonment of not less than five years and not more than ten years and concurrently to a fine of not less than one time and not more than five times of the illegal gains.

If a unit commits a crime under the preceding paragraph, the unit shall be sentenced to a fine and concurrently, the person-in-charge directly responsible and other persons directly responsible of the unit shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention. The range of inside information shall be delimited in accordance with the provisions of laws and administrative regulations. The range of persons knowing inside information shall be delimited in accordance with the provisions of laws and administrative regulations.

Article 181 A person who fabricates and disseminates false information of impact on transaction of securities and disturbs the transaction market of securities, thus causing serious results, shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention and concurrently or independently, to a fine of not less than 10,000 yuan and not more than 100,000 yuan. A person of a stock exchange or a securities company, or a person of the securities institute


or securities administrative department, who intentionally provides false information or forges, alters or destroys transaction records and inveigles investors into buying or selling securities, thus causing serious results, shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention and concurrently or independently, to a fine of not less than 10,000 yuan and not more than 100,000 yuan and; if the circumstance is especially flagrant, to fixed-term imprisonment of not less than five years and not more than ten years and concurrently to a fine of not less than 20,000 yuan and not more than 200,000 yuan. If a unit commits a crime under the preceding two paragraphs, the unit shall be sentenced to a fine and concurrently, the person-in-charge directly responsible and other persons directly responsible of the unit shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention.

Article 182 A person who, under any of the following circumstances, rigs the transaction price of securities for unjustified profits or risk shift, shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention and concurrently or independently, to a fine of not less than one time and not more than five times of the illegal gains therefrom if the circumstance is serious: 1. to centralize, independently or conspiratorially, funds or stocks held to form advantages or taking advantage of information to buy or sell, jointly or continuously, in order to rig the transaction price of securities; 2. to perform, in collaboration with another person, mutually securities transaction or buying or selling mutually securities not being held yet according to the time, price and method agreed upon in advance, in order to affect the transaction price of securities or the transaction volume of securities; 3. to behave as the sole transaction partner and perform transaction in which the buyer is the seller and the ownership over securities has not been transferred, in order to affect the transaction price of securities or the transaction volume of securities; or 4. to rig the transaction price of securities in any other way. If a unit commits a crime under the preceding paragraph, the unit shall be sentenced to a fine and concurrently, the person-in-charge directly responsible and other persons responsible of the unit shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention.

Article 183 A person of an insurance company who takes advantage of his post to draw up intentionally an insurance accident which never happens and to give an adjustment in order to defraud the insurance money and take possession of it, shall be convicted of a crime and sentenced in accordance with the provisions of Article 271 of this Law.A person of a state-owned insurance company or a person being sent by a state-owned insurance company to a non-state-owned insurance company to perform public service shall, if committing any of the acts under the preceding paragraph, be convicted of a crime and sentenced in accordance with the provisions of Article 382 or 383 of this Law.

Article 184 A person of a bank or any other financial institution who, in the course of the financial business activities, extorts or accepts illegally another person' property and seeks profits for another person, or violates the state's regulations and accepts rebate or commission and takes possession of it, shall be convicted of a crime and sentenced in accordance with the provisions of Article 163 of this Law. A person of a state-owned financial institution or a person being sent by

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a state-owned financial institution to a non-state-owned financial institution to perform public service shall, if committing any of the acts under the preceding paragraph, be convicted of a crime and sentenced in accordance with the provisions of Article 385 or 386 of this Law.

Article 185 A person of a bank or any other financial institution who, by taking advantage of his post, misappropriates his unit's or the client's funds, shall be convicted of a crime and sentenced in accordance with the provisions of Article 272 of this Law. A person of a state-owned financial institution or a person being sent by a state-owned financial institution to a non-state-owned financial institution to perform public service who commits any of the acts under the preceding paragraph, shall be convicted of a crime and sentenced in accordance with the provisions of Article 384 of this Law.

Article 186 A person of a bank or any other financial institution who, in violation of the provisions of a law or an administrative regulation, issues a credit loan or a guaranteed loan to his interested party with more favorable conditions than to other borrowers for the same kind of loans shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention and concurrently to a fine of not less than 10,000 yuan and not more than 100,000 yuan if a relatively huge loss is caused and; if a major loss is caused, to fixed-term imprisonment of not less than five years and concurrently to a fine of not less than 20,000 yuan and not more than 200,000 yuan. A person of a bank or any other financial institution who, in violation of the provisions of a law or an administrative regulation, issues a loan to a person other than his interested party, shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention and concurrently to a fine of not less than 10,000 yuan and not more than 100,000 yuan if a major loss is caused and; if an especially major loss is caused, to fixed-term imprisonment of not less than five years and concurrently to a fine of not less than 20,000 yuan and not more than 200,000 yuan. If a unit commits a crime under the preceding two paragraphs, the unit shall be sentenced to a fine and concurrently, the person-in-charge directly responsible and other persons directly responsible of the unit shall be sentenced in accordance with the provisions of the preceding two paragraphs. The range of the interested parties shall be delimited in accordance with the Commercial Bank Law of the People's Republic of China and relevant financial regulations.

Article 187 A person of a bank or any other financial institution who, with a view of profit and by the means of absorbing the funds of clients without entering into the account, uses the funds for lending or granting loans, shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention and concurrently to a fine of not less than 20,000 yuan and not more than 200,000 yuan if a major loss is caused and, if an especially major loss is caused, to fixed-term imprisonment of not less than five years and concurrently to a fine of not less than 50,000 yuan and not more than 500,000 yuan. If a unit commits a crime under the preceding paragraph, the unit shall be sentenced to a fine and concurrently, the person-in-charge directly responsible and other persons directly responsible of the unit shall be sentenced in accordance with the provisions of the preceding paragraph.


Article 188 A person of a bank or any other financial institution who, in violation of the regulations, offers another person a letter of credit or any other certificates of guarantee, negotiable instruments, certificates of deposit or certificates of credit status, shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention if a relatively huge loss is caused and; if a major loss is caused, to fixed-term imprisonment of not less than five years. If a unit commits a crime under the preceding paragraph, the unit shall be sentenced to a fine and concurrently, the person-in-charge directly responsible and other persons directly responsible of the unit shall be sentenced in accordance with the provisions of the preceding paragraph.

Article 189 A person of a bank or any other financial institution who, in the course of business activities of negotiable instruments, accepts, pays for or guarantees the negotiable instruments that do not conform to the Negotiable Instruments Law, shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention if a major loss is caused and; if an especially major loss is caused, to fixed-term imprisonment of not less than five years. If a unit commits a crime under the preceding paragraph, the unit shall be sentenced to a fine and concurrently, the person-in-charge directly responsible and other persons directly responsible of the unit shall be sentenced in accordance with the provisions of the preceding paragraph.

Article 190 If a state-owned company or enterprise or any other state-owned unit which, in violation of the state's regulations, deposits foreign exchange outside China without approval or illegally transfers foreign exchange from China to the outside, and if the circumstance is serious, the unit shall be sentenced to a fine and concurrently, the person-in-charge directly responsible and other persons directly responsible of it shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention.

Article 191 A person who knows clearly that the money is unlawful earnings and their profits obtained from the drug-related crime, crime committed by the group in the nature of criminal syndicates or crime of smuggling, and commits any of the following acts for the purpose of covering up or concealing its source and nature, shall be confiscated of the unlawful earnings and their profits obtained from the above-mentioned crimes, be sentenced to fixed-term imprisonment of not more than five years or criminal detention and concurrently or independently, to a fine of not less than 5% and not more than 20% of the sum of money laundered; and if the circumstance is serious, to fixed-term imprisonment of not less than five years and not more than ten years and concurrently to a fine of not less than 5% and not more than 20% of the sum of money laundered:1. to provide a fund account; 2. to assist in transforming the property into cash or financial documents; 3. to assist in transferring funds by means of transferring accounts or other means of settling accounts; 4. to assist in remitting funds to any place outside China; or Section 5 Crime of Financial Fraud

Article 192 A person who, for the purpose of illegal possession, collects capital illegally by means of swindling, shall be sentenced to fixed-term imprisonment of not more than five years

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or criminal detention and concurrently to a fine of not less than 20,000 yuan and not more than 200,000 yuan if the amount involved is relatively huge; if the amount involved is huge or any other serious circumstance exists, to fixed-term imprisonment of not less than five years and not more than ten years and concurrently to a fine of not less than 50,000 yuan and not more than 500,000 yuan; and if the amount involved is especially huge or any other especially serious circumstance exists, to fixed-term imprisonment of not less than ten years or life imprisonment and concurrently to a fine of not less than 50,000 yuan and not more than 500,000 yuan or confiscation of property.

Article 193 A person who, under any of the following circumstances and for the purpose of illegal possession, swindles a loan of a bank or any other financial institution, shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention and concurrently to a fine of not less than 20,000 yuan and not more than 200,000 yuan if the amount involved is relatively huge; if the amount involved is huge or any other serious circumstance exists, to fixed-term imprisonment of not less than five years and not more than ten years and concurrently to a fine of not less than 50,000 yuan and not more than 500,000 yuan; and if the amount involved is especially huge or any other especially serious circumstance exists, to fixed-term imprisonment of not less than ten years or life imprisonment and concurrently to a fine of not less than 50,000 yuan and not more than 500,000 yuan or confiscation of property: 1. to fabricate false reasons such as introduction of a fund or project; 2. to use a false economic contract; 3. to use a false documentary evidence; 4. to use a false property certificates as guarantee or guarantee repeatedly by exceeding the value of security; or 5. to swindle a loan by any other manner.

Article 194 A person who, under any of the following circumstances, conducts swindling activities of financial bills, shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention and concurrently to a fine of not less than 20,000 yuan and not more than 200,000 yuan if the amount involved is relatively huge; if the amount involved is huge or any other serious circumstance exists, to fixed-term imprisonment of not less than five years and not more than ten years and concurrently to a fine of not less than 50,000 yuan and not more than 500,000 yuan; and if the amount involved is especially huge or any other especially serious circumstance exists, to fixed-term imprisonment of not less than ten years or life imprisonment and concurrently to a fine of not less than 50,000 yuan and not more than 500,000 yuan or confiscation of property: 1. knowingly to use a forged or an altered promissory note, bill of exchange or check;2. knowingly to use an invalid promissory note, bill of exchange or check; 3. falsely to use other's promissory note, bill of exchange or check as his own;4. to issue bounced checks or checks on which signatures are inconsistent with their reserved ones to defraud property; or 5. the drawer of promissory note or bill of exchange who issues the promissory note or bill of exchange without security of funds or produce a false record on the note or bill to defraud property.A person who uses forged or altered other bank settlement receipts such as


commission collection receipts, remittance receipts and bank deposit receipts shall be sentenced in accordance with the provisions of the preceding paragraph.

Article 195 A person who, under any of the following circumstances, conducts swindling activities of letters of credit, shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention and concurrently to a fine of not less than 20,000 yuan and not more than 200,000 yuan; if the amount involved is huge or any other serious circumstance exists, to fixed-term imprisonment of not less than five years and not more than ten years and concurrently to a fine of not less than 50,000 yuan and not more than 500,000 yuan; and if the amount involved is especially huge or any other especially serious circumstance exists, to fixed-term imprisonment of not less than ten years or life imprisonment and concurrently to a fine of not less than 50,000 yuan and not more than 500,000 yuan or confiscation of property: 1. to use a forged or an altered letter of credit or attached note or document; 2. to use an invalid letter of credit; 3. to defraud a letter of credit; or 4. to conduct swindling activities of letters of credit by any other manner.

Article 196 A persons who, under any of the following circumstances, conducts swindling activities of credit cards, shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention and concurrently to a fine of not less than 20,000 yuan and not more than 200,000 yuan if the amount involved is relatively huge; if the amount involved is huge or any other serious circumstance exists, to fixed-term imprisonment of not less than five years and not more than ten years and concurrently to a fine of not less than 50,000 yuan and not more than 500,000 yuan; and if the amount involved is especially huge or any other especially serious circumstance exists, to fixed-term imprisonment of not less than ten years or life imprisonment and concurrently to a fine of not less than 50,000 yuan and not more than 500,000 yuan or confiscation of property: 1. to use a forged credit card; 2. to use an invalid credit card; 3. falsely to use any other's credit card as his own; or 4. to overdraw through malice. To overdraw through malice mentioned in the preceding paragraph means an act that, for the purpose of illegal possession, a card holder overdraws by exceeding the prescribed amount limit or time limit and fails to return the money after the bank issuing the card urges him to pay it. A person who steals and uses a credit card shall be convicted of a crime and sentenced in accordance with the provisions of Article 264 of this Law.

Article 197 A person who conducts swindling activities by using forged or altered treasury bills or any other securities issued by the state shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention and concurrently to a fine of not less than 20,000 yuan and not more than 200,000 yuan if the amount involved is relatively huge; if the amount involved is huge or any other serious circumstance exists, to fixed-term imprisonment of not less than five years and not more than ten years and concurrently to a fine of not less than 50,000 yuan and not more than 500,000 yuan; and if the amount involved is especially huge or any other especially serious circumstance exists, to fixed-term imprisonment of not less than ten years or

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life imprisonment and concurrently to a fine of not less than 50,000 yuan and not more than 500,000 yuan or confiscation of property.

Article 198 A person who, under any of the following circumstances, conducts swindling activities of insurance, shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention and concurrently to a fine of not less than 10,000 yuan and not more than 100,000 yuan if the amount involved is relatively huge; if the amount involved is huge or any other serious circumstance exists, to fixed-term imprisonment of not less than five years and not more than ten years and concurrently to a fine of not less than 20,000 yuan and not more than 200,000 yuan; and if the amount involved is especially huge or any other especially serious circumstance exists, to fixed-term imprisonment of not less than ten years and concurrently to a fine of not less than 20,000 yuan and not more than 200,000 yuan or confiscation of property: 1. An insurance policy holder intentionally fabricates the object of insurance to defraud the insurance money; 2. An insurance policy holder, insurant or a beneficiary fabricates false reasons for or exaggerate the degree of loss on an insurance accident which has happened to defraud the insurance money; 3. An insurance policy holder, insurant or a beneficiary fabricates an insurance accident which never happens to defraud the insurance money; 4. An insurance policy holder or insurant intentionally causes an insurance accident with property loss to defraud the insurance money; or 5. An insurance policy holder or a beneficiary intentionally causes death, injury, disability or disease of the insurant to defraud the insurance money. A person who commits an act listed in sub-paragraph 4 or 5 of the preceding paragraph and also constitutes any other crimes shall be sentenced in accordance with the provisions on combined punishment for several crimes. If a unit commits a crime under paragraph 1, the unit shall be sentenced to a fine and concurrently, the person-in-charge directly responsible and other persons directly responsible of it shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention; if the amount involved is huge or any other serious circumstance exists, to fixed-term imprisonment of not less than five years and not more than ten years; and if the amount involved is especially huge or any other especially serious circumstance exists, to fixed-term imprisonment of not less than ten years. A verifier, witness or property assessor of insured event who intentionally makes a false documentary evidence and provides conditions for another person to swindle shall be sentenced as an accomplice of insurance swindling.

Article 199 A person who commits a crime set forth in Article 192, 194 or 195 of this Section shall, if the amount involved is especially huge and an especially heavy loss of the interests of the state and the people is caused, be sentenced to life imprisonment or death and concurrently to confiscation of property.

Article 200 If a unit commits a crime set forth in Article 192, 194 or 195 of this Section, the unit shall be sentenced to a fine and concurrently, the person-in-charge directly responsible and other persons directly responsible of it shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention; if the amount involved is huge or any other serious circumstance exists, to fixed-term imprisonment of not less than five years and not more than ten years; and if


the amount involved is especially huge or any other especially serious circumstance exists, to fixed-term imprisonment of not less than ten years or life imprisonment.

Section 6 Crime of Jeopardizing the Administration of Tax Collection

Article 201 A taxpayer who fails to pay or underpays the amount of tax payable by means of forging, altering, concealing or destroying accounting books or vouchers for the accounts without approval, or overstating expenses or omitting or understating incomes in accounting books, or refusing to fill a tax declaration after notification by the tax authority, or filling a false tax declaration, shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention and concurrently to a fine of not less than one time and not more than five times the amount of tax evaded if the amount of tax evaded amounts to not less than 10% and not more than 30% of the amount of tax payable and the amount of tax evaded is not less than 10,000 yuan and not more than 100,000 yuan or if he commits tax evasion again after having been twice subjected to administrative sanctions by the tax authority for tax evasion; and if the amount of tax evaded amounts to not less than 30% of the tax payable and the amount of tax evaded is not less than 100,000 yuan, to fixed-term imprisonment of not less than three years and not more than seven years and concurrently to a fine of not less than one time and not more than five times the amount of tax evaded.A withholding agent who, by means listed in the preceding paragraph, fails to pay or underpays the tax which has been withheld or collected shall, if the amount involved amounts to not less than 10% of the amount of tax payable and is not less than 10,000 yuan, be sentenced in accordance with the provisions of the preceding paragraph. A person who has repeatedly committed an act under the preceding two paragraphs without having been subjected to punishment shall be sentenced on the basis of the accumulated amount.

Article 202 A person who refuses to pay tax with resort to violence or threat shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention and concurrently to a fine of not less than one time and not more than five times the amount of tax he has refused to pay; and if the circumstance is serious, to fixed-term imprisonment of not less than three years and not more than seven years and concurrently to a fine of not less than one time and not more than five times the amount of tax he has refused to pay.

Article 203 A taxpayer failing to pay tax who uses the means of transferring or concealing his property, thus resulting in the tax authority's inability to pursue the tax in arrears, shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention and concurrently or independently, to a fine of not less than one time and not more than five times the amount of tax in arrears if the amount involved is not less than 10,000 yuan and not more than 100,000 yuan; and if the amount involved is not less than 100,000 yuan, to fixed-term imprisonment of not less than three years and not more than seven years and concurrently to a fine of not less than one time and not more than five times the amount of tax in arrears.

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Article 204 A person who obtains fraudulently from the state a tax refund for exports by filling a false export declaration or any other deceptive means shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention and concurrently to a fine of not less than one time and not more than five times the amount of the tax refund which has been fraudulently obtained if the amount involved is relatively huge; if the amount involved is huge or any other serious circumstance exists, to fixed-term imprisonment of not less than five years and not more than ten years and concurrently to a fine of not less than one time and not more than five times the amount of the tax refund which has been fraudulently obtained; and if the amount involved is especially huge or any other especially serious circumstance exists, to fixed-term imprisonment of not less than ten years or life imprisonment and concurrently to a fine of not less than one time and not more than five times the amount of the tax refund which has been fraudulently obtained or confiscation of property. A taxpayer who, after paying tax, obtains fraudulently the tax he has paid by using deceptive means mentioned in the preceding paragraph, shall be convicted of a crime and sentenced in accordance with the provisions of Article 201 of this Law; and if the amount of the tax fraudulently obtained exceeds the tax paid, shall be sentenced in accordance with the provisions of the preceding paragraph.

Article 205 A person who falsely fills out value-added tax invoices or any other invoices for obtaining fraudulently tax refunds on exported items or tax deduction shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention and concurrently to a fine of not less than 20,000 yuan and not more than 200,000 yuan; if the amount involved in the falsification of the invoices is relatively huge or any other serious circumstance exists, to fixed-term imprisonment of not less than three years and not more than ten years and concurrently to a fine of not less than 50,000 yuan and not more than 500,000 yuan; and if the amount involved in the falsification of the invoices is huge or any other especially serious circumstance exists, to fixed-term imprisonment of not less than ten years or life imprisonment and concurrently to a fine of not less than 50,000 yuan and not more than 500,000 yuan or confiscation of property.

A person who commits an act under the preceding paragraph and obtains fraudulently tax from the state shall be sentenced to life imprisonment or death and concurrently to confiscation of property if the amount involved is especially huge, the circumstance is especially serious and an especially great loss is caused to the state.

If a unit commits a crime set forth in this Article, the unit shall be sentenced to a fine and concurrently, the person-in-charge directly responsible and other persons directly responsible of it shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention; if the amount involved in the falsification of the invoices is relatively huge or any other serious circumstance exists, to fixed-term imprisonment of not less than three years and not more than ten years; and if the amount involved in the falsification of the invoices is huge or any other especially serious circumstance exists, to fixed-term imprisonment of not less than ten


years or life imprisonment. To falsely fill out value-added tax invoices or any other invoices for obtaining fraudulently tax refunds on exported items or tax deduction means an act involving falsely filling out the invoices for oneself or for another person, allowing another person to falsely fill out the invoices for oneself or introducing another person to the action of falsely filling out the invoices.

Article 206 A person who counterfeits value-added tax invoices or sells counterfeited value-added tax invoices shall be sentenced to fixed-term imprisonment of not more than three years, criminal detention or public surveillance and concurrently to a fine of not less than 20,000 yuan and not more than 200,000 yuan; if the amount involved is relatively huge or any other serious circumstance exists, to fixed-term imprisonment of not less than three years and not more than ten years and concurrently to a fine of not less than 50,000 yuan and not more than 500,000 yuan; and if the amount involved is huge or any other especially serious circumstance exists, to fixed-term imprisonment of not less than ten years or life imprisonment and concurrently to a fine of not less than 50,000 yuan and not more than 500,000 yuan or confiscation of property.

A person who counterfeits and sells counterfeited value-added tax invoices shall, if the amount involved is especially huge, the circumstance is especially serious and the economic order has been thereby undermined seriously, be sentenced to life imprisonment or death and concurrently to confiscation of property.

If a unit commits a crime set forth in this Article, the unit shall be sentenced to a fine and concurrently, the person-in-charge directly responsible and other persons directly responsible of it shall be sentenced to fixed-term imprisonment of not more than three years, criminal detention or public surveillance; if the amount involved is relatively huge or any other serious circumstance exists, to fixed-term imprisonment of not less than three years and not more than ten years; and if the amount involved is huge or any other especially serious circumstance exists, to fixed-term imprisonment of not less than ten years or life imprisonment.

Article 207 A person who illegally sells value-added tax invoices shall be sentenced to fixed-term imprisonment of not more than three years, criminal detention or public surveillance and concurrently to a fine of not less than 20,000 yuan and not more than 200,000 yuan; if the amount involved is relatively huge, to fixed-term imprisonment of not less than three years and not more than ten years and concurrently to a fine of not less than 50,000 yuan and not more than 500,000 yuan; and if the amount involved is huge, to fixed-term imprisonment of not less than ten years or life imprisonment and concurrently to a fine of not less than 50,000 yuan and not more than 500,000 yuan or confiscation of property.

Article 208 A person who illegally purchases value-added tax invoices or purchases counterfeited value-added tax invoices shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention and concurrently or independently, to a fine of not less than 20,000 yuan and not more than 200,000 yuan. A person who illegally purchases value-

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added tax invoices or purchases counterfeited value-added tax invoices and then falsely fills out or sells such invoices shall be convicted of a crime and sentenced respectively in accordance with the provisions of Article 205, 206 or 207 of this Law.

Article 209 A person who counterfeits or produces without approval any other invoices which may be used for obtaining fraudulently tax refunds on exported items or tax deduction or sells such invoices, shall be sentenced to fixed-term imprisonment of not more than three years, criminal detention or public surveillance and concurrently to a fine of not less than 20,000 yuan and not more than 200,000 yuan; if the amount involved is huge, to fixed-term imprisonment of not less than three years and not more than seven years and concurrently to a fine of not less than 50,000 yuan and not more than 500,000 yuan; and if the amount involved is especially huge, to fixed-term imprisonment of not less than seven years and concurrently to a fine of not less than 50,000 yuan and not more than 500,000 yuan or confiscation of property. A person who counterfeits or produces without approval any invoices other than those mentioned in the preceding paragraph or sells such invoices shall be sentenced to fixed-term imprisonment of not more than two years, criminal detention or public surveillance and concurrently or independently, to a fine of not less than 10,000 yuan and not more than 50,000 yuan; and if the circumstance is serious, to fixed-term imprisonment of not less than two years and not more than seven years and concurrently to a fine of not less than 50,000 yuan and not more than 500,000 yuan. A person who illegally sells any other invoices which may be used for obtaining fraudulently tax refunds on exported items or tax deduction shall be sentenced in accordance with the provisions of paragraph 1. A person who illegally sells any invoices other than those mentioned in paragraph 3 shall be sentenced in accordance with the provisions of paragraph 2.

Article 210 A person who steals value-added tax invoices or any other invoices which may be used for obtaining fraudulently tax refunds on exported items or tax deduction shall be convicted of a crime and sentenced in accordance with the provisions of Article 264 of this Law. A person who obtains value-added tax invoices or any other invoices which may be used for obtaining fraudulently tax refunds or tax deduction through deceptive means shall be convicted of a crime and sentenced in accordance with the provisions of Article 266 of this Law.

Article 211 If a unit commits a crime set forth in Article 201, 203, 204, 207, 208 or 209 of this Section, the unit shall be sentenced to a fine and concurrently, the person-in-charge directly responsible and other persons directly responsible of it shall be sentenced in accordance with the provisions of the relevant article.

Article 212 If a person commits a crime set forth in Article 201 to 205 of this Section and is sentenced to a fine or confiscation of property, the tax authority shall first pursue for the payment of tax or tax refunds which has been obtained fraudulently before the execution.

Section 7 Crime of Infringing upon Intellectual Property


Article 213 A person who, without a permission of a registered trademark owner, uses a trademark identical with the latter's registered trademark on the same kind of goods, shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention and concurrently or independently, to a fine if the circumstance is serious and; if the circumstance is especially serious, to fixed-term imprisonment of not less than three years and not more than seven years and concurrently to a fine.

Article 214 A person who knowingly sells goods bearing counterfeited registered trademark shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention and concurrently or independently, to a fine if the amount of the sale is relatively huge and; if the amount of the sale is huge, to fixed-term imprisonment of not less than three years and not more than seven years and concurrently to a fine.

Article 215 A person who forges or makes without approval representations of a registered trademark of another person or sells representations of a registered trademark which is forged or made without approval shall be sentenced to fixed-term imprisonment of not more than three years, criminal detention or public surveillance and concurrently or independently, to a fine if the circumstance is serious and; if the circumstance is especially serious, to fixed-term imprisonment of not less than three years and not more than seven years and concurrently to a fine.

Article 216 A person who forges another person's patent shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention and concurrently or independently, to a fine, if the circumstance is serious.

Article 217 A person who, with a view of profit, commits any of the following acts of infringing upon copyright, shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention and concurrently or independently, to a fine if the amount of illegal gains is relatively huge or any other serious circumstance exists; and if the amount of illegal gains is huge or any other especially serious circumstance exists, to fixed-term imprisonment of not less than three years and not more than seven years and concurrently to a fine:1. to reproduce and distribute, without the permission of a copyright owner, a written work or musical, cinematic, television or video work, or computer software or any other work of the latter; 2. to publish a book of which another person has the exclusive publishing right;3. to reproduce and distribute, without the permission of a phonogram or videogram producer, a phonogram or videogram produced of the latter; or4. to produce and sell a work of art bearing the forged signature of another person.

Article 218 A person who, with a view of profit, sells those which he well knows infringing reproductions specified in Article 217 of this Law, shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention and concurrently or independently, to a fine, if the amount of his illegal gains is huge.

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Article 219 A person who commits any of the following acts of infringing upon business secrets shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention and concurrently or independently, to a fine, if a heavy loss of the person who enjoys the right of the business secret is caused; and if an especially serious result is caused, to fixed-term imprisonment of not less than three years and not more than seven years and concurrently to a fine:1. to acquire business secret of a person who enjoys the right by stealing, lure, force or any other improper means; 2. to reveal, use or permit another person to use the business secret of the person who enjoys the right acquired by means specified in the preceding paragraph; or 3. to reveal, use or permit another person to use the business secret held by him in violation of the agreement or the demand of the person who enjoys the right on protection of the business secret. A person who acquires, uses or reveals another person's business secret which he knows or ought to know the act listed in the preceding paragraph shall be deemed an act of infringement upon business secrets. Business secrets mentioned in this Article mean the technical information and management information which are unknown by the public, can bring economic profits to the person who enjoys the right, is of utility and has been taken classified measures by the person who enjoys the right. The person who enjoys the right mentioned in this Article refers to the owner of business secret or the user of business secret who is permitted by the owner of business secret.

Article 220 If a unit commits a crime set forth in Article 213 to 219 of this Section, the unit shall be sentenced to a fine and concurrently, the person-in-charge directly responsible and other persons directly responsible of it shall be sentenced in accordance with the provisions of the relevant article.

Section 8 Crime of Disturbing Market Order

Article 221 A person who fabricates and disseminates false facts to impair commercial goodwill or merchandise reputation of another person, thus causing a heavy loss to the latter or any other serious circumstance, shall be sentenced to fixed-term imprisonment of not more than two years or criminal detention and concurrently or independently, to a fine.

Article 222 An advertiser, advertising operator or advertising publisher who, in violation of the state's regulations, uses advertisements to conduct false propaganda on merchandise or service, shall be sentenced to fixed-term imprisonment of not more than two years or criminal detention and concurrently or independently, to a fine if the circumstance is serious.

Article 223 A bidder who informs mutually the quoted price of a bid in collaboration to harm the interests of the bid inviter or another bidder shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention and concurrently or independently, to a fine, if the circumstance is serious. A bidder and a bid inviter who act in collaboration in bidding, thus harming the legitimate interests of the state, collective or citizen, shall be sentenced in accordance with the provisions of the preceding paragraph.


Article 224 A person who, under any of the following circumstances, obtains fraudulently the property of the other party for the purpose of illegal possession in the course of signing or performing a contract, shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention and concurrently or independently, to a fine if the amount involved is relatively huge; if the amount involved is huge or any other serious circumstance exists, to fixed-term imprisonment of not less than three years and not more than ten years and concurrently to a fine; and if the amount involved is especially huge or any other especially serious circumstance exists, to fixed-term imprisonment of not less than ten years or life imprisonment and concurrently to a fine or confiscation of property: 1. to sign a contract in the name of a false unit or another person; 2. to use a forged, altered or invalid bill or any other false certificate of property rights as guarantee; 3. to trap the other party to go on signing or performing the contract by means of performing in advance a petty contract or making part performance in a case of incapability of making full performance practically; 4. to flee after receiving the goods, payment for goods, payment in advance or guaranteed property; or 5. to obtain fraudulently property of the other party by any other means.

Article 225 A person who, in violation of the state's regulations, commits any of the following acts of illegal business operations, thus disturbing the market order, shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention and concurrently or independently, to a fine of not less than one time and not more than five times the illegal gains therefrom if the circumstance is serious and, if the circumstance is especially serious, to fixed-term imprisonment of not less than five years and concurrently to a fine of not less than one time and not more than five times the illegal gains therefrom or confiscation of property: 1. to trade, without permission, in a monopolized, exclusive sale or restricted commodity which is defined by laws or administrative regulations; 2. to buy or sell an import or export license, import or export origin certificate or any other business permit or approval document which is defined by laws or administrative regulations; or 3. to commit any other act of illegal business operations which disturbs seriously the market order.

Article 226 A person who, by means of violence or threat, buys or sells a commodity, or forces others to provide or accept service, shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention and concurrently or independently, to a fine, if the circumstance is serious.

Article 227 A person who counterfeits tickets for vehicles or ships, postage stamps or any other valuable tickets or resells such tickets shall be sentenced to fixed-term imprisonment of not more than two years, criminal detention or public surveillance and concurrently or independently, to a fine of not less than one time and not more than five times the sum of the tickets or stamps if the amount involved is relatively huge; and if the amount involved is huge, to fixed-term imprisonment of not less than two years and not more than seven years and concurrently to a fine of not less than one time and not more than five times the sum of the tickets or stamps. A person who resells tickets for vehicles or ships shall, if the circumstance is serious, be sentenced to

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fixed-term imprisonment of not more than three years, criminal detention or public surveillance and concurrently or independently, to a fine of not less than one time and not more than five times the sum of the tickets.

Article 228 A person who, with a view of profit and in violation of laws or regulations on land administration, illegally transfers or resells the right for land use, shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention and concurrently or independently, to a fine of not less than 5% and not more than 20% the sum obtained through transfer or sale of the right for land use if the circumstance is serious and; if the circumstance is especially serious, to fixed-term imprisonment of not less than three years and not more than seven years and concurrently to a fine of not less than 5% and not more than 20% the sum obtained through transfer or sale of the right for land use.

Article 229 A person of an intermediary organization performing such functions as evaluation of assets, examination of assets, examination of certificates, accounting, auditing, legal service, who provides intentionally a false documentary evidence, shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention and concurrently to a fine, if the circumstance is serious. A person set out in the preceding paragraph who extorts another person's property or accepts illegally another person's property, thus committing a crime under the preceding paragraph, shall be sentenced to fixed-term imprisonment of not less than five years and not more than ten years and concurrently to a fine. A person set out in paragraph 1 who neglects his duty seriously and provides a documentary evidence which is seriously inconsistent with the fact, thus causing a serious result, shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention and concurrently or independently, to a fine.

Article 230 A person who, in violation of the provisions of the Law on Import and Export Commodity Inspection, evades commodity inspection, sells or uses, without approval, an import commodity which must be inspected by the commodity inspection agency but fails to do so, or exports, without approval, an export commodity which must be inspected by the commodity inspection agency but fails to do so or to pass the inspection, shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention and concurrently or independently, to a fine, if the circumstance is serious.

Article 231 If a unit commits a crime set forth in Article 221 to 230 of this Section, the unit shall be sentenced to a fine and concurrently, the person-in-charge directly responsible and other persons directly responsible of it shall be sentenced in accordance with the provisions of the relevant article.

Chapter IV Crime of Infringing upon the Citizen's Personal or Democratic Right

(excised)

Chapter V Crime of Encroaching on Property


(excised)

Chapter VI Crime of Disrupting the Order of Social Administration

(excised)

Section 4 Crime of Impairing Control of Cultural Relics

(…)

Section 5 Crime of Jeopardizing Public Health

(…)

Section 6 Crime of Undermining Protection of Environment or Resources

Article 338 A person who, in violation of the state's regulations, discharges, dumps or disposes radioactive wastes, wastes carrying infectious pathogens, poisonous substances or any other dangerous substances to land, water or air, thus causing a serious accident of environmental pollution, shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention and concurrently or independently, to a fine, if a serious result or a great loss of public or private property or bodily injury or death of another person is caused; and if the result is especially serious, to fixed-term imprisonment of not less than three years and not more than seven years and concurrently to a fine.

Article 339 A person who, in violation of the state's regulations, dumps, piles up or disposes solid wastes abroad inside China, shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention and concurrently to a fine; if a serious environmental pollution accident is caused, thus resulting in a heavy loss to public or personal property or a great injury to people's health, to fixed-term imprisonment of not less than five years and not more than ten years and concurrently to a fine; and if the result is especially serious, to fixed-term imprisonment of not less than ten years and concurrently to a fine. A person who takes the liberty to import solid wastes as raw materials without permit of the relevant competent department of the State Council, thus causing a serious environmental pollution accident, shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention and concurrently to a fine, if a heavy loss to public or personal property or a great injury to people's physical health is caused; and if the result is especially serious, to fixed-term imprisonment of not less than five years and not more than ten years and concurrently to a fine. A person who, in the name of utilizing raw materials, imports solid wastes that cannot be utilized as raw materials, shall be convicted of a crime and sentenced in accordance with the provisions of Article 155 of this Law.

Article 340 A person who, in violation of laws or regulations on the protection of aquatic resources, fishes for aquatic products in an area where fishing is prohibited, during a period

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when fishing is prohibited or using implements or methods that are prohibited, shall be sentenced to fixed-term imprisonment of not more than three years, criminal detention, public surveillance or a fine if the circumstance is serious.

Article 341 A person who illegally catches or kills the species of wildlife under special state protection which are rare or near extinction, or illegally purchases, transports or sells the species of wildlife under special state protection which are rare or near extinction or their products, shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention and concurrently to a fine; if the circumstance is serious, to fixed-term imprisonment of not less than five years and not more than ten years and concurrently to a fine; and if the circumstance is especially serious, to fixed-term imprisonment of not less than ten years and concurrently to a fine or confiscation of property. A person who, in violation of game laws or regulations, hunts in a game reserve, during a period when hunting is prohibited or using implements or methods that are prohibited, thus damaging wildlife resources, shall be sentenced to fixed-term imprisonment of not more than three years, criminal detention, public surveillance or a fine if the circumstance is serious.

Article 342 A person who, in violation of laws or regulations on land administration, illegally occupies cultivated land and uses it for other purposes, shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention and concurrently or independently, to a fine, if the amount involved is relatively huge and serious damage to a large amount of cultivated land is caused.

Article 343 A person who, in violation of the provisions of the Mineral Resources Law, mines without a mining license, enters without approval and mines in mining areas that the state has planned to develop, in mining areas with ores of significant value to the national economy, or in other's mining areas, or exploits special kinds of minerals that the state has prescribed for protective exploitation, and refuses to stop mining after he is ordered to do so, shall be sentenced to fixed-term imprisonment of not more than three years, criminal detention or public surveillance and concurrently or independently, to a fine, if damage to mineral resources is caused; and if serious damage to mineral resources is caused, to fixed-term imprisonment of not less than three years and not more than seven years and concurrently to a fine. A person who, in violation of the provisions of the Mineral Resources Law, exploits mineral resources in a destructive manner and causes heavy damage to mineral resources, shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention and concurrently to a fine.

Article 344 A person who, in violation of the provisions of the Forestry Law, illegally cuts down or destroys rare and precious trees, shall be sentenced to fixed-term imprisonment of not more than three years, criminal detention or public surveillance and concurrently to a fine; and if the circumstance is serious, to fixed-term imprisonment of not less than three years and not more than seven years and concurrently to a fine.


(…)

Section 7 Crime of Smuggling, Trafficking in, Transporting or Producing Drugs

(…)

Section 8 Crime of Organizing, Forcing, Luring, Sheltering or Introducing Women into Prostitution

(…)

Section 9 Crime of Producing, Selling or Spreading Obscene Articles

(…)

Chapter VII Crime of Endangering Interests of National Defense

(excised)

Chapter VIII Crime of Embezzlement or Bribery

Article 382 A public servant of the state who, by taking advantage of his post, appropriates, steals, swindles or otherwise illegally takes possession of public property shall be guilty of a crime of embezzlement. A person who is authorized by a state organ, state-owned company, enterprise, institution or people's organization, to administer or manage state-owned property shall, if, by taking advantage of his post to appropriate, steal, swindle or otherwise illegally take possession of state-owned property, be dealt with as embezzlement. A person who conspires with the person listed in the preceding two paragraphs to engage in embezzlement shall be dealt with as an accomplice.

Article 383 A person who commits a crime of embezzlement shall, depending on the seriousness of the circumstance, be sentenced respectively according to the following provisions: 1. A person who embezzles the amount of not less than 100,000 yuan shall be sentenced to fixed-term imprisonment of not less than ten years or life imprisonment and may concurrently be sentenced to confiscation of property; and if the circumstance is especially serious, to death and concurrently to confiscation of property. 2. A person who embezzles the amount of not less than 50,000 yuan and not more than 100,000 yuan shall be sentenced to fixed-term imprisonment of not less than five years and may concurrently be sentenced to confiscation of property; and if the circumstance is especially serious, to life imprisonment and concurrently to confiscation of property. 3. A person who embezzles the amount of not less than 5,000 yuan and not more than

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50,000 yuan shall be sentenced to fixed-term imprisonment of not less than one year and not more than seven years; and if the circumstance is serious, to fixed-term imprisonment of not less than seven years and not more than ten years. A person who embezzles the amount of not less than 5,000 yuan and not more than 10,000 yuan may, if, after committing the crime, showing signs of repentance and giving up the embezzled money of his own accord, be given a mitigated punishment or be exempted from criminal punishment, and in such a case, shall be given administrative sanctions by the unit to which he belongs or by the competent superior department.

4. A person who embezzles the amount of not more than 5,000 yuan shall, if the circumstance is relatively serious, be sentenced to fixed-term imprisonment of not more than two years or criminal detention; and if the circumstance is relatively minor, be given administrative sanctions according to the circumstance by the unit to which he belongs or by the competent superior department. A person who repeatedly commits embezzlements for many times and goes unpunished shall be sentenced according to the accumulated amount of money he has embezzled.

Article 384 A public servant of the state who, by taking advantage of his post, misappropriates the public money for his own use or for conducting an illegal activity, or misappropriates a relatively large amount of public money for conducting activities with a view of profit, or misappropriates a relatively large amount of public money and fails to return it after three months, shall be guilty of a crime of misappropriation of public money and shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention; and if the circumstance is serious, to fixed-term imprisonment of not less than five years. If such a person misappropriates a large amount of public money and fails to return it, he shall be sentenced to fixed-term imprisonment of not less than ten years or life imprisonment. A person who misappropriates for his own use the money or materials allocated for disaster relief, emergency rescue, flood prevention and control, the care of disabled servicemen and the families of revolutionary martyrs and servicemen, the care of the poor, resettlement of residents or social relief shall be sentenced heavily.

Article 385 A public servant of the state who, by taking advantage of his post, asks for another person's property, or illegally accepts another person's property and secures advantages for him, shall be guilty of a crime of acceptance of bribes. A public servant of the state who, in violation of the state's regulations, accepts commissions and service charges offered in various names for his own possession in economic transactions shall be dealt with as acceptance of bribes.

Article 386 A person who commits a crime of acceptance of bribes shall, depending on the amount of bribes and the seriousness of the circumstances, be sentenced in accordance with the provisions of Article 383 of this Law. A person who extorts bribery shall be sentenced heavily.

Article 387 Where a state organ, state-owned company or enterprise, institution or people's organization extorts or accepts illegally property from another person and seeks profit for him


and if the circumstance is serious, the unit shall be sentenced to a fine and concurrently, the person-in-charge directly responsible and other persons directly responsible of it shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention.

A unit listed in the preceding paragraph which, in its economic transactions, accepts secretly rebates or commissions in various names without entering into its account shall be deemed as acceptance of bribes, and sentenced in accordance with the provisions of the preceding paragraph.

Article 388 A public servant of the state who, by taking advantage of his favorable conditions of his post or position, seeks unlawful profits for the entruster through the acts of office of another public servant of the state, and extorts or accepts the entruster's property, shall be dealt with as acceptance of bribes.

Article 389 A person who, with a view of unjust benefit, gives property to a public servant of the state shall be guilty of bribing. A person who, in economic transactions, violates the state's regulations to give property of a large quantity to a public servant of the state or to give commissions and service charges to the latter shall be dealt with as bribing. A person who is extorted to give property to a public servant of the state and has not got any unjust benefit shall not be deemed bribing.

Article 390 A person who commits a crime of bribing shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention. A person who seeks unjust benefit by bribing shall, if the circumstance is serious or a heavy loss is caused to the state's interests, be sentenced to fixed-term imprisonment of not less than five years and not more than ten years; and if the circumstance is especially serious, to fixed-term imprisonment of not less than ten years or life imprisonment and may concurrently be sentenced to confiscation of property. A briber who voluntarily confesses his bribery before being prosecuted may be given a mitigated punishment or be exempted from punishment.

Article 391 A person who, with a view of unjust benefit, gives property to a state organ, state-owned company or enterprise, an institution or a people's organization, or, in economic transactions, violates the state's regulations to give commissions and service charges offered in various names, shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention. If a unit commits a crime under the preceding paragraph, the unit shall be sentenced to a fine and concurrently, the person-in-charge directly responsible and other persons directly responsible of it shall be sentenced in accordance with the provisions of the preceding paragraph.

Article 392 A person who introduces a bribe to a public servant of the state shall, if the circumstance is serious, be sentenced to fixed-term imprisonment of not more than three years or criminal detention. A person who introduces a bribe shall, if he voluntarily confesses his

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activities before being prosecuted, be given a mitigated punishment or exempted from punishment.

Article 393 If a unit, with a view of unjust benefit, offers a bribe or offers, in violation of the state's regulations, commissions or service charges to a public servant of the state, and if the circumstance is serious, the unit shall be sentenced to a fine and concurrently, the person-in-charge directly responsible and other persons directly responsible of it shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention. If illegal gains are obtained by bribing and such gains are taken possession of by a person, the said person shall be convicted of a crime and sentenced in accordance with the provisions of Article 389 or 390 of this Law.

Article 394 A public servant of the state who, in the domestic activities for public purpose or in their contact with foreigners, accepts gifts which shall be handed over as required by the state and fails to do so, shall be convicted of a crime and sentenced in accordance with the provisions of Article 382 or 383 of this Law if the amount involved is relatively huge.

Article 395 A public servant of the state whose property or expenditure apparently exceeds his lawful incomes may, if the difference is huge, be ordered to explain the sources of his property. If he can not explain the lawful sources of his property, the amount of property that exceeds his lawful incomes shall be treated as illegal gains, and he shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention, and the property that exceeds his lawful incomes shall be taken over.A public servant of the state shall, if having bank savings in another country or territory, make a report in accordance with the state's regulations. A person who has a relatively large amount of such savings and does not report them shall be sentenced to fixed-term imprisonment of not more than two years or criminal detention; and if the circumstance is relatively minor, shall be given administrative sanctions according to the circumstance by the unit to which he belongs or by the competent superior department.

Article 396 If a state organ, state-owned company or enterprise, institution or people's organization, in violation of the state's regulations, distributes state-owned assets collectively to individuals in the name of the unit, the person-in-charge directly responsible and other persons directly responsible shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention and concurrently or independently to a fine if the amount involved is relatively huge; and if the amount involved is huge, to fixed-term imprisonment of not less than three years and not more than seven years and concurrently to a fine. A judicial organ or an administrative organ who, in violation of the state's regulations, distributes collectively to individuals the confiscated property which shall be turned over to the state in the name of the unit, shall be sentenced in accordance with the provisions of the preceding paragraph.

Chapter IX Crime of Dereliction of Duty

(excised)


Supplementary Provisions

Article 452 This Law shall enter into force on October 1, 1997.

The regulations, supplementary provisions and decisions listed in Appendix I of this Law, which were formulated by the Standing Committee of the National People's Congress, are already brought into this Law or are not applicable and, from the date of entry into force of this Law, shall be repealed.The supplementary provisions and decisions listed in Appendix II of this Law, which were formulated by the Standing Committee of the National People's Congress, are reserved. Among them, the provisions on administrative sanctions and administrative measures shall continue to remain in force; and the provisions on criminal responsibility are already brought into this Law and, from the date of entry into force of this Law, the provisions of this Law shall apply.

Appendix 5. FDI- restricted and prohibited areas of industry in China

Table 8. FDI-restricted and prohibited areas in China. Source: PRC Gov.

Foreign Investment is Restricted Foreign Investment is Prohibited

Agriculture, Forestry, Animal Husbandry and Fishery

Selection and cultivation of new varieties of crops, and production of seeds (with CSH). Processing of the lumber of precious trees varieties (limited to JV). Processing of cotton (seed cotton)

R&D in breeding and planting of China’s rare flora and fauna. R&D and production of transgenic crop and livestock. Fishing in waters under China’s jurisdiction

Mining Exploration and mining of special and rare kinds of mineral, precious stones and metals

Exploration and mining of tungsten, molybdenum, tin, stibonium and fluorite; of rare earth elements; of radioactive minerals

Agro-food Processing Processing of edible oils and fats from soybean, rapeseed, peanut, cottonseed, camellia seed, sunflower seed, palm ; processing of rice, flour, and deep processing of corn; . Production of biological liquid fuels (fuel ethanol and biodiesel) (with CSH)

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Beverage Manufacturing

Production of rice wine and famous-brand spirits (with CSH)

Processing of green tea and special tea with Chinese traditional techniques (including famous tea and dark tea)

Tobacco Processing and production of threshed and re-dried tobacco leaves

Printing and Reproduction of Recording Media

Printing of publications (with CSH)

Petroleum Processing, Coking and Nuclear Fuel Processing

Atmospheric and vacuum refinery with an annual output of below 10 million tons, catalytic cracking; continuous reforming ;hydrogen cracking production with an annual output of below 1.5 million tons

Manufacturing of Raw Chemical Materials and Chemical Products

Production of calcined soda,caustic soda, sulfuric acid, nitric acid, potassium carbonate with limited output or using obsolete process ; of photosensitive materials; benzidine; precursor chemicals ; low-end hlorofluorocarbons or chlorofluoro-compounds; butadiene rubber, E-SBR, (SBS) rubber; of PVC through acetylene method, and production of ethene of limited output and post-processing products; of polluting dyes and paints of limited output ;of ludwigite; of inorganic salt with obsolete process and pollution

Pharmaceutical Production of low-end generic drugs and vitamins; of varieties of vaccines that are under the scope of national immunity planning ; of active pharmaceutical ingredients (APIs) for anesthetics and Category I psychotropic drugs (with Chinese CS);of blood products

Production of traditional Chinese medicinal materials

Chemical Fiber Manufacturing

Production of chemical fiber drawnwork of conventional copolyester (CoPET); of viscose fibers



Nonferrous Metals Smelting and Rolling

Smelting of rare metals including tungsten, molybdenum, tin (excluding tin compounds) antimony ; of nonferrous metals including electrolytic aluminum, copper, lead and zinc; of rare earth elements (limited to Sino-foreign equity/cooperative joint venture operations)

Smelting and Processing of radioactive minerals

General Equipment Manufacturing

Manufacture of various types of general grade (P0) bearings and their components (steel balls and cages) and roughcasts; of wheeled, caterpillar hoisting machinery with a lifting capacity of less than 400 tons (limited to Sino-foreign equity/cooperative joint venture operations)

Transportation Equipment Manufacturing

Repair, Design and manufacture of vessels (including sections) (with CSH)

Special purpose Machinery and Equipment Manufacturing

Manufacture of equipment for ordinary dacron filament and short fiber; of bulldozers of 320 horsepower or less, hydraulic excavators of 30 tons or less, wheeled loaders of 6 tons or less, the graders, road rollers, and forklifts of 220 horsepower or less, electrically driven off-highway dump trucks of 135 tons or less, hydro-mechanically driven off-highway dump trucks of 60 tons or less, asphalt concrete mixing, paving and high altitude operation machinery, garden machinery and tools and ready-mixed concrete machinery

Manufacturing of Weapons and Ammunition

Telecommunication Equipment, Computer and Other Electronic Equipment Manufacturing Industries

Production of satellite telecasting ground receiving facilities and key components

Manufacture of open (i.e., acid mist directly coming out) lead-acid, mercury-contained silver oxide button, mercury-contained alkaline zinc-manganese button, pasted zinc-manganese and nickel-cadmium batteries

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Transportation, Storage & Warehousing and Postal Services Industries

Railway freight, Railway passenger transport (with CSH); highway passenger transport;. Cross-boundary automobile transport; water transport (with CSH);general aviation companies for photography, prospecting and industrial purposes (with CSH);: value-added telecommunication services (with the proportion of foreign investment not exceeding 50%); basic telecommunication services (with the proportion of foreign investment not exceeding 49%)

Air traffic control companies .Postal companies; domestic express mails delivery business

Wholesale and Retail Industries

Direct sales, mail orders, and online sales;. Purchase and distribution of grains, cotton, vegetable oil, sugar, tobacco, crude oil, agricultural chemicals, agricultural plastic film and fertilizers (in the case of chain stores with more than 30 stores established and selling products of different varieties and brands from multiple suppliers, the Chinese parties shall be the controlling shareholders). Construction and operation of large-scale agricultural products wholesale markets. Distribution of media (excluding movies) (limited to Sino-foreign cooperative JV). Vessel agencies (with CSH) and ocean shipping tally companies (limited to Sino-foreign equity/cooperative/JV)6. Wholesale of product oil, and construction and operation of gas stations (in the case of those with 30 chain gas stations established and funded by the same foreign investors and selling product oil of different varieties and brands from multiple suppliers, CHS)



Water Conservancy, Environmental, and Public Facilities Management Industries

Construction and operation of, in small grids, power plants using coal-fired and steam condensation thermal generator sets with a single generator capacity of 300,000 kilowatts or less, and thermoelectric power stations using coal-fired, steam condensation and extraction thermal generator sets with a single generator capacity of 100,000 kw or less. Construction and operation of grids (with CSH); of pipeline networks for gas, heat, water supply and sewage in cities with the population over 0.5 million (with CSH)

Construction and operation of, outside small grids, power plants using coal-fired and steam condensation thermal generator setswith a single generator capacity of 300,000 kw or less, and thermoelectric power stations using coal-fired, steam condensationand extraction thermal generator sets with a single generator capacity of 100,000 kw or less. Construction and operation of natural reserves and internationally important wetlands; of wild animal and plant originated in and protected by China

Finance Banks, financial companies, trust companies, and currency brokerage companies ;insurance companies (in the case of life insurance companies, the proportion of foreign investment shall not exceed 50%) ; Securities companies (limited to underwriting of A Shares, underwriting and transaction of B Shares, H Shares, and government andcorporate bonds, with the proportion of foreign investment not exceeding one third), and securities investment fund management companies (with the proportion of foreign investment not exceeding 49%); insurance brokerage;futures (with CSH)

Real Estate 1. Development of tracts of land (limited to JV);construction and operation of high-class hotels, high-class office buildings and international exhibition centers; real estate secondary market transactions and real estate brokerage

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Business Consulting Legal consulting; market surveys (limited to JV) credit investigation and rating services

Social surveys

Education Ordinary senior high schools (limited to JV)

Compulsory education institutions, education in military affairs, police, politics and other special fields, and Party Schools

Technology services Surveying and mapping companies (with CSH); import and export goods inspection, appraisal and certification companies; photography services( excluding aerial photography for survey and mapping purposes; (limited to JV)

Development and application of human stem cell and genetic diagnosis and treatment technology Geodetic surveying, marine charting, aerial photography for surveying and mapping purposes, map compilations.



Cultural, Sports and Entertainment Industries

Production of radio and television programs and movies (limited to JV) Construction and operation of movie theaters (with CSH); of large theme parks.Performance brokerage agencies (with CSH). Operation of recreational venues (limited to JV)

News agencies. Publishing of books, newspapers, and periodicals; of audio-video products and electronic publications.All radio stations, TV stations, radio and TV channels , radio and TV transmission and coverage networks. Radio and TV program production and operating. Movie production companies, distribution, and theater companies. Provision of news websites, online audio and video programs, operation of business premises for Internet-access services, and operation of Internet cultural business (excluding music). Construction and operation of golf courses and villas. Gambling and lottery industry (including horse race tracks for gambling purposes). Pornography industry

Appendix 6. Law of the PRC on Choice of Law for Foreign-related Civil Procedures

Law of the People's Republic of China on Choice of Law for Foreign-related Civil Relationships(Adopted at the 17th session of the Standing Committee of the 11th National People's Congress on October 28, 2010)

Chapter I General Provisions

Article 1 This Law is enacted in order to clarify the application of laws concerning foreign-related civil relations, reasonably solve foreign-related civil disputes and safeguard the legal

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rights and interests of parties.

Article 2 The application of laws concerning foreign-related civil relations shall be determined in accordance with this Law. If there are otherwise special provisions in other laws on the application of laws concerning foreign-related civil relations, such provisions shall prevail.If there are no provisions in this Law or other laws on the application of any laws concerning foreign-related civil relations, the laws which have the closest relation with this foreign-related civil relation shall apply.

Article 3 The parties may explicitly choose the laws applicable to foreign-related civil relations in accordance with the provisions of law.

Article 4 If there are mandatory provisions on foreign-related civil relations in the laws of the People's Republic of China, these mandatory provisions shall directly apply.

Article 5 If the application of foreign laws will damage the social public interests of the People's Republic of China, the laws of the People's Republic of China shall apply.

Article 6 As for the application of foreign laws on a foreign-related civil relation, if different laws are enforced in different regions of this foreign country, the laws of the region which has the closest relation with this foreign-related civil relation shall apply.

Article 7 The proper laws applicable to the relevant foreign-related civil relations shall apply to the limitation of action.

Article 8 Lex fori shall apply to the determination on the nature of foreign-related civil relations.

Article 9 Foreign laws applicable to foreign-related civil relations do not include the Law of the Application of Law of this foreign country.

Article 10 Foreign laws applicable to foreign-related civil relations shall be ascertained by the people's court, arbitral authority or administrative organ. If any party chooses the applicable foreign laws, he shall provide the laws of this country. If foreign laws cannot be ascertained or there are no provisions in the laws of this country, the laws of the People's Republic of China shall apply.

Chapter II Civil Subjects

Article 11 The laws at the habitual residence shall apply to the civil rights capacities of a natural person.

Article 12 The laws at the habitual residence shall apply to the civil acts capacities of a natural person. Where a natural person conducting civil activities is determined as incompetent for civil acts in accordance with the laws at the habitual residence but is determined as competent for civil


acts in accordance with the laws at the locality of the acts, the laws at the locality of the acts shall apply unless they are related to marriage, family or inheritance.

Article 13 The laws at the habitual residence of a natural person shall apply to the declaration of missing or declaration of death.

Article 14 The laws at the locality of registration shall apply to such items as the civil rights capacities, civil acts capacities, organizational institutions, rights and obligations of shareholders, etc. of a legal person and its branch. If the main business place of a legal person is inconsistent with the locality of registration, the laws of the main business place may apply. The main business place of a legal person shall be its habitual residence.

Article 15 The laws at the habitual residence of a right holder shall apply to the contents of his right of personality.

Article 16 The laws at the locality of agency act shall apply to agency, but the laws at the locality of agency relation shall apply to the civil relations between the principal and the agent. The parties concerned may choose the laws applicable to entrustment of agency by agreement.

Article 17 The parties concerned may choose the laws applicable to trust by agreement. If the parties do not choose, the laws at the locality of the trust or of the fiduciary relation shall apply.

Article 18 The parties concerned may choose the laws applicable to arbitral agreement by agreement. If the parties do not choose, the laws at the locality of the arbitral authority or of the arbitration shall apply.

Article 19 If the laws of the state of nationality are to apply in accordance with this Law and a natural person has more than two nationalities, the laws of the state of nationality in which he has a habitual residence shall apply; if he has no habitual residence in any of the states of nationality, the laws of the state of nationality with which he has the closest relation shall apply. If a natural person has no nationality or his nationality is uncertain, the laws at his habitual residence shall apply.

Article 20 If the laws at the habitual residence are to apply in accordance with this Law and a natural person's habitual residence is uncertain, the laws at his current residence shall apply.

Chapter V Real Right

Article 36 The laws at the locality of immovables shall apply to the right to immovables.

Article 37 The parties concerned may choose the laws applicable to the right over the movables by agreement. If the parties do not choose, the laws at the locality of the movables when the legal facts take place shall apply.

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Article 38 The parties concerned may choose the laws applicable to any change of the right over the movables taking place in transportation by agreement. If the parties do not choose, the laws at the destination of transportation shall apply.

Article 39 The laws at the locality of the realization of the rights of negotiable securities or other laws which have the closest relation with the negotiable securities shall apply to negotiable securities.

Article 40 The laws at the locality of the establishment of the right of pledge shall apply to the pledge of rights.

Chapter VI Creditor's Rights

Article 41 The parties concerned may choose the laws applicable to contracts by agreement. If the parties do not choose, the laws at the habitual residence of the party whose fulfillment of obligations can best reflect the characteristics of this contract or other laws which have the closest relation with this contract shall apply.

Article 42 The laws at the habitual residence of consumers shall apply to consumer contracts; If a consumer chooses the applicable laws at the locality of the provision of goods or services or an operator has no relevant business operations at the habitual residence of the consumer, the laws at the locality of the provision of goods or services shall apply.

Article 43 The laws at the working locality of laborers shall apply to labor contracts; if it is difficult to determine the working locality of a laborer, the laws at the main business place of the employer shall apply. The laws at the dispatching place of labor services shall apply to labor dispatches.

Article 44 The laws at the place of tort shall apply to liabilities for tort, but if the parties have a mutual habitual residence, the laws at the mutual habitual residence shall apply. If the parties choose the applicable laws by agreement after any tort takes place, the agreement shall prevail.

Article 45 The laws at the habitual residence of the infringed shall apply to product liabilities; if the infringed chooses the applicable laws at the main business place of the infringer or at the locality of the infringement, or the infringer has no relevant business operations at the habitual residence of the infringed, the laws at the main business place of the infringer or at the locality of the infringement shall apply.

Article 46 If such personal rights as the right of name, right of portrait, right of reputation, right of privacy, etc. are infringed upon via the network or by other means, the laws at the habitual residence of the infringed shall apply.

Article 47 The applicable laws chosen by the parties concerned by agreement shall apply to ill-gotten gains and negotiorum gestio. If the parties do not choose, the laws at the mutual habitual


residence of the parties shall apply; if there is no mutual habitual residence, the laws at the locality of ill-gotten gains and negotiorum gestio shall apply.

Chapter VII Intellectual Property Rights

Article 48 The laws at the locality where protection is claimed shall apply to the ownership and contents of the intellectual property right.

Article 49 A party may choose the laws applicable to the assignment and licensed use of intellectual property right by agreement. If the parties do not choose, the relevant provisions on contracts of this Law shall apply.

Article 50 The laws at the locality where protection is claimed shall apply to the liabilities for tort for intellectual property, the parties concerned may also choose the applicable laws at the locality of the court by agreement after the tort takes place.

Chapter VIII Supplementary Provisions

Article 51 If the provisions in Article 146 and Article 147 of the General Principles of the Civil Law of the People's Republic of China and Article 36 of the Law of Succession of the People's Republic of China do not conform with the provisions in this Law, the provisions in this Law shall prevail.

Article 52 This Law shall come into force on April 1, 2011

Appendix 7. IP trial procedure

Chinese intellectual property legislation was written to correspond with international intellectual property treaties, such as the WTO Agreement on Traded-Related Aspects of Intellectual Property Rights (TRIPs), the Bern Convention and the Paris Convention.

Administrative Hearing and Court Action

When considering intellectual property enforcement in China, one can file for an administrative hearing or in court. In general, there are pros and cons of both options - for example the administrative track is faster and less costly, but the factual analysis is less comprehensive and the application of law is less predictable in some localities. Court action is more suited to handling complex issues. The parties have more scope to present their cases and the court can award the damage compensation unlike the more limited penalties available from the administrative bodies. But it takes more time and cost.

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Of note, as to administrative actions, is that the central government of China has just announced plans to establish an office under the Ministry of Commerce to facilitate the crackdown further on infringement of intellectual property and counterfeit products: see - http://www.mmlcgroup.com/sitebuildercontent/sitebuilderfiles/cunov2011.pdf

Court Structure

China has a single court structure with four levels. The level in which to file a case depends on the type of case and the amount in controversy. The four levels of courts are: (1) the Primary People’s Court, (2) the Intermediate People’s Court, (3) the High People’s Court, and (4) the Supreme People’s Court.

Jurisdiction

According to the Article19.1 of the China Civil Procedure Law, the Intermediate People’ court has jurisdiction over the major foreign related cases. We can conclude that sometimes the Primary People’ court has the jurisdiction over the small foreign related cases. Generally, intellectual property related cases should be judged in Intermediate People’s court, but some of the Primary people’ courts such as Beijing’s Primary people’ courts have the jurisdiction of those cases. So, we can conclude that generally, if a foreign company want to commence a trademark infringement case where the infringer is incorporated in Beijing, it should lodge a lawsuit in the Intermediate People’ court in Beijing and also the Primary People’s courts in Beijing are not prohibited for the jurisdiction of that case according to China Civil Procedure Law.

Appeals from the Patent Reexamination Board or Trademark Review and Adjudication Board should be filed to the Beijing No.1 Intermediate People’s Court. According to the China Civil Procedure Law, a client wants to commence a copy right case against a Shanghai entity should lodge a lawsuit in Shanghai’ relevant Intermediate People’ Court.

How to File Appeals

Generally, if one appeal from the Intermediate Court to the High Court, he or she should submit the appeal petition to the Intermediate Court and then the Intermediate Court transfers the petition to the High Court. We call the appellate course second-instance. After the second-instance is completed, the decision comes into effect right now. So, we can’t appeal it to the Supreme People’s Court then. That’s to say we can only appeal once. However, if the High People is the first-instance court, we can appeal the decision of the High Court to the Supreme People’ court as of right. But there is still a way to correct the decision of the second-instance court. Retrial procedure can be correct the effected decisions.

Retrial Procedure


Although the decision of the second-instance court comes into effect, we can also file a petition for retrial procedure to second-instance court or its higher level court to correct it. That’ why we can see lots of cases started in the Intermediate Court, and then appealed to the High Court and again to the Supreme Court. We should not call the above said Supreme Court third-instance court but the retrial court. There are stricter rules for reason to initiate a retrial procedure than a second-instance course. If a foreign entity appeals from the first-instance court within 30 days after it received the decision, the appeal will be accept by the second-instance court. But the retrial court will not initiate a retrial unless the petition is consistent with Article 179 of the China Civil Procedure Law.

Article 179 of the China Civil Procedure Law states that - The retrial court should initiate the retrial procedure if the petition has one of the following situations: 1. There are new evidences which can overthrow the original decision; 2. The basic fact of the original decision is lack of evidence; 3.The main evidence supporting the basic fact of the original decision is fake; 4. The main evidence supporting the basic fact of the original decision is without cross-examination; 5.The parties can’t collect the evidence which is needed in the court for objective reasons. They files written petition to ask the court to collect it and the court refuses; 6. The original decisions applies the wrong law; 7. The jurisdiction is wrong according to the law; 8. The composition of the judge collegial panel is illegal or the member of the collegial panel who shall to challenged according to the law has not been challenged; 9. The legal agent of the parties who don’t have capacity to act in the court has not attend the court or parties or his/her agent who shall attend the court does not attend the court for the reasons which are not caused by their own fault;10. The parties are deprived of right to defend themselves; 11. The court renders a judgment by default without serving summons; 12. The original decision is omitting or beyond the claims; 13. The basic legal document that the original decision is made relying on has been revoked or changed. The court should initiate a retrial on the conditions of the original court violating the legal procedure which may lead to the wrong decisions or the any of the judge has committed embezzlement, accepted bribes or done malpractice for personal benefits or perverted the law.

One can file a petition for retrial within 2 years after the decision came into effect. So, the law offers us much longer time to petition for retrial than file an appeal. Article 184 of the Civil Procedure Law states that- the parties should apply for retrial within two years after judgment or ruling comes into effect; If the original documents which the decisions are made base on are cancelled or altered 2 years after the decisions come into effect or parties find that the judges in the adjudication of the case have committed embezzlement, accepted bribes, engages in malpractices for personal gain and perverted the law of behavior 2 years after the decision comes into effect, the parties can apply for the retrial 3 months after they get to know that.

The Supreme People’s Court

The supreme People’ Court is the highest court in China. It handles appeals from the High People’s Courts. If the judge of the first instance is made by the high court, the appellate court

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should be the Supreme People’s court. You need to file the appeal petition to the high court. The high court will transfer your petition to the Supreme People’ Court without any leave. It serves an administrative role, in which it issues judicial interpretations that are legally binding upon lower courts. It tries cases of first instance over which it has jurisdiction according to law and cases of first instance it deems that it should try, cases of first instance submitted for trial by people's courts at lower level in accordance with law, cases of appeal and protests against the judgments and orders of High People's Courts and special people's courts and cases of protests filed by the Supreme People's Procuratorate in accordance with the procedures of trial supervision. The Supreme People's Court supervises the trial conducted by local people's courts and specialized people's courts.

The High People's Court

There are now in China 30 High People's Courts at the level of province, autonomous region and municipality with provincial status. High people's courts try cases of first instance over which they have jurisdiction, cases of first instance submitted for trial by people's courts at lower level according to law, cases of first instance transferred from the Supreme People's Court according to law, cases of appeal and protest against judgments and orders of people's courts at lower levels and cases of protest filed by people's procuratorates in accordance with the procedures of trial supervision. The High People's Courts supervise the adjudication work of people's courts at lower levels. There is one High People’s Court in each province and autonomous region (e.g., Tibet), as well as certain large cities that have the rank of province, such as Beijing, Shanghai, and Tianjin.

The Intermediate People's Court

The Intermediate People's Courts are set up in prefectures in China's provinces and autonomous regions, districts in municipalities with provincial status, cities and autonomous prefectures of provinces and autonomous regions and in other places as needed. An Intermediate People's Court hears cases of first instance over which it has jurisdiction, cases of first instance empowered by the Supreme People's Court to try, cases of first instance submitted for trial by Primary People's Courts, cases of first instance transferred from courts at higher level according to law, cases of appeal and protest against judgments and orders of Primary people's Courts and cases of protest filed by the people's procuratorate according to the procedures of trial supervision. An Intermediate People's Court supervises the adjudication work of the Primary People's Courts within its jurisdiction. Each major Chinese city has one or two Intermediate People’s Courts. For example Beijing has two Intermediate people’s courts — Beijing No.1 Intermediate People’ Court and Beijing No.2 Intermediate People’ Court. Appeals against the decisions of the Trademark Review and Adjudication Board or Patent Reexamination Board should be submitted to Beijing No.1 Intermediate People’ Court.

The Primary People's Courts


The Primary People's Courts or District Courts are set up in counties, cities at county level, autonomous counties, banners, city districts and in places as needed. A Primary People's Court may set up a number of people's tribunals in light of local conditions, the density of local population and the pressure of case laid. A Primary People's Court hears criminal, civil, economic and administrative cases of first instance, except for those cases otherwise stipulated by law. A Primary People's Court also handles civil disputes, economic disputes and minor criminal cases not requiring trial and guide people's mediation committees in their work. Each county, or district, in each major city has one Primary People’s Court.

Two Instance Trial Policy

China has a "two-instance" judicial system—the decisions of the court of first instance can be appealed to the court at the higher level and heard de novo, which makes what essentially is a final decision. Appeals hearings are not de novo. The appellate court just investigates if the decision of the first-instance court is correct. If the final effect decision is not correct, retrial procedures can be implemented.

Power of Attorney

As general principle, a power of attorney outside China by a foreign party must undergo notarization and legalization as provided by China’ Law on Civil Procedures. The foreign party may also issue a power of attorney in China. If it does so then (i) No notarization or legalization is required if a foreign natural person signs it before the trial judge in China on production of his ID and arrival records;(ii) if the foreign nature person signs the power of attorney and has it notarized in China, he need not get notarization in his own country;(iii) if a legal representative or responsible person of a foreign organization produces a document stating that he has the right to sign as the natural person mentioned above. Any evidence forms abroad including Power of attorney need to be notarized and consularized before they are submitted to the courts. Chinese courts will not accept the foreign things without notarization and consularization.

Certificates of Incorporation

A foreign entity that intends to litigate in China must provide proof of its existence and have it notarized, consularized. Where there is a judicial assistance agreement between China and the county in which company was incorporated, the formalities must be carried out according to the agreement.

Experts

In areas that require highly specialized knowledge, such as intellectual property, the court can decide to appoint a technical expert to sit on the panel to provide insight into the case. The expert has an equal vote in the ruling as the judges.

Evidence

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Evidence is the centerpiece of a lawsuit, with legal proceedings revolving around the question of how to prove a case most effectively. There is no evidence statute in China at present provisions on evidence scattered throughout the laws on procedure and related judicial interpretations and opinions. Below are some noteworthy matters on evidence in IP-related cases to help IP owners better know how to litigate their IP rights in China. The supreme people's court’ provisions on evidence in civil proceedings provides that if the evidence submitted to the court is formed abroad, it should be notarized in its country, and consularized by the China’ consulate in that country.

Registration Certificates

When a foreign party to Paris convention for protection of intellectual property produces a trademark registration certificate issued in his own country as evidence to a Chinese court, it is unnecessary to legalize the certificate, according to Article 6 quinquies of Paris convention for protection of intellectual property: “A (1) Every trademark duly registered in the country of origin shall be accepted for filing and protected as is in the other countries of the Union, subject to the reservations indicated in this Article. Such countries may, before proceeding to final registration, require the production of a certificate of registration in the country of origin, issued by the competent authority. No authentication shall be required for this certificate.” As for patents or copyright, there are not similar regulations. So, if a foreign patent registration certificate or a copyright certificate is submitted to the Chinese court, it is need to be notarized and consularized.

Other Evidence. As a general rule, no notarization or legalization is required for evidence obtained from official or publicly accessible foreign publications or patent searching databases, or affirmed and admitted by other valid court judgments or arbitration awards in China, or proven to have been accepted by the opposing party, or admitted by the party that submits such evidence.

Evidence Obtained by the Entrapment. In IP litigation, a plaintiff often uses notarization to fix evidence of a defendant’s infringing acts or their damaging consequences, The defendant often raises the so-called entrapment defense, denying the probative value of such evidence Chinese courts generally draw a distinction between the following situations(i) if the defendant intends to perform or has performed infringing acts before the rights holder makes the notarized purchase, and the purchase merely provides the infringer with an opportunity for infringement, then the evidence obtained through “affording opportunity” is admissible, as the Supreme People’ Court ruled in the Beida Founder case;(ii) if the alleged infringer does not intended to infringe but is induced to plan and perform an infringing act by the way in which the rights holder collects the evidence. In the latter case, courts will reject such evidence as inadmissible. In the Beida Founder case, the Supreme court interpreted that, Peking University founder notarized forensics way, helps to obtain evidence for installation of pirated software on the spot and the other pirated software to be sold to other customers, its purpose is not improper, Its behavior did not harm the


public interests and other legitimate rights and interests. Furthermore, evidence for the computer software copyright infringement is latent, and difficult to find, take this forensics way, helps to solve the problems of collecting evidence in such case, will deter infringement, strengthen the protection of intellectual property rights.

Burden of Proof. In IP cases, the burden of proof lies according to the maxim “he who asserts must prove”, but it may sometimes shift or invert, for example, where a patent infringement disputes concerns a patented invention for making a new product, entities or individuals that make the same product must prove that their method differ from those used for the patent being litigated. If a seller of infringing products claims no liability for damages, he is obliged to prove he had no intention to infringe. If an applicant requests cancellation of a registered trademark on the grounds that it has not been used for three consecutive years, it is incumbent on the registrant either to produce.

Preliminary Injunctions. A preliminary injunction is an order made by a Chinese court upon application by a rights holder prior to the commencement of civil proceedings against the infringer. The application is to be filed with a court having jurisdiction over the infringer to enjoin the infringer from carrying on certain infringement acts.

Preliminary injunction is a remedy provided under the various substantive laws and regulations governing intellectual property rights in China. The PRC Patent Law, the PRC Copyright Law and the PRC Trademark Law, the Computer Software Protection Regulations, and the Integrated Circuit Layout Design Protection Regulations all contain this remedy. Where there are ongoing or imminent infringement acts, which would result in irreparable damages to the rights holder should there be no injunctive order issued, the rights holder may apply to the court for this remedy.

The availability of the remedy depends on whether the substantive laws and regulations contain express provisions for the remedy. Currently, preliminary injunction is unavailable under the PRC Anti-unfair Competition Law. There seems to be no legal basis for a preliminary injunction in an unfair competition action against the infringer.

At the present time, the preliminary injunction remedy is only available in IP cases.

Requirements for Granting a Preliminary Injunction. There are at least three elements for considering the grant of a preliminary injunction:

(1) The applicant must be the rights holder or an interested party;

(2) The person against whom the injunction is sought is or will be committing infringement; and

(3) The infringement would result in irreparable harm to the lawful rights and interests of the right holder, unless it is immediately stopped.

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As far as the applicant is concerned, it is generally straightforward in examining whether the rights holder has the patent certificate, copyright registration certificate or the trademark registration certificate. If the rights holder is not the owner of the patent or trademark, then the court will look at whether it is an exclusive licensee of the patent or the licensed trademark to qualify the applicant as an interested party.

In copyright cases, the applicant must be the rights holder who owns the copyright or who has the neighboring rights. Reference to an "interested party" is not made in the Copyright Law.

Evidence of infringement must show the ongoing or imminent nature of the infringement. In this regard, evidence of alleged infringing products or samples must be submitted. Where there is evidence of past infringement, the applicant will need to show fresh evidence of ongoing infringement.

The rules do not clearly specify what constitutes "irreparable harm". It is up to the discretionary authority of the court, but the applicant needs to state the grounds to convince the court that immediate measures of enjoining the defendant from committing the infringement should be taken in order to avoid harm to be caused to the rights holder, which cannot be easily compensated in monetary terms.

Procedural Requirements. Procedurally, the Patent Law, the Trademark Law, and the Copyright Law refer to the provisions of the PRC Civil Procedure Law governing the granting of a pre-suit property preservation order.

Under the Civil Procedure Law, where there is an urgent situation calling for the granting of a property preservation order, and where irreparable damages would be caused to the lawful rights and interests of the applicant if such order were not immediately granted, the court may grant the property preservation order. In this procedure, the applicant must provide security for the preservation order. If the applicant fails to provide security, the court will reject the application.

In the case of a preliminary injunction, the applicant must also provide security. The amount of the security should be determined according to the value of the goods at stake, in addition to the amount of other reasonable expenses. The court will examine the application according to the above-mentioned requirements and will make a written ruling within 48 hours from the time of the application.

The rules permit the court to charge a nominal fee of Rmb500 to Rmb1,000 for each application. The case will then be numbered with the Chinese character "" (Injunction), for statistical purposes.

The Injunction. Typically, the injunction will contain prohibited terms enjoining the defendant from manufacturing, selling or importing the alleged infringing products. Once the injunction


order is made, it is to be served and executed immediately. In practice, the court will organize an action team for this purpose.

The applicant may also apply for evidence preservation measures together with the injunction order. In such a case, the action team will seize the infringing goods or attach the relevant evidence on a preliminary basis at the venue of the infringement. Evidence preservation is, similarly, set out in the various intellectual property laws.

The defendant is entitled to a review of the injunction, and the plaintiff is required to commence the civil proceedings within a specified period of time after the injunction is granted. (Han, 2011)

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References________________________________________________________________________________________________________

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