How to Protect Your Product When Selling in China

It can be incredibly profitable to sell your products in China, and in the age of Amazon and eBay, it is easier than ever. The rapid development of the Chinese economy sets the stage for both great opportunities and great hazards to Western businesses. Aside from the typical care needed for contracts, special care needs to be taken when international transactions are concerned.

Typically, Chinese companies seek to become distributors of popular foreign products via joint ventures, (a structure that rarely makes sense for the foreign company), and sometimes using subsidiaries based in Hong Kong. Before entering into a joint-distribution agreement or partnering with a Chinese firm, it is imperative that these steps are taken (at a minimum) to protect your company and protect your product.

  1. Do a Due Diligence

    Before entering into a contract, it is highly advisable to assess the legal existence and reliability of the Chinese business partner, especially for the first business contact in China. The State Administration of Industry and Commerce (SAIC) and the local AIC bureaus in China oversee registration and administration of companies. All companies must be registered with the AICs to obtain the business license which proves the status of legal person. Do you know the identity of the buying parties? Have you checked local and national business licenses? Have you preformed a credit check? Are there third parties involved in your transaction without your knowledge? Have you seen the import license of the Chinese company?

  2. Decide governing jurisdictional law and dispute resolution.

    I advise falling back onto the UN Convention on Contracts for the International Sale of Goods as China joined the China joined the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention, 10 June 1958). As inefficiency, cost and time, and lack of transparency complicate dispute settlement in Chinese Courts, I typically recommend arbitration at the Singapore International Arbitration Center. The location is convenient, and it is essentially the Arbitration Institute of Stockholm Chambers of Asia. Also, have you considered stringent terms for non-compliance or non-payment/late payment?

  3. Steps to protect intellectual property should be taken.

    Any IP rights must be register in China (It must be registered in China to be protected) and a non-disclosure, non-use, and non-circumvention Agreement is imperative. Consider having your product manufactured and produced in separate locations/factories and by separate parties/companies to discourage intellectual property theft. Keep equipment, drawings, software, trade secrets, or client and vendor lists as “need-to-know” as possible. Use third-party due diligence, training, audit, and other standard compliance and internal controls to protect your property.

  4. Decide on acceptable forms of credit and payment.

    I usually advise on taking payment in USD. Additionally, letters of credit are used extensively when selling into China and tend to be the preferred method of payment for most transactions. Only letters of credit from well-established banks in China should be accepted. Generally, that includes the following banks: Bank of China, China Construction Bank, Industrial and Commercial Bank of China, China Development Bank, Bank of Communications, or a branch of well-established American, Asian or European banks.

Doing business in a foreign country is difficult, different, and can be fraught with pitfalls or dangers. The Stanley Law Group can help you craft legal protections for your product and company. If you need the advice of a qualified attorney, give us a call at (540) 721-6028.

Disclaimer: The article above is not intended as legal advice. We recommend you come to our offices for a proper legal consultation with our excellent attorneys to formulate a strategy which is suitable for your specific case.

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