The Law and New Tech in China

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Here’s something a bit on the practical side. I wrote so much about how the international media and U.S. politicians have been bashing China this week that I thought I should end on some real lawyer-type commentary. That way, I can ensure that my readership plummets precipitously going into the weekend. Anyway, here goes.

Been meaning for a while to write about something that comes up quite often when I do regulatory work, particularly in the IT sector.

Here’s the fact pattern: Company A makes nano-widgets in the U.S. and sells them in the U.S., EU and parts of Asia. They now wish to sell in China and would like to know if China permits foreign companies to sell nano-widgets in the PRC.

Company A calls me up and asks me to check this out. First, we take a look at the relevant laws and regulations. No surprise, there is no law in China regulating nano-widgets because the technology is so new.

Second, one of my associates calls over to the Ministry of Mysterious Technology (MMT) to find out what their policy is on this. The official at MMT says that he is aware of nano-widgets, and although the Ministry has yet to take a formal position on the issue via publishing a regulation, their internal policy is that foreigners may not sell nano-widgets in China.

Further research shows that two foreign companies are selling these products, one in Tianjin and the other in Shenzhen. I ask the MMT about the likelihood of administrative enforcement, and the official says that MMT will not take any action and is aware of what these companies are doing.

What do you tell Company A? There are several possibilities:

1. There is no law that says you cannot sell nano-widgets in China. Go for it.

2. China has no licensing scheme at the present time for the sale of nano-widgets, therefore Company A cannot secure a license to sell these products.

3. It is illegal for Company A to sell these products because the MMT says that it is prohibited.

4. Company A should go ahead with sales in China because even though there is an internal policy against it, the lack of enforcement implies a tacit acceptance by MMT in the absence of regulation.

5. Company A should sell more traditional products.

This is by no means a strange fact pattern, although it is not a perfect example – I didn’t want to get too close to a real situation here for obvious reasons. I have come across this sort of thing many times. The most difficult issue is not the lack of clarity by the government, although that is indeed frustrating.

No, the most challenging part of this is explaining everything to a regulatory compliance person back in Company A’s HQ in New York, who is not at all amused when I respond to his "What’s the degree of legal risk if we decided to market our product?" with "That’s hard to say. Depends on your definition of ‘legal risk.’"

7 responses on “The Law and New Tech in China

  1. Brad Luo

    As a lawyer, the best thing that you can do under this circumstance, I guess, is to explain where the potential pitfalls are. Finding out and knowing the risks are probably the most difficult part of doing the deal.

  2. Chris Devonshire-Ellis

    It’s an issue also of linguistics. Usually, for specific product categories, it is relatively straightforward to define whether or not – or under which regulatory circumtances – a particular product can be sold. You’d need to overlay that on top of the new product and assess how much appears out of compliance. If not, then you’d probably be OK. Risk assessment and compliance also can deal with the likely extent of any fines levied in the event of the company being out of compliance. That also can be part of a strategy. “Just do it” and clean up the pieces later. “Just doing it” and then facing a fine later may be an acceptable strategy to some businesses. The onus is then of corporate counsel to discuss the merits or otherwise with his board and let them decide. That’s why you have inhouse counsel, and that’s why you have boards of directors. Most risks in China business involve financial risks, and not criminal. Counsel should also appreciate the difference.

  3. Stan Post author

    Two important points above by Chris that should be highlighted. First, this analysis is fairly straightforward with most products. Absolutely true (most of the real-life examples I deal with involve services – I fudged on the fact pattern to make it easier to write). I can’t get away with anything these days!

    Second, also true that 99.99% of the discussion is not about risk of criminal prosecution – that doesn’t come up that often in the work I do. Everything else can be called financial risk, but it’s worth pointing out that financial risk includes a lot in addition to the threat of a civil fine by an administrative agency. For many MNCs these days, one big financial risk is the PR disaster than will ensue when the news gets out that the company was in violation of a PRC policy/rule/law. And when the news gets out, it is immediately all over the world, thanks to our friend the Internet.

  4. Chris Devonshire-Ellis

    So we’re saying that legal counsel should work closely with their PR departments. Not something I am generally used to seeing…

  5. Stan Post author

    I’m a big supporter of that. Corporate communications and crisis management should always have a seat at the table for a lawyer, now more than ever in China for MNCs.

  6. Chris Devonshire-Ellis

    I would agree, but in reality I don’t see much of it. PR is considered a ‘marketing’ thing only worth attention from corporate counsel if the PR girl has big tits. The PR function at corporate level needs, uh, more PR about it’s true function in crisis management and at board inhouse counsel level.