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The Legal Great Wall of China


Written By: A. Wilt

May 2015

Chinese owned companies can operate in America in a way that makes them almost untouchable in American courts, giving them competitive advantages over American companies. As investment grows, American companies or individuals that do business with Chinese firms are increasingly vulnerable without legal protection. That’s the conclusion the US-China Economic and Security Review Commission came to in a report released May 5, 2015.

Process Service of a Case

Every court case begins with the Plaintiff filing a suit and then serving the Defendant with Summons papers. Chinese companies with US operations have the ability to hide behind complicated corporate structures protecting the parent companies in China. Many of them also do not have an agent set up to receive process service in the US, which allows them avoid service of court papers in the US court system. These protections leave American individuals and companies with little recourse in the legal arena.

 

 

Further, even if a Chinese owned operation is successfully served, the companies often claim that the American courts lack jurisdiction over them.

Back in the USA News Story: The Legal Great Wall of China. www.backintheusa.us

Gucci America v Weixing

Though there are several cases with essentially the same narrative, the most cited case demonstrating the difficulty of pursuing a company in American Courts is Gucci America v Weixing. In 2011, Gucci sued Weixing, who was doing business under the website, myluxurybags.com. The suit was over intellectual property and trademark infringement, with Gucci alleging that the company was selling knock off purses, and thus, devaluing the Gucci brand.

In the Gucci suit, Defendants did not appear in Court, leading the Court to grant a temporary restraining order, which was later converted into an injunction freezing the Defendants’ assets and ordering them to stop the sale of counterfeit goods.

Following the injunction, Gucci discovered that Defendants were wiring proceeds from counterfeit sales into their Chinese bank accounts in violation of the Court Order. Gucci then attempted to serve the Bank of China the order to freeze Defendants’ accounts. In this case, they were able to serve the documents to the Bank of China’s New York Office.

However, the Bank of China refused to comply with the order, claiming that their New York officers were not authorized to receive service of the injunction and could not access any information from the Chinese branches of the bank. They further answered that complying with the subpoena would violate Chinese law. After much back and forth, Gucci won in District Court. The Bank of China was further issued sanctions for contempt of Court.

 

 

The Bank of China, as a nonparty to the action, appealed, claiming that the US federal courts did not have jurisdiction to require the discovery or the asset freeze. On appeal, the Circuit Court ruled against The Bank of China, rejecting its arguments and remanding the case back to District Court. It’s still pending, more than four years after it was initially filed. The sanctions for contempt were dropped.

The Hague Convention

Chinese companies argue that American companies already have legal recourse through the Hague Convention, which governs rules about taking international discovery, international asset-freezes, etc. China and the United States are both signing members of this Convention, and yet interpret their responsibilities under the treaties in much different manners.

A big example of the difference in how each country views its responsibility is discovery.  During the discovery phase of litigation, the parties may be required to produce documents to the other side by Court Rule. In the United States, a Request to Produce isn’t a “request” to produce so much as “you are required to produce,” absent good cause. In China, these requests are considered truly requests with little obligation to respond to them. That cultural difference in interpretation makes it difficult to proceed under Hague Convention rules.

Back in the USA News Story: The Legal Great Wall of China. www.backintheusa.us

The Hague Convention

A Solution?

The solution presented by the US-China Economic and Security Review Commission seems a simple one. First, it calls on the United States to monitor foreign compliance with the Hague Convention, and to raise awareness of countries that have poor compliance, such as China.

The Commission also calls on Congress to require all foreign companies who operate in the United States to assign an agent for service of process in the United States. That requirement would be prerequisite to access to American markets. Congress is also called upon to definitively legislate that those Chinese companies that do business in America, or are a member of American financial markets, are subject to American law, eliminating the jurisdiction arguments.

It seems straightforward. If you want to do business here, you are subject to the laws here.  While it won’t eliminate all of the issues, it will make it easier to regulate and bring the playing field closer to even.

~~~~~

Other Articles of Interest:

Buying American Made Products

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Darn Tough Vermont: A Manufacturing Comeback Story

Understanding the True Cost of America's Promises—Unfunded Liabilities

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