China: A Consistent Commitment To The Rule Of Intellectual Property And Corporate Law - Part II

Saturday, July 1, 2006 - 01:00

Part I of this interview appeared in the June 2006 issue.

Editor: Should companies seeking to invest or conduct operations in China work with foreign law firms or Chinese law firms?

Garbus: The Chinese government does not permit certain practices that are sanctioned elsewhere. A nationalist element is present in the ways in which the Chinese government and China's business culture react to foreign law firms, and over time increasing government regulation will give the Chinese law firms a substantial upper hand. For this reason, I have associated myself with a Chinese firm. It is the best, and most practical, way in which to serve clients.

During my most recent visit, I participated in half a dozen intellectual property trials. The Chinese legal system moves quickly, and it is rarely more than six months from the filing of an action before the parties are facing a judge, and this is true of both civil and criminal cases. Once charges are filed in a criminal matter - and the criminal justice system is inquisitional rather than adversarial - the accused is almost certain to be convicted. The prosecutor is engaged in every step of the investigation. It is even permissible for the prosecutor and the judge to share their views in the absence of the defendant or his lawyer. In such a system, the defense attorney is focused on mitigation rather than on guilt or innocence. And the degree to which the prosecutor will listen to him depends in large part on who he and his client are. That, in turn, depends upon relationships, respect and guanxi.

The Chinese have various mediation techniques. They believe that reasonable people can work things out. They also have an administrative system which, at least at this point, is neither as confrontational nor as potent as the legal system, and they have come to recognize that it is simply not as effective as litigation in protecting IP - both Chinese IP and that of foreign enterprises. There are three alternative means of dealing with disputes, and each has its strengths and weaknesses. Each has its particular cultural dimension as well, and that is why it is important to have a Chinese lawyer at your elbow. One who understands the nuances that go into any relationship in China.

An American company that brings an action in a Chinese court against a Chinese enterprise that has pirated its IP is going to have a much better chance of prevailing today than it would, say, 20 years ago. But, there may be consequences. Success in the lawsuit may impair the American company in its dealings with other Chinese concerns. It is important to understand how such a step - bringing a lawsuit - is perceived by the people with whom you wish to do business, and to at least attempt to take alternative steps if that is what is indicated. The avoidance of confrontation is at the heart of Chinese culture. China will not appropriate the West's litigious nature.

Editor: You spoke of nuances.

Garbus: Yes. Retaining a local firm cuts through the foreign image. An American law firm licensed to operate in China must hire a Chinese lawyer to appear in court. Even were that not the case, it is important to have Chinese representation in most dealings - in and out of court - in China. A Chinese representative, when he is retained as a lawyer, is an unofficial sponsor for his client. By acting on your behalf, he is often vouching for your character.

The term guanxi is difficult to translate, but it is often the most important factor in whether a transaction is consummated. Guanxi describes the individual link within a social network. It can be used in a negative context, to describe, say, bribery and corruption, but it is more useful in understanding a person's influence and stature within the group. It looks at a person through his or her connections and relationships. Foreign businessmen who do not know how to address this will be unsuccessful in their dealings.

Over many years, I have built a relationship with a law firm which now has offices in six cities, and that number, in a few years, will approach 15. Working together, the Chinese lawyer and his Western counterpart, can be far more helpful to a client than if they worked separately. We - and I mean this particular Chinese firm and myself - know what matters and what does not, that what a person says and what he means may be very different, and that there is a whole extralegal and quite invisible framework within which one must operate in order to be successful.

By the same token, there are many things that the Chinese are learning about us and about our business culture, and this process has greatly accelerated since China's accession to the World Trade Organization. As China's companies begin to compete in the world arena, and as these companies increasingly come to be run by people who received at least some of their education in American and European universities - and who are advised by young Chinese lawyers with Western law degrees - the rules by which the global economy operates are being absorbed into China's consciousness, both individual and collective. There are going to be enormous battles in the WTO. The Chinese know that they must fully understand those rules if they are going to achieve success in the international arena.

Editor: To outsiders, China appears to be a monolithic culture and society. You have pointed out that this is not the case.

Garbus: In addition to the considerable diversity among the Han Chinese, there are many minority groups in China. They are coming to play an ever greater role in the economic and social development of the country, including the development of its judiciary, its academic lawyers and its legal practitioners.

During this last visit to China I taught one class of 72 people, all but six of whom were from the countryside and had competed in national examinations to win a place in Beijing. Years ago such a class composition would not have occurred. One of them was a young woman from Tibet. Her story was fascinating. She had been raised in an illiterate family, and the family lived in a village where no one was literate. At the age of 14 she was sent to school in a town where at least some people could read and write and, for the first time, began to learn Chinese. She went on to university, learned English and then to the United States, twice, on scholarships. She holds a master's degree from the Temple-NYU-Tsinghua University program where I previously taught, and today she is a judge in Beijing.

There are 900 million people in the rural areas. Their migration to the cities is the largest movement of people in history. As China moves forward, the judge's story will be typical. As more and more young people, particularly minorities and Han Chinese from poor backgrounds, see something of the world, receive a good dose of Western education and have an exposure to Western economic, political and social institutions and take their experiences into the interior of the country, the kind of Western business culture that has been operating on the coast is going to penetrate the hinterland. But it will be secondary to the influence of China's long history.

Editor: China and India are emerging as major players on the world stage at the same time. Any thoughts about how they compare?

Garbus: Western democracy and free market capitalism are tied together, but I think that it is possible to have one without the other. There is a saying in China: "Under the leadership of the Communist party, the Chinese people are marching from Socialism to Capitalism." Notwithstanding the contradiction, there is truth in this statement. And it is going to be true for some time into the future, certainly until China is a developed nation. The continuing development of the Chinese economy is going to include some features of the democratic process - but of course China is not going to become a Western-type democracy, and to expect that is to court disappointment.

It is the Chinese command economy that is going to propel the country into a position of leadership in the global arena. India has too much in the way of still obvious communal animosities, it is too anarchic - there are parts of the country (in contrast to China) where the central government does not exercise any effective control - too many educational, healthcare, and social shortcomings, and too much poverty, to stay abreast of China. China has many similar problems, but the authoritarian Chinese are more cohesive, and they function in a more disciplined and orderly way. Notwithstanding the country's problems, I am optimistic in the long run. I think the Beijing Olympics in 2008 is going to be an astonishing display of all of China's strengths, and that the world is going to come away deeply impressed.

During the first part of our interview I spoke about China's consistent commitment to the rule of law. That is not inconsistent with what I have just said about the forces behind the country's economic development. The Chinese recognize that the superiority of American science is a function of the freedom to inquire, to think creatively and to make mistakes. They are making extraordinary efforts to replicate that state of affairs in Chinese science. They understand, in addition, the tremendously important role that a fair judiciary plays in the development of their economy. As a consequence, I have been free, in talks arranged by the United States State Department or in lectures to business people to talk about individual rights in addition to copyrights and patents.

Editor: With the collapse of the Soviet Union, the powers that be in China must see some of these developments as the gradual opening of a Pandora's Box.

Garbus: Yes, they do. During my recent visit an American representative of the World Trade Organization was in China to castigate the Chinese government on a variety of issues. The students, who have come to see the WTO as the creature of the developed world and globalization as benefiting the G-7 countries rather than the Third World, thereupon took it upon themselves to attack the representative of the WTO. Something along the same lines took place last year concerning Japan's failure to acknowledge what is called the Rape of Nanking during World War II.

If the students are free to speak out on these issues, they will in time speak out on issues that are closer to home.

At the same time, China is turning out an extraordinary number of college graduates. While there is certainly a need for educated young people, there is also an increasing concern to find employment for them. All of these things point to a Pandora's Box.

The authorities are extremely sensitive to charges of corruption. But the central government is very hard pressed to exercise any real control in many of the provinces and at the village level. In a country of 700,000 villages - in many of which everyone is related - appointments and elections allow of nepotism and worse.

These are realities of China today. Some of them are extremely difficult problems, others not so difficult. All are going to be addressed by their government in the context of a Chinese culture that draws upon the resources of a very deep well of the past, together with the help of a few friends. The rule of law, to which I have been privileged to contribute, falls into the latter category.

Please email the interviewee at mgarbus@dglaw.com with questions about this interview.