Beijing: The Hub Of A Greater China Practice

Friday, December 1, 2006 - 00:00

Editor: Mr. Chang, would you tell our readers something about your professional experience?

Chang: I am an attorney in Morgan Lewis' business and finance practice, and I have a particular focus on China. My practice is concerned with corporate and securities transactions, venture capital financing, cross-border mergers and acquisitions and public offerings for industrial and technology companies located in the U.S. and China. I am also a U.S. licensed patent attorney and have worked on a number of IP litigation matters. Prior to becoming a lawyer, I was a research scientist. I have a Ph.D. and a B.S.E degree, both in chemical engineering.

Editor: How did you come to Morgan Lewis?

Chang: Morgan Lewis is developing into an international law firm, and China has become one of the most important sources of business in the international arena in recent years. Someone with my background, accordingly, fit in well with this aspiration. From my perspective, I was very impressed with the discipline and work ethic of the Morgan Lewis people I met. The firm possesses expertise across a wide range of practices, and it is also very collegial.

Editor: Would you give us an overview of the firm's Greater China Practice? What disciplines and practice groups are included in the practice?

Chang: We opened an office in Beijing last January. That office is now staffed with two full-time attorneys and two Chinese-trained legal specialists. I spend approximately half of my time in Beijing and other regions of Greater China. As a result, we have three core practices in Beijing: venture capital and the private equity market; foreign direct investment and mergers and acquisitions; and intellectual property consultation and licensing transactions. We are looking at additional areas as well, and an initial step is probably going to be into the life sciences and biotechnology area.

Our major focus has been on information technology. Our firm has a particular expertise as structured finance specialists, and this particular moment in the evolution of the Chinese economy offers a unique opportunity to a firm with these particular strengths.

Editor: Where does the Greater China Practice reside?

Chang: Beijing constitutes the hub of the practice, but the practitioners who contribute to the practice reside all across the firm, and we call upon attorneys from New York, Washington, DC, Palo Alto and other offices on a regular basis. We have contacts in Shanghai, Hong Kong and Taiwan as well. I would say that while the core of the office is in Beijing, it is really a virtual office that exists across the entire Greater China region.

Given the types of activity on which we are focused, Beijing is the place for us to be. As you know, at the present time, the Chinese system permits a foreign law firm to have only one office in the country for a period of three years. When we have an opportunity to have a second office, I believe we will take a very serious look at Shanghai. It is China's business capital, and as our practice expands I think a Shanghai presence is almost inevitable. A Hong Kong presence is also a possibility. While Shanghai is becoming an increasingly important financial center, the world's capital markets continue to be accessed, in the main, from Hong Kong, London and New York.

Editor: Please describe the information technology climate in China today.

Chang: China is becoming a major technology player in the world very quickly. They understand the problem that patent infringement poses in the global arena because, for the first time, domestic technologies are targets of infringement. The Chinese are at the point where many of their leading companies have developed very sophisticated technologies that are in need of protection going forward. Part of our practice seeks to address this. We represent a number of Chinese enterprises in their IP interactions and licensing activities with companies in Europe and North America. We are also engaged in the mediation of a variety of patent disputes, which appears to be a growing legal service area.

Editor: What does China's development of a technology-based economy mean for your China-based IP practice?

Chang: As China evolves a technology-based economy, our IP practice attempts to move in tandem. The important areas, at the moment, are wireless communications and Internet-based commerce, and we are also seeing foreign investment in Chinese channels of distribution. In certain regions - and this includes Shanghai - biotechnology is the increasingly important sector. Genetic engineering enterprises are also locating in Shanghai and other areas. Many U.S.- and European-based venture capitalists that are interested in investing in China are setting up operations within China, and that is of particular benefit to the economies of Beijing and Shanghai and to our China-based IP practice.

Editor: What types of project are you handling for the Chinese companies?

Chang: On the internal side, we are setting up internal IP generation systems. The concern is to have an automated internal control system that will serve to avoid potential infringement claims. It is necessary to have such systems in place if potential investors are going to feel secure. With respect to investment, we are attempting to help these companies develop the right public strategies.

Patent prosecution is a growing field, although there are hurdles. At the moment, filing a U.S. patent costs at least $10,000, and $30,000 is not out of the question. That is too much for many of these Chinese organizations, whether they are entrepreneurial start-ups or established research institutions.

We are also seeing U.S. companies seeking to acquire Chinese companies, and if political considerations can be set aside, I think this type of activity is going to flourish. I refer to the controversy resulting from the attempted acquisition of Unocal Corporation by China National Offshore Oil Corporation last year. It remains to be seen whether that event will influence the ability of foreign companies to acquire Chinese enterprises.

China has just issued a set of new rules governing such acquisitions, and predictably it states that national economic security overrides the contractual undertakings of the parties. This gives the government pretty broad discretion. The proposed acquisition of a leading Chinese enterprise by the private equity partnership Carlyle Group has been held up at the governmental level for months, presumably on the issue of national economic security, for example.

Editor: Is there some cultural dimension to this, something that many of us from the West miss at first encounter?

Chang: This type of thing may reflect a particularly Chinese theme. Someone may regard this as a disguised way of perpetuating a protectionist system, which reflects - at least for the present, although it is much less strong than it was 25 years ago, when China first began to open - a sense of insecurity. In the U.S. the rules are rather clear, and those who interpret them have a narrow field in which to maneuver. In China, the rules are much more open to interpretation, and administrators and officials have considerable discretion to determine an outcome that is right for the country.

Another example: if, in the U.S., we have to regulate certain behaviors, there will be a list of what is unacceptable. It is often the other way around in China: the list will indicate what is permitted, and what is not on the list is prohibited. I think the Chinese system is in transition toward something similar to what prevails in the U.S. The transition is going to take some time, and, of course, there are those who are very apprehensive of such a change. That contributes to the difficulty.

Nevertheless, there are a lot of U.S. investors going to China looking for deals.

Editor: What kinds of deal are they seeking?

Chang: Many of these deals have to do with Internet-based and wireless companies seeking a commercial Internet application. There is also strong interest in cell phone communication, including getting online through the use of a cell phone. They wish to provide a framework for smaller-sized, web-based technologies in China, the kind of thing that failed elsewhere in the late 1990s. They believe that China represents an opportunity to get all of the contributing factors right.

Editor: If I bring money and my technology to China for development, how can I be sure that the IP will not be appropriated by someone else?

Chang: The two most important types of IP rights are patents and trade secrets. Patents are relatively easy to file in China, and although patent enforcement can be a problem - particularly outside the major cities - having a patent permits the holder the strongest possible assertion of his rights. In the absence of a patent, he may simply not be in a position to prove ownership of his own technology.

The second area is trade secrets. This is currently the most problematic area in China's IP laws. In the U.S. we have the Uniform Trade Secrets Act. There is no federal law dedicated to trade secret protection in China. The owner of trade secrets is therefore dealing with a variety of statutes including contract law, labor law and the law against unfair competition. And it is important to understand that the legal environment, generally, is hostile to the type of restrictive covenant that addresses the trade secrets issue. These covenants are often perceived as inhibiting employee mobility.

Perhaps, the best advice to someone with valuable technology to bring to China at the present moment is to leave the crown jewels at home.

Editor: Where do you see China's economy in, say, five years?

Chang: Certainly manufacturing is going to continue to be at the center of China's economy, but the movement toward a service economy is strong and gaining momentum. The growth of e-commerce is underway in a very big way as but one example.

The WTO has issued a policy statement in favor of countries making rational use of their resources. "Green" products are increasingly important. When people purchase a house, they inquire about the chemicals present and whether there are any hazards. There is a market here: people are willing to pay for the right conditions for life and health. The Chinese economy is primed to participate in this development.

Editor: Where would you like the Beijing office to be in, say, five years?

Chang: The Beijing office will grow in response to the needs of its clients. We believe that many of them will grow and that we will be able to grow with them. I indicated the lack of clarity in many Chinese laws and regulations. That represents a real opportunity for a firm with the ability to interpret those laws and regulations. While the competition is stiff - just two years ago there were 45 U.S. law firms in China, and today over 90 - the right combination of expertise, experience and cultural sensitivity will permit us to play a role in the development of Chinese economic life.

Please email the interviewee at lchang@morganlewis.com with questions about this interview.