Wisconsin Lawyer: From the Central Sands to the Central Kingdom: Navigating Civil Litigation in China:

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    From the Central Sands to the Central Kingdom: Navigating Civil Litigation in China

    The biggest obstacle with litigation against Chinese parties in the United States is enforcement of favorable U.S. court judgments in the People’s Republic of China after the case concludes.

    Richard K. Wagner

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    Chinese boatsAre you prepared for litigation in China? This would have seemed an odd question years ago, but now it is one that every general counsel must be ready to answer. Some of the nation’s most vibrant and successful companies are based in Wisconsin, and many of these companies have operations in China or do business with companies based in China. United States companies have found themselves litigants in a wide range of cases in China today – from antitrust litigation involving retail price maintenance to product liability, trade disparagement, unfair competition, and contractual disputes – and the number of cases is increasing as the Chinese market matures. This article will help you get ready for litigation in China.

    Introduction

    China has a legal culture that is more than 2,000 years old, dating from before the emergence of China’s first imperial dynasty in 221 BCE. China’s present legal system, however, is quite young, having only been established in 1949 with the founding of the People’s Republic of China (PRC). Despite encouraging steps in law reform since then, the Chinese legal system remains a work in progress, and litigation can be difficult for Wisconsin companies that do not know the ropes in China. Discussed below are some of the difficulties with civil litigation in China and some suggestions for handling them.

    Chinese Courts not Independent

    The Chinese judiciary is not independent but is subject to interference through various channels. Under the PRC Constitution, the courts report to China’s legislatures, the people’s congresses at both the central and the local level. Judges are appointed by local legislatures and are funded by the local government. Lower courts in China are also subject to supervision by the higher courts in their respective provinces and the Supreme People’s Court in Beijing. The Communist Party of China, China’s ruling party, can also influence court decision-making through internal organs of the court, and externally.

    Given these features of the Chinese court system, an adversary with good connections (guanxi, in Chinese) may be able to work a case from behind the scenes, and outside the formal court process. The situation has improved in major metropolitan areas such as Beijing and Shanghai, and the Chinese leadership has been taking more concrete steps to address corruption in society. But China’s judiciary continues to face serious problems with corruption, which remains as a potential barrier to any action brought by or against a foreign party. At the outset of a case, be sure to research your opponent in Chinese- and English-language resources to see what can be uncovered about his or her background or connections. You will be amazed by what can be gathered by Internet searches and open-source data mining, particularly with Chinese search engines and Chinese-language websites.

    Richard K. Wagnercom Richard.Wagner Bakermckenzie Richard K. Wagner, George Washington Univ. 2002, is an attorney with Baker & McKenzie LLP in Chicago. Formerly based with the firm’s Beijing and Hong Kong offices, he represents clients in disputes and investigations related to business dealings in Asia, and counsels practitioners with special issues concerning China-related litigation.

    In addition, many of the companies with which you do business in China are owned in whole or in part by the PRC. These companies are not generally immune from suit in China (or in the United States for that matter) but can be well connected. It is important to know what you are up against in advance of a filing and carefully consider what can reasonably be accomplished in China when certain companies are the targets. Does the Chinese company have assets in the United States or is there a nexus to Wisconsin, making a lawsuit in the United States feasible?

    Sometimes, bringing a U.S. action can add leverage to the dispute and eventually provide an opening for settlement. For trade secret cases involving Chinese companies, consider initiating a section 337 investigation before the International Trade Commission (ITC). Section 337 of the Tariff of 1930, 19 U.S.C. §1337, is an important tool for countering unfair trade practices and enforcing intellectual property rights.

    The Federal Circuit’s 2011 decision in Tian Rui significantly enhanced companies’ ability to use section 337 in trade secret infringement cases,1 and section 337 can be a powerful weapon, especially when deployed against Chinese companies that refuse to appear or attempt to hide behind technical defenses in U.S. federal court. Failing to respond to a section 337 investigation results in a complete bar on importation of the Chinese product that allegedly incorporates the trade secrets. Because of this, there is perhaps often more of an incentive for the Chinese party to appear without delay and defend itself before the ITC than it would be inclined to do in ordinary civil litigation before a U.S. federal court.

    Moreover, unlike in federal civil litigation, it is difficult to prevent a section 337 investigation from quickly entering the discovery phase. Discovery burdens before the ITC (which can include depositions of Chinese witnesses) can be quite significant for Chinese parties unfamiliar with U.S.-style litigation. Initiating a section 337 investigation can sometimes be used effectively to bring leverage at the bargaining table.

    Unpredictability in Applying the Law to Concrete Cases

    Although China has made sustained progress in law reform since joining the World Trade Organization (WTO) in 2001, gaps in the law remain, and understanding how the law may be applied to an actual case can be difficult to comprehend for the uninitiated. Publicly accessible judicial decisions are becoming more prevalent, but few of these decisions are binding – there is no formal case law in China. Chinese courts, with the exception of the Supreme People’s Court in Beijing, do not have the power to fill gaps in the law, and this can make it difficult to predict how a particular court will apply the law to a particular set of facts.

    However, there are now some fairly comprehensive case collections available (in Chinese), some of which can be persuasive with courts. Researchers should not limit themselves to online case databases, as these often are incomplete. Hard-copy case collections and compendiums that can be purchased in legal bookstores in China (Beijing has several good ones) are good resources.

    One such case collection, the Zhongguo Shenpan Anli Yaolan (Compendium of Important Cases) (the Compendium), publishes cases that can be highly useful before courts and judges in China. The Compendium is jointly edited by the National Judicial College and the Law School of Renmin University of China. The editorial board for the publication reads like a “who’s who” of senior judges and law professors in China. The cases are selected from courts throughout China and edited with commentary by sitting judges. They can go a long way in helping a litigant understand how a court might approach a particular issue.

    Not All Cases Filed are Accepted by the Courts

    Harkening back to imperial times, cases are not automatically accepted by courts in China today. A division of the court, called the case acceptance or docketing division, makes an initial decision as to whether a case has been sufficiently pleaded and enough prima facie evidence has been submitted to substantiate the claims alleged. The court makes docketing decisions internally and typically outside the presence of the plaintiff. The PRC Civil Procedure Law (most recently amended in 2012) identifies limited grounds for case refusal,2 but, in practice, the courts have been known to refuse cases or sit on docketing decisions for long periods without giving reasons for doing so. This can prevent a party from having its day in court if the case is not closely monitored.

    The court’s docketing division has come under greater scrutiny in recent years and process reforms continue, but getting a case accepted in China is by no means a sure thing. This can cause great consternation for the unprepared.3 Attorneys should prepare thoroughly for filing, know the weaknesses of the case well in advance of filing, and be prepared to supplement evidence or educate the docketing division about the law if doing so becomes necessary. If a case is rejected, be prepared to argue why it should be accepted. Be persistent, and do not give up.

    Generally No Pleading in the Alternative

    Although this point is debated among attorneys, there is some reason to believe that in China, litigants are not permitted to plead in the alternative – for example, including a breach of contract count and a tort count in the same complaint.4 Pleading multiple causes of action tends to confuse courts and can lead to unexpected complications in court proceedings. Carefully weigh the causes of action that are available, and determine which claims may be pursued in the same pleading and which provide the most promising avenue for relief.

    Service of Process Initiated by Court

    Service of a civil summons and complaint is initiated by court personnel, not private parties, in China. Service on the Chinese subsidiary of a Wisconsin company in China typically takes place with court personnel visiting the subsidiary and delivering the service packet to the company’s representative. Sometimes, the court calls and requests that a representative from the Chinese subsidiary travel to the court, retrieve the service packets, and sign the service receipt.

    If the Wisconsin company does not have a subsidiary or a representative office in China, service is often handled by the court pursuant to the mechanisms articulated in the 1965 Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters. The PRC is a party to this convention, and Chinese courts typically adhere to the requirements mandated by the treaty. The time it takes for international service on a U.S. party can vary, but in recent years, the speed has increased – service is often accomplished in six months or less.

    Recently, Chinese courts have suggested that service of an initial summons and complaint may be effected by mail (or even email) on a U.S. company without an office in China, but the legal basis for this remains questionable under applicable rules.5 Wisconsin companies should be prepared for service requests from Chinese courts and have in place protocols to mitigate the risks in not responding to Chinese lawsuits in a timely manner.

    High Filing Fee for Commercial Litigation

    Chinese courts charge a fee that is linked to the amount in controversy in most circumstances. For a significant commercial dispute, the amount of the filing fee is calculated in accordance with a cumulative rate pegged to the amount in controversy. For example, the filing fee for a $10 million commercial dispute could be more than $50,000.

    No Motion Practice in Chinese Court Proceedings

    There is essentially no motion practice before China’s courts, as reflected in an underdeveloped docketing or pretrial division. Once a case has begun, it is very difficult to obtain a dismissal absent a full trial on the merits. Cases can quickly move to trial in China, and when defending an action in China it is important to quickly assess whether there might be a basis for filing one of the very limited sorts of objections to the suit – often styled as “objections to jurisdiction.”

    Judge Bao Temple Complex

    Judge Bao Temple Complex, Kaifeng, China. Photo: Richard K. Wagner

    Creativity, however, can reap rewards, and if a basis can be crafted, a timely filed objection to jurisdiction can bring some control to a proceeding and allow a defendant time to prepare a defense or work to settle the matter before a full trial.

    Restricted Approach to Evidence and Discovery

    Although evidence is exchanged, there is not a discovery mechanism like there is in the United States. Evidence exchange in China is more akin to Federal Rule of Civil Procedure 26(a)(1) initial disclosures. Each party is required to present its evidence to the court but has little opportunity to compel the production of evidence from its adversary. Witness statements may be filed, but these often are not given much weight, and, as such, have little evidentiary value. There are no depositions in China, and courts generally view witness testimony with suspicion.

    Much greater emphasis is placed on documentary evidence, but the authenticity of such evidence is “cross examined.” If the evidence originates from outside China, it must be notarized and legalized before a PRC embassy or consulate before it can be entered into evidence. This can be a burdensome and expensive undertaking for the foreign party. Consolidating evidence-legalization applications when possible can reduce legalization costs.

    The restrictive approach to discovery in China can make it very difficult to prosecute certain types of claims in China for foreign companies – trade secret infringement cases, for example. One possible avenue for collecting adverse party evidence is by filing a special evidence collection petition with the court.6 These are subject to court discretion, but sometimes can be used quite effectively to collect evidence that otherwise would not be obtainable.

    High Reliance on Court-conducted Mediation

    Presiding judges in Chinese court actions often seek to have the parties mediate a dispute (tiaojie), instead of proceeding to a trial on the merits. Mediation is attractive to judges because it allows for an accelerated disposition of a matter without having to go through a trial on the merits and then risk a possible reversal on appeal. In recent years, court-related policy documents have also encouraged judges to mediate cases to foster a spirit of “harmonious litigation,” a neo-Confucian value that has seen a resurgence. Under Chinese law, mediation is required to be consensual, but judges have been known to push parties to mediate their disputes.

    Notwithstanding such concerns, the parties themselves may choose to mediate a dispute, particularly a dispute that they are in the process of settling. This is because settlement agreements are not directly enforceable in a Chinese court (a new case for breach of the settlement agreement would need to be initiated), whereas mediation orders (tiaojieshu) are directly enforceable.7

    As part of settling a cross-border or “global” dispute (with U.S. and Chinese forums), it is often advisable to seek and have entered separate mediation orders for each of the Chinese lawsuits that had been initiated in connection with the dispute. It is not possible to simply withdraw a case with prejudice in China. To obtain the equivalent of a withdrawal with prejudice, a mediation order should be obtained. Resist your adversary’s resistance to seeking mediation orders in connection with settlements as being “too complicated.” A China action that is simply withdrawn may be refiled at a later date. As such, settlements must be handled very carefully in China.

    Difficulties with Enforcing Judgments in China

    Enforcing favorable judgments issued by Chinese courts against local Chinese parties remains problematic in the PRC. Although there have been procedural reforms designed to address issues with enforcement, local protectionism remains. There are numerous ways in which a local Chinese party has been able to appeal to the local government to resist enforcement or employ connections to hinder enforcement proceedings. As with commercial litigation in any jurisdiction, in China, potential issues with enforcement (local protectionism, judgment-proof defendants, and so on) should be analyzed together with chosen counsel well in advance of initiating any lawsuit.

    Wisconsin Litigation an Option?

    Given the challenges with litigating in China, consider whether it would be feasible to bring your case in Wisconsin or in another U.S. jurisdiction. A growing number of litigants are bringing China-related cases before U.S. courts in connection with a wide range of issues.8 The facts of the particular dispute will guide whether an action in the United States would be appropriate. However, unless there is a particular U.S. objective or significant assets in or passing through the United States, a U.S. court judgment against a Chinese party might not be very effective.

    It can be difficult and very expensive to prosecute lawsuits in the United States against Chinese companies that lack a defined nexus to the United States – from issues with Hague service, jurisdiction, and forum non conveniens, to those involving documentary evidence written in Chinese and China-based witnesses. But the biggest obstacle with litigation against Chinese parties in the United States is enforcement of favorable U.S. court judgments in the PRC after the case concludes. A judgment against a Chinese company that does not have assets, shares, or business interests in the United States would be difficult to enforce in China, to say the least. There is no treaty between the United States and China that governs the recognition and enforcement of court judgments.

    One key question when analyzing the enforceability of a U.S. court judgment from the perspective of Chinese law is whether “reciprocity in fact” can be established between Wisconsin (or perhaps the United States) and China.9 This is an untested proposition for commercial cases before Chinese courts, but one that could be worth exploring in the right case. There are at least arguments today for suggesting reciprocity in fact between the United States and China in certain types of cases and with certain U.S. jurisdictions.

    In 2011, for example, the Ninth Circuit affirmed a California Central District court’s ruling that agreed to recognize a Chinese court judgment.10 In 2013, another judge in the same district recognized a Chinese court judgment, finding summary judgment for one of the defendants in the case on the basis of collateral estoppel.11 These will not be the last cases in which a party seeks to enforce a Chinese court judgment in the United States. And the day may come in the not-too-distant future when it may be possible to enforce U.S. decisions in Chinese courts. Keep an eye out for developments.

    Parties in established commercial relationships may have an applicable arbitration agreement, and, if so, international arbitration provides a binding alternative to litigating the dispute. Arbitral awards rendered in the United States are generally enforceable in the PRC and vice versa pursuant to the New York Convention.12

    Conclusion

    Chinese litigation is usually manageable if you know what to watch out for and accept that sometimes there is no choice but to litigate in China. The Chinese party may initiate a suit before its home court or the circumstances may be such that the claims must be pursued in China to be viable. There are countermeasures that can be employed to mitigate most situations and you should not be afraid to litigate in China. You must be prepared, however, to navigate the waters and rapids of litigation in the Central Kingdom. Litigation is very different there than it is here.

    Endnotes

    1 See, e.g., TianRui Grp v. ITC, 661 F.3d 1322 (Fed. Cir. 2011) (investigation initiated under section 337 against Chinese group company in connection with trade secret misappropriation).

    2 Articles 119, 123, PRC Civil Procedure Law (2012).

    3 See generally Nanping Liu & Michelle Liu, Justice Without Judges: The Case Filing Division In the People’s Republic of China, 17 U.C. Davis J. Int’l L. & Pol’y 283 (2011).

    4 Article 122, PRC Contract Law (1999).

    5 Xi Xiaoming (ed.), Applying and Understanding the Revised Articles of the PRC Civil Procedure Law 572-73 (Beijing: People’s Court Press 2012) (suggesting the absence of an Article 10(a) declaration means that the particular foreign nation allows service of an initial complaint by mail).

    6 Article 64, PRC Civil Procedure Law (2012); Article 17, Certain Regulations of the Supreme People’s Court Concerning Evidence in Civil Litigation, Fashi [2001] No. 33.

    7 Articles 97, 234, PRC Civil Procedure Law.

    8 E.g., Sinochem Int’l Co. v. Malay. Int’l Shipping Corp., 549 U.S. 422 (U.S. 2007) (China-related case concerning doctrine of forum non conveniens); Peerless Indus. v. Crimson AV LLC, 2013 U.S. Dist. LEXIS 39913 (N.D. Ill. 2013) (upholding magistrate’s decision to require China-based witness to be deposed in Illinois); Schreiber Foods Inc. v. Lei Wang, 651 F.3d 678 (7th Cir. 2011) (case concerning Chinese entities and Wisconsin’s economic loss doctrine).

    9 In re Russian Nat’l Symphony Ensemble, Atemengte Ltd. Co. Application to Recognize an English High Court Judgment, No. 121, at 635, Compendium of Important Cases (authors trans.), published conjointly by the People’s Court Press and People’s University (2006 Civil Cases) (discussing in commentary the concept of reciprocity in the context of enforcing foreign-court judgment in China).

    10 Hubei Gezhouba Sanlian Indus. Co. v. Robinson Helicopter Co., 2009 U.S. Dist. LEXIS 62782 (C.D. Cal. July 21, 2009), aff’d, 425 Fed. Appx. 580 (9th Cir. 2011) (unpublished).

    11 Folex Golf Indus. v. China Shipbuilding Indus., 2013 U.S. Dist. LEXIS 67044 (C.D. Cal. May 2013) (recognizing a PRC court judgment on international comity grounds and opining favorably on adequacy of due process in PRC judicial system).

    12 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 21 UST 2517 (1968).

    13 Article 58, PRC Civil Procedure Law (2012).

    14 Id.

    15 Supreme People’s Court Opinion on Certain Questions Concerning the Application of the PRC Civil Procedure Law, Fafa [1992] No. 22, Item 308. See also Xiaoming, supra note 5, at 121-22.

    16 See, e.g., Zhang Yan v. Jinghua Times, No. 23, at 128-34, Compendium of Important Cases (authors trans.), published conjointly by the People’s Court Press and People’s University (2008, Civil Cases) (discussing in commentary New York Times v. Sullivan).




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