China Manufacturing: Bad Contracts and Bad Times Lead to Bad Products

Not entirely sure why, but in the last couple weeks our China lawyers have seen a massive increase in emails and phone calls from North American companies seeking our help in dealing with defective products/quality control problems. In this post, I explain what you (and they) need to have in place to avoid these sorts of problems in the future, and to make it possible to resolve such problems should they occur. Our China attorneys also have been receiving an unusually high number of emails and phone calls from companies being pursued by Sinosure, and I will discuss how to deal with that in a future post.

My theory is that this slew of calls is due to two things. An increase in QC problems at China factories due to rising costs. Whenever costs rise for China factories quality problems rise as well, until such time as the China companies can increase their prices to their foreign buyers. This influx of bad product calls may also simply be due to the time of year; it may just be the end of 2016 hangover. I note that our last bit tick in these calls was in February 2016. What makes this year’s version so much more interesting for us anyway, is how many of these new matters involve Internet of Things products and how woefully unprepared these companies are to deal with these problems.

I am going to try to avoid getting all preachy here, but I truly do believe that all of these companies could have avoided their bad product problems had they had a good contract in place with their China product supplier. Only one of the companies that have contacted us so far this year had any contract at all with their China factory, and that one contract called for all disputes to be resolved in the U.S. Court of the American buyer, and as we have discussed constantly on here, that is 99.99% of the time a non-starter. In Four Common (And Somewhat Deadly) China Law Mistakes To Avoid, I briefly (for me anyway) gave a real life example as to why this is such a bad idea:

A lawyer calls us with an airtight $ 2 million dollar breach of contract lawsuit against a Chinese company. This lawyer had drafted a contract calling for disputes between her client and the Chinese counter-party to be resolved in Boston Federal Court and she had already sued the Chinese company in Boston and secured a default judgment against it. She was now seeking my law firm’s help in domesticating the judgment in China, and It was clear she expected us to jump at the opportunity to take the case on a contingency fee basis.

That is until we told her that China does not enforce U.S. judgments. Ever.

She then came up with the idea that we start all over by suing the Chinese company again in China. We had to tell her that could not work because the Chinese court would have two strong grounds for throwing out that lawsuit. First, improper jurisdiction because the contract clearly called for the lawsuit to be in Boston. Second, res judicata because the entire case had already been tried (and won) in Boston (the proper jurisdiction). I have no idea how she explained all this to her client.

American lawyers commonly assume that what makes sense for a domestic transaction necessarily also makes sense for an international transaction. Boston would have made sense in the above instance if the counter-party had been in Los Angeles, but the rules and the issues are different when doing business internationally.

If you check out this post, China Contracts that Work, you will see that what is needed for you to have a manufacturing contract that works is for that contract to be in Chinese with a provision calling for disputes to be resolved in a Chinese court under Chinese law. Your manufacturing contract should also contain a liquidated damages provision and a mold protection provision (so that the factory does not keep your molds if there is a dispute, and be properly chopped/sealed by the Chinese side. It is also critical that your contract be with the right Chinese company as Chinese companies are notorious for signing agreements with an essentially empty shell company, usually based in Hong Kong. If your contract satisfies all of these things, the odds of your having a manufacturing problem go way way down. And if you have such a contract and you do have a problem, your odds of being able to resolve it with your Chinese factory without having to contact a China law firm for legal assistance go way way up. And in those rare instances where you do need to engage a China attorney to assist, that attorney will be well positioned to resolve your problem relatively quickly.

One more thing. Whenever someone contacts our law firm with a problem with their factory, one of the first things we always ask them is whether they have secured China trademarks for their trade name and their brand and their logo. We then explain how common it is for Chinese factories (they actually have someone else do the filing for them) to go off and register YOUR brand name and YOUR logo as a trademark so that they can use this as leverage against you or so that they can keep making your product with your brand name and your logo and sell that product in any country in the world where you have not protected them with a trademark. Sadly, about half the time we are too late and the trademarks have already been registered to someone else, making it difficult or even impossible for the foreign buyer to continue having its products made in China. For more on this critical IP issue, check out When to Register your China Trademark. Ask Tesla and China: Do Just One Thing, Trademarks. So if you have not already registered your brand names and logos in China, you should do this IMMEDIATELY and you certainly should do so before you complain to anyone there.

China Law Blog

China Manufacturing: Bad Contracts and Bad Times Lead to Bad Products

Times’ Failed Attempt At Fairness and Equity

On November 2nd, Norm Pearlstine (LinkedIn) penned a missive to «Photographers Who Work with Time Inc.» where he harkened back to the roaring 20’s and the origins of Time and Life magazines (NYSE: TWX), and mentioned the «power of iconic photography» and suggested that «our commitment to original photography is as true today as ever», yet what Norm fails to recognize, in the new Time contract he’s proffering, detailed and analyzed below, is that  Time has NOT factored in any kind of cost-of-living into what Time is paying their photographers, and is trampling on the rights of photographers like a 20’s flapper stomping on the dance floor.

Perhaps they should remember that it’s the talents of these photographers to create striking visuals that boost single-copy sales, and the talents of writers, reporters, and photographers, to create compelling content that readers will want to consume. This contract fails at facilitating a living wage.

First, check out this Bureau of Labor Statistics calculator (here) and you’ll see that to have the same buying power in 2015 as $ 1.00 in 1925, you’d need $ 13.60. So, has Time increased their assignment rates 13X since then?

Let’s start with 1980 rates.

Going back to 1980, and adjusting for inflation their rates should be over $ 1,000 for what used to be a $ 350 assignment back in 1980. Exhibit A in the contract shows a 2015 rate of $ 650. That means, that what you were earning at $ 350 in 1980 only gives you $ 191 in buying power today. We wrote about this extensively in December of 2014 — The Pathetic and Paltry Time Magazine Assignment Rate & Rights Grabs (12/31/14). I would love to find out what Time paid as an assignment in 1925 and plug it into the same calculator, because if they paid even $ 100.00 for an assignment in 1925 the same assignment would be $ 1,359 today. So, to reverse the equation, $ 650 in 2015 means that an assignment rate of $ 225 in 1980 was fair, and just shy of $ 48 an assignment in 1925. In neither case was it fair, and in 1980 they paid much more than that.

But I digress.

Pearlstine’s missive uses several softening touches to what is a really really horrible contract. He even says «Some photographers have already signed a cross-brand agreement» as if to say «others don’t have a problem with it so you shouldn’t either. » An attached letter by Jeniqua Moore, Time’s Associate Director, Digital Asset Contracts and Rights Management, requires you to agree to what’s written or «No new assignments will be made to you after January 1, 2016 unless you confirm your agreement to the attached new Time Inc. commissioned photography agreement by signing the agreement.» They also include a notice of termination, writing:

«On behalf of Time Inc. and each Time Inc. division, affiliate, subsidiary, brand, and publication, this letter constitutes notice of termination of each Prior Agreement, effective as of January 1, 2016. All rights to photography you created under previous agreements between you and Time Inc., or any Time Inc. division, affiliate, subsidiary, brand, or publication, will continue to be governed by those agreements.»

So, what does the new contract dictate?

(Continued after the Jump)

Let’s look at the contract and break it down:

TIME INC. COMMISSIONED PHOTOGRAPHER AGREEMENT 

This agreement (“Agreement”) is made and entered into as of January 1, 2016 (the “Effective Date”), by and between Time Inc., including its affiliates, subsidiaries, and divisions (each, a “Publisher Brand”), including editorial publications published, managed and/or operated by Time Inc. for third parties (unless such publications send you a separate agreement), and __________________ («you»). Collectively, Time Inc. and Publisher Brands are referred to in this Agreement as “Publisher.” This Agreement governs the rights and obligations of Publisher and you with respect to Photographs and Videos you create in connection with each Assignment (as defined in Section 1) after the Effective Date of the Agreement, but not any photographs, videos, or other content you created or submitted to Time Inc. or any of its affiliates, divisions, or subsidiaries under any prior agreements. Rights granted by you are specified in Sections 3 and 4 and payments to be made to you are described in Section 6. Your performance of any Assignment or submission of any Photographs and Videos constitutes your acceptance of this Agreement.  

COMMENTARY:
The above is standard boilerplate. Nothing wrong with that.Keep in mind here, all video you produce, and make no mistake about it, all smart phone photos you produce, are also governed by this agreement. Just because you used your professional cameras for much of the assignment, if you are using a different camera that happens to be a smart phone too, all the content you shoot with that device is also governed by this agreement.

1. Assignments. This Agreement will commence on the Effective Date and will continue unless and until terminated as provided in Section 16 (the “Term”). Each Publisher Brand based in the United States (an «Assigning Brand») may engage you from time to time during the Term to create for, and deliver to, the Assigning Brand: (i) photographs, including outtakes if requested, suitable for the Assigning Brand (each, a «Photograph») and, if also requested and agreed, (ii) video, motion pictures, and audiovisual works, including outtakes, suitable for the Assigning Brand (each, a “Video”). The Assigning Brand will communicate to you, before the applicable shoot, in an email or other writing, the Photograph/Video subject(s), due date, photo shoot expense budget, and other information relating to the particular project (the “Assignment”). Publisher Brands retain sole discretion over whether and when to use, and authorize the use of, the Photographs and Videos.

COMMENTARY:
Now it starts to get murky. «Assigning Brand» isn’t defined.  It may be obvious where they are saying related brands could be for Time and Time for Kids, or People and People en Espagnol,  but what about Golf Magazine and Money and Fortune? Consequently you really don’t know what rights you are assigning away to whom, or from whom you can expect to receive reuse payments under the «Affiliated Brands» schedule.Throughout this contract, video is referred to, and it should be noted that these could be full on productions requiring an entirely separate crew, or a simpler behind-the-scenes video of the shoot. Make certain you’re estimating a completely different fee set for also being the producer of those videos.

2. Delivery. You shall deliver to the Assigning Brand all Photographs and Videos created pursuant to each Assignment, as specified in the Assignment or otherwise requested by the Assigning Brand editor, whether in the form of original transparencies, negatives, contact prints, high resolution, low resolution, digital media, video, audio-visual, computer generated work, or any other format now known or hereafter developed, no later than the due date set forth in the applicable Assignment, time being of the essence, or after such due date if requested at any time by the Assigning Brand.

COMMENTARY:
This requires you to deliver all your raw files (stills and video) on request. Be sure to allocate extra DAYS for the FTP time on this.

3. Rights Granted. You reserve and retain all rights in and to the Photographs (excluding the Idea House Assignments, as defined in Section 4) that are not specifically granted to Publisher under this Agreement, including ownership of the copyright. You hereby license to Publisher, the Rights (as defined below) to each Photograph created pursuant to an Assignment (excluding the Idea House Assignments), exclusively to the extent specified in Section 5 (Embargo). “Rights” means, collectively, the Assigning Brand Use & Reuse Rights, the Affiliated Brand Use & Reuse Rights, the Syndication Rights for Sports Illustrated, and the Time Inc. Photo & Food Studio Rights, each as defined below, each and all including the rights to reproduce, distribute, publish, publicly perform, display, download, transmit, and store the Photographs, and authorize and license the exercise of such rights to and by third parties, each and all throughout the world, in perpetuity, in any and all media, formats and methods of transmission now known or hereafter developed.

Times’ Failed Attempt At Fairness and Equity