Working with Chinese Clients

Enforcing a U.S. judgment against a Chinese company also can be a difficult task. There is no governing treaty between our two countries on this point, so recognition and enforcement of a U.S. judgment in China can be a challenge. As such, plaintiffs have seized foreign assets to satisfy judgments. That was the result when a Florida handyman was injured in 2010 after a link chain broke and struck him in the eye while he was attempting to remove a tree stump. The retailer and importer of the chain settled with the plaintiff before trial. The Chinese manufacturer did not participate in the trial, so the case proceeded in default and the jury awarded the plaintiff $44,714,000 in damages. After the trial, plaintiff's counsel suggested that he planned to satisfy the judgment from the Chinese company's worldwide assets based on the company's claimed annual exports to the U.S. of somewhere between $50 and $100 million.

Today, however, “Fortress China” is evolving as many Chinese companies establish a significant presence in the United States through acquisitions, asset purchases and joint ventures. This increased exposure to liability is one reason that companies based in the world's largest manufacturing nation have shown an increased participation and defense against litigation in the U.S. While this shift in posture presents opportunities for plaintiff and defense counsel in many legal sectors, China's dominance in the manufacturing market means that product liability attorneys, in particular, should familiarize themselves with the unique aspects and challenges of representing Chinese clients.

Back to the Basics

To start, many Chinese clients may not be familiar with what we consider the most basic theories of liability ' breach of warranty, strict liability, and negligence. Counsel also may need to educate their clients on statutory liability under U.S. consumer protection laws and the FDA's regulatory authority (to the extent that the client is engaged in the pharmaceutical or medical device industries).

Preventing spoliation of evidence is always an important concern, particularly in product liability suits. In cases with Chinese companies, however, this issue presents distinct challenges. Attorneys and their U.S. clients are familiar with the duty to preserve evidence and to institute litigation hold notices ' discovery rules in the U.S. are intended to uncover both helpful and damaging evidence. In China, however, discovery is generally limited to evidence that supports the claims or defenses of the party proffering that evidence. When you are retained by a Chinese client in a litigation matter, counseling that client regarding the importance of preserving evidence ' even evidence that could be harmful to your client ' should be at the top of your list.

State Secrets

Perhaps the most challenging aspect of representing Chinese entities is ensuring that your client complies with its discovery obligations under U.S. law, and yet simultaneously does not run afoul of People's Republic of China (P.R.C.) state secrets law. The Law of the People's Republic of China on Guarding State Secrets was adopted in 1988 and revised in 2010. This law prevents state secrets from being disclosed and requires review before information can be produced in U.S. litigation.

Production of documents or information in contravention of China's state secrets law can result in administrative sanctions and criminal penalties. Courts in the U.S. may nevertheless require production, but Chinese parties may be willing to accept U.S. civil sanctions if it means they can avoid criminal sanctions in China. To help stave off this no-win situation, Chinese litigants should promptly notify the U.S. court if a potentially discoverable document may be prohibited from production under state secrets law.

Often, however, the extent of China's state secrets law can be unclear to U.S. litigants. The law defines state secrets as “matters that have a vital bearing on state security and national interests and ' are entrusted to a limited number of people for a given period of time.” The law further identifies seven specific categories for which protection is mandated but also includes a broad catch-all category that covers other secret information as determined by state departments charged with maintaining state secrets. Additionally, there is no requirement that a state secret be denoted as such from the outset, so information that is publicly circulated can be withdrawn or retroactively determined to be a “state secret” based on the consequences of disclosure.

This complicated state secrets law can be confusing for U.S. judges and litigants alike and has generated a not insignificant amount of case law as attorneys in the United States attempt to balance their clients' discovery obligations with the international implications of disclosing state secrets.

A relatively early and guiding case out of the U.S. Court of Appeals for the Ninth Circuit, Richmark Corp. v. Timber Falling Consultant, 959 F.2d 1468 (9th Cir. 1992), showcased the tension between U.S. discovery obligations and China's state secrets law. At the district court, Timber won a default judgment for fraud and breach of contract against Beijing Ever Bright Industrial Co. (Beijing), a corporation organized under the laws of the P.R.C. and an arm of the Chinese government. When Timber sought discovery of Beijing's worldwide assets to satisfy the judgment, Beijing resisted and refused to comply with the district court's discovery orders. The district court imposed discovery sanctions and ordered contempt fines of $10,000 a day.

On appeal, Beijing invoked the state secrets law and argued that it would be subject to criminal prosecution in China if it complied with the discovery order. The Ninth Circuit accepted Beijing's contention that China's state secrets law barred disclosure of the information. Nevertheless, in balancing China's admitted interest in secrecy against the interests of the U.S. and the plaintiffs in obtaining the information, the court determined that the United States' interest in enforcing its judgments outweighed China's confidentiality interest, which was limited, at best, given that the documents sought in discovery had previously been publicly released to business partners and in trade brochures.

While there was no dispute in Richmark that the documents at issue were classified as state secrets, in other cases the question whether or not information is barred from disclosure under the state secrets law will often require the use of expert witnesses. In Wultz v. Bank of China Ltd., 942 F. Supp. 2d 452 (S.D.N.Y. 2013), the plaintiffs moved to compel production of documents the Bank of China (BOC) claimed were protected from disclosure under China's banking and state secrets laws. The BOC proffered an expert witness who testified to the broad confidentiality obligations China imposes on banks and financial institutions. Although finding fault with the abstract approach taken by the BOC's expert, the court found the BOC's expert more persuasive than the plaintiffs' expert and concluded that the BOC was “more likely than not” prohibited under Chinese laws from producing the materials requested by the plaintiffs. In weighing the importance of the documents to the U.S. proceedings against Chinese privacy concerns, the court ultimately ordered production of the discovery, allowing certain documents to be redacted and others to be produced first for an in camera review.

A recent case from the Northern District of California provides another example of a U.S. court enforcing Chinese litigants' discovery obligations despite potential liability abroad. When Autodesk sued the Chinese corporation ZWSoft for copyright infringement and trade secret misappropriation in Autodesk v. ZWCAD Software Co., Ltd., 2015 U.S. Dist. LEXIS 39695 (N.D. Cal. 2015), ZWSoft requested that Autodesk stipulate to an amended protective order permitting the examination of ZWSoft's data in China. Autodesk refused, and ZWSoft filed a motion seeking relief from the court.

Declining to grant ZWSoft's requested relief, the court first acknowledged that Chinese law prohibits the exportation of state secrets without the government's permission. The court nevertheless found that ZWSoft had not adequately supported its contention that China “may” consider its source code to be or contain state secret information as “technology,” the exportation of which would negatively impact China's “national and economic development.” Autodesk's expert opined that the Chinese government normally considers documents to contain state secrets only if they are prepared by government agencies or are otherwise related to a government-funded project. Because ZWSoft's source code was developed by a private company for private business purposes, it was highly unlikely that the source code contained state secrets.

The court further determined that ZWSoft had failed to show that the interests of sovereignty justified the additional expense or burden of examination of the source code in China. The court acknowledged that China had imposed severe penalties on people who had violated its state secrecy or privacy laws but ultimately found that ZWSoft's “unsubstantiated” claims did not raise a present danger that it would be subjected to liability if it produced its source codes in the U.S.

The discovery of state secrets undoubtedly presents a significant challenge in working with Chinese clients. The best practice for addressing this challenge, however, often is to notify the judge and opposing party early in the litigation that these issues may arise. Facilitating narrow discovery requests and retaining a foreign law expert are other good practices to consider.

Intervention by the Chinese Government

Although the issue of state secrets indirectly involves the Chinese government, in recent years, the Chinese government has directly involved itself in U.S. litigation when the action appears to implicate state sovereignty.

In a recent case, the United States Embassy of the P.R.C. sent a letter to a federal judge regarding China-U.S. relations and the sovereign immunity of the State-owned Assets Supervision and Administration Commission of the State Council of the People's Republic of China (SASAC). SACAC is a special commission of the P.R.C. responsible for managing state-owned enterprises, by, among other things, appointing executives, approving mergers and overseeing sales of stocks or assets. SASAC had been named as a defendant in the case, and the plaintiffs attempted to serve SASAC through diplomatic channels. In response, the Ministry of Foreign Affairs of the People's Republic of China presented a diplomatic note to the Embassy expressing the Chinese government's “discontent and concerns” with the lawsuit. The diplomatic note further underscored SASAC's sovereign immunity as one of the “ministries and commissions composing the Chinese central government.”

China's MOFCOM

China's Ministry of Commerce (MOFCOM) has had ongoing participation in the In re Vitamin C Antitrust Litigation currently pending before U.S. Court of Appeals for the Second Circuit. The plaintiffs in that case filed an antitrust class action against manufacturers of vitamin C, alleging that these manufacturers had engaged in a price-fixing scheme. In defense of these claims, the manufacturers have argued that Chinese law required the price-fixing, a defense known as foreign sovereign compulsion. MOFCOM filed amici briefs in 2008, arguing that the companies were required to participate in the government-initiated trade group system or else face losing their export licenses. MOFCOM's briefing was the first appearance by a Chinese agency before any U.S. court.

In 2011, the district court rejected MOFCOM's arguments, finding that the Chinese law relied upon by the defendants did not compel their illegal conduct and that the government crafted a “post hoc attempt to shield defendants' conduct from antitrust scrutiny.” The case eventually yielded a jury verdict for $153 million for the plaintiffs. The defendants have appealed, but the Second Circuit has yet to rule. For attorneys working with Chinese clients, this case is one to watch as the issues of sovereignty and comity could have wide-reaching implications for litigation involving Chinese companies.

Joshua Becker, a member of this newsletter's Board of Editors, is a partner and Kelly Blair is an associate at Alson & Bird.