On Being a China Lawyer and on Doing Business In China: An Interview

I was interviewed last year by as part of an ongoing interview series on strategy and innovation. The below is that interview [it is no longer online anywhere else].

Dan Harris is the founder of Harris Sliwoski, an international law firm with offices in Seattle, Portland, Los Angeles, Phoenix New York, Barcelona, Madrid and Beijing. He represents companies doing business internationally, especially in or with emerging economies. His work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, overseeing litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt.

Dan co-edits the China Law Blog, which discusses the practical aspects of Chinese law and how it impacts foreign companies doing business there. China Law Blog has been a mainstay of ABA Journal’s Blawg top 100 law blogs, and in 2013 was named to the Blawg 100 Hall of Fame. It is an indispensable resource for lawyers and companies seeking to do business in or around China. Dan’s perspectives on international legal issues have appeared in such publications and media outlets as The Wall Street Journal, Forbes, Fortune, Business Week, The Economist, The New York Times, The Washington Post, CNBC, and BBC News.  

Last April Dan was a keynote speaker at the Oregon Law Review Symposium on Disruptive Innovation in Law and Technology, where he discussed how lawyers could better position themselves in the evolving legal marketplace. He talked about the aversion many lawyers have to marketing, as well as the need for lawyers to become more business-minded, which legal training traditionally hasn’t encouraged. You can find Dan’s paper from the symposium here.

How did you get into doing China work?

My law firm has done a lot of international maritime and international litigation work, and we were known as the firm that could get things done in Russia. The Wall Street Journal did a cover story on some unusual work we did for Caterpillar Financial. The contract provided that if Caterpillar didn’t get paid, it could seize three ships without having to go to a court. We spent about six months planning, went to Russia and got the ships out. It got a lot of press, and then everybody started hiring us for those things.

Soon China started entering into that equation. I ended up going to China on behalf of a Singaporean fuel supplier owed a lot of money. While in China I became friendly with a lawyer in Qingdao, and realized China was where it’s at.

I convinced a friend of mine, Steve Dickinson [now retired] (who had headed up the international law group at a big firm where both of us had worked, but was now teaching Chinese law at the University of Washington) to get back into practicing international law again. We sent him to China and it took off from there. It was amazing how quickly it happened. There was such a demand for a law firm that would help SMEs deal with China.

How would you describe China’s legal system?

China’s legal system is geared to achieve harmony. Harmony has a lot in common with fairness, but it’s not the same thing. It’s closer to the legal conception of equity: if you and I are in a lawsuit, equity is what’s fair for you, what’s fair for me, what’s fair for society, what’s going to cause the least amount of waves. That’s China.

Americans and Europeans, especially American and European lawyers, tend to focus on the law as it is written. That often does not work well with China. I often use the following example to illustrate this:

A lawyer once called me and asked how much capital it would take for his client to form a company in China. I said, “It’s hard to know, I’d have to check, but I’m guessing it would probably cost $5-10 million because you’re going to have to buy the equipment and that’s going to be a lot of money.”

He goes, “Right, but we’ve already bought the equipment. And we’ve already sent it to China.”

“You have?”

“Yeah. So we can use that equipment towards our minimum capital, right?”

“No, you can’t.”

“Well, we spent $10 million on that equipment. Are you saying we have to spend another $10 million on equipment?”

“I’m not saying you need to spend another $10 million on equipment, but I’m saying that the $10 million that your client has already spent isn’t going to count. For anything that you’re buying, you have to get approval – a valuation or an appraisal –  before it can count for the capital requirement. You haven’t done that, and you can’t do it after the fact.”

“Well, that’s ridiculous. That’s putting form over substance.”

Whenever lawyers say that to me, I don’t know what to say. What can I say? It’s Chinese law. It is putting form over substance, but Chinese law is a lot of times based on that. China does not want its bureaucrats to have a lot of discretion, because with discretion comes bribery.

What is also fascinating is that American companies think of China as the wild, wild west far too often. We had a company that makes a product with chemicals in it, and it took them about $3 million and a year to get U.S. EPA approval to use the chemicals in their product. They go over to China, they build this factory, it’s all ready to go, and then they call us up and say that they’re being blocked from bringing these chemicals into China.

They didn’t realize that they would have to get their chemicals independently approved in China. It cost them three or four more months. It never occurred to them that China would be like the United States. The U.S. is not going to say, “Oh yeah, go ahead, put those chemicals in this product because it’s allowed in Malaysia.” That’s not how the U.S. works. That’s not how China works, either. So you get this situation where people assume China is completely different from the United States.

Other times, they will assume it’s the same. Here’s where we see that the most: you can fire somebody in the U.S. for good reason, bad reason, or no reason at all. You can’t do that in China. We are constantly getting calls from companies that are being threatened by ex-employees because they fired them. China is a communist country. You shouldn’t fire somebody without getting a settlement and release. It’s not the U.S., and American companies have trouble grasping that.

As best you know, how does China’s history and culture shape or inform its legal norms?

This whole idea of harmony is very much a Chinese cultural phenomenon. China has 1.5 billion people. They need to get along.

What’s fascinating about the Chinese government is that it’s not a democracy like in the U.S., but it must to a certain extent answer to its people. It does listen to its people; not on everything, but on a lot of things. Legitimacy is important to the Chinese government, and its legal system helps them maintain legitimacy. It’s tailored to its history, and to the future it wants to shape.

How would you describe the Chinese style of negotiation?

It’s not win-win. It’s win-lose. In fact, if you talk about win-win, they’re just going to think you’re disingenuous, and that you’re using it as a tactic to crush them.

They can be tough negotiators, and Americans are not used to that. It’s a completely different style of negotiation.

As you’ve learned more about China, what has surprised you the most?

I dealt with Korea and Japan for many years before I started dealing with China intensively, and I find China to be more like the United States than either of them.

In Japan, Tokyo is everything. In Korea, Seoul is everything. They are homogeneous countries, and China is not homogeneous. It is a big country like the United States, and a lot of the ways that Americans look at the world, the Chinese do too.

You can become a really big company without ever leaving the United States. You can become a big company without ever leaving China, too. Chinese companies get big and successful in China, and then they come to the United States and try to do the exact same thing and it’s a complete disaster. Americans and Chinese have the most difficulty making adjustments because they really haven’t had to.

Is there something about doing business in China that lawyers believed to be true, but never was?

A lot of times, what Americans view as dishonesty is either miscommunication or cultural differences.

Take something as simple as, “Can you get me this product in 30 days?” The Chinese manufacturer will say, “No problem.” But they don’t think it means, literally, 30 days every time. They think it means we’ll try to get it to you in 30 days; sometimes it will be 45. It’s a cultural difference. It’s not dishonesty.

What do peers in your practice area think, say, or do all the time that strikes you as wrongheaded?

I remember a bankruptcy trustee who hired us to get money in China. We got them some money, and it wasn’t all that hard. The trustee said, “Wow. I had always heard China has no legal system. I wish I’d come to you sooner, because I’ve probably had five other cases where we could have gotten money.”

There is a legal system in China. There are lawyers who believe there isn’t and so we need to set up our contracts so that all disputes are resolved in a U.S. court because if we go to China we’ll get slaughtered. They put that in the contract, and they’ve just harmed the client because Chinese courts do not enforce U.S. judgments.

So, that’s one belief that is wrong. Most errors stem from the belief that everything needs to be done the American way.

Looking at your practice area, what has been the biggest development in the last five years?

Things that American and European companies could get away with in China five years ago, they can’t anymore. China now has sophisticated tax and tax collection systems. Like all governments, the Chinese government wants your money and if you don’t pay them the money they believe they are owed, they will make your life miserable beyond any conception of the word miserable.
Americans and Europeans are getting in major trouble for this. We see it in two areas constantly.

An American or European company will hire, say, three “independent contractors” in China. The Chinese government will come to the American or European company three years later and say, “What are you doing? You have three employees but haven’t paid employer taxes for the last three years or withheld employee taxes. We’re going to say that you’re doing business in China because you have these three employees, so you owe company income taxes. And by the way, employer taxes and benefit taxes equal about 40% of what you paid them in salary for the last three years. And we’re going to charge you interest and a penalty. And if you don’t pay, we will shut down your business and we may not let you leave the country.”

“What? They’re just independent contractors,” the Americans or the Europeans will argue. Well, guess what? If they’re not your cleaning person, or your plumber who’s coming to fix your sink for two days, and you’re paying them money and they don’t have a company, they are your employees.

Americans will set up a company in China that sells a service or a product back to the parent company in the United States. They set it up so that the company in China makes no profit. The Chinese government will come in and say, “People don’t run businesses for no profit. We’re going to impute a 30% profit, and you need to pay the last three years’ taxes on that plus penalties, plus interest.”

You should bring on accountants who understand China transfer pricing issues to figure out that the typical profit margin is, say, 6-10%, so maybe they put you down for 8%. The Chinese tax authorities will look at that and won’t mess with you. But if they have to come in and you’re making no profit, they don’t start at 8%. They come in at 30%.

That’s how governments always work. American and European companies need to understand that what they got away with five years ago they probably can no longer get away with. And the things Chinese companies down the street are getting away with? Well, you’re not a Chinese company.

Oh, and we are seeing a lot more disputes between foreign and Chinese companies that are no longer just getting shoved under the carpet. Both sides are realizing that it sometimes makes sense to litigate or arbitrate.

Looking out five years, what concerns you the most? What excites you the most?

It concerns me that American companies are getting on the wrong side of the Chinese legal system. But it also excites me because China’s legal system is becoming more developed, more advanced, and more secure – more real. That means an increased need for lawyers. Every time China tightens a screw our China lawyers get more work.

What also excites me is that I am seeing this happen to Chinese companies, too. That’s more important for China than that it just be happening to foreign companies. China does want to reduce corruption. Big Chinese companies pay their employees; they pay their employer taxes. A lot of them operate similarly to foreign companies, and it’s being pushed down to other Chinese companies.

What’s also exciting is the Chinese who come to the U.S. and then return to China. They are more international-thinking than typical Chinese. They go to Chinese companies and make them more international. But very, very slowly.

Is there work that you don’t really do a lot of today that you expect to see more of in the future?

Yes. That would be representing Chinese companies doing business in the U.S. and in Latin America. We’re very well equipped to represent them.

What special precautions does your firm take when you’re operating overseas?

We generally do not keep data on our computers. We keep it in the cloud, and we don’t access it when we’re overseas.

What is it about China that continues to mystify you? What would you like to learn more about?

What’s fascinating about China is that there is no Chinese archetype. China is not monolithic. If you spend a month in Shanghai and come back to the U.S., you’ll describe China in one way that has no reality for most of the rest of China.

That’s what’s exciting about China, and that’s also what’s exciting about the United States. In fact, China has a ton of minorities, just like the U.S.

But what we have over China – and I’m stealing this from a Microsoft VP who talked about this – is that China is not diverse in the way the United States is. A company like Microsoft, if it’s having an issue regarding Ethiopia, it can call together ten Ethiopians in Redmond, Washington, and figure out what to do. We have people from so many different countries who want to in the United States and on whom we can rely to bring their different views. China’s not even close to that level.

What’s a formative experience that has shaped how you make decisions or see the world?

I lived in France for a year when I was in fourth grade, and I lived in Turkey for a year when I was in 11th grade. So, living overseas definitely shaped me. My parents shaped me because they were the ones who took me overseas. They were the kind of people who found it exciting to go to new places that were different and challenging. What also shaped me is meeting all different kinds of people from different parts of the world.

I love the United States. I describe myself as patriotic even though that’s old-fashioned. But we don’t have a lock on things and it’s not good for us to think we do. It drives me crazy when Americans say stuff like “we have the best healthcare system in the world,” or “we have the best food safety system in the world.” People think we’re the least corrupt country in the world. None of that’s true.

It’s an arrogance that can be destructive – we’re the best; we don’t have to work at it. I’m not saying we should become like China or Denmark or whatever, but I am saying we can and should learn from other countries.

How do you clear your head when life gets hectic?

I enjoy life. I work out every day. I love eating good food. I love being with my family. I love watching basketball. I love traveling for fun. I love traveling for work. I go to movies. I binge watch TV shows. I voraciously read and listen to the news.

When I first started practicing law, I went to a movie and the entire time I was thinking about a particular case. I didn’t enjoy the movie and I didn’t accomplish anything in terms of work, either. What I realized is that either you do one or the other. You go have fun or you work, but if you try to combine the two, it’s not going to work. Make your time count. That reduces stress.

What are some of the barriers to innovation in the legal industry you see today? 

A lack of diversity at the top.

But don’t law schools recruit students from a diversity of backgrounds? Doesn’t that help bring in new ways of looking at the profession?

That’s actually another problem with the legal industry. You can have a diversity of backgrounds, but law school pounds that out of its students, training all of its students to be incredibly conservative and risk averse.

And it makes sense: a lawyer’s job is to point out risks and help ameliorate them. But what that also creates is a personality that is afraid. Too many lawyers are naysayers.

Too many lawyers see their job as coming up with 10 reasons for why not to push forward, not to take risks, not to innovate, not to risk failure. I see the lawyer’s job as helping surmount risks and problems, not just pointing them out.

Is it fair to say that clients moving legal work in-house is a big problem facing law firms today?

I don’t see that as a big issue. I see the bigger issue as law firms not being in sync with their clients.

You would be shocked at how many times companies choose my law firm over two or three others simply because we were the only one willing to quote them a fixed fee rate on a project. These companies tell me that the other firms insisted they had no way to know what the project would cost. If a law firm drafts international manufacturing contracts 5-10 times a month (as mine does), how can it not know how long it will take? In the early days when my law firm was offering flat fees, some of the lawyers in my firm would try to make the same excuse for being unwilling to come up with a flat fee amount. My response to them was to “get over it and start thinking of yourself as a homeowner whose plumber told you he or she had “no idea” how long a relatively simple project was going to take.” When it comes to pricing and estimates, we need to be more like plumbers.

Take something like writing an international manufacturing contract. Ninety percent of those that we take on come within a two to three hour range of each other, with maybe ten percent taking a bit more or less time. It is not as though one takes five hours and another takes twenty hours. And why can’t a law firm that does 50+ international manufacturing contracts a year take on the risk that it might be underpaid just a bit on a few of them? There are two answers to this. The law firm is actually not very experienced with such contracts or it is too risk-averse.

In your article for the Oregon Law Review, you talk about the aversion lawyers have to marketing. Why do you think that aversion exists?

One thing that propels lawyers is this idea that the world is a meritocracy. The typical lawyer goes to high school, works hard, does well. Goes to undergrad, works hard, does well. Goes to law school and fights to be in the top 10% of the class. Your first job is determined in large part by how you did in law school. Lawyers’ formative lives are based on reaching an attainable, pretty much numerical goal and then being rewarded for it.

Then they get in the real world, and suddenly clients don’t care that they graduated from law school magna cum laude. They care about what you can do for their companies. Lawyers get thrown for a loop by that.

Lawyers don’t like the idea of having to compete. They had to compete in law school, but it was for a clear goal. Now they have to meet with ten people in the hopes of getting two clients, and the carrot at the end is not as clear cut.

And again, there’s the whole idea of uncertainty and risk. Lawyers will often talk about how this doesn’t work or that doesn’t work, and they do it with marketing, too. So many are unwilling even to try because they cannot get past the idea of failing.

When we first started marketing via our website and our blog, almost all lawyers would say, “I’ve heard you can never get a good clients off the internet.” They would state it like it was a fact, even though they had no evidence to support it. I’d just stay silent because we were getting great clients off our China Law Blog almost from day one.

Looking to the future, what kinds of firms are going to survive?

The first-tier big firms are necessary and will continue to thrive, as will some regional firms. But there are some second-tier big firms that don’t have a niche, that are just not as good as the Skadden Arpses, the Kirkland & Ellises, the Wachtell Liptons or the Latham & Watkinses of the world. These second-tier big firms are going to need to merge to create even greate economies of scale or they risk not surviving.

Whenever our firm competes with a second-tier big firm for a matter, I love it because we offer so many advantages over them and yet they charge so much more than us.

The typical client that comes to us is not going to Skadden, Arps. You go to Skadden, Arps for huge international deals and huge international litigation. My law firm handles smaller international deals and smaller international litigation. Oftentimes we’ll compete for that work with a 250-lawyer law firm not nearly as well focused as us and yet it has a much higher cost structure. They might put five lawyers on a matter on which we would put two lawyers, or three lawyers on a matter on which we would put one lawyer and a paralegal or an international business specialist.

These second-tier big firms like to think of themselves as a Skadden Arps or a Kirkland & Ellis and they are trying to emulate those firms. But they’re not Skadden or Kirkland. I will note that our law firm has very good relationships with a number of big law firms that bring us in to help them on specific international aspects of their transactions and their litigation. Just by way of a couple examples, a number of big firm M&A lawyers bring on my law firm to help them with the international due diligence and we often consult with big firms on foreign litigation issues.

Have you noticed differences in how the Millennial generation of lawyers thinks and works compared to its predecessors?

Millennials are more in tune with business. They’re more comfortable with technology, they’re more comfortable operating anywhere, and they’re more comfortable appearing more “normal” and less lawyer-like, not using lawyer-type words. I think they understand better what clients want. Too many older lawyers feel compelled to tell potential clients everything about their own backgrounds and the work that they’ve done, rather than listen to the client and respond directly to that.

Have you seen Millennials struggle with certain imperatives of the profession, like having to actually call people on the phone instead of emailing or texting?

Yes, but I don’t view that as a negative.

There’s this idea among lawyers and probably others that the best marketer is the car salesman or the quarterback type. That’s just not true. There are many different types of potential clients out there. Millennials can be extremely effective with other Millennials. They can be extremely effective by being who they are, especially with other Millennials. That means texting and emailing instead of calling.

Millennials tend to be morally centered. They dislike working on matters when they don’t like the client, and there have been times when they have refused to do so and so we sent the client walking. There’s something to be said for that. They like working on matters when they believe in the client.

I do not buy the idea that Millennials are lazy. I’ve not seen that. They want freedom, and we give it to them. We’re a law firm that doesn’t care when or where our people do their work. We just care about the quality and the timeliness of the work. Our attitude on this jibes with what they are seeking and in that way we are a good fit.

One thing I’ve noticed – and I don’t think this is necessarily peculiar to Millennials, but a factor of being a new lawyer – is that I’m more confident in them than they are in themselves. They’ll look at their workload and see that in three weeks, five things might happen, so they’re reluctant to take on anything new. I see it as my job to convince them to go ahead and take on something new. Of those five things, probably only two or three are actually going to happen. I encourage them to take on a more risk in large part by assuring them that if all five things do actually happen, we have plenty of lawyers who can and will help them.

How has technology affected the way you practice law?

I generally dislike most legal technology because it’s lousy. But there is a lot more VC money starting to go into it, so I’m hopeful.

We use a program called Clio. It’s a cloud-based software program geared to law firms, and way better than anything was five years ago. There’s another one called RocketMatter. RocketMatter and Clio very much compete. Both are dubbed “comprehensive legal software.” I would describe them as good – the competition is definitely helping – but every once in a while, we come up with something that’s not that unusual that is just not possible to do in the software.

When it comes to software for our firm, the best software we use is non-legal. I’m always raving about DocuSign. It’s very simple, and it just works. I think all programs should be like it. We love it because we can get off the phone and send clients a fee agreement in five minutes. The client doesn’t have to print it out, sign it, scan it, and email it back, which is the way most law firms operate. Everybody in the firm has a record of what’s going on with the fee agreement because it’ll show when it went out and when it was signed, and it’ll stay up in the cloud. It’s really a good program, and there are very few of those that work well for law firms. The proof is that all of our lawyers use it. Here’s a contrast. Our firm is a member of an international legal and accounting association based in Spain. When we joined this association last year we had to sign a document and then overnight the original to Spain. The association would not even accept a pdf!

There’s another software program we love called LawPay. One of the problems law firms have with alternative payments (forms other than check) is that when money goes into a trust account, it cannot touch the hands of a third person. So law firms cannot use PayPal or credit cards for trust account payments. If you have a big case and you’re charging by the hour or by the month, or if you want an advance fee payment, you have to use something like LawPay. LawPay may be the only company that does this and somehow it’s set up so that it complies with the bar rules.

Now we can get off the phone with people – it happens two or three times a month – they’ll sign the fee agreement, and we’ll be paid within 10 minutes. It’s just amazing. This is unbelievably efficient for everyone involved and our clients will often compliment us on it and I have no doubt it makes them feel even better about having chosen my firm for their legal work.

What would you like technology to do for you that it presently can’t?

We do 5-10 dual language international manufacturing agreements a month. These agreements are fairly complicated agreements and vary with each client, each product, and each manufacturer.

A manufacturing agreement for having your candy made in Mexico is going to be very different from a manufacturing agreement to have golf carts made in China – the time periods, the standards, etc. But there are always going to be similarities. What I would like is a document system that would allow us to easily pull and re-use provisions in both the English and the Spanish or the German or the Japanese or the Chinese. For instance, if we know there is going to be a 1% penalty for every day beyond a week that the product delivery is delayed, it would be nice to be able to review our ten best delivery delay provisions and just click the one that best fits, in both languages.

Like in a dropdown menu in the software? So you don’t have to copy-paste from past agreements? 

Exactly. That’s not out there yet. We charge a flat fee for these manufacturing agreements, so any inefficiency is on us. If we could save even 30 minutes on each one, that’s real time and money. Amazingly enough, our international litigation team uses really good document review software that is quite good at reviewing foreign language documents.

Have you ever applied an idea from another field to help you do your job better?

All the time. Everybody at my law firm has the exact same computer and the same desks and the same chairs. I want the small things to be systematized, so we are free to deal with the bigger things. If somebody has a problem with their desk or their computer, I don’t want a staff person to have to spend three hours researching the best desk or computer to buy. They can just replace it right away with what we are already using. It takes three minutes.

We have loyalty with our vendors because it allows for smoothness. Could we maybe get a better deal somewhere else? Yes, but then we are taking a risk that it will be a disaster and five hours will be wasted. I borrowed that from Henry Ford. I want our firm on the low-level things to be an assembly line, to be routinized.