Many years ago, a very good client of mine in the international food brokerage business learned that one of its employees had set up a rival company and was using my client’s resources to generate business for that rival company. To grossly oversimplify, whenever this employee would find a particularly good deal on product, it would buy and then resell that product on behalf of its own company, not on its employer’s behalf. I lead with this to emphasize that this sort of thing can and does go on everywhere. It also gives me an opportunity to relive how much fun it is for us lawyers when a US company discovers an employee doing this sort of thing.
We also once had a client that sold $1500 consumer products and received a complaint email from one of its retailers claiming to have received more than $80,000 of product in less than stellar condition from “XYZ distributer.” This email alarmed our client as it had NO distributers and it had no record of any sales to this retailer. To make a long story short, the profit margins from selling millions of dollars of products that cost you nothing to make are astronomical.
This sort of thing — what some call a company within a company is very common in China. See this classic Financial Times story from many years ago. So common in fact that when our China lawyers have been involved in confronting employees that engaged in such conduct, their usual reaction is not one of “I’m really sorry, go ahead and fire me, but rather something more like the following:
We typically advice our clients not to confront China employees that have gone rogue without first making sure that they have good grounds for termination and that such a confrontation will not be putting the company at great risk. See China Employee Termination: Avoid These Mistakes.
What though can and should you do to prevent this sort of thing from happening to you in China?
I could go on and on with how to prevent this sort of thing and there are tons of articles out there on this as well. I will instead simply conclude by saying that this sort of thing is far more likely to happen to the company that believes it cannot happen to them than to the company that believes vigilance is necessary.
Not trying to scare anyone here, but do be careful out there.
We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.