This story first appeared in the June 28 issue of The Hollywood Reporter magazine.
As the breakneck pace of the Chinese box office boom continues, a few cracks in the industry’s support structure are starting to show: namely, an entertainment law sector struggling to keep pace with the expansion.
“It’s not keeping up,” says Gabriel Bloch, an associate at international law firm Morrison & Foerster’s Beijing office. “It has been easy for the business to run forward, but the way Chinese legal development works, it’s always marginal and always incremental. This has been particularly true for the movie business, because no one predicted that it would grow quite this fast.”
China’s box office hit $2.7 billion in 2012, growing by 37 percent over the year prior, and surpassing Japan to become the world’s second largest movie market behind only North America. As of May, the Chinese box office was up another staggering 40 percent over figures from the same time last year, according to state-backed film giant, China Film Group. Many analysts had previously predicted China’s box office would surpass North America within a decade – some are now edging that number downwards, towards as few as five years. And with rapid growth in the value of any business, come legal conflicts.
Part of the problem is a simple shortage of qualified intellectual property and entertainment lawyers in the country. “There are far from enough,” says Stanley Rosen, director of the East Asian Studies Center at USC. “The legal profession is just developing and copyright law is one area that needs great expansion,” he adds. The situation has created opportunities for Beijing-based firms like Hylands and King & Wood, as well as U.S.-based firms such as O’Melveny & Meyers. But American IP lawyers working in China have long argued that the country won’t get serious about copyright protection until it has valuable intellectual property of its own to safeguard (copyright protection is a foreign and relatively new concept to China; both Confucian and Communist tradition viewed copying as an appropriate way of showing reverence for past tradition).
By many accounts, that moment has now arrived.
Beijing Enlight Entertainment’s low-budget road comedy, Lost in Thailand (reportedly produced for just $5 million) set a local box-office record at the start of the year, pulling in $202 million. In March, Wuhan Hua Qi Film & TV Production Co. filed suit against the studio, claiming that it infringed the copyright of Wuhan’s 2010 film, Lost on Journey, and seeking damages of $16 million — a sum which local lawyers believe is the highest ever for the industry.
Insiders say there is no telling how the case will shake out. While China already has a world-class set of intellectual property laws on the books, this is largely because such a framework is a requirement of the country’s membership to the World Trade Organization. “The trouble is that this framework has been grafted onto a society that simply has no frame of reference for the underlying concepts,” says Mathew Alderson, a partner at Harris Moure specializing in media, entertainment and IP law, and Co-Chair of the American Chamber of Commerce’s Media & Entertainment forum in Beijing.
“Traditionally, parties didn’t turn to legal methods to resolve their disputes,” says Yongpei Liu, a partner and director of the intellectual property department at Yingke Law Firm. “But formal legal mechanisms will have more and more influence as the film industry grows with great fortune.” Liu also agrees that China is facing a shortage of lawyers specializing in the legal affairs of the film business. “And film industry practitioners still aren’t paying enough attention to legal risks, which results in an underinvestment of budget in legal services,” he adds.
When film industry-related cases do reach the courts, a lack of precedent can also present problems. Although Chinese law is a statutory system, and doesn’t rely on ‘stare decisis,’ (the rule of precedent) as U.S. courts do, past cases can still be used for reference, when available. “From a guidance point of view, it’s still very helpful if you can say this is what has happened in similar cases in the past,” says Block. “But because this industry is such a baby, the odds of being able to find analogous prior examples for entertainment law issues is very unlikely, which can make the process more unpredictable.”
So, what does this all mean for the legions of Hollywood and international dealmakers knocking at China’s gates? Proceed with caution – and have a China-qualified lawyer present.
As is well known, foreign involvement in the Chinese entertainment business is officially categorized as “restricted” by the government, meaning it is heavily regulated and foreigners can only operate in the sector by entering into joint-ventures or co-productions (or by importing goods and services, such as films, under existing quotas and regulatory frameworks).
Because of the occasional uncertainties of the Chinese legal system such as it is today, foreign investors in China should be rigorous in drafting their contracts, as they will often carry extra weight in the event they land in court.
While Hollywood Studios are adept at drafting some of the longest and most sophisticated contracts of any industry, Chinese counterparts often won’t be accustomed to dealing with lots of legal paperwork. “The Chinese side might show up with a ten-page document outlining the deal, while the studio will slap down an inch or two of documents,” says Block. “Then there’s always a moment of figuring out how you’re going to come together, when you have such different expectations.”
It’s essential not to rush these negotiations and to work patiently towards a contract that entertains all contingencies, protects your interests and genuinely satisfies both parties.
“Don’t say, ‘oh, it’s China, things are different here.’ The days of finding a Chinese partner you trust and outlining a deal on the back of a napkin are over,” adds Bloch.
Tim Appelo contributed to this report.