Growing Chinese trade results in wider litigation.

The booming trade between the United States and China is producing a mini-boom in local courtrooms.

A growing number of Chinese companies are suing their U.S. customers over mundane contract disputes--when they don't get paid, for instance--and being sued in return.

Such cases rarely gain attention, although one did last month when a Chinese supplier, Sichuan Changhong Electric Co., brought suit in Los Angeles Superior Court seeking payment for $484 million worth of television stets it shipped to Ontario-based Apex Digital Corp.

More Chinese parties are appearing in courts as both plaintiffs and defendants, said Jinshu "John" Zhang, partner with Greenberg Traurig LLP who specializes in China-related business.

"It used to be, if you sued a Chinese company in a court here, the Chinese company just wouldn't show up. Now, Chinese firms even prefer to file suit in the U.S."

Until now, the U.S.-Chinese legal disputes that grabbed the most attention have tended to center on intellectual property, such as when American companies seek enforcement of anti-piracy and copyright laws within China. But the lopsided increase in trade between the two countries has cast America largely as the buyer and China the seller, leading to disputes over more mundane business matters.

There are few statistics on the number of cases being filed in the U.S. involving Chinese companies. But law firms are devoting an increasing number of resources to the area.

Judy Lam, partner with the Pacific Rim practice group at Alschuler Grossman Stein & Kahan, said she has seen a sharp increase in Chinese-related business over the past three years. Launched in 2002, the firm's Asia Pacific group now has 11 partners and seven associates.

Suing to get paid

In Greenberg Traurig's L.A. office, three of the 15 partners in the litigation group are devoted to China-related trade.

Most cases involve payment or shipment delays, Zhang said. He is representing a Chinese company in a lawsuit against a Fortune 500 company over non-payment of a finder's fee.

The Chinese company claims it was hired to consult and find a suitable local company for the U.S. company to acquire, which it did, resulting in $168 million acquisition. The Chinese company claims its contract involved a finder's fee of one-third of the value of the acquisition, or $58 million, which was never paid.

Experts note that the increase in lawsuits is a natural result of increasing business. The U.S. trade deficit hit a record $60.3 billion in November, and trade with China accounted for $16.6 billion of that gap--twice as large as the next largest country, Japan.

"My impression is that the frequency of lawsuits is really increasing with the frequency of transactions with China," said Gregory Keever, partner with Coudert Brothers LLP.

However, there are other reasons. The U.S. legal system draws cases because it is relatively efficient, and there is expertise and general acceptance of litigiousness and compensation awards, said Arvind Bhambri, professor of global business strategy at USC's Marshall School of Business. "The party that feels it has been wronged would prefer to file the suit in the U.S."

Changhong, based the Chinese city of Mianyang, is the largest color TV maker in China. It claims Apex submitted false checks over the course of several quarters. The stakes rose on Jan. 5, when Apex revealed that its chief executive, David Ji, had been arrested in China on Oct. 24 on fraud charges stemming from the Apex debt, and that the Chinese government has detained him for the past three months.

Changhong allowed at least two quarters to pass before acknowledging the losses it would have to absorb due to the Apex's alleged unpaid accounts.

The late December announcement triggered a 27 percent slide in Changhong's stock on the Shanghai stock exchange. According to Chinese news reports, the exchange is preparing an investigation into why company management waited months before revealing the problem.

Culture clash, competition

Poor business practices, a lack of cross-cultural understanding and marketplace competition are factors in many of the cases, Zhang said.

"Sometimes Chinese companies are too eager to move into the U.S. market," he said. "They're afraid that if they don't agree with the distributor's terms, then nobody will do business with them."

In some cases, the U.S. partner might want to delay payments as long as possible to manage cash flow. That's a typical business practice in the United States, but Chinese companies, some of which grew out of the centrally planned economy, are often unprepared to deal with it.

"Some operations were owned by the state, and they were less careful about guarding their receivables," Zhang said.

When payments do get delayed, Chinese companies can quickly find themselves in financial trouble. "You run into executives who are just acquiring a sense of what business means, and they wouldn't think about squeezing the last bit of working capital from their business the way their U.S. partners might," Bhambri said.

Terry Garnett, another partner in Alschuler Grossman's Pacific Rim group, said his workload has also increased in the patent and intellectual property area, but there too a shift has taken place.

As Chinese companies get larger, he said, they want to become globally competitive. In the past, it's been the Chinese or Taiwanese company that's being sued, "but in the past year I've seen Taiwanese companies being able to assert their patent portfolios against other companies," Garnett said.

His clients include BenQ Corp. and Fox Conn Oy, a division of Taiwan's Hon Hai Precision Industries. The two Taiwanese electronics companies have offices in Southern California and have sought counsel in patent cases against other companies in Asia. "This is new," Garnett said. "I'm sure we'll see more of it."