Yahoo’s Legal Obligations

In the Hutong
Waiting for another Monday Conference Call

Richard over at The Peking Duck references a post by “Chinese Law Prof ” which suggest that, in fact, Yahoo! is not obliged under Chinese Law to hand over information to the authorities. I won’t reprint the post for you – please pop over to Peking Duck and take a look – but it suggests that because Yahoo! is HK based, and because HK law does not require Yahoo! to hand over such information, then Yahoo! just did it for some other reason.

Now, as someone who is neither an attorney nor a law professor, but who has had frequent cause to counsel others (within my scope of competence) on China’s regulatory environment, I have to disagree, for the following reasons, ranked strongest to weakest:

1. Yahoo! actually has operations in China, albeit managed now by Jack Ma and his capos over at Alibaba. Certainly that unit falls under the purview of regulations on the mainland, not the SAR.

2. Regulating the Internet is a strange phenomenon. The fact is, it doesn’t matter where your company is domiciled (i.e., has its offices). If a competent regulatory authority has the ability to restrict your business – i.e., who views your site, uses your services, clicks on your ads – you are, in fact, regulated by that country. Yahoo! could easily find itself blocked in China and its business shut down. This implies a level of regulatory authority over Yahoo!, albeit only over local commercial operations, that would oblige Yahoo! to comply to local regulations if it wants to continue its business.

3. China has established a precedent for its authority over companies providing telecommunications services into China but not domiciled in China. China’s tax laws stipulate that a Chinese company operating in China and paying a foreign service firm NOT operating to render services must withhold from their service fees a 15% tax that is payable to the government. In other words, even a company with no presence in the market delivering a telecom link or television by satellite to a Chinese company is subject to Chinese tax law. My company, an advisory services firm, is domiciled in Hong Kong, but every time I render services to a client in China, I get hit with the 15%.

4. Chinese law is not just what is on the books. In the words of my esteemed mentor, Jeanne-Marie Gescher (a British barrister) and Luka Lu (a Chinese attorney), China’s structure of laws consist of three things:

> Statutes, administrative rules and regulations, and their attendant clarifying documents either passed by the National People’s Congress or other competent authority (the Written Law);

> Policy, or those sets of both formal pronouncements and informal decrees from the most senior levels of government and the party that establish the general tone and direction of the government.

> Administrative interpretation, or the set of both informal and formal decisions made by ministries and other specialist organs of government that take into account statutes and policy and actually create the guidelines for action in the form of implementation rules and unwritten but understood frameworks around specific issues.

Given the above, I would say that Jerry Yang is indeed right, that he is in fact subject – de facto or de jure – to Chinese law.

You can argue the morality of what Yahoo! did – and I do – but I have to agree with the thinking that if Yahoo! choses to do business in China (as it does both really and virtually), it is compelled to comply with the law.