OSI Defies China Court Verdict as Frustrations Grow Over System

  • Two Chinese OSI units found guilty of selling out-of-date meat
  • Company says verdict follows `smear campaign' by state media

OSI Group LLC.’s rejection of a Shanghai court verdict that its China units broke food safety laws reflects a growing sense of frustration among U.S. companies about the legal system of the world’s second-biggest economy.

Aurora, Illinois-based OSI said late Monday the judicial outcome was “unjust” and it would consider appealing after the Shanghai Jiading court ruled that its units, Shanghai Husi Foods Ltd. and Hebei Husi Foods Ltd, intentionally passed off disqualified products as being acceptable.

“Foreign companies are increasingly dissatisfied with what they perceive to be an absence of due process of law in China,” New York University law professor Jerome Cohen said. The system allows “judges and officials an enormous amount of discretion -- foreign companies usually decide that the likelihood of reversing the verdicts is small.”

Rather than try to protest, most companies have tended to accept their punishments, Cohen, who researches China’s legal system, said in e-mail. Recent cases have ended with British drugmaker GlaxoSmithKline Plc paying an almost $500 million fine for bribery, while automakers including Bayerische Motoren Werke AG cut prices of spare parts after government probes.

The Shanghai court fined OSI’s two units 1.2 million yuan each ($182,000) and ten employees were given jail sentences, more than a year after broadcaster Dragon TV reported workers were repackaging and selling expired chicken and beef. The ensuing outcry prompted fast-food chains in China and Japan to halt supplies from OSI’s Chinese units.

KFC-owner Yum Brands Inc., which gets more than half its revenue from China, saw its strong growth cut short by the incident, while McDonald’s Corp. is only just recovering from the impact. It’s one of a chain of highly publicized food safety scares in China, which have included the detection of fox DNA in donkey meat sold by Wal-Mart Stores Inc.

OSI said it is also considering suing Dragon TV, operated by state-owned Shanghai Media Group, for running a “harmful smear campaign” and hurting its reputation and business operations “through intentional falsification of press reports.”

Dragon TV spokesman Zhou Jie referred queries to the company’s TV news editor-in-chief Liu Weihua, who could not be reached at his office number. OSI, which according to its website has nine production plants in China, didn’t respond to queries on how the court case would affect its business plans in the country.

‘Silently Co-Operate’

“We have made every effort to follow firm instructions to silently co-operate on the advice it would lead to a fair conclusion,” OSI, run by banker-turned-burger tycoon Sheldon Lavin, said in its statement. “However, we can no longer accept injustices against our people and our reputation.”

Yang Liqun, an Australian citizen who was a general manager for OSI in China, was given the heaviest sentence of three years in jail, a 100,000-yuan fine and deportation, according to the court. It wasn’t clear if he’ll first serve his sentence before being forced out of the country. The other nine were sentenced to jail terms of 19 to 32 months.

Lawyers at MWE China Law Offices, representing OSI, didn’t respond to requests for comment. Australia’s Department of Foreign Affairs and Trade said it’s providing consular assistance to an Australian arrested in Shanghai and declined to give further comment.

“Foreign companies used to think that expressing their alignment with the political system was an important part of doing business in China," said Anne Stevenson-Yang, co-founder of J Capital Research, a Beijing-based equities analysis firm. OSI’s stance against the court “shows clearly the eroding international confidence in Chinese governance,” she said.

Opaque Environment

OSI could pursue its appeals through various informal channels such as the Chinese Communist Party’s political-legal committee, but none of those options “hold forth a great deal of hope,” said NYU’s Cohen. “Food violations are very sensitive public matters these days in China, so it may be harder to enlist any help from anywhere.”

An American Chamber of Commerce in China survey published last month showed U.S. companies feel less welcome doing business in China than in prior years with “inconsistent regulatory interpretation and unclear laws” as their top challenge.

While areas such as intellectual property protection have improved, strengthening of China’s legal institutions remains the top reform sought by foreign companies, said Kenneth Jarrett, head of the chamber’s Shanghai-based sister organization, in an interview Tuesday. “The mood among foreign businesses here is realistic and sober - China is a challenging business environment, but companies are here for the long term.”

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