Technology Agreements in China

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TECHNOLOGY AGREEMENTS

IN CHINAProtecting Your Intellectual Property Rights


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Introduction

• IP licensing and other technology transfer agreements inChina are governed by many Chinese laws, regulationsand official pronouncements including, but not limited to,Contract Law, Patent Law, Unfair Competition Law,

Foreign Trade Law, Antitrust Law, Administration ofTechnology Imports and Exports Regulations (TIER) andJudicial Interpretation on Litigation Issues Relating toTechnology Contract Disputes.

• A technology contract is invalid if it includes terms that are

contrary to the mandatory provisions of Chinese laws andregulations. Under Chinese law, technology contractsthat are contrary to the mandatory provisions of law andregulations are invalid; they could be void entirely orunenforceable, with respect to the offending provisions.

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Wide Range of Transactions are Subject to

Regulatory Restrictions

• Patent / patent application assignments

• Patent licenses

• Know-how or trade secret assignments

• Technical services contracts• Research & development contracts

• Technology consultancy contracts

• Technology training contracts

• Technology brokerage transactions

• Technology import/export transactions

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Administration of Technology Import/Export

Regulations (TIER)

• Regulates act of transferring technology from

outside territories to China/ transferring

technology from China to outside territories

(Article 2 TIER)•Transferring technology, includes:

Assignment of patent rights and know-how;

License of patented technologies and

know-how

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TIER Classifies Technologies into Three

Broad Categories: • Prohibited Technologies: technologies that cannot be

imported into or exported out of China

• Restricted Technologies: technologies that must beapproved by the relevant governmental authority beforeimport or export, and the relevant technology transferagreement must be submitted to the relevant governmentalauthority

• Permitted Technologies: technologies that can beimported into or exported out of China without priorgovernmental approval, but the parties need to register theagreement with the relevant governmental authority. Whilethe failure to register an agreement does not affect thevalidity of the agreement, other adverse consequences mayresult; for example, the inability of a Chinese licensee toconvert royalty payments into foreign exchange to make

payment to the licensor

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Administration of Technology Import/Export

Regulations (TIER)

• TIER Provides that a Technology Import Contract CannotContain Provisions that Allow, Among Other Things:

• Purchase of unnecessary technology and/or equipment

• Payment for expired or invalid patents

• Restrictions on the Licensee’s ability to improve technology orto use the improved technology

• Restrictions of the Licensee’s ability to acquire similar orcompeting technology

• Unreasonable restrictions on equipment/material resources

• Unreasonable restrictions on production volumes, models andsales price

• Unreasonable restrictions on export channels for productsmade with licensed technology

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Supreme Court Judicial Interpretation Specifies the Following

Contractual Terms as “Illegal Monopoly and Impeding

Technological Progress”:

• Restricting new R&D on the basis of licensed technology

• Limitations on further improvement of licensed technology

• Limitations on use of improved technology

• Unfair exchange conditions on improved technology, such asgrant-back of improved technology without compensation; non-

reciprocal transfer of improved technology

• Limitations on Licensee’s reasonable exploitation of licensed

technology according to market demand, such as unreasonable

restriction on sales quantity, type, price, channel and export

• Tie-ins

• Prohibitions or restrictions on Licensee’s ability to challenge the

validity of the licensed IP

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Contract and Antitrust Laws

• Article 329 of the Chinese Contract Law voids a

contract that illegally monopolizes technology, impedes

technological progress or infringes on another person’s

technology

• Article 55 of the Chinese Antitrust Law applies if

license agreement eliminates or restricts market

competition by abusing IPRs stipulated in the relevant IP

laws and administrative regulations

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Contract Provisions and Contracts for specific

types of Intellectual Property Rights (IPRs)

• Using the right provisions and contracts for your specific IPRis key to protecting them.

• ‘Trade Secret’ is defined as “any non-public technical orbusiness information with commercial value that is guarded

by confidentiality measures” • ‘Confidential information’, on the other hand, generally

refers to “any non-public information pertaining to acompany’s business”, and is therefore broader in scope than‘trade secret’. However, no protection is afforded to

‘confidential information’ under Chinese law, unless it fallswithin the scope of trade secrets, or is otherwise specified ina contract

• NDA – non-disclosure and non-use

• NNN - non-disclosure, non-use and non- circumvention (typically used in

source and manufacturing contracts)

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Important Contract Provisions to INCLUDE

• Definition of licensed rights

• Monitoring of the licensee’s activities: Preventunauthorized use of the licensed rights

• Challenges of validity: Ensure the validity of youragreement

• Include clauses on the severability of validity of thelicense agreement

• This will ensure that even if one or more of thelicensed rights in the agreement expires, thevalidity of the entire agreement and the licensegranted within that agreement may not bechallenged

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Protection of New IP Generated:

Address Ownership Issues

Under China’s Patent Law, the party who makes

improvements to a technology based on the licensed

patent or technology automatically owns the IP on such

improvements

• The licensee can enter into a separate agreement to

assign or license its rights to the improvements back to

the licensor

• However, if the technology covered in the improvementsfalls into the ‘prohibited for exportation’ category as outlined

in the official guide, China’s Ministry of Commerce will not

approve such a transaction, and the improvements will not

be granted back to the licensor

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Assignments or TransfersNo Registration – No Contract:

• Article 10 of Chinese Patent Law states if a Chinese

company assigns one of its Chinese patents to a foreign

company, the written assignment does not become effective

until the assignment has been approved and registered by

the State IP Office of China (SIPO). Parties to a patentlicensing contract are required to apply for recordal within

three months of the effective date of the contract

• SIPO will issue its decision that a patent licensing contract

may be recorded within seven days of receiving theapplication

• Patent assignment takes effect upon recordal with registry

• Assignments and licenses by a Chinese Licensee to a

foreign Licensor will be subject to export control regulations

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Statutory Representations and Warranties:

Guarantee your Technology is Fit for Transfer

• Licensor must warrant it is the lawful owner of the

subject technology, with the rights to license such

technology (Article 24 TIER)

• Licensor must undertake responsibility for third-party infringement claims (Article 24 TIER)

• Licensor must undertake responsibility for harm

to lawful interests of others (Article 24 TIER)• Licensor must warrant that technology provided is

complete, error-free, effective and capable of

achieving its intended purpose (Article 25 TIER)

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Confidentiality: Statutory Confidentiality Term

• Licensee to keep trade secrets and know-how

received from licensor confidential during the

term of the contract (Article 26 TIER)

• Government employees for examining and

registering technology contracts have anconfidentiality obligation

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Confidentiality: Statutory Confidentiality Term

• Contractual confidentiality obligation• May contractually stipulate scope and duration

• Consider the useful lifetime of the confidentialinformation

• Try to bind affiliates and employees of the other party tothe same terms

• Disclose to employees only on “need to know” basis

• Define clearly what constitutes confidential informationfrom all perspectives: technical, legal and business

• Preparation of derivative works (i.e., translations,summaries)

• Need to track derivative works that are created

• Such works should be owned by the owner of theconfidential information

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Dispute Resolution: Choice of Law • Agreement should specify the law that governs the disputes

of the agreement (in this case, foreign law or Chinese law),

along with the chosen methods of dispute resolution.

• It is important to note, however, that while disputes on the

performance and interpretation of the contract in general

can be governed by foreign law, in reality, if theagreement is to be enforced in China, certain provisions

of Chinese law (e.g., IP rights) are mandatory and,

therefore, the agreement should, as a general rule, be

governed by Chinese law.• If your contract adopts arbitration or other non-judicial

methods of dispute resolution, it is also important to include

a clause that permits you to file in courts where you can

seek injunctive relief or claim damages against IP

infringement.

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Dispute Resolution: Language • If the agreement is executed in both English and Chinese, the

agreement should specify ONE official language to control ifthere is a dispute. It is neither advisable to draft a contract thatis silent on the official language, nor to draft contracts that callfor both English and Chinese to apply

• Whether English or Chinese should be the official languageof the contract? It depends.

• Consider where you would most like to see disputesresolved.

• If arbitration in English then you almost certainly will wantEnglish as the official language

• But if the Chinese courts will be the best place to resolveconflicts, then Chinese should be the official language

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Dispute Resolution: Enforcement

• While a judgment from a foreign court is effective

against a Chinese company that has

assets/operations in the foreign venue

• Enforcement of the judgment against a Chinese

company that does not have assets/operations in

the foreign venue will be difficult; the foreign

company must then obtain recognition andenforcement of its foreign court judgment in China.

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20*Alternative Arbitration Venues: SIAC (Singapore) and


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To increase chances of having an agreement that willactually be enforced, the following steps may be

considered:

• The agreement should include an accurate translation into

the Chinese language

• The agreement should provide for enforcement through

litigation in a Chinese court or through the China

International Economic and Trade Arbitration Commission

("CIETAC")*

• Agreement should provide for specific monetary damages

that will be awarded in the case of a breach. Specific

contract damage provisions are encouraged by Chinese

courts since they ease the court’s work

20Alternative Arbitration Venues: SIAC (Singapore) and

HKIAC (Hong Kong)

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• Avoid relying on injunctive relief as the primary enforcementmechanism

• Under Chinese law, the parties to a contract are

encouraged to set a fixed amount for damages that will

result from a breach. If written correctly, the liquidateddamage amount sets a floor on damages, but if actual

damages exceed that amount, it is permissible to seek

damages for the excess

• In addition, money damages and injunctive relief are not

mutually exclusive. A court or arbitrator is free to order

that damages be paid and that the infringing/breaching

party terminate the infringing action

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Termination: Specify What Happens When

the Agreement Comes to an End

• It is necessary to specify when and on what

conditions the agreement will terminate, e.g .,

upon the liquidation or dissolution of one party

• You should always include terms on theconsequences of termination; for example, the

licensee shall cease to have access to, or must

return, all the licensed rights, or the licensee shall

destroy or return all inventory bearing thelicensed trade mark to the licensor

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Take-Away Messages • Tailor your IP contracts to suit the IPR you are

protecting, and make sure you include sufficientspecific detail in the contracts’ key provisions

• Certain IPR protection provisions are unlawful underChinese law, and may render a contract void if you

include them in your agreement, so be cautious whendrafting these provisions

• Sign an NDA, NNN or ensure that there is adequateprotection in your contract addressing confidentiality

issues• For manufacturing or sourcing in China, considersigning an NNN agreement to prevent your Chinesebusiness partner from disclosing your confidentialinformation or competing with you later

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Take-Away Messages

• Choose the right Chinese partner

• Understand the legal and regulatory environment

• Put in place the airtight legal agreements

• Protect your know-how and trade secrets through

NDAs, NNNs and other practical measures

• Keep lines of communications open and clear up

misunderstandings quickly• Carry out regular audits

• Have seasoned bilingual on the ground to bridge

cultural and language barriers

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Documents

Technology Agreements in China