Tech Transfer Legal and regulatory framework foreign practitioners must understand if they want to avoid pitfalls, say Benjamin IP licensing and technology transfer is subject to complex legislation, which Traps for the unwary Failure to comply with Chinese law Common mistakes 39 Permitted, restricted, prohibited Bai , Anthony Chen , and Marcus Woo of Jones Day www.managingip.com China IP Focus 2008 B ecause applicable Chinese laws can differ from transfer agreement must be submitted to the relevant foreign law in important ways, IP licensing in governmental authority. China is fraught with traps for the unwary. 3. Permitted technologies: technologies that can be im- Approaching technology agreements in China ported into or exported out of China without prior with the boilerplate language common in foreign legal governmental approval, but the parties need to reg- documents is likely to breed problems down the road. ister the technology transfer agreement with the rel- But there are ways to avoid the pitfalls. evant governmental authority. With respect to per- mitted technologies, though the failure to register a technology transfer agreement does not affect the IP licensing and other technology transfer agreements validity of the agreement, other adverse consequenc- in China are governed by a plethora of Chinese laws, es may result – the inability of the Chinese licensee including but not limited to the Contract Law, Patent to convert renminbi into foreign exchange to make Law, Unfair Competition Law, Foreign Trade Law, and royalty payments to the licensor, for example. Antitrust Law (China promulgated its Antitrust Law China periodically updates the Technology Import on August 30 2007, which becomes effective on August Catalogue (technology whose import China Restricts 1 2008). The principal regulations covering technology or Prohibits) and the Technology Export Catalogue transfer are the 2002 Regulations on Administration of (technology whose export China Restricts or Prohib- Technology Imports and Exports promulgated by the its.) These catalogues list the technologies classified as State Council. In addition, the Chinese Supreme Court prohibited or restricted technologies for import or ex- promulgated a Judicial Interpretation on Litigation Is- port purposes, respectively. Technologies not expressly sues Relating to Technology Contract Disputes, which listed on either catalogue are considered as permitted. took effect on January 1 2005. Foreign business investing research and development in China should give early consideration to the Technol- ogy Export Catalogue . As discussed below, Chinese law Under the Technology Regulations, “import and ex- mandates that ownership of improvements to licensed port of technologies” is broadly defined to include acts technology made by a Chinese licensee belongs to the of transfer of technologies through trade, investment Chinese licensee. The assignment or license by the Chi- or economic and technological cooperation, from in- nese licensee of such improvements to a non-Chinese side China to outside China, and vice versa. Due to the licensor will be subject to China’s export control regula- breadth of the Technology Regulations in China, most tions. In addition, non-Chinese companies wishing to es- technology transfers by foreign companies to China fall tablish a research and development facility in China and under their scope. The Technology Regulations classify to use the results of the research outside China will need technologies into three broad categories: to comply with China’s export control regulations. 1. Prohibited technologies: technologies that cannot be imported into or exported out of China. 2. Restricted technologies: technologies that must be approved by the relevant governmental authority be- When a foreign company transfers technology to Chi- fore import or export, and the relevant technology na, the parties to the transfer agreement can generally
Tech Transfer 40 Foreign IP practitioners would be well likely to breed problems down the road common in foreign legal documents is in China with the boilerplate language Approaching technology agreements Invalid contract advised to do their homework www.managingip.com China IP Focus 2008 sonable restriction on sales quantity, type, price, chan- nel, and export. 5. Tie-ins. 6. Prohibitions or re- strictions on licensee’s abil- ity to challenge the valid- ity of licensed intellectual property. choose the governing law, including foreign law, for Furthermore, Chinese law limits a foreign licensor’s the agreement. This freedom to choose has given many ability to disclaim its liabilities in connection with the foreign companies the false impression that they don’t licensed technology. For example, Chinese law requires need to worry about the restrictions of Chinese law if that the foreign licensor guarantee that the licensed they have selected a foreign law to govern the agree- technology is complete, correct, effective, and that it ment. In reality, if the agreement is to be enforced in will reach the specified technological target. It must China, certain provisions of Chinese law are manda- also guarantee that it is the party with legal ownership tory. A foreign licensor should carefully structure its of, or right to license, the technology. If the Chinese technology transfer agreement to make sure that the licensee infringes on another party’s right by using the agreement complies with these mandatory provisions. licensed technology pursuant to the license agreement, For example, Article 329 of the Chinese Contract the licensor is required to bear responsibility for such Law voids a contract that illegally monopolizes tech- infringement. nology, impedes technological progress or infringes on Under Article 55 of the Chinese Antitrust Law, the another person’s technology. The Technology Regula- new law will be applied if a licensing contract elimi- tions provide that a technology import contract cannot nates or restricts market competition by abusing IP contain provisions that allow, among other things, for: rights stipulated in the relevant IP laws and adminis- 1. Purchase of unnecessary technology, equipment. trative regulations. While it is too early to determine 2. Payment for expired or invalid patents. precisely how the new Antitrust Law will be applied to 3. Restrictions on the transferee/licensee’s rights to im- licensing transactions, there is likelihood that Chinese prove technology or to use improved technology. licensees could start to take advantage of the new law 4. Restrictions on the transferee/licensee’s rights to ac- to attack foreign licensors. quire similar or competing technology. 5. Unreasonable restrictions on equipment/material sources. A technology contract is invalid if it includes terms 6. Unreasonable restrictions on production volumes, that are contrary to the mandatory provisions of the models, and sales price. law and regulations. As such, invalid technology con- 7. Unreasonable restrictions on export channels for tracts are invalid ab initio and cannot be enforced. If products made with transferred/licensed technol- a technology contract is found to be invalid, the par- ogy. ties are discharged from performing the contract. If the The 2005 Chinese Supreme Court’s Judicial Inter- performance is under way, it should be ceased. Where a pretation specifies the following contractual terms as contract has been fully performed, courts will attempt “illegal monopoly of technology and impeding of tech- to restore the parties to their pre-contract state (that nological progress”: is, as if the contract had never been entered into). The 1. Limitations on further improvement of licensed party at fault for rendering the contract invalid is liable technology. for damages caused to the other faultless party. 2. Limitations on usage of improved technology. Under Chinese law, technology contracts that are 3. Unfair exchange conditions on improved technology, contrary to the mandatory provisions of laws and regu- such as grant-back of improved technology without lations are invalid. They could be void in their entirety compensation; non-reciprocal transfer of improved or unenforceable with respect to the offending provi- technology; sole or joint ownership of improved sions. Invalid technology contracts include, for exam- technology without compensation. ple, (i) contracts obtained by fraud, (ii) contracts that 4. Limitations on licensee’s reasonable exploitation of licensed technology according to market de- mand, such as unrea-
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