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Technology Transfer with China

Date: 8 November 2018

 

By Hugh Dunlop

 

China’s 13th 5-year plan announced that mass innovation and entrepreneurship will be the “twin engines of growth” and in line with that plan, China has risen (in 2017) to second position behind the US as a source of international patent applications filed via WIPO.

 

IP has been a headline topic in partnering with China, and the US and EU have filed IP-related “requests for consultations” at the WTO, an early stage of the trade-dispute resolution process, raising criticisms that Chinese policy over IP aspects of technology transfer are detrimental to China’s international partners in the long term.

 

In this article, we look at some of those policies, and have some top-tips for UK and European technology companies considering doing business in China.

 

China’s Regulations on Technology Import and Export Administration (TIER) set some stringent IP ownership and transfer provisions in cases of import of technology to China and export of technology from China. UK and European companies wishing to undertake development with local Chinese partners need to consider the effects of this regulation on their plans.

 

In particular, Article 27 has the effect that a Chinese licensee of background IP will own any improvements to a licensor’s technology. At first sight, this may be a major deterrent to plans to transfer technology into China. IP owners may fear that within a short period the local partner will have developed the technology to an extent that the licensor’s involvement is no longer needed. 

 

But there can be various ways to mitigate this concern or work within the Regulation.

 

Transfer in

 

Considering first the transfer of technology into China, there are four possibilities:

 

  1. Article 27 applies only to import of technology.  So if the technology is first licensed to a wholly-owned foreign entity (WOFE) – i.e. a local Chinese subsidiary – then the local WOFE can receive the import licence and undertake the development, and the ownership of the foreground will remain within the licensor group of companies.  Alternatively, the WOFE can license the background to the local Chinese partner and the TIER does not apply to a licence between Chinese entities.
  2. Another solution is to agree by contract that the foreground will transfer back to the UK/European licensor, with some reasonable compensation in exchange.  This may or may not be within the spirit of the TIER regulation, but this is not uncommon practice.  It is our understanding that such arrangements have not yet been put to the test as to what is reasonable compensation.
  3. A third solution is to assess the risk and, if it is low and containable, then live with it on the basis that the upside value is greater than the risk of losing control of the technology over a longer period (for example because R&D outside China will make the licensed technology and its improvements obsolete is a foreseeable timescale).  If this option is chosen, we would ask the question – why not implement option 2 above anyway?
  4. A fourth solution is to execute the licence completely outside China.  This solution may be suitable for multinational companies that have entities inside and outside China.

 

Liability for infringement of third party rights

 

A further regulation to be considered when licensing technology in China is Article 24 of TIER.  This places the liability for 3rd party infringement on the technology licensor.  The prospect of taking on unlimited 3rd party liability can be a major blockage in negotiations.  The regulation was implemented in 2001 when the expectation was that small unwary Chinese companies should be protected from large, knowledgeable multinationals.  But much has changed since then, and this provision can  be a very heavy burden for a small innovative company wanting to license to a large Chinese company! 

 

Again, there are possibilities for mitigating the risk. One possibility is to agree a cap on the liability (in absolute terms or on some sliding scale).  It is our understanding that such an arrangement has never been ruled lawful or unlawful.  Indeed, the Chinese government has been known to downplay this provision by saying it has never been put to the test.  (The counter position in international trade negotiations is that if this is the case, then why should it be necessary.) 

 

Greater comfort may be found in the December 2017 UK-China Joint Strategy for Science, Technology and Innovation Cooperation, and in particular, the IP Annex to that document.  This gives consortia flexibility to negotiate IP agreements between themselves according to the specific circumstances of each project and applies to all the issues above.  This document may be seen to be in conflict with TIER, but it has been agreed at Ministerial level in China, and such political assurance has great weight in China.  Participants have to decide if this assurance outweighs the plain letter of the law, or take comfort from the assurance that agreements entered into are not entirely in conflict with the letter of the law but are in harmony with its purpose.

 

Transfer out

 

Articles 33-38 relate to licensing out from China.  To address these regulations, it is necessary to know if the technology is: 1) encouraged technology; 2) restricted technology or 3) prohibited technology.  In addressing these regulations, parties should consider entering into a mutual obligation to comply with the relevant technology import/export restrictions of their respective governments.  This places the onus on the Chinese party to handle the cumbersome export regulations and the UK/European party to handle the rather less burdensome (but not always negligible) regulations in UK and Europe.

 

Note also that China has additional restrictions on exporting of data.  A comprehensive overview can be found here.

 

Top Three IP Tips in China

 

Number 1 tip for any company considering doing business in China is register your trademark first.

 

Do this before you even think about approaching anyone in China. Do it now!

 

China, like many countries, is a first-to-file country.  5 million trademark applications were filed in China in 2017 – more than in the entire history of the EUIPO.  China is notorious for trademark and domain name “squatters” – people who file registrations for foreign trademarks and domain names in the hope that sooner or later the foreign owner will want to use the mark in China and will have to pay through the nose for their own rights when the time comes.  In contrast to other jurisdictions, bad faith alone is not a ground for revocation of a trademark registration in China.  There are other grounds for remedying a case of trademark squatting, and at present more such cases are being won by the original foreign trademark owners than are being lost, but the 2012 “Muji” case is a sobering warning that a Chinese company can register and commence use of a mark not previously widely known in China and take ownership of that mark.

 

Number 2 tip is execute a non-disclosure agreement, in Chinese, under Chinese law, under the jurisdiction of the courts of China, with clear penalties for breach, and have it stamped by the local authority.  Chinese courts will enforce Chinese agreements but will not enforce agreements that say they are subject to other jurisdictions.  Chinese contracting parties respect enforceable agreements and respect the authority of a government stamp on an agreement.

 

Number 3 tip is register your copyright.  What’s that?  Register copyright?  Isn’t it inherent under international convention?  Well – yes it is, but it can be registered and stamped in China, and this gives evidence of ownership.  So register your software (you don’t have to disclose all the code) and your tables of data and your instruction manuals etc.  We can do this for you (and, if you wish, we can also register your copyright in the US to give you the benefit of statutory damages there for added protection).

 

 

We thank Tom Duke, UK IP Attaché to China, for his talk to the China Britain Business Council on 7 November 2018, from which this article draws heavily.

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