TECHNOLOGY AGREEMENTS

IN CHINA
Protecting Your Intellectual Property Rights

Introduction
IP licensing and other technology transfer agreements in

China are governed by many Chinese laws, regulations

and official pronouncements including, but not limited to,
Contract Law, Patent Law, Unfair Competition Law,
Foreign Trade Law, Antitrust Law, Administration of
Technology Imports and Exports Regulations (TIER) and
Judicial Interpretation on Litigation Issues Relating to
Technology Contract Disputes.
A technology contract is invalid if it includes terms that are
contrary to the mandatory provisions of Chinese laws and
regulations. Under Chinese law, technology contracts
that are contrary to the mandatory provisions of law and
regulations are invalid; they could be void entirely or
unenforceable, with respect to the offending provisions.

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

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

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 be
approved by the relevant governmental authority before
import or export, and the relevant technology transfer
agreement must be submitted to the relevant governmental
authority
Permitted Technologies: technologies that can be
imported into or exported out of China without prior
governmental approval, but the parties need to register the
agreement with the relevant governmental authority. While
the failure to register an agreement does not affect the
validity of the agreement, other adverse consequences may
result; for example, the inability of a Chinese licensee to
convert royalty payments into foreign exchange to make
payment to the licensor

Administration of Technology Import/Export

Regulations (TIER)
TIER Provides that a Technology Import Contract Cannot

Contain Provisions that Allow, Among Other Things:

Purchase of unnecessary technology and/or equipment
Payment for expired or invalid patents
Restrictions on the Licensees ability to improve technology or
to use the improved technology
Restrictions of the Licensees ability to acquire similar or
competing technology
Unreasonable restrictions on equipment/material resources
Unreasonable restrictions on production volumes, models and
sales price
Unreasonable restrictions on export channels for products
made with licensed technology

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 as

grant-back of improved technology without compensation; nonreciprocal transfer of improved technology

Limitations on Licensees 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 Licensees ability to challenge the
validity of the licensed IP

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 persons
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

Contract Provisions and Contracts for specific

types of Intellectual Property Rights (IPRs)
Using the right provisions and contracts for your specific IPR

is key to protecting them.

Trade Secret is defined as any non-public technical or
business 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 a
companys business, and is therefore broader in scope than
trade secret. However, no protection is afforded to
confidential information under Chinese law, unless it falls
within the scope of trade secrets, or is otherwise specified in
a 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 licensees activities: Prevent

unauthorized use of the licensed rights

Challenges of validity: Ensure the validity of your

agreement
Include clauses on the severability of validity of the
license agreement
This will ensure that even if one or more of the
licensed rights in the agreement expires, the
validity of the entire agreement and the license
granted within that agreement may not be
challenged

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Protection of New IP Generated:

Address Ownership Issues
Under Chinas 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 improvements

falls into the prohibited for exportation category as outlined

in the official guide, Chinas Ministry of Commerce will not
approve such a transaction, and the improvements will not
be granted back to the licensor

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Dealing with Improvements: Be Equitable or

Provide Consideration
During the term of the license, improvements

technology shall belong to the party that made

the improvement (Article 27 TIER)
No automatic grant-back permitted
Compensation required; or
Reciprocation (such as granting license)
Cannot restrict licensee from making
improvements to technology (Article 29 TIER)

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Assignments or Transfers
No 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 patent
licensing 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 the
application
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 thirdparty 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 an

confidentiality obligation

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Confidentiality: Statutory Confidentiality Term

Contractual confidentiality obligation
May contractually stipulate scope and duration

Consider the useful lifetime of the confidential

information
Try to bind affiliates and employees of the other party to
the same terms
Disclose to employees only on need to know basis
Define clearly what constitutes confidential information
from 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 the
confidential 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 the
agreement 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 if

there is a dispute. It is neither advisable to draft a contract that
is silent on the official language, nor to draft contracts that call
for both English and Chinese to apply
Whether English or Chinese should be the official language
of the contract? It depends.
Consider where you would most like to see disputes

resolved.
If arbitration in English then you almost certainly will want
English as the official language
But if the Chinese courts will be the best place to resolve
conflicts, 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 and
enforcement of its foreign court judgment in China.

*Alternative Arbitration Venues: SIAC (Singapore) and

HKIAC (Hong Kong)

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Dispute Resolution: Enforcement

To increase chances of having an agreement that will
actually 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 courts work

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Dispute Resolution: Enforcement

Avoid relying on injunctive relief as the primary enforcement

mechanism
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 liquidated
damage 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 the
consequences 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 the
licensed 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 sufficient

specific detail in the contracts key provisions
Certain IPR protection provisions are unlawful under
Chinese law, and may render a contract void if you
include them in your agreement, so be cautious when
drafting these provisions
Sign an NDA, NNN or ensure that there is adequate
protection in your contract addressing confidentiality
issues
For manufacturing or sourcing in China, consider
signing an NNN agreement to prevent your Chinese
business partner from disclosing your confidential
information 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