Today this entry is dedicated to Technology Transfer, and Import of
Intellectual Property Rights
.
This theme is of paramount importance especially today if a foreign enterprise decide to make use of its intangible assets like IPR to do business in China.
The transfer of technology or intellectual and industrial property rights (e.g., trademarks, patents, know-how) represent the most frequent contribution when setting-up a new business in conjunction with a Chinese counterpart or when forming others type of investments (e.g., FIE). Having analyzed in the precedent paragraphs the main characteristics of the Intellectual Property rights directly involved in the realization of an investment in China, it is now necessary to spend a few words with regard to technology transfer or “import of IPRs into China.”
(The rules governing the transfer of technology has changed with the accession of China into the WTO. The regulatory instrument currently in force and to consider on this question are: (i) le
Regulation on Technology Import and Export Administration of the People’s Republic of China
, promulgated by the State Council and come into force January 1, 2002; (ii)
Administrative Measures on Registration of Technology Import and Export Contracts
, promulgated by the ‘ex’ MOFTEC now MOFCOM, December 30, 2001 in force January 1, 2002; (iii)
Administrative Measures on Import of Prohibited or Restricted Technology
, promulgated by MOFCOM, as well as (iv)
Administrative Measures for Export-Prohibited Technology or Export Restricted Technology
).
The technology import and export as referred to in the
Regulations on Technology Import and Export
(2002) as “acts of transferring technology from outside the territory of the People’s Republic of China into the territory of the People’s Republic of China or vice-versa by way of trade, investment, or economic and technical cooperation.”
(A very useful web-site on this topic, is available at:
http://www.china-iprhelpdesk.eu/en/solution-centre/licensing-and-technology-transfer
).
It seems appropriate to specify that the Regulations 2002 have a rather broad concept of “technology,” and in particular refers to “technology transfer” as the assignment or use of patents or models in China by a third party helping the foreign owner of these rights to achieve certain goals; or also refers to the supply of know-how in the form of technical information, drawings or other material containing information on manufacturing processes, formulas, designs of products; or even as the supply of facilities or production lines, when it involves the sale or the right to use patents.
In other words, the “technology” essentially refers to the complex technical knowledge, experiences, formulas, designs, of which the company owns and uses in a given production process or other industrial process. In general these are intangible assets protected as industrial property rights (a category of IP rights) which naturally belong to the company’s assets.
Under the Technology Transfer Regulations 2002, technology is divided into three categories: (i) freely transferable, (ii) restricted and (iii) prohibited technology. The category under which a particular technology falls, depends on whether it is for import or export; therefore a technology that might be prohibited from import might at the same time be free for export.
Technology classified as prohibited from import may not be imported; restricted technologies require approval from the Ministry of Commerce (MofCOM) and the Ministry of Science and Technology before the technology transfer contract is enforceable; and freely transferable technology transfer contracts require registration (rather than approval) with MofCOM (or its local branch) but are still effective upon proper execution. However, certain restrictions are prohibited as a matter of public policy and certain unreasonable restrictions on the transferee’s use of the technology in cross-border transfer contracts can be held invalid.
Contracts involving “technology transfer,” when the transfer is seen and considered as a “capital contribution” in the case of the creation of an FIE, must always be approved in accordance with the procedure for authorizing the investment made regardless of the type or category of technology involved. The registration authority (the MofCOM) may require an agreement to be amended before registration, if certain restrictive clauses are included. The Contract Law stipulates that a technology-related contract which illegally monopolizes technology, impedes technological advancement or infringes another’s technology is invalid.
Terms that restrict one party from obtaining from other origins technology similar to or in competition with the technology transferred is prohibited. Terms must not require the transferee to accept conditions that are dispensable to the technology import, such as purchasing unnecessary technology, raw materials, products, equipment or services. Requiring the transferee to pay royalties or assume certain obligations for using technologies of expired or invalid patents is prohibited.
In addition, the “transfer” can take place according to different types of contract, often through licensing agreements, with which the owner of these intangible assets (e.g., patents, know-how) grants the right to use them.
The registration of the contract or of the license of technology is a common practice and is used not only to carry out a formal control on the content of the contracts, but also in order to “standardize” the administration of contracts for import and export of technologies.
If during the audit, authority finds that the technology to be transferred is obsolete, or that it is already available in China, or considers that the fees are excessive, or that some clauses penalize a party, it can refuse to register the contract. In such a case, the parties are required to change their agreement and re-submit the contract to the MofCOM; in fact, registration is usually a necessary condition for the licensee to make use of the rights as stipulated in the contract, and to pay the royalties due, or to take advantage of any tax relief.
(The dispositions for the registration of the contracts, and the limits concerning the content, are contained in both the
Administrative Measures on Registration of Technology Import and Export Contracts
and in the
Administrative Measures on Import of Prohibited or Restricted Technology
; reference must also be done to the
Administrative Measures for Export-Prohibited Technology or Export Restricted Technology.
All these regulations have a role to play in this context, and they have to be considered together).
In licensing core technology in inter-company transfers, the licensor would unlikely restrict the subsidiary from making improvements. However, headquarters may require that it exclusively own, jointly own, obtain an assignment, or use for free the improvements made by the licensee based on the licensed technology. These restrictions raise monopoly concerns and are considered to impede technological advancement. Restrictive clauses such as these are prohibited if there is no reasonable consideration given in return. That is, there must be reciprocity.
For companies selling their products and doing business in China with a Chinese counterpart protecting intellectual property remains an issue. The laws and regulations are still evolving; enforcement is difficult, and there is a constant need for vigilance in order to make sure others are not exploiting your rights without permission. Although the efforts of the Chinese government are evident in order to put its legal framework related to IPR more in line with international standards, including membership in organizations such as the WIPO (i.e.,
World Intellectual Property Organization
), infringements remain a plague. This particular situation has its root in the culture itself of this country; in fact imitation and sharing have always been considered an effective method of learning. Nevertheless, the responsibility of China can not be mitigated, and indeed, in order to maintain a constant and even increasing inflow of foreign capitals, China must not only ensure compliance with its law regulating IPR, but also with the initiative of the foreign investor.
Though China has made progress in recent years by improving its legal and regulatory framework; nonetheless, patent, trademark, copyright and trade secret infringement remain a major concern; therefore the investor should always be aware of the risk when investing in China and use some basic and simple shrewdness such as: (i) seek advice but take self-help measures to protect your IPR; (ii) register your IP rights—even copyright; (iii) if action is necessary, be resolute but consider mediation first or other forms of dispute resolution; however civil litigation has a much more potent deterrent effect than administrative enforcement. (A very useful web-site to help the foreign investor understanding IPR in China is the following:
http://www.chinaipr.gov.cn/
).
This entry was intended to describe how to transfer and import IP rights into China. As it has emerged from the description of the legal framework is not an easy task to use these assets in China and a series of laws and regulations must be taken into consideration.
(Some of these articles are extracted from my work titled M&A and Takeovers in China, so if you are interested in this topic, please visit:
http://www.kluwerlaw.com/Catalogue/titleinfo.htm?ProdID=9041140484
).
Cristiano Rizzi