On March 18 2019, China announced amendments to its laws on joint ventures and the Regulations on Administration of Technology Import and Export (TIER) with immediate effect. The changes took away some of the restrictions around cross-border technology transfers, delivering more freedom in contracts in future transactions. The announcement has attracted lots of attention from around the world as the rules are directly related to some of the claims in the US-China trade disputes. The changes may turn out to be beneficial to both Chinese and foreign companies in the long-run. We highlight the background and key changes below.
China regulated cross-border technology transfers from the beginning of the 1980s, with a view to protecting domestic companies who were not sophisticated in such transactions. At the heart of the regulations, China uses a classified system to categorise technologies into freely-tradable, restricted and prohibited. If a technology (patented or non-patented) subject to technology licensing or assignments, falls into one of the catalogues of restricted technologies, import or export bound, it requires approval. After the US-China trade dispute escalated in recent years, China passed a special law to add national security and industry impact reviews for technologies intended to be licensed or assigned to overseas entities.
In its law on joint venture, China stipulated that in a joint venture involving foreign parties, the Chinese parties should have rights to continue using the licensed technology after the initial 10-year term expires.
The restrictions imposed by the TIER in technology import contracts, which cover all sorts of patent licences, assignments and licences of know-how or technical secrets, were controversial.
Firstly, the TIER made it compulsory for a foreign licensor to indemnify Chinese licensees for any loss arising from the use of the licensed technology under the contract (Art. 24). What was often criticised is that such compulsory rules prevail over the PRC's contract law under which two Chinese parties are allowed to freely negotiate indemnification terms.
Secondly, the TIER required that any improvements made by the Chinese licensee to the imported technology should per se belong to the licensee (Art. 27). Contract law does not contain such rules. Parties are free to use contracts to allocate the ownership of improvements made by the licensee. However, judicial interpretations issued by the top court authority further clarify that there must be reasonable consideration for any grant-back of the improvement by the licensee.
Further, the TIER required that anti-competitive restrictions imposed by foreign licensors should be invalid. Such anti-competitive restrictions include (a) bundled sales of unnecessary technology, raw materials, products, equipment or services; (b) pay for expired or invalid patents; (c) restraining licensees from improving the technology; (d) restraining licensees from obtaining licences from competing sources; (e) imposing restrictions on sourcing of the raw materials, parts, products or equipment; (f) imposing restrictions on quantity, types, sales price of products; and (g) restricting export channels. Notably, similar anti-competitive restrictions are prohibited under the PRC Contract Law and relevant judicial interpretations for any and all licensors.
The adoption of these rules by the TIER as well as the law on joint venture was widely believed to be based on considerations which went back to the 1980s when China had just started carrying out cross-border transactions on a large scale. The protections were enacted to ensure the interests of unsophisticated Chinese enterprises. However, after China entered the WTO, the necessity and utility of such rules encountered continuous questioning. Criticism was often focused on the inconsistency between the TIER and contract law, as well as the unnecessary complexities or even failures caused to cross-border technology transactions by the TIER.
Implication of amendments
The amendments, as enacted, seem to eliminate all the controversial rules that were accused of violating the national treatment obligations stipulated in the TRIPS Agreement.
The direct impact of the changes is the broadened freedom of contract in technology transactions.
Parties may independently agree on indemnity provisions and the ownership of improvements made by the licensees. Cross licences, royalty free licences or joint ownership are allowed. Parties may leverage their business interest to decide on these terms. However, licensors need to keep in mind that China has some general requirements on fairness of contract terms. Gross unfairness might be cited as grounds for voiding licensing contracts.
What might be more interesting are those anti-competitive terms that have been taken away in the new amendments. The old TIER stipulated that several anti-competitive or restrictive clauses should not be allowed. Most of these provisions are actually in Article 329 of the Contract Law and the relevant judicial interpretations. The Anti-monopoly Law can always be invoked to question some of the licensing arrangements under analysis, in addition to the general provisions dealing with IP abuse. One notable item is tie-in sales or bundling. The current Contract Law and the judicial interpretation do not include prohibitions against bundling. Thus, the net effect of the changes to the TIER means that bundling is no longer a per se violation in technology licensing contracts.
To conclude, the TIER's amendments and the joint venture law are significant changes to the technology transfer regime in China. Hopefully, the legislative changes will lead to a significant increase in transactions and, more importantly, confidence among licensors and licensees.
AnJie Law Firm
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