In response to the adoption of China's new foreign investment law, the China State Council promulgated decision no. 709, which revoked certain provisions of the Administration of Technology Import and Export Regulations (TIER), effective since March 18 2019. These changes address one of the biggest controversies in the US-China trade war and open up a window for free negotiation in cross-border technology transfers by lifting certain mandatory restrictions. The changes include deleting Article 24(3), Article 27 and Article 29 of the regulations.
According to Article 24(3) of the TIER which was introduced on January 1 2002, where the transfer of a technology import contract infringes another person's lawful rights and interests by using the technology supplied by the transferor in accordance with the terms and clauses of the technology import contract, the transferor shall bear the liability. Due to the risks caused by being unable to remove completely third-party tort liability, this provision may deter foreign companies from transferring or licensing technology to Chinese companies. In addition, many Chinese and foreign speakers and practitioners pointed out that this provision was in conflict with Article 353 of the Contract Law (China Contract Law). Pursuant to Article 353 of the China Contract Law, where the exploitation of the patent or the use of the technical secret by the transferee in accordance with the contract infringes on the lawful interests of any other person, the liability shall be borne by the transferor, except otherwise agreed by the parties. In comparison with 24(3) of the TIER, Chinese contract law permits parties to negotiate indemnities where parties may provide for the sharing of liability in the event that the use of technology infringes on the lawful interests of a third party. As a result, it appears that this restriction set out in the TIER was imposed only on technology import contracts. Accordingly, foreign companies argued that China seemed to accord less favourable treatment to foreign intellectual property right holders in comparison with Chinese intellectual property right holders, which put foreign companies in a disadvantaged position. Thus, the deletion of Article 24(3) reflects the principle of "national treatment" being extended to foreign companies which is expressly stipulated in China's new foreign investment law.
Pursuant to Article 27 of the TIER, while the contract for technology import is valid, an improvement to the imported technology belongs to the party making the improvement. The TIER further provided that the transferor cannot restrict the transferee from making improvements to the technology. In Section 301 of the Investigation Report released by the US on March 22 2018, the US government claimed that "these provisions are particularly harmful to a U.S. licensor if the Chinese licensee makes an improvement severable from the original invention and then patents the severable improvement in China or elsewhere. The TIER's provision on mandatory ownership of improvements enables the Chinese licensee to enjoy the severable improvement without the original technology licensed by the U.S. entity to the Chinese entity, and block the U.S. entity from enjoying the benefit of the severable improvement."
By contrast, according to Article 354 of the Contract Law, the parties may, on the basis of mutual benefit, set forth the method of sharing any subsequent improvement resulting from the exploitation of the patent or use of the technical secret in the technology contract. Thus, the restriction set out in Article 27 of the TIER also resulted in claims that such a restriction was discriminatory and was clearly more burdensome for foreign companies than domestic companies. Therefore, deletion of this provision addresses a huge concern in the international business community and levels the playing field for business players regardless of the nationality of the players.
Finally, according to Article 29 of the TIER, a technology import contract shall not contain any of the following restrictive clauses:
1) requiring the transferee to accept any additional condition unnecessary for the technology import, including buying any unnecessary technology, raw material, product, equipment or service;
2) requiring the transferee to pay an exploitation fee for a technology or to undertake other relevant obligations when the term of validity of the patent right has expired or the patent right has been invalidated;
3) restricting the transferee from improving the technology supplied by the transferor, or restricting the transferee from using the improved technology;
4) restricting the transferee from obtaining technology similar to that supplied by the transferor from other sources or from obtaining a competing technology;
5) unduly restricting the transferee from purchasing raw material, parts and components, products or equipment from other channels or sources;
6) unduly restricting the quantity, variety, or sales price of the products the transferee produces; or
7) unduly restricting the transferee party from utilising the channel for exporting products manufactured using the imported technology.
Although deletion of Article 29 offers parties autonomy to freely negotiate, it is worth noting that as technology agreements are also required to comply with all other laws and regulations, the deletion of Article 29 of the TIER does not imply that the restrictive clauses listed in Article 29 can be specified in technology import contracts at parties' will. Notably, Article 329 of the Contract Law expressly specifies that technical contracts which illegally monopolise technology and impair technological advancement are invalid. Subsequent judicial interpretation made by the China Supreme Court listed six circumstances which "illegally monopolise technology and impair technological advancement". The listed circumstances in the interpretation cover most of the restrictive clauses in Article 29 of the TIER. Accordingly, parties should cautiously deal with these restrictive clauses.
In conclusion, the changes in the TIER aim to level the playing field by creating equality between foreign-related technology contracts and domestic technology contracts. Lifting an obstacle for trade talk by removing these controversial provisions, the changes of the TIER together with the adoption of the China Foreign Investment Law are believed to facilitate the trade negotiation between China and the US and help two countries wrap up a historical agreement which is beneficial to both countries and the global economy. Meanwhile, these changes will inevitably promote cross-border technology exchange between China and western countries.
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