The currently enforceable regulations governing China's licensing-in business were promulgated in 1985 (the Regulations on the Administration of Technology Acquisition Contracts) and in 1988 (the Implementing Rules of the Regulations). The country is now considering formulating new licensing rules, ie PRC Regulations on Technology Import And Export. Certain important changes may happen under the new regulation.
Capacity to contract
Under China's central planning regime, not all entities or individuals were able to establish commercial contracts with foreign companies. The PRC Ministry of Foreign Trade and Economic Cooperation (MOFTEC) adopted strictly the so-called foreign-trade-agency system, under which nobody apart from foreign-trade corporations were granted power to conclude international buying and selling contracts. The practice was initiated in China's international licensing business. With the open-door policy formulated by the late Deng Xiaoping, the scope of the entitlement was enlarged to many large- or medium-sized industrial manufacturers, or even to many private entities.
Yet, such a practice has not been totally abolished up to now. Since the international licensing business is within the administration of MOFTEC, such a compulsory agency system is introduced into the business within the ministry's supervision. Although obtaining the entitlement to be involved in international licensing is not as difficult as it was before, it will cause trouble to be a licensor or licensee without such an entitlement.
Therefore, when intending to sign a licensing contract with a Chinese party, the foreign company always needs to check out whether the potential Chinese licensee or licensor is entitled by MOFTEC to sign such a contract. If not, the Chinese party needs to turn to someone with the entitlement. Without such entitlement to sign, the validity of the contract may be challenged. However, whether such a contract could be declared invalid or not shall be decided by a judicial or arbitration court in consideration of the found facts.
Unfortunately, under the draft new PRC Technology Import And Export Regulations, the stipulations on the restricted capacity to contract is not changed. Anyhow, we expect that such a practice will be totally stopped once China enters the WTO.
Approval and recordation
Under the current regulations, international licensing contracts need to be approved by MOFTEC or its local offices. Nevertheless, a 1995 internal circulation by MOFTEC reduces the examining and approving procedure to a recordation practice for normal licensing contracts. Upon recordation, a certificate will be issued, with which the Chinese licensee may go through easily all the formalities for foreign exchange remittance, tax payment, inspection of the imported equipment, etc.
As we are informed, the draft new regulations divide technology into three groups, ie technology prohibited to be imported or exported, technology restricted to be licensed in or out and technology to be freely traded. It is said that lists for the first and the second categories will be published by MOFTEC in consultation with the Ministry of Science And Technology from time to time. Contracts for the technology within the second category need to be approved within 15 days (used to be 60 days), and those for the third-group technology need to be recorded within five working days. It is noticeable that the validity of such contracts depends upon the approval or recordation, meaning that failing the procedure, the contracts may be declared unenforceable. As it is now and may still be, we suggest that foreign licensors pay special attention to the approval or recordation requirements.
Terms and conditions
The following are the comparisons of some stipulations with regard to certain terms and conditions in a license contract under the current law and the forthcoming law.
Term of a licence
Under the current regulations, the term of a licence is generally no more than 10 years. If longer term needed, special APPROVAL by the authorities is unavoidable, while under the forthcoming regulations, EXPLANATION by the licensee to the recordation authorities is demanded for longer term. We anticipate that the authorities will normally respect the agreement by the parties, meaning that longer term for know-how licensing is possible.
Confidentiality
Under the current regulations, the term of non-disclosure obligation by the licensee shall not be more than 10 years. In case of a longer term, APPROVAL by the authorities shall be sought. While the new Regulations may stipulate that the term and the scope in relation to confidentiality obligation by the licensee may be negotiated and decided by the parties and no mandatory term is mentioned. In addition, the licensor is also required to bear the undertaking of non-disclosure against the licensee's secret information.
Ownership of improvements
The current regulations do not lay down provisions on the ownership of the improvements on the licensed subject matter, but provides for that conditions for the grant and grant-back of improvements shall NOT be unequal. While under the new regulations, it may stipulate that the principle of "who makes, who owns" is to be followed, and the conditions for the exchange of improvements be decided by the parties.
Post-contract use of licensed technology
Under the current law, the licensor cannot prohibit the licensee to continue to use the licensed technology after the expiry or termination of the license, while the new law to be issued may leave the matter to the parties' discussion and decision.
Unreasonable restrictive practices
Under the current law, there are nine prohibitions on the clauses in a license contract, ie:
Tie-in clause.
Restriction on licensee's procuring raw materials, parts and components from others than licensor.
Restriction on improvements by licensee.
Restriction on licensee's sourcing similar or competing technology from others than licensor.
Unequal exchange of improvements.
Restriction on quantity, variety or price of the licensed products.
Restriction on licensee's distribution or export channel of the licensed products.
Prohibition on continued use of the licensed subject matter after expiration or termination of the license.
Payment on unused or elapsed patent.
It is said that under the coming new regulations, the number of the mandatory prohibitions is reduced to six, ie:
Tie-in clause.
Restriction on improvements by licensee.
Restriction on sourcing by licensee of other technology.
Payment or any other obligation on elapsed patent.
UNREASONABLE restriction on licensee' procurement of raw materials, parts or components.
UNREASONALBE restriction on export of licensed products.
Guarantee and warranty
In the framework of the Chinese law, the licensor shall make guarantees in three aspects, ie performance guarantee, legitimacy guarantee and non-infringement guarantee. Details of the specifications of the licensed technology are set forth and listed by the parties as an attachment to the licence contract, and the licensor guarantees that those technical data are complete, accurate and effective, and the exploitation of the licensed technology will reach the contractual target. The licensor shall also guarantee that it is the legitimate owner of the licensed technology and shall be fully liable to the infringement upon any third party's valid intellectual property right.
It is said that under the new law, mandatory requirements on guarantee on patent and that on know-how may be different, and details may be negotiated and fixed by the parties.
In practice, the Chinese licensee prefers to have the scope of the non-infringement guarantee as wide as possible. Thus, the issue always becomes a hard nut in the negotiation of licensing business with a Chinese entity.
Room for improvement
Though the forthcoming new Chinese regulations on technology import and export may make a step forward in comparison with the current existing one as we heard so far, there is still vestige of the nature of central planning system, and there are rooms for further amendment, such as the capacity to license or to be licensed when dealing with foreign companies, the extent of state intervention into the conclusion and administration of a licence with a foreign company, etc. We have sound reason to believe that a free-market-based modern law on technology transfer will be witnessed when China enters the WTO.
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