China has long been criticized for having enacted various regulations allowing discriminatory technology licensing practices against foreign technology owners. These regulations restrict the ability of foreign technology owners to negotiate market-based terms for the transfer of technology into China, which effectively amounts to forced technology transfer to Chinese licensees in some cases. In contrast, purely domestic technology transfer contracts between Chinese licensors and licensees are governed by separate laws and regulations and are not subject to such restrictions. The most recent amendments (mostly deletions) to the technology transfer regulations aim to address these criticisms. This LawFlash reviews the new amendments to determine their impact on future technology transfer deals between foreign technology owners and Chinese licensees.
China’s State Council on March 18 further promulgated the Decision of the State Council on Amending Some Administrative Regulations (the Decision), which, among others, deleted multiple provisions in the Regulations on the Administration of Technology Import and Export (the TIER) as well as one provision under the Implementing Regulations of the Law on Sino-foreign Joint Ventures (the JV Regulations). These provisions have long been controversial in the commercial negotiation of technology licensing contract between foreign licensors and Chinese licensees.
For example, Article 24(3) of the original TIER mandated that the technology licensor (typically a foreign entity for a technology import contract) is liable for any claims of “infringing [a third party’s] lawful rights” made against the licensee resulting from the use of the licensed or transferred technology. This provision effectively means that foreign technology licensors of imported technology are required to indemnify Chinese technology licensees for, among other things, third-party infringement claims based on use of the imported technology. With the deletion of this provision, it means the parties are now free to negotiate the allocation of the indemnity risk regarding third-party claims.
Article 27 of the original TIER mandated that "during the period of validity of the technology import contract (including in-license), the results of any improvements in the technology shall be vested in the party making the improvements.” Article 29(3) of the original TIER further prohibits technology import contracts from including any clause that “restrict[s] the receiving party from improving the technology supplied by the supplying party, or restricting the receiving party from using the improved technology.” These provisions meant that the TIER restrictions on the ownership of improvements cannot be contractually avoided by parties and foreign licensors cannot stop the Chinese licensee from making improvements to the original technology licensed by the foreign licensor and patent such improvement. Deletion of such provisions means that the parties are now free to negotiate shared ownership or that the foreign licensor will own improvements made by the Chinese licensee.
The Decision also amended the JV Regulations, which deleted the provisions that the duration of technology transfer agreements generally does not exceed 10 years. This 10-year term limitation applies not just to patents, trademarks, and copyrights, for which the law provides protection longer than 10 years, but also to trade secrets that do not have a specific term of protection before being made public. Another provision under the JV Regulations provides that the Chinese joint venture shall be allowed to use the licensed technology freely after expiration of the term of license. The deletion of the 10-year term restriction means that the parties to a Chinese joint venture are now free to negotiate the term of the technology transfer, and that the Chinese joint venture will not be automatically granted the right to use the technology in perpetuity after a previously legally mandated 10-year term.
The above deletion is meant to implement China's new Foreign Investment Law, which was promulgated on March 15, 2019, and will be effective on January 1, 2020. Article 22 of the new law provides that the state "…encourages technological cooperation based on the principle of voluntariness and business rules. The conditions for technological cooperation in the course of foreign investment are to be negotiated by the various parties to the investment, and administrative organs and their employees must not force the transfer of technology through administrative measures." Articles 21 and 23 of the Foreign Investment Law also clearly stipulate in law for the first time that royalties for technology licensing shall be freely expatriated outside of China, and that government agencies and their employees must keep confidential the trade secrets of foreign investors and foreign-invested enterprises they obtain in performing their duties, and shall not disclose or illegally provide them to others. While the general language of the new Foreign Investment Law has quickly been criticized by commentators for not going far enough on implementing details, the latest amendments to the existing technology transfer regulations appear to be a further and more concrete step showing that the Chinese government is being serious in leveling the playing field and addressing the fear of forced technology transfer from foreign technology owners.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact the author, Todd Liao, in our Shanghai office, or any of the following Morgan Lewis lawyers:
Shanghai
Alex Wang