China is increasingly a key component in global business and deals involving the Chinese market and/or made with Chinese companies are always of increasing importance.
As with other areas of IP, doing deals in China (at least according to attorneys that cover this topic) is radically different than in Western countries. Here is a collection of some of the most surprising differences described in relevant literature:
Requirement to register licenses/patents
It is essentially necessary to register patent licenses in China before they can be enforced by a licensee. This registration requirement is not unique to China, but it is different than most Western countries (e.g., the US). Attorneys involved in addressing this issue should be mindful to balance confidentiality obligations with this need (does the agreement or suite of relevant agreements permit for registration without breaching the confidentiality provisions?). Such registration requirements are one reason that nationally specific (e.g., China-specific/US-specific) deals may be beneficial. However, most companies find managing a suit of country/region-specific deals to be too daunting a task.
Antitrust & IP policy issues
Chinese law reportedly violates any contract that:
- grant backs improvements without compensation
- restricts ability to challenge licensed IP
- restricts rights to improve technology or use improvements
- includes disclaimer of liabilities in association with licensed technology
- restricts licensee/transferee from obtaining similar/competing technology
- is a technology agreement that induces infringement of 3rd party rights
Experienced Western attorneys will recognize that many of these practices are commonplace in IP licensing agreements!
Chinese law also voids contracts that:
These requirements, however, are more in line with the laws of Western countries.
Chinese Contract Law “quirks”:
- A licensor under Chinese law reportedly must guarantee licensed technology is complete, correct, effective, and that it will reach the specified technological target!!
- If the Chinese licensee infringes on another party’s right by using the licensed technology pursuant to the license agreement, the licensor is generally required to bear responsibility for such infringement.
Other concerns when doing a deal with a Chinese entity include where enforcement can take place, particularly given the fact that Chinese IP enforcement rates and remedies currently do not nearly match those of Western countries.
Factors that may be considered in considering jurisdiction issues:
- Does the Chinese partner have assets in US, EU, etc.?
- Have jurisdiction objections been waived?
- Has local jurisdiction/venue been selected for disputes in China?
- Some experts point to the China International Economic and Trade Arbitration Commission (CIETAC) as a good forum for resolving IP issues in China
Patent Laws Impacting Deals (e.g., Collaborations)
- Local patent filing requirements (~ “foreign filing licenses”)
- Chinese patent law includes a China first policy, much like the US system. This might present a serious issue when US and Chinese organizations collaboraiton on inventions. This makes control over patent prosecution strategy important and dealmakers may also want to deal with the potential loss of rights in one jurisdiction carefully.
- Inventor compensation
- Chinese patent law (similar to other countries – e.g., Germany and Japan) requires inventor compensation. Some have suggested that failure to adequately comply with such laws might cast doubts on the validity of assignments of inventions outside of China.
Brave New World
Chinese law presents a different and potentially dangerous world for IP licensing business executives and attorneys from the West. Great care has to be taken when conducting deals in China, particularly given the reliance on tradition in the licensing process throughout Western countries.