International Alignment: China removes three key mandatory obligations in its Technology Import Regulation

By Christine Yiu, Yang Li

03-2019

On 18 March 2019, the State Council of China released the Administrative Order No.709[1] announcing amendments to the Regulation on the Administration of the Import and Export of Technologies ("TIER") with immediate effect. Three articles in the import section of the Regulation were removed, namely Article 24(3), Article 27, and Article 29:

  1. Article 24(3) was known as the mandatory indemnification provision. It imposed mandatory obligations on foreign technology owners to indemnify the Chinese party (be it a licensee, assignee, or joint venture partner) against infringement risk of third party IP rights. 

  2. Article 27 dealt with ownership of improvements to licensed technology. It stated that the fruits of the improvements to the technology shall belong to the party making the improvements, without a proviso allowing the parties to allocate the rights by contract like that in a domestic tech transfer.

  3. Article 29 set out the prohibited terms to a technology import contract. Article 29(3) echoed with Article 27, and prohibited any term which restricts the licensee of the technology from using the improvements it develops.

TIER has been a subject matter of much debates between US, China, and the EU over the years largely because the above three restrictions do not exist in technology export contracts nor domestic technology transfer contracts. The amendment is a welcoming change to both foreign and domestic tech companies. 

The 2002 version of TIER was an administrative measure which protected Chinese party to a cross border technology import transaction, perhaps envisaging a scenario where an all powerful foreign tech giant commissioned a small Chinese factory to manufacture its products. In the past years China has become much stronger and actively invests in technology. The bargaining powers of the two sides to a tech transfer transaction are guided by commercial positions more often than before the Chinese party is more powerful financially. Those provisions in TIER may deter foreign universities or technology start-up from transferring the technology into China because they could not afford to give those mandatory indemnity to more powerful Chinese counterparts which would ramp up the scale of commercial exposure. Some technology owners decided to assume the risk and went ahead. A number of transaction structures were devised to minimise the risk in the process, but each come with additional contract arrangement, enforcement risk, and tax exposure.

With the removal of the three provisions, tech companies can now negotiate and allocate risk in these aspects by contract. The amendments to TIER closely follow the overarching principle set out in the new Foreign Investment Law passed three days prior, on 15 March 2019. Article 22 states "China encourages technology cooperation based on voluntarily agreed terms and business practices in the process of foreign investment. The terms of technology cooperation shall be negotiated by investors on the basis of fairness and equality. No administrative authorities and their officers shall force technology transfer by implementing any administrative measures." The Foreign Investment Law is to be implemented from 1 January 2020. This also follows the national strategy to encourage technology transfer into China, an area which has seen exponential growth under active government initiatives.

It is also worth noting that in negotiating a global technology transfer project there are still China specific provisions to localise by. For example, Article 25 of TIER remains intact. Article 25 requires the foreign tech importer to guarantee that the technology is complete, effective, and error free, and is able to achieve the goal agreed in the contract. Similar wording is also found in Article 349 of the PRC Contract Law and is in fact one of the commonly invoked provisions in a technology dispute, thus warrants thoughtful drafting. Also, there are provisions in the PRC Contract Law and Anti-Monopoly Law which may be applicable.  Companies should pay attention to those provisions in allocating improvements rights and avoiding anti-competitive terms (see Table below). Further, the existing regulation and approval procedure relating to technology export, especially that in integrated circuit, big data, and the computer software industry is also an area which is increasingly regulated and requires careful compliance.

The chart below summarizes the provisions that were deleted from TIER against the still effective Chines laws on the same issues:

 

Provisions removed from TIER

Contract Law and Competition Law

Infringement of third party rights

Art 24(3)

 

Where the receiving party to a technology import contract infringes another person’s lawful rights and interests by using the technology supplied by the supplying party, the supplying party shall bear the liability therefore.

 

Art 353 of PRC Contract Law:

 

Where the exploitation of the patent or utilization of the technical secrets by the transferee as contracted infringes upon legitimate rights and interests of others, the liability therefor shall be borne by the transferor, unless the parties stipulate otherwise.

Improvements

Art 27

 

...an improvement made in improving the technology concerned belongs to the party making the improvement.

Art 61 and 354 of PRC Contract Law:

 

These provisions provide that parties of a technology transfer contract can contractually agree on how to share the ownership of the improvements; in the absence of such an agreement or if the agreement is unclear, the improvements belong to the parties making the improvement.

 

Prohibited Terms in a technology contract

Art 29

 

A technology import contract shall not contain any of the following restrictive clauses:

(1) require the receiving party to purchase unnecessary raw materials, products, equipment or services;

(2) request royalty payments for expired and/or invalid patents;

(3) restrict the receiving party from improving the licensed technology or using the improvements;

(4) restrict the receiving party from acquiring similar or competing technologies from others;

(5) unreasonably restrict the channels for the receiving party to purchase raw materials, parts or components, products or equipment;

(6) unreasonably restrict sales quantity, product models, or prices of the products the receiving party manufactures;

(7) unreasonably restrict the channels for the receiving party to export the products manufactured using the technology.

Art 329 of PRC Contract Law:

 

It provides that a technology contract that illegally monopolises technology, impairs technological progress or infringes upon the technological achievements of others will be rendered null and void.

 

Art 343 of PRC Contract Law:

 

It provides that a technology transfer contract shall not restrict technology competition and development.

 

Art 10 of 2004 Supreme People's Court Judicial Interpretation on Application of Law for Technology Contract Disputes:

 

Restrictions which illegally monopolize technology or impair technological progress include:

(1) restrict making improvement or use of the improvement;

(2) restrict acquiring similar or competing technology from others;

(3) set unfair exchange conditions for the improvements, such as requesting (exclusive/non-exclusive) grant-back without consideration;

(4) restrict the licensee's reasonable exploitation of licensed technology according to market demand, including unreasonably restricting sales quantity, product models, price and channels;

(5) require the assignee or licensee to accept conditions that are not necessary for implementing the technology, including purchasing unnecessary technology, raw materials, products, equipment, services or accepting unnecessary personnel;

(6) unreasonably restrict the licensee's channels to purchase raw materials, components or devices;

(7) prohibit or restrict the counterparty to challenge validity of the intellectual property rights.

 

Additionally, Art 8-10 of the 2015 Regulations on Prohibition of Conduct Eliminating or Restricting Competition by Abuse of Intellectual Property Rights also provide that a business undertaking with a dominant market position, without a justifiable reason, shall not engage in abuse of IPR behaviours such as refusal to grant licence on reasonable terms, unjustified tie-in, requesting exclusive grant-back to use the improvement, restriction on challenging validity of IPRs, restrictions on business dealings with others, discriminatory treatments, etc.

 

 

Authors

Yang Li

Legal Manager
China

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