China Update: Technology transfer regulations revised – Main protective IP restrictions removed

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On March 2, 2019 the State Council by its decision No. 709 in paragraph 38 deleted several provisions of the Regulations of the People’s Republic of China on the Administration of Import and Export of Technology (“TIER”) which have been at the center of problems for foreign IP owners when engaging in technology import to a Chinese entity. This change opens up technology imports to more free negotiation without having to consider these mandatory restrictions which previously protected the Chinese entities in such agreements.

The changes are;

(a) Deletion of Article 24 (3) TIER – Liability for the licensed technology

Previously the licensor had to bear liability for the infringement of third party rights by the Chinese technology importer when using the licensed technology. This deletion will remove the requirement to define such liability which can now be freely regulated by the parties of the technology transfer agreement.

(b) Deletion of Article 27 TIER – Improvements made by the Chinese technology importer

Improvements to the imported technology made by the Chinese importer had to be owned by the Chinese entity making those improvements. There was no way to deviate from this restrictive condition, even if the parties would have preferred other conditions and would have otherwise been allowed to do so. When drafting agreements it was difficult to find solutions to accommodate both parties’ needs and interests. Usually to accommodate this, commissioned research agreement elements were created in addition to technology transfer contracts or cross-licensing options of future improvements agreed among the parties to overcome the barrier of initial ownership with the Chinese importer according to Article 27. The deletion of Article 27 will alleviate this need.

(c) Deletion of Article 29 TIER – Restrictive clauses which are forbidden

Article 29 TIER had a list of prohibited restrictive clauses which are now deleted. The prohibited conditions included regulations on bundling, licensing expired patents, restrictions on making improvements or licensing competing technologies, price fixing for products made with the technology and limiting export channels.

However, the drafting of technology agreements may still be required to adhere to all other laws and regulations in this area such as the Contract Law, and including the “Interpretation of the Supreme People’s Court concerning Some Issues on Application of Law for the Trial of Cases on Disputes over Technology Contracts”, the Anti-Unfair Competition Law of China or the Anti-Monopoly Law. But foreign technology licensors will now be put under the same scheme of rules as domestic licensors and cross-border agreements will now not face special scrutiny anymore. This will provide relief to intra-company agreements of multinational companies with their Chinese affiliates when setting up technology transfer agreements.

After years of lobbying for these changes this is a significant improvement for all companies licensing technology to China or with business operations in China (which usually involves technology transfer to China).

The revised regulations became effective as of March 18, 2019. From now on agreement drafting with Chinese entities will be freed from the special considerations of the old TIER. However, there are still many technology transfer agreements which have already been entered into and which did not attend to the former TIER. These agreements have been unenforceable as they deviated from the old regulations under the former TIER which was a mandatory Chinese law and could not been superseded by foreign laws. It will now have to be seen whether it could be argued that the revised TIER may be applied retroactively in these cases. This may be judged on a case-by-case basis on the circumstances by the courts. We will continue to monitor developments and provide insight as needed. Please contact our China team for any additional information or for assistance with you IP needs in China.

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