Australia signed the landmark Free Trade Agreement with China (the ChAFTA) on 17 June 2015. The ChAFTA unlocks significant business potential in China for Australian businesses. Following from our article, “Crouching trade mark, hidden reform”, earlier this year, this article outlines some practical tips to protect your innovative work when conducting businesses in China.
1. Consult the technology import and export catalogues.
Not all technology may be imported into or exported from China. Technology imports and exports in China are divided into “prohibited”, “restricted” and “unrestricted”. Technologies may be “prohibited” from transfer into or out of China if they endanger national security and social morality, threaten health or safety, affect public interest or otherwise prohibited by law. It is prudent to check the Catalogue of Technologies Prohibited and Restricted for Imports, published by the Ministry of Commence (MOFCOM) to ascertain whether your technology is importable to China with or without restrictions. Contracts dealing with “restricted” technology require approval by the Chinese government, whilst contracts dealing with “restricted” or “unrestricted” technologies may require registration with the relevant authorities. If you anticipate that technology will later be exported, you should also consult the Catalogue of Technologies Prohibited and Restricted from Export.
2. Protect your IP rights.
The Chinese intellectual property regime, whilst still relatively young, is expanding rapidly. The Chinese Patent Office had more patent applications than any other country in 2014. Brand protection may be obtained by filing trade mark applications with the China Trade Mark Office. Copyright works do not require registration for protection, but you may wish to register your copyright work on a voluntary basis for some additional certainty. Although there may continue to be certain difficulties in effectively enforcing your intellectual property rights in China, the establishment of Intellectual Property Courts in Beijing, Shanghai and Guangzhou late last year is certainly indicative of China’s determination to strengthen its intellectual property regime. Please contact us if you wish to obtain more information for the protection of your intellectual property in China.
3. Choose the right partner.
Many will tell you that having the right connections or “guanxi” in China is key to all successful commercial activities. Chinese people value relationships highly and it is not uncommon for parties to interact for a long time before commencing business negotiations. Ideally, your Chinese partner will be competent to conduct its tasks but depend on the transaction, you may not wish to choose a partner who is so well-placed as to be able to compete directly with you! In some circumstances, you may wish to engage several Chinese parties for different tasks so that no one party would be able to access your technology entirely. When conducting negotiations, ensure that you identify the legal entity of the partner you will be actually dealing with in your proposed transaction as it may be quite different to that with which you interact!
4. Structure your deal carefully.
The structure of your transaction should be driven by your commercial strategy. You may wish to take advantage of the low manufacturing costs in China by simply engaging a Chinese contract manufacturer. Other business structures that may be available for Australian companies include “Wholly Foreign-Owned Enterprise” (WFOE), which usually give you the greatest amount of control; or “Joint Ventures”, which may be contractual or in equity. Joint ventures enable you to take advantage of your Chinese partners’ established facilities or networks. Alternatively, you may choose to establish a representative office for liaison purposes only. A representative office may not engage in profit-making activities. Obviously, there are also important tax and other considerations for the adoption of a particular business structure.
5. Have a good contract.
It is recommended that a carefully considered contract be put in place to govern the proposed relationship. Article 329 of the Contract Law in China regulates technology transfer contracts and there are a few peculiarities which your lawyer should consider when preparing your contracts, in particular, contracts with an intellectual property focus.
(a) Ownership and validity.
If you are commissioning a Chinese party to develop intellectual property, your contract should clearly state that you own the developed intellectual property, otherwise, it will be owned by the commissioned Chinese party.
In addition, provisions that prohibit or restrict a party from challenging the validity of the transferred technology are illegal under Chinese law.
Reverse engineering is not expressly prohibited in China and a comprehensive technology transfer agreement should include a provision limiting or prohibiting such behaviour.
(b) Improvements to licensed technology.
Article 329 also imposes certain restrictions on how improvements are to be dealt with in the contract. In particular, the contract must not:
- restrict a party undertaking new research on the relevant technology, or acquiring competitive technology from other sources;
- restrict a party from making or using improvements to the transferred technology; or
- include terms for exchange of developed improvements which are not reciprocal, such as automatic grant of ownership of such improvements without some form of compensation or a licence-back arrangement.
(c) Royalties and accounting.
Royalty payments for expired or invalid patents are not allowed in technology transfer contracts. In addition, due to the potential difficulty in auditing or enforcing your rights in the contract, it may be beneficial (where appropriate) to select a price structure that requires a more substantial upfront payment as opposed to heavily relying on subsequent royalty payments calculated on the net sales of products. In some circumstances, you may wish to retain your competitive edge so that the Chinese party will require your expertise at the end of the transaction to keep the final payments coming.
(d) Confidentiality.
As with other technology transfer agreements, it is absolutely essential to include strong confidentiality provisions in the contract to reduce the risks of your intellectual property being inadvertently leaked or misappropriated. It is not generally possible to obtain an injunction to prevent threatened breaches of confidentiality, however, damages may be awarded if a breach occurs. Some practical tips to protect your confidential information include marking such information “Confidential” so that it is clear to the recipient that you view the document as confidential; password protect electronically-stored confidential information to limit the extent of access by the personnel of the recipient party; and conveying the information by “show-how” for an initial training period instead of providing written specification.
(e) Dispute resolution.
Hong Kong is a Special Administrative Region in China, where its legal system adopts a common law framework. You may consider requiring arbitration in Hong Kong for resolution of disputes. Pursuant to an agreement for mutual recognition of arbitration awards between Hong Kong and China, Hong Kong arbitration awards are generally enforceable in China. There are only limited grounds of refusal for enforcement (such as contrary to public policy or interests of China). There may, however, be some practical difficulties in enforcing such awards in China (e.g. due to local protectionism).
(f) Governing law.
Notwithstanding the above, you may consider using Australian law, Hong Kong or Chinese law as the governing law for the contract. Make sure you engage the relevant local lawyer to advise on compliance and the governing law issues. We work repeatedly with Chinese associates to check comprehensive, Australian drafted agreements, for compliance with ‘mandatory’ law.
(g) Formalities.
Agreements must be signed by the Chinese companies’ legal representative with the corporate “seal” or “chop” affixed. You may also wish to translate your contract into Chinese. However, poor translations of the contract may lead to later disputes. You should engage a competent translator and preferably, a bilingual lawyer to verify the translation. In any event, it is prudent to include in the contract that the English version will prevail in the event of any inconsistencies between the English and Chinese versions.
The above tips are obviously not exhaustive. Extending your business to China requires careful and long term planning. Other considerations including differences in culture, language and business etiquette and practices are equally important. The Australian government also provides plenty of resources with respect to conducting business in China via AUSTRADE.
Please feel free to contact us should you have any queries or need assistance when conducting business in China.
Sylvie Tso has assisted Australian businesses to gain access to the Chinese market through the preparation and negotiation of licences, supply agreements and manufacture agreements with Chinese entities. Sylvie reads and writes Chinese and speaks both Cantonese and Mandarin.