Updated: May 19, 2020
The protection of intellectual property rights ("IPRs") always concerns foreign investors. China's new Foreign Investment Law ("FIL") has strengthened IPRs protection. It also strictly forbids unfavourable practices, such as forced technology transfer. Therefore, foreign investors should, hopefully, have far fewer concerns about protecting their IPRs in China. The Foreign Investment Law has established new regulations on technology transfer, serving as guidelines for investors to form contracts. This article intends to help foreign investors better understand the relevant Chinese laws and regulations to make the right decisions while investing in China. We will emphasise the following two aspects:
Relevant regulations in the FIL that protect foreign investors' IPRs.
Restrictive Rules on Technology Transfer in China concerning foreign investment.
Relevant regulations in the FIL to Strengthen the Protection of Foreign Investors' IPRs
The determination of the Chinese government to provide stronger protection to foreign IPRs is undoubtedly great news for anyone who considers investing in China. Following the principle of treating foreign enterprises and the domestic ones equally, the Foreign Investment Law and its supporting laws forbid discrimination against foreign investors in any aspect, including the protection of IPRs. The enhanced-protection is mainly reflected in the following measures:
Explicit protection of trade secrets
FIL (article 23 and 39) stipulates that the trade secrets of foreign investors should be protected strictly.
Stricter measures to prevent intellectual property infringement
FIL (article 22) ensures that intellectual property infringement ("IP infringement") will be subject to legal liability based on thorough investigations. Through a complaint mechanism (article 26), foreign investors can assert their IPRs. There is a legal trend in China to establish a punitive compensation system for IP infringement. China determines to protect IPRs more effectively by increasing the penalties of IP infringement.
Guaranteed freedom to dispose of profits from technology cooperation
According to the FIL (article 21), foreign investors are entitled to freely transfer inward and outward their royalties of IPRs within the territory of China in CNY or a foreign currency.
Prohibition of forced technology transfer
FIL (article 22) encourages technology cooperation based on free will and business rules during the process of foreign investment. Conditions for technology cooperation are determined by all investing parties upon negotiations under the principle of equity. No government authority or its staff may force any transfer of technology in any way.
In the past, there were rules where technology importers have the right to continue to use imported technology after the technology import contract expires. This provision is now abolished because it constitutes forced technology transfer. The parties to a technology import contract are now entitled to freely agree on the licensees' right to use the imported technology after the contract expires.
Encouragement of free negotiation by reducing restrictive rules on technology contracts
In supporting regulations on Administration of Import and Export of Technologies, several restrictive rules have been removed or amended, which reflects the full respect towards parties’ freedom of contract. The following two aspects are worth noticing:
Ownership of improved technology In the past, improved technology belongs to the improver. This rule is changed now. The parties to the contract are entitled to reach agreements regarding the ownership of improved technology. Only when there is no such agreement, or the agreement is invalid, the default rule of “the improved technology belongs to the improver” applies.
Liability of technology infringement Given the amended regulations, the contractual parties have more room to negotiate liability of technology infringement, concerning issues of, for instance, who is held liable, liability sharing/distribution, and the limit of liability, etc. However, the parties' agreement should not exclude defect liability. The technology supplying party should ensure that: a) he or it is the legitimate owner of the technology supplied or one who has the right to assign or license the technology; b) he or it assists in dealing with disputes concerning assigned or licensed IPRs.
Restrictive Rules on Technology Transfer in China
It is important for foreign investors to remember that the validity of clauses regarding IPRs in a technology transfer contract is regulated in different laws and regulations. Besides the Foreign Investment Law, these regulations and laws should not be overlooked:
Regulations for Implementing the Foreign Investment Law,
Regulations on Administration of Import and Export of Technologies,
Supreme Court’s interpretation of the technology contract, and
There is an overlap between various laws and regulations mentioned above. Investing parties are granted with freedom of contract at a higher level by Regulations on Administration of Import and Export of Technologies. But the relevant restrictions on technology transfer still exist in other laws and regulations.
First, according to article 329 in Contract Law of China, clauses that constitute (1) illegal monopoly of technology, (2) impediment of technology development or (3) Infringement to technical results of other persons are invalid.
Second, according to Anti-Monopoly Law of China, undertakings holding a dominant position on the market, without justifiable reasons, should not conduct tie-in sale of commodities or adding other unreasonable trading conditions to transactions which eliminate or restrict competition.
To effectively circumvent the restrictions mentioned above on technology transfer by the Contract Law and the Anti-Monopoly Law, the parties to the technology transfer may adopt foreign laws and arbitrations. Related arbitration awards are likely to be recognised and enforced in China.
When engaging in technology transfer, foreign investors should make full use of their rights prescribed by law and optimise their interests within the legal framework. Meanwhile, foreign investors should also pay attention to restrictions existing in laws and find legal ways to circumvent these restrictions.
Connect Flow International Is at Your Service
Connect Flow International can provide reviewing and drafting services for your technology transfer contract. We can help you ensure the validity of the contract terms and the success of technology transfer.
At Connect Flow International, we provide clients with various services to protect your intellectual property rights：
IPRs legal consultancy,
brand protection strategy,
trademark & copyright registration,
trademark & copyright management,
IP dispute resolution, and
anti-unfair competition investigation.
If you have questions, remarks, feedback, or requests, please contact us.