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19 Apr 2019

Amendments to the PRC Rules on Technology Import: Empowering the Transferor?

Last month, the State Council struck out three controversial provisions from the Regulations on Technology Import and Export Administration of the People’s Republic of China (“TIER”), the amendment being effective as of March 18, 2019.[1] As with the Foreign Investment Law of the People’s Republic of China (“Foreign Investment Law”), passed just three days before then,[2] the State Council decision has been heralded as a positive response to complaints about “forced technology transfer” and a move towards satisfying the obligations of the People’s Republic of China (“PRC”) as a WTO member. This newsletter analyzes the changes and their effects on the importation of technology to mainland China.

Deleted Provisions

Although only three provisions of TIER have been deleted, they were among the principal ones criticized for disadvantaging foreign businesses transferring technology into mainland China and jeopardizing their rights and interests in the technology.

The first deleted provision, Article 24(3), provided that the party supplying technology retained sole liability for infringement of any third party’s rights or interests caused by the use of the technology by the party receiving it.[3] In other words, if a foreign company provided technology to a mainland China enterprise and the latter’s use led to the infringement of any other party’s rights, e.g., of intellectual property (“IP”), it was the foreign company which was held liable.

The second deleted provision, Article 27, provided that any improvement of supplied technology belonged to the party making the improvement.[4] Thus, if a foreign business licensed technology to a mainland China business and the latter took and further developed the technology, it could claim the result as its own.

The third deleted provision, Article 29, prohibited a technology import contract from containing any of the following so-called “restrictive provisions”:

  • requiring the receiving party to accept any additional condition unnecessary for the technology import, e.g., taking on a related but unnecessary product or service;
  • imposing on the receiving party such obligations as paying a use fee for technology after a patent has expired or been invalidated;
  • restricting the receiving party from improving supplied technology or using the improvement;
  • restricting the receiving party from obtaining similar technology from other sources or obtaining competing technology;
  • unreasonably restricting the receiving party from purchasing raw material, components, products or equipment from other sources;
  • unreasonably restricting the quantity, variety or sales price of products of the receiving party; or
  • unreasonably restricting the receiving party from utilizing channels for exporting products that are manufactured using the imported technology.[5]

In other words, a foreign transferor of technology could not impose certain contractual obligations on the mainland China transferee with regard to the latter’s use of the technology.

The deletion of these provisions, which were long deemed to indirectly force technology transfer from foreign to domestic parties, reflects the new technology-transfer provisions in the Foreign Investment Law. In particular, Article 22 of the Foreign Investment Law provides: the “State shall protect the intellectual property rights of foreign investors”; in case of any IP infringement, “legal liability shall be strictly investigated in accordance with law”; “the State shall encourage technology cooperation on the basis of free will and business rules”; and, specifically, “[c]onditions for technology cooperation shall be determined by all investment parties upon negotiation under the principle of equity”.

However, other provisions of the TIER and other laws, regulations and rules continue to govern not only other matters of technology transfers but to a certain extent even those ostensibly affected by the deletion of the above provisions.

Remaining Provisions

Contracts relating to the transfer of technology are governed not only by TIER, all of whose provisions but three remain intact, but also by several other legislative and judicial instruments, most notably the Contract Law of the People’s Republic of China (“Contract Law”). In light of the deleted provisions, parties to technology transfers should pay particular attention to the below.

Liability for infringement of transferred technology, previously governed by Article 24(3) of TIER, is now subject to Article 353 of the Contract Law: the parties to technology transfer may stipulate who bears liability for infringement of third-party rights, but in the absence of a (clear) agreement, the transferor remains liable.

Ownership of improvements on transferred technology, previously governed by Article 27 of TIER, now according to Article 354 of the Contract Law also may be agreed upon by the parties, but not only is the default rule (in the absence of a clear agreement) that improvements belong to the party making them: in addition, an agreement not based on “mutual benefit” (see below) is deemed invalid, according to Article 329 or 343 of the Contract Law, for “illegally monopoliz[ing] technology and impair[ing] technological advancement” or “restrict[ing] technology competition and development”.

The all-important Interpretation of the Supreme People’s Court Concerning Some Issues on the Application of Law for the Trial of Cases on Disputes over Technology Contracts (“SPC Interpretation”) has wide-reaching provisions that may be used to the same or similar effects as the deleted provisions. Article 10 of the SPC Interpretation provides a list of “restrictions” on technology transfer which cover much of the same ground as the “restrictive provisions” previously prohibited by Article 29 of TIER, but in the SPC Interpretation the “restrictions” are prohibited by virtue of Article 329 of the Contract Law (see above).

Thus, Article 10 of the SPC Interpretation deems the following “restrictions” to “illegally monopolize technology or impair technological progress”:

  • requiring the receiving party to accept any additional condition unnecessary for the technology import, e.g., taking on a related but unnecessary product, service or person;
  • restricting the receiving party from improving supplied technology or using the improvement or imposing conditions on the exchange of improved technology that are not reciprocal (or “mutually beneficial”);
  • restricting the receiving party from obtaining similar technology from other sources or obtaining competing technology;
  • unreasonably restricting the receiving party from purchasing raw material, components, products or equipment from other sources;
  • restricting the transferee’s reasonable exploitation of transferred technology according to market demand, including unreasonably restricting sales quantity, variety, price, channels or market;
  • prohibiting or restricting the counterparty from challenging the validity of the intellectual property rights.

The above show how the addition of restrictive provisions in a technology import contract, notwithstanding the deletion of Article 29 of TIER, may invalidate an agreement, including (in connection with the deletion of Article 27 of TIER) for failing to base the ownership of improvements on the principle of “mutual benefit”.[6]

Remaining articles of TIER should also not be overlooked in carrying out technology transfers into mainland China. Even if no other article applies to the particular technology transfer, parties drafting technology import contracts should still consider Article 25 of TIER, which is often invoked in conjunction with Article 349 of the Contract Law in technology-related disputes, as these articles require the transferor to ensure the technology is “complete, accurate, effective and capable of achieving the agreed technical object”.

Takeaways

As an initial matter, a foreign transferor (or licensor) of technology may negotiate with the mainland China transferee (or licensee) to subject the technology transfer to a foreign governing law and thereby avoid all potential issues arising out of TIER, the Contract Law and the SPC Interpretation. However, the transferor/licensor should pay special attention to any special structural or contractual arrangement, as it may render PRC law the mandatory governing law. For example, where a foreign party will transfer/license technology to a subsidiary in mainland China and the subsidiary will sublicense the technology to a mainland China party, the contract between the subsidiary and the mainland China licensee cannot be governed by foreign law due to a lack of foreign factors. In such a case, the TIER, the Contract Law, the SPC Interpretation and other related PRC rules will govern.

The changes to TIER give parties more flexibility to negotiate the allocation of infringement liability and ownership of improvements. Transferors should pay attention to the provisions relating to these issues in the transfer agreement, as the default rules (in the absence of agreement) favor the transferee, and refer to rules beyond TIER, including the Contract Law and SPC Interpretation, in negotiating the terms for ownership and use of improvements as well as how to protect the improvements (e.g., as patents or trade secrets), which party will be responsible for initiating legal proceeding against infringing third parties, caps on indemnification, etc. When drafting terms restricting the rights of, or imposing additional obligations on, the transferee/licensee in relation to the technology, the transferor/licensor should take special care to avoid falling under the scope of Article 10 of the SPC Interpretation and related rules.

Finally, though the changes to TIER reflect the general PRC recent trend towards greater respect of party autonomy in technology transfers, such transfers in certain industries (e.g., big data) are instead increasingly regulated and call for careful compliance.



[1] Decision of the State Council on Revising Certain Administrative Regulations (Order of the State Council of the People’s Republic of China No. 709) (“国务院关于修改部分行政法规的决定(中华人民共和国国务院令第709号)”), issued on 2 March 2019 and released on 18 March 2019, Paragraph 38.

[2] See our newsletter of 18 March 2019 for an overview of the Foreign Investment Law.

[3] Article 24 Paragraph 3 of TIER: “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.”

[4] Article 27 of TIER: “Within the term of validity of a contract for technology import, an achievement made in improving the technology concerned belongs to the party making the improvement.”

[5] Article 29 of TIER: “A technology import contract shall not contain any of the following restrictive clauses:

(1) requiring the receiving party to accept any additional condition unnecessary for the technology import, including buying any unnecessary technology, raw material, product, equipment or service;
(2) requiring the receiving party to pay exploitation fee for a technology when the term of validity of the patent right in which has expired or the patent right of which has been invalidated, or to undertake other relevant obligations;
(3) restricting the receiving party from improving the technology supplied by the supplying party, or restricting the receiving party from using the improved technology;
(4) restricting the receiving party from obtaining technology similar to that supplied by the supplying party from other sources or from obtaining a competing technology;
(5) unduly restricting the receiving party from purchasing raw material, parts and components, products or equipment from other channels or sources;
(6) unduly restricting the quantity, variety, or sales price of the products the receiving party produces; or
(7) unduly restricting the receiving party from utilizing the channel for exporting products manufactured using the imported technology.”

[6] Additionally, Articles 8 to 10 of the Regulations on Prohibition of Conduct Eliminating or Restricting Competition by Abuse of Intellectual Property Rights provide that a business undertaking with a dominant market position may not, without a justifiable reason, engage in abusive conduct with respect to IP rights, e.g., a refusal to grant a license on reasonable terms, an unjustified tie-in, a request for exclusive grant-back to use the improvement and restrictions on business dealings with others.

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