Chinese patent law, the contract law, as well as technology transfer regulations must be considered when entering into patent licenses with Chinese companies. A patent license is considered a type of technology transfer agreement. Therefore we will briefly describe the basic rules related to technology import below as well as other issues that are raised by relevant laws.
Technology transfer regulations
Before an SME licenses its technology in China it should first determine whether approval or registration is required for such technology import, which depends on the classification of the technologies in the Catalogue of Technologies Prohibited or Restricted to be Imported into China (‘Technology Import Catalogue’) released by the Ministry of Commerce (MOFCOM). The catalogue divides technologies into three categories:
- ‘Prohibited’ – import of such technology is prohibited, and any technology cooperation agreement between a foreign entity and a Chinese entity involving technology of this kind are never effective in China.
- ‘Restricted’ – import of such technology is only allowed after approval has been obtained from MOFCOM. The agreement for the import of ‘restricted’ technology is not effective until it is approved by MOFCOM, even if the agreement is duly executed by the parties.
- ‘Free’ – if a technology is not listed in the above ‘Prohibited’ or ‘Restricted’ lists, then it is considered ‘free’ technology and only registration of the related technology agreement with MOFCOM or its local branch (rather than approval of MOFCOM) is required. The agreement is effective upon execution by the parties.
Contracts for the import of restricted technologies are not effective until they are approved. Contracts for the import of ‘free’ technologies are effective if they would otherwise be effective (e.g. properly executed, no invalid terms, etc).
Restrictions on making improvements on any licensed technology may render the contract invalid in whole or in part. Certain restrictions may raise monopoly concerns and are considered to impede technological advancement. Ownership of improvements: The law specifies that ownership of improvements belong to the party making the improvement unless the contract specifies otherwise but proper compensation must be given.
When a party is acting in the capacity of a licensor in China, it is required under the Contract Law to provide to the licensee a warranty of reliability and completeness of technology. However, the law does not specify whether or not this warranty can be disclaimed or limited by contract. Therefore, to manage the licensor’s risk, language should be included in the contract that limits the statutory warranty to the extent permitted by law.