Contract terms to protect intellectual property
Contracts are an integral part of an intellectual property protection strategy. SMEs wishing to license intellectual property in China should create a strong legal contract with their Chinese counterpart to ensure the language and agreement are explicitly understood. This usually means contracts should be in both Chinese and English. Contracts in China must be put together a certain way so that it will be recognised and enforceable by the government of China. A local advisor can assist with this. Often companies neglect terms covering the return of moulds or other tools or tangible forms of information they have passed on to the Chinese company such as specifications and designs etc. Contracts should require the return of moulds / information and the destruction (and confirmation of destruction) where return is not feasible.

To ensure that the individual with whom the SME is in business negotiations with has the authority to bind the company, the SME should ensure that the company seal is imprinted on the contract and that the name on the seal is consistent with the name in the contract.

Governing law and regulations
If the license agreement is between two China registered companies (including any wholly foreign owned companies or joint venture companies registered in China), the contracting parties must adhere to Chinese law as the governing law. The laws of Hong Kong and Macau are deemed as foreign law. Therefore, the choice of governing law is usually only open to negotiation by the parties when a foreign party is involved in the agreement. However, under certain situations, Chinese law would govern in spite of what the parties have agreed (e.g. JV agreements).

Industry-specific regulations might also apply. SMEs should obtain legal advice on the legal enforceability of its proposed deal with respect to industry regulations (e.g. energy, telecommunications, publishing, food and beverage, etc).

Type of licensing
SMEs should consider whether to grant an exclusive, sole, or non-exclusive license. Exclusive licensees are those that are permitted to use the licensed intellectual property within the geographic scope and during the term specified in the license at the exclusion of all others, including the licensor. Unlike an exclusive license, a sole license does not prevent the licensor from using the intellectual property within the geographic scope and during the term specified in the license. In China, exclusive licensees obtain a right by law to initiate proceedings against infringers based on its license rights. In China, a sole licensee, unlike an exclusive licensee cannot initiate an infringement suit entirely independent of the licensor.

If sublicensing is permitted, the contract should clearly specify this.

Supervision
Trademark licensors are required to supervise the quality of the licensee’s goods that are the subject matter of the licensed trademark. The license agreement should cover quality supervision/control, the type of remedies that are available to the licensor if the licensee fails to meet quality standards. The licensor should in fact perform its quality supervision/control obligations as set forth in the agreement and take actions to control the quality. The licensor’s quality control terms and actual supervision can serve as evidence in potential litigation regarding the licensor’s liability for products of poor quality that may have harmed a third party.

Parallel imports related to trademarks
There is no specific rule under Chinese law that addresses the issue of parallel imports related to trademarks, nor is there any express provision under China’s trademark law that grants the trademark owner the right to stop the unauthorised importation of trademarked products into China. Without any legal prohibition, it is difficult to control parallel imports by third parties. However, control of parallel imports by the licensee or other parties in privity of contract with the trademark owner can be addressed through contractual provisions. We suggest including an express prohibition on the sale of licensed products outside mainland China or any licensed territory. In addition, we recommend that the product markings or packaging include a statement that the product is only for sale in mainland China or the licensed territory (if not China) because such statement may discourage or add a level of difficulty to engage in parallel imports.

Product liability
Trademark licensors should obtain from the licensee warranties and indemnification with respect to product liability. In China, indemnity is meant to be compensatory—enough to restore the party back to the financial state it was in before a claim, but nothing more. Actual and direct losses would be repaid, but punitive damages are unlikely to be granted by Chinese courts. It is important to back‐up warranties with a requirement for indemnification in the event of breach of such warranty.

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).

Restrictive terms
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.

Statutory warranties
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.

Trademark recordal
The recordal measures specifically state that the licensor is responsible for the recordal. It may entrust a trademark agency recognised by the State Administration for Industry and Commerce (SAIC) to record the license. However, where the licensor is a foreigner or foreign enterprise, he/it must entrust a trademark agency designated by the SAIC to handle the recordal.

The following documents must be submitted along with the trademark license that is to be recorded:

• trademark license contract recordal form;
• duplicate of the trademark license contract (see note below);
• photocopy of the registration certificate of the licensed trademark

Note: in practice the Trademark Office requires an original trademark license contract (usually an originally executed short form agreement) and that any document in a foreign language must be accompanied by a Chinese translation.

Number of recordal forms
The number of recordal forms must mirror the number of trademarks being licensed. For example, if in one contract three trademarks are licensed, three separate recordal forms must be completed. However, only one duplicate of the trademark license contract is required.

Fees
A recordal fee of RMB 300 (approximately USD 45) based on the number of trademarks per class is required (fee may be subject to change). Therefore, if a single contract grants licenses to three trademarks, the total fee will be three times the fee noted above. The fee may be paid directly to the Trademark Office or via a trademark agency if one is used.

Short-form agreements for recordal purposes
The drawback of recording a trademark agreement is that sensitive information contained in the contract will be disclosed to the public. In practice a "short-form" trademark license agreement is prepared for such recordal to avoid having to reveal sensitive information. This short-form agreement only contains the basic information required by the authorities, revealing no more than is necessary for recordal purposes and must be in Chinese. For instance, the long-form agreement would contain provisions on dispute resolution and other substantive commercial terms whereas the short-form agreement would not. In the event that there are disputes between the parties, they can rely on the long-form license agreement.

The short-form agreement would primarily include the following basic information.

• trademark and its registration number;
• range of goods on which the trademark may be used;
• term of the license;
• method for providing licensed trademark to the licensee;
• provisions relating to the licensor's supervision of the quality of the goods on which the trademark is used;
• provisions requiring the name of the licensee and the origin of the goods to be indicated on the goods that bear the registered trademark.

With respect to specifying the range of goods, it is recommended to not simply indicate the class of goods, but also the specific goods in the class for which the trademark is licensed.

The Chinese party rather than the foreign SME would be responsible for applying for the technology import approval or registration (as discussed above). To register, the Chinese party must have import rights. Only an entity registered in a corporate form having a business license may obtain import and export rights.

Restricted Technology
Please note that these procedures may be subject to change as discussed in section 3 below. To import technologies that are restricted from importation, an application for an import license must be submitted to the Ministry of Foreign Trade and Economic Cooperation ('MOFTEC'). A decision to approve or reject the application is to be made within 30 working days of receiving the application. If the application is approved, a preliminary import license for import of technologies is issued. The importer may enter into technology import contracts upon obtaining this preliminary license (or if the contracts are already drafted and executed they may be submitted at the same time and proceed to the next phase described below). Once the contract is executed between the parties, the importer should submit the preliminary import license, copies of the contract and exhibits (if any) and documents evidencing the legal status of the contracting parties (e.g. certificates of incorporation or business licenses) to MOFTEC to apply for a Technology Import License. MOFTEC will then review the contract and make a decision to whether or not to grant the Technology Import License within ten working days of receiving the documents. The technology import contract (e.g. the agreement to license the SME's patent to a Chinese company as described in the question) becomes effective on the day the Technology Import License is issued, not the date the contract is signed by the parties. The importer may be asked to present the Technology Import License in order to go through the formalities at the authorities of foreign exchange, banking, taxation and customs (where applicable).

Free Technology
MOFTEC and local branches of MOFTEC are in charge of the administration of registration of technology import contracts (e.g. technology licenses into China). After entering into a license contract, the licensee of free technology is required to register the contract through the website of China International E-Commerce Network (www.ec.com.cn), and submit to MOFTEC or the local branches of MOFTEC the following documents:

• registration application;
• copies of the contracts;
• documents evidencing the legal status of the contracting parties for registration.

MOFTEC or its local branches will review the contract and issue a registration certificate within three working days of receiving the application and documents. The licensee (the importer) should present the registration certificate in order to go through the formalities at the authorities of foreign exchange, banking, taxation and customs.

If the main terms of the technology import agreement changes, the licensee is required to apply for a new technology import license or a new registration certificate.

Specific to patent licenses
If the technology imported is in the form of a patent, the patent license agreement, in addition to being subject to the requirements stated above, would also need to be recorded with the State Intellectual Property Office (SIPO) within three months of the contract becoming effective. The licensor or licensee may record the license. However, if a European based SME (with no presence in China) records the license it would have to designate a patent agent to record the contract on its behalf.

The following documents are needed for recording the license and should be prepared in Chinese or if in the original language, accompanied by a Chinese translation:

• power of attorney from both contracting parties (if the recordal is handled by an agent) or power of attorney from the party not handling the recordal
• an application form
• the original contract
• copy of the patent certificate
• legal documentation confirming the identity of the patentee

In general, if the application documents are complete, the recordal certificate is issued within seven working days after they are submitted.

Remittance of royalties from China to Europe is remitted by the Chinese licensee at its local bank. In general the Chinese company may be asked to present the following documents:

• an application by the licensee;
• the contract;
• invoice from licensor;
• proof of tax payment on the royalty from the tax authority.

Additional documents are required depending on the intellectual property licensed, as described below.

Trademarks
the recordal certificate for the trademark license;

Technology license agreements
the registration certificate of the technology import contract / technology import license; technology import contract data form provided by a local branch of MOFTEC; if the technology is in the form of a patent, then the recordal certificate of the patent license is required. This is obtained from SIPO.

The documents required may differ depending on the licensee’s choice of local bank. It is best to have the licensee check with the bank prior to the remittance.

Recording short‐form agreement.
Recording of agreements are often required for remitting royalties overseas. If an overseas licensor charges royalties, the licensee may be asked to present a recordal certificate issued by the trademark authority to the bank at the time it remits royalty payments overseas. In addition, if the licensee wishes to advertise the product with a licensed trademark or requires services for printing the trademark on packaging or other materials, the advertising agent or printer may ask the licensee to show proof of authorisation such as a recordal certificate. In practice short‐form versions of licenses are recorded rather than the original since recorded contracts may become public information. The contract should include clauses requiring assistance from the licensee in executing and registering such agreements.

Time lag between recordal and first payment
Where a recordal certificate is required by a bank before royalty payments made to an overseas entity can be remitted, there will be a short waiting period between the first payment and the issuance of the recordal certificate. For instance, the Trademark Office usually issues recordal certificates within three to six months of submission if the recordal application contains all the required information and documents. Therefore, there may be a lag time of three to six months after a contract is signed before the first royalty payment can be made. This should be taken into consideration when drafting royalty payment requirements.

‘De‐registration’ after license ends.
The contract should also contain terms requiring the assistance of the licensee in 'de‐registering' the license registration once the license ends in case the registration could be improperly used as ‘proof’ of a license to use the trademarks.

The following measures for damages are available for intellectual property infringement:

• the illegal profits gained by the infringer
• loss of profits to the rights-holder
• in the case of patent rights, reasonable royalties (in practice you will have to be able to show a Court the level of licensing revenue derived from comparable licensing arrangements, preferably in China)
• reasonable attorney fees and expenses
• statutory damages (not exceeding RMB 500,000)

Additionally, the following damages are available for breach of contract (relevant here as technology transfer agreements / licences are basically contractual arrangements):

• liquidated (pre-estimated) damages provisions in contracts are allowed and enforceable in China, especially if actual damages are difficult to determine. Courts will only adjust the liquidated damages amounts if the party that has to pay the damages can show that the amounts specified are significantly higher than the actual damages.
• the actual losses suffered by the party to be compensated (these do not include those that were not foreseeable at the time of contracting).
• The amount varies depending on the evidence of loss (whether you can prove the amount), not by the type of technology transferred.

We have heard that there are changes to the technology transfer provisions and regulations coming into force in China. What consequences might there be for European SMEs?

The Technology Import and Export Regulations (the 'Regulations'), issued by the State Council in 2002 actually remain unchanged. Instead, draft changes have been circulated with respect to the Measures for the Administration of Import and Export Contracts Registration (June 2008 draft amendments), Measures for the Administration of Prohibited and Restricted Technology Import (June 2008 draft amendments), and Measures for the Administration of Prohibited and Restricted Technology Export (July 2008 draft amendments) rather than with respect to the Regulations. The final amendments are expected to be promulgated this year. Proposed changes do not affect the underlining Regulation, but rather only affects the details of the implementing measures / procedures. China's Catalogue on Technologies Prohibited or Restricted to be Imported into China ('Import Catalogue') was revised and approved in 2007. The proposed changes that might have consequences for European companies are described below.

Measures for the Administration of Import and Export Contracts Registration These measures relate to the registration of contracts for free technology.

Previously there was no deadline within which to submit such contracts for registration. The proposed amendments clarify the time for registration.within 30 days the contract becoming effective.

For contracts with fees based on annual sales, information on the basis of the sales must also be submitted within the new deadline. Any changes in sales must be recorded with the relevant authority. For example, if royalties are based on a percentage of sales, sales might be based on a forecast. If information on actual sales is available, then the proposed revisions require this to be recorded. However, the revisions do not go into any further detail about what should be submitted. It is possible that audited reports or tax invoices may be required but this is not stated specifically.

Previously there was no penalty for failure to register. Now a penalty is imposed.

Measures for the Administration of Prohibited and Restricted Technology Import These measures relate to contracts for the import of prohibited and restricted technologies. The approval authority was previously MOFCOM. The amendments propose to change the approval authority to the provincial branches of MOFCOM. In general, lower level authorities may be less strict in applying approval criteria, however, because there are over 30 provincial level authorities, there may be lack of consistency in the application of the approval criteria. In addition, some authorities may not have the appropriate experience.

A panel of trade and technology experts will be formed to review the contract and technology.

The scope of the trade review has been widened to include the consideration of whether the transfer will create an unfavourable influence on the establishment or acceleration of establishment of certain domestic industries (which are not specified).

The scope of the technology review has been widened to include the consideration of whether the proposed transfer endangers national security, public interest or public morality, the impact on lives and health of plants as well as to that of humans, and the impact on the environment (previously the term 'ecological environment' was used, which was not as clear).

Measures for the Administration of Prohibited and Restricted Technology Export These measures relate to contracts for the export of prohibited and restricted technologies. The original measures and proposed changes mirror its import counterpart (above). The significant differences are as follows:

Deadlines for internal administrative purposes were imposed. The local level MOFCOM representative office must review and transfer the export application within 5 days of receipt to the local level science and technology authority for its review. This does not affect the total days within which the administrative authority has to respond to the applicant (30 days).

Exports of technology that are considered national secrets would be subject to more stringent technology export procedures.

Import Catalogue The previous Import Catalogue was a short document about one page long. After the amendments the list of prohibited and restricted technologies increased. In general, the type of technology that is now prohibited or restricted, which was permitted in the past, relate primarily to environmentally harmful technology, outdated technology, and those that have a negative influence on national security or interests, public morality, human health and safety, and technologies in industries the Chinese government wants to develop domestically.