What general precautions should we take into account when entering into an agreement to license our patent or trade mark to a Chinese company?
Companies wishing to license intellectual property in China should create a strong and comprehensive legal contract with their Chinese counterpart and ensure the language and agreement are explicitly understood. This usually means contracts should be in both Chinese and English. Contracts in China must include certain clauses in order to be recognised and enforceable in China. A local advisor can assist with this.
To ensure that the individual with whom you are in business negotiations with has the authority to bind the company, you should ensure that the company seal is imprinted on the contract and that the company name on the seal is consistent with the company name stated in the contract.
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. joint venture agreements, or if the contract is between two companies registered in China).
Industry-specific regulations might also apply. You should obtain legal advice on the legal enforceability of the proposed deal with respect to industry regulations (e.g. energy, telecommunications, publishing, food and beverage).
Is there more than one type of license I can choose from?
You 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.
If you sign a non-exclusive license, you retain the right to license your intellectual property to more than one licensee.
Do I have to record my license agreement?
Yes. Although recordation of license agreements with the relevant bodies is not compulsory, without registration it may be difficult to remit royalty payments out of China: recordal certificate may be required by the bank at the time it remits royalty payments overseas.
In addition, if the licensee wishes to advertise the product with a licensed trade mark or requires services for printing the trade mark on packaging or other materials, the advertising agent or printer may ask the licensee to show proof of authorisation such as a recordal certificate
Also you need to record your license agreement in order to act against any third parties using your trade mark. Finally, customs will require a copy of the license registration certificate before approving the recordation of the right for customs protection.
It should be noted that contracts for the import of restricted technologies are not effective until they are approved by the Ministry of Commerce (MOFCOM).
Which license agreements should I record?
Although recordation of license agreements with the relevant bodies is not compulsory, agreements licensing the use of trade marks, patents, designs and copyrights should be registered.
What happens if I do not record my license agreement?
Your license agreement will still be valid even if not recorded with the relevant authority.
However, certificates of recordal of license agreements are often required for remitting royalties overseas. If an overseas licensor charges royalties, the licensee may be asked to present a recordal certificate to the bank at the time it remits royalty payments overseas.
In addition, if the licensee wishes to advertise the product with a licensed trade mark or requires services for printing the trade mark on packaging or other materials, the advertising agent or printer may ask the licensee to show proof of authorisation such as a recordal certificate.
Also you need to record your license agreement in order to act against any third parties using your trade mark
Finally, customs will require a copy of the license registration certificate before approving the recordal of the right for customs protection.
It should be noted that contracts for the import of restricted technologies are not effective until they are approved by the Ministry of Commerce (MOFCOM).
Where do I record my license agreement?
The application for recording a trade mark license agreement should be submitted to the China Trade mark Office (CTMO).
The application for recording a patent license agreement should be submitted to the State Intellectual Property Office (SIPO).
The application for recording a copyright license agreement should be submitted to the Copyright Protection Centre of China (CPCC).
How much does it cost to record my license agreement?
For recording a trade mark license agreement, a recordal fee of RMB 500 for one trade mark per class, is required (fee may be subject to change). Therefore, if a single contract grants licenses to use three trade marks, the total fee will be three times the fee noted above. The fee may be paid directly to the Trade Mark Office or via a trade mark agency if one is used.
There are no official fees for recording a patent license agreement.
The official fees for recording a copyright license agreement vary based on the nature of the work and range between RMB 100 to RMB 2,000.
What precautions specific to trade mark licenses should we take into account?
Trade mark licensors are required to supervise the quality of the licensee’s goods that are the subject matter of the licensed trade mark. 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. You should in fact perform your own quality supervision/control as stipulated in the agreement and take actions to control the quality. Your quality control terms and actual supervision can serve as evidence in potential litigation regarding your liability for products of poor quality that may have harmed a third party.
As the trade mark licensor, you 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.
Can I prevent my trade mark licensee from selling the licensed products outside China?
There is no specific rule under Chinese law that addresses the issue of parallel imports related to trade marks, nor is there any express provision under China’s trade mark law that grants the trade mark owner the right to stop the unauthorised importation of trade marked 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 contract with a the trade mark owner can be addressed through contractual provisions.
It would be advisable to include 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 a statement may discourage or add a level of difficulty to parallel imports.
Am I responsible for recording the trade mark license agreement or should my licensee take care of this procedure?
The recordal measures clearly state that you, as the licensor, are responsible for recording the trade mark license agreement. All foreigners or foreign enterprise licensors must entrust a trade mark agency recognised by the State Administration for Industry and Commerce (SAIC) to handle the recordal.
The trade mark license agreements contain some sensitive information. Is there any way to avoid disclosure when recording the agreement?
The drawback of recording a trade mark agreement is that sensitive information contained in the contract will be disclosed to the public. In practice a short-form trade mark license agreement can be prepared for recordal to avoid having to reveal sensitive information. This short-form agreement need contain only the basic information required by the authorities, revealing no more than is necessary for recordal purposes and must be in Chinese.
The short-form agreement should primarily include the following basic information:
- The trade mark and its registration number
- The range of goods on which the trade mark may be used (indicating the specific goods in the class for which the trade mark is licensed)
- The term of the license
- The method for providing the licensed trade mark to the licensee
- Provisions relating to the licensor's supervision of the quality of the goods on which the trade mark 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 trade mark
In the event of disagreement between the parties, the long-form license agreement will be used to govern the dispute.
What documents do I need to submit for recording the trade mark license?
The following documents must be submitted to the China Trade Mark Office (CTMO) along with the trade mark license that is to be recorded:
- trade mark license contract recordal form
- duplicate of the trade mark license contract (see note below)
- photocopy of the registration certificate of the licensed trade mark
In practice, CTMO requires an original trade mark license contract (a short-form version is acceptable) and any document in a foreign language must be accompanied by a Chinese translation.
The number of recordal forms must mirror the number of trade marks being licensed. For example, if in one contract three trade marks are licensed; three separate recordal forms must be completed. However, only one duplicate of the trade mark license contract is required.
What precautions specific to patent licenses should we take into account?
A patent license is considered a type of technology transfer agreement. Before a company licenses its technology in China, it should first determine whether approval or recordal 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.
The catalogues are updated regularly so be sure to check the latest version. .
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.) but they are required to be recorded. As a licensor in China you must provide a warranty of reliability to confirm that the technology is complete, fit for purpose and does not infringe any other party’s rights.
Can I insert a clause for restrictions on making improvements when I license my patent?
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 impediments to technological advancement. The law specifies that ownership of improvements belong to the party making the improvement unless the contract specifies otherwise, but proper compensation must then be given.
Is there a specific procedure to import restricted technology into China?
The Chinese company rather than the foreign partner is responsible for applying for the technology import approval or registration. In order to be able to do so, the Chinese party must have import rights. To import technologies that are restricted from importation, an application for a Proposal for Technology Import License should be submitted to the competent commercial authorities under the central government (local branches of Ministry of Commerce [MOFCOM]) to obtain permission to import the technology. Once obtained, the letter of intent (that grants the permission) is valid for three years. After the letter of intent is issued, the operator that intends to license its restricted technology can sign the technology import contract. Once the contract is executed between the parties, the importer should submit the letter of intent, copies of the contract and exhibits (if any) and documents certifying the legal status of the contracting parties (e.g. certificates of incorporation or business licenses) to the competent local commercial authorities to apply for a Technology Import License. The local commercial authorities will then review the contract and make a decision whether or not to grant the Technology Import License.. The technology import contract 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).
If the main terms of the technology import agreement change, the licensee is required to amend the Technology Import License.
Is there a specific procedure to import non-restricted technology into China?
The technology import contract should be recorded within 60 days from when it becomes effective, unless the contract provides royalty payments.
In the latter case, the contract should be registered within 60 days from the generation of the royalty base for the first instalment. The contract should be amended every time the base amount of each subsequent royalty payment is accrued.
The Ministry of Commerce (MOFCOM) and local branches of MOFCOM are in charge of the administration of registration of technology import contracts (e.g. technology licenses into China).
The first step is to register the contract online on the information management system of technology import and export contracts section on the official website of MOFCOM and then complete the procedure of registration with the competent department by presenting the application for registration of technology import or export contract, the copy of the technology import or export contract and documents certifying the legal status of the contracting parties.
MOFCOM will review the submission within three working days and grant the relevant certificate of registration.
Do I have to record my patent license?
Yes. If the technology imported is in the form of a patent, the patent license agreement, in addition to being subject to the requirements set forth for the import of technologies (whether free or restricted), 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 company (with no presence in China) records the license it would have to designate a recognised PRC patent agent to record the contract on its behalf.
What documents do I need to submit for recording a patent license?
The following documents are needed to record a patent 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 will be issued within seven working days after they are submitted.
When drawing up a contract with a Chinese company, what should we consider with respect to remitting royalties?
Royalties from China to Europe are 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. For trade marks you should submit the recordal certificate for the trade mark license.
For technology license agreements you should submit the registration certificate of the technology import contract / technology import license, the technology import contract data form provided by a local branch of the Ministry of Commerce (MOFCOM) and, if the technology is in the form of a patent, the recordal certificate of the patent license.
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.
The time lag between recordal and first payment should also be considered. 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 China Trade Mark Office (CTMO) 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.
Should I ‘de-record’ my license after it comes to an end?
Yes. The contract should in fact contain terms requiring the assistance of the licensee in ‘de‐recording’ the license registration once the license ends in case the record could be improperly used as ‘proof’ of a license to use the IP right.
What damages are available to a party who has had their intellectual property infringed by breach of a technology transfer agreement? Do the amounts vary depending on the type of technology transferred?
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.