The National People’s Congress of China (NPC) adopted the new Foreign Investment Law (FIL) on March 15, 2019, with a view toward unifying and streamlining the foreign investment framework into China. One of the main emphases under the FIL is to further strengthen protections of the foreign investors’ intellectual property rights under Chinese law. In particular, the FIL calls for stricter protections against intellectual property infringement and further encourages “voluntary and fair” technology collaboration between foreign investors and Chinese parties. The FIL also seeks to prohibit Chinese government agencies from “forcing” a foreign investor to commit to technology transfers in China as a condition of investment.
Following the enactment of the FIL, which will go into effect on January 1, 2020, China will have to pass further specific legislations to detail and implement these principles of enhanced protection of foreign investors’ intellectual property rights. This process has already begun, and we set forth below the initial wave of these legislative developments.
On March 18, 2019, i.e., three days after enactment of the FIL, the PRC State Council released Administrative Circular No. 709 announcing amendments to the Regulations for the Implementation of the Law on Sino-Foreign Equity Joint Venture (“JV Regulations”) and the Regulation on Administration of Technology Import and Export (TIER), with immediate effect.
These amendments removed certain provisions of the JV Regulations and the TIER, which had previously been criticized by foreign market players and governmental authorities, including the Office of the United States Trade Representative, as onerous and discriminatory, providing less favorable treatment to foreign entities as compared to their Chinese counterparts. A summary of these provisions, which have now been revoked, is as follows:
- Duration of technology transfer. Article 42 (3) and (4) of the JV Regulations previously provides that the term of any technology transfer agreement between a foreign transferor and a PRC joint venture transferee must generally not exceed ten years. Upon the expiration of the technology transfer agreement, the PRC joint venture transferee must be granted the right to use the transferred technology in perpetuity. Transfer terms can now be freely negotiated.
- Indemnity terms. Article 24 (3) of the TIER requires the foreign licensor to be held liable for any validly asserted intellectual property infringement claims raised by a third party against the Chinese licensee resulting from the use of the licensed or transferred technology. Under the amended TIER, parties can negotiate the allocation of such liabilities.
- Rights in technology improvements. Article 27 of the TIER provides that all technology improvements created during the term of technology import contracts belong to the party making such improvement. Article 29 (3) of the TIER further provides that the foreign entities cannot prohibit Chinese recipients from making improvement to its technology. However, under the domestic technology transfer, the parties can freely agree on the ownership of the improvements. With the removal of this provision, the foreign party can now also agree on the ownership of improvements with its Chinese licensee.
- Other restrictive provisions. In addition to the restrictions on improvements discussed above, according to Article 29 of the TIER, the technology import contracts cannot contain certain other restrictive provisions. Those restrictive provisions include:
(a) Requiring the recipients to purchase unnecessary raw materials, products, equipment or services (b) Requesting royalties for expired and/or invalid patents (c) Restricting the recipients from purchasing similar or competing technologies from others (d) Unreasonably restricting the channels for the recipients to purchase raw materials, parts or components, products or equipment (e) Unreasonably restricting sales quantity, product models or prices of the products that the recipients manufacture or (f) Unreasonably restricting the channels for the recipients to export the products manufactured using the concerned technology
It should be noted, however, that the PRC Contract Law, its judicial interpretations and the PRC Anti-Monopoly Law still contain similar restrictions from an antitrust perspective, which are applicable on a reciprocal basis to both Chinese and foreign transferors/licensors under technology import and export contracts. For example, the PRC Contract Law generally provides that a technology transfer contract shall not restrict technology competition and development. More specifically, under the 2004 Judicial Interpretations of the Supreme People’s Court on Application of Law for Technology Contract, technology transfer contracts must not contain any provisions restricting the transferee from making improvements or using any improvements, or setting unfair exchange conditions for improvements, such as requesting exclusive or non-exclusive grant-back without consideration. Foreign investors must still be mindful of such restrictions when negotiating a cross-border technology transfer agreement, so long as such agreement is governed by the PRC law.
In addition, the NPC amended the Administrative Permission Law on April 23, 2019. The amended Administrative Permission Law specifically set out, among others, that Chinese governmental authorities cannot require technology transfer to be a condition precedent for granting any type of administrative permissions (e.g., regulatory permits or licenses).
More stringent liability for IP infringement
Consistent with its position under the FIL to protect foreign investors’ intellectual property rights, the PRC government has also been amending its intellectual property legislation to increase civil liability for intellectual property infringement.
On April 23, 2019, the NPC issued an amendment to the PRC Trademark Law, which will become effective on November 1, 2019. Under the amended Trademark Law, in the case of malicious infringement, the maximum punitive damages that the trademark owner may claim against the infringing party is increased from three times to five times the actual losses, any economic benefits obtained by the infringing party or any royalties that the trademark owner could have collected. If such amounts cannot be ascertained, the new law also increases the cap on punitive damages from RMB 3 million to RMB 5 million. These amendments further empower each people’s court to order the destruction of the goods bearing counterfeited trademarks, while previously only the Administration for Market Regulation has such authority. The new law also clearly provides that the counterfeited goods cannot be further distributed or sold in the market after removal of the counterfeited trademarks.
Similar amendments have also been proposed for the PRC Patent Law. According to the Draft Amendment to the PRC Patent Law, which was published for public comments from January 4 to February 3, 2019, the maximum punitive damages awarded to the patent owner is to be increased from three times to five times the actual losses, any economic benefits obtained by the infringing party or any royalties that the patent owner could have received. Where such amounts cannot be ascertained, the cap on punitive damages that the court may grant is also to be increased from RMB 3 million to RMB 5 million. This Draft Amendment to the PRC Patent Law is currently subject to further review by the NPC and expected to be promulgated by the end of 2019.
Those recent PRC legislations relating to intellectual property protection appear to be the Chinese government’s response to the persistent accusations by the international community of the “forced” technology transfer requirements in China, as well as claims of intellectual property theft and infringement. They are aimed at creating a more equal and vigorous IP protection landscape for foreign investors. The actual force of these provisions will need to be tested in court and in commercial negotiations between foreign investors and Chinese parties in the coming years.