On March 18, 2018, the General Office of the State Council of the People's Republic of China promulgated the Measures Governing Transfer of Intellectual Property Rights Overseas (Trial Implementation) [No. 19 (2018) of the General Office of the State Council) (hereinafter referred to as “Measures”). These measures are chiefly aimed at regulating the transfer of intellectual property overseas. The number of patents and the quality thereof has increased in tandem with the volume of transfers of intellectual property in recent years. According to statistics released by the State Intellectual Property Office ("SIPO"), the value of the intellectual property transferred out of China in 2017 exceeded $4 billion USD.
Notwithstanding major economic losses, China will also suffer a massive loss in terms of its ability to foster its own innovative capabilities as well as its international competitiveness should the process of IP transfer not be subject to a strict scrutiny review process, especially for national security related core IP rights. This lack of review could result in China losing control over the development of its ability to autonomously develop key technologies in key fields.
With this in mind, the Measures contain language which subjects foreign investors who intend to acquire Chinese intellectual property through means such as a merger with or acquisition of a domestic enterprise to a review process. This review is done in order to ensure that the overseas transfer of intellectual property does not endanger national security. The review process will take into account the effects that the transfer of intellectual property will have on China's national security as well as China's ability to develop and innovate key technologies in key industries. The Measures also clearly stipulate the scope, content, mechanism, means and rules governing the review process for whether or not intellectual property is permitted to be transferred to a foreign entity. The work under the regime will involve relevant departments such those regulating intellectual property, trade, technology, agriculture and forestry.
Many nations have already adopted strict measures controlling the transfer of intellectual property to foreign entities in which the transfer could affect national security. It is for this reason that the aforementioned review system as well as limits on such transfers are in line with international treaties as well as with international practice. The Agreement on Technical Barriers to Trade of The World Trade Organization clearly stipulates that "no country should be prevented from taking measures necessary for the protection of its essential security interest."
Nearly every major nation in the world has established a robust review system governing the transfer of intellectual property rights overseas, a system which is a part of their efforts to protect their national interests. The United States is representative of this trend in that the transfer of technology and products using certain technologies are regulated by the United States Department of Commerce. Under the American intellectual property transfer regime, when the transfer of intellectual property takes places as a result of merger or acquisition or other such business needs, the Committee on Foreign Investment in the United States will be responsible for reviewing and supervising the transfer of that technology. The EU and Japan also have similar intellectual property transfer regimes.
According to statistics gathered by China's Ministry of Commerce, the foreign investment in actual use in China amounted to 877.56 billion Yuan in 2017, setting a new record. Furthermore, China was some of the highest seen in any country that year in terms of foreign investment in actual use. Therefore, the establishment of a robust review system governing the overseas transfer of intellectual property will not have an effect on China's business environment. Rather, the creation of such a system is a concrete measure that will improve China's business environment.