China Announces the Measures Governing Transfer of Intellectual Property Rights Overseas (Trial Implementation)

Source: SIPO

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.

The complete text of the Measures Governing Transfer of Intellectual Property Rights Overseas (Trial Implementation) is as follows:

Measures Governing Transfer of Intellectual Property Rights Overseas (Trial Implementation)

These measures are formulated for the purposes of implementing the comprehensive national security concept, the improvement of the national security system, the safeguarding of national security and major public interests, the regulation of overseas transfers of intellectual property and are done so in accordance with relevant laws and regulations pertaining to national security, foreign trade and intellectual property.

Section 1: Scope of the Reviewing Mechanism

(1) Where the export of technology, foreign investment or a merger with or acquisition of a domestic enterprise results in the overseas transfer of intellectual property that is regulated under these measures, including but not limited to patent rights, exclusive rights to integrated circuits, computer software copyrights or the rights to new plant varieties, said transfer must, in accordance with these Measures, be subject to review; and, application rights shall be deemed as intellectual property rights.

(2) Overseas transfer of technology, as referenced in these Measures, means the transfer of domestic intellectual property rights by a Chinese entity or individual to a foreign enterprise, individual or other organization, and includes changes in rights ownership, changes in the actual controller of intellectual property as well as the exclusive license to exploit intellectual property rights.

2. Review Content

(1) The overseas transfer of intellectual property rights will have an effect on Chinese national security; or

(2) the overseas transfer of intellectual property rights will affect China’s capacity to innovate and develop key technologies in key fields.

3. Reviewing Mechanism

(1) The Reviewing mechanism as it pertains to instances in which the export of technology involves the overseas transfer of intellectual property rights.

  1. Where, in the course of the export of technology, the technology that is being exported falls under the category of technology that is forbidden or restricted for export as clearly defined by the Chinese government, and involves patent rights, the exclusive rights to integrated circuit technology, computer software copyright or any other such intellectual property, said technology shall be subject to review.
  2. The competent local trade authority, upon receiving an Application for the Export Restricted Technologies (hereinafter referred to as "Application”) from an entity engaged in the export of technology which involves patent rights, the exclusive rights to integrated circuit technology, or any other such intellectual property, shall submit all relevant information to the competent local intellectual property management authority. The competent local intellectual property management authority, upon receiving the relevant information, shall accordingly review the proposed transfer of intellectual property and make a written opinion, which shall be submitted back to the competent local trade authority as well as the competent authority for intellectual property of the State Council for filing purposes.
  3. The competent local trade department shall make their review decision in accordance with the written submission issued by the competent local intellectual property management authority and in accordance with the relevant regulations enumerated under the Regulations of the People's Republic of China Governing the Administration of Import and Export of Technologies.
  4. Where the overseas transfer involves computer software copyrights, the competent local trade department as well as the competent local science and technology authority shall conduct a review of that transfer in accordance with the relevant regulations enumerated under the Regulations of the People's Republic of China Governing the Administration of Import and Export of Technologies and the Regulations Governing the Protection of Computer Software. The competent local trade authority shall notify the computer software registration authority in a timely manner in the event that it has found that the copyrights of computer software to be transferred have already been registered with the computer software registration authority. Where the transfer of intellectual property rights is denied after being reviewed, the computer software registration authority shall not, upon being notified of this denial, register the change in ownership.
  5. Where an overseas transfer of intellectual property involves the new plant varieties, the competent agricultural authority as well as the competent forestry authority shall, in accordance with the Regulation of the People's Republic of China Governing the Protection of New Plant Varieties as well as their duties, execute a review of the proposed transfer. The review shall focus on the possible effects that a transfer of a new plant variety would have on the security of China's agricultural sector, particularly as it pertains to food security and that of the seed industry.

(2) Reviewing mechanism as it pertains to instances in which it involves the overseas transfer of intellectual property rights during the security review of foreign investors conducting a merger with or acquisition of Chinese enterprises.

  1. The security review mechanism, in the course of determining the possible effects on Chinese security that could arise as a result of a merger with or acquisition of a Chinese enterprise and involves the overseas transfer of intellectual property, shall, taking into account the type of intellectual property that is being transferred, submit relevant materials to the relevant competent authority, asking that authority for their opinions. The intellectual property authority of the State Council shall be competent authority for instances which involve the transfer of patent rights or the exclusive rights to integrated circuit layouts; and, the copyright authority of the State Council shall be competent authority for instances which involve the transfer of computer software copyrights; and, the agricultural authority or forestry authority of the State Council shall, according to the responsibilities of each authority, be competent authority for instances which involve the transfer of new plant varieties.
  2. The relevant competent authorities shall conduct reviews in a timely manner and issue written opinions, which shall be sent to the Agency for the Security Reviews of Foreign Investments. The Agency for the Security Reviews of Foreign Investments shall, in the rendering of their review decisions, refer to the written opinions given to them by the relevant competent authorities.

4. Other Matters

(1)The relevant competent authorities shall formulate a detailed set of regulations governing the review process; these regulations shall clearly stipulate the materials, procedures and deadlines with respect to the review in addition to the work responsibilities of those involved with the relevant competent authority in its conducting of the review.

(2) Upon the rendering of the final decision on the review of the overseas transfer of intellectual property, if a change in ownership of that property is permissible; both parties involved in the transfer of that intellectual property shall complete the necessary procedures for the change in ownership in accordance with relevant laws and regulations.

(3) The personnel of the relevant competent authority shall maintain the confidentiality of the trade secrets of both parties involved in the overseas transfer of intellectual property.

(4) These measures shall not apply to any and all transfers of intellectual property which affect China's national security; such transfers shall be governed by other such relevant laws.

(5) These Measures shall enter into effect on the date of their publication. (Note: These measures were implemented on a trial basis on March 18, 2018).