The State Council of China (the cabinet) just announced a decision on March 18 to delete a number of regulatory provisions on inbound technology transfer which have been widely criticized by foreigners as unfair treatment against them. This is likely a direct result of the ongoing trade negotiation between China and US. The deletions took immediate effect.

These deletions should also be read in connection with the newly-promulgated PRC Foreign Investment Law, which includes a provision that no administrative agency or official shall compel technology transfer via administrative resorts.

The provisions being deleted are:

(1) Item 3, paragraph 2, Article 43 of the Implementing Regulations of the PRC Joint Venture Law, which required that a technology transfer agreement toward a JV should not last more than 10 years.

(2) Item 4, paragraph 2, Article 43 of the Implementing Regulations of the PRC Joint Venture Law, which demanded that the JV should be able to continue to use the technology after termination of the technology transfer agreement.

Item 4 was widely criticized a form of compulsory technology transfer.

(3) Paragraph 3, Article 24 of PRC Regulations on the Management of Technology Import and Export, which required that the technology transferor should indemnify the transferee from an infringement claim from a third party if the transferee has been using the technology according to the contract.

After this deletion, the parties can negotiate on the specific scope of the transferor’s indemnification obligation toward the transferee.

(4) Article 24 of PRC Regulations on the Management of Technology Import and Export, which categorically required that the transferee own any improvements over the transferred technology.

Article 24 was regarded as another form of compulsory technology transfer. After this deletion, the parties can freely negotiate on ownership of the improvements, subject to Article 329 of the PRC Contract Law (which voids any contract provision that constitutes “illegal monopolization of technology and impedance of technological progress”.

(5) Article 29 of PRC Regulations on the Management of Technology Import and Export, which prohibited various restrictions the technology transferor could try to impose on the transferee.

It should be noted that this deletion does not mean that the transferor could impose any restrictions he desires over the transferee. Instead, Article 329 of the PRC Contract Law still applies, and the Supreme People’s Court has a judicial interpretation listing acts that are prohibited by Article 329.

Two major differences existed between Article 329 and Article 29. First, the interpretation given by the Supreme People’s Court of Article 329 is considered more reasonable than the restrictions listed in Article 29. Second, Article 329 applies to all types of technology transfer, being it inbound, outbound or between two domestic entities and thus reflecting national treatment toward foreigners as the transferors. In contrast, Article 29 specifically imposed higher obligations on foreign transferors, and thus was widely criticized as a violation of the national treatment principle.