Foreign investors should be aware that China has laws that restrict the export of IP rights developed with Chinese government funding. The People’s Republic of China law on the Advancement of Science and Technology (the “Law”) was first enacted in July 1993 and was subsequently revised. The current version of the Law was passed by the People’s Congress on December 29, 2007 and became effective on July 1, 2008. The eight sections of the Law are: (a) the general section; (b) scientific research, technology development, and the use of technology; (c) the technological advancement of enterprises; (d) R&D institutions and organizations; (e) scientists and technologists; (f) measures for protecting research investments; (g) legal responsibilities and penalties; and (h) supplementary articles.
Purpose for Enacting the Law
The purpose for enacting the Law is to coordinate the efforts of various governmental agencies in providing a favorable environment to foster the advancement of science and technology in China and keep the IP rights developed with government funding for use within China first. The ultimate goal is to improve homegrown R&D capabilities and to utilize the resulting IP rights within China in order to keep the Chinese economy growing.
The crux of the Law in the context of exporting certain IP rights outside of China is in Article 21, which reads as follows:
- The Chinese government encourages preferential treatments in selecting and using intellectual properties that were developed by science and technology projects or programs that received Chinese government funding and requires that they be used in China first.
- As to any IP rights created in the manner stated in the previous sentence, any transfer of or the granting of exclusive rights to such IP rights to a person or organization located outside of China must be approved by the project managing organization that supervises the creation of such IP rights. If the organization that has the power to approve IP rights transfer is subject to any other laws and regulations, then such laws and regulations must be followed.
While Article 21 restricts the transfer of any IP rights falling within the meaning of Article 21 out of China, it is unclear whether the transfer of the same IP rights to a foreign–invested company located in China would also be restricted and thus subject to the approval requirements as specified thereunder. Based upon the wording of Article 21, it appears that no such approval would be needed in such a case.
Article 21 must also be read in conjunction with Article74. Article 74 states that the transfer of any “national defense related” technologies shall be subject to the regulations promulgated by the State Council and the Central Military Committee of China. But Article 74 does not define which technology is considered “national defense related,” and other published laws do not provide authoritative guidance on this issue. In some cases, the “national defense related” phrase might be used as a catch-all provision giving the approving authorities more discretion and cause uncertainties as to the transfer of IP rights governed by Article 21.
Article 11 of the Law states that the science and technology related ministries and departments under the State Council are responsible for carrying out the task of encouraging the advancement of science and technology in China. From the plain language of the Law, it is unclear if Article 11, whether intentionally or unintentionally, granted the local counterparts of the science and technology related ministries the power to review the export of IP rights that fall within the meaning of Article 21. Thus, any person or entity intending to transfer any IP rights developed under Article 21 outside of China, the first step is to find the appropriate approving authority at the appropriate administrative level.