On March 2, 2019, Premier Li Keqiang signed a State Council decree No.709 to amend a total of 49 regulations, including the Technology Import and Export Regulations (TIER) and the Regulations for the Implementation of the Law of the People's Republic of China on Chinese-Foreign Equity Joint Ventures (JV Regulations). The amendment was published on March 18, 2019 and took effect immediately.
The amendments to TIER and the JV Regulations revoked certain provisions that were biased against the foreign transferor in technology import situations, and reinstated for those foreign parties the general rules under the Contract Law of the People's Republic of China (PRC Contract Law). Such legislative efforts are likely meant to show China's willingness to address US concerns regarding forced technology transfer in the ongoing trade war and to meet the national treatment obligations under TRIPS.
Third party infringement claims
TIER applies to the transfer of foreign technology into China, among other things, and it includes several mandatory provisions on technology import contracts. Among those, the latest amendment deleted Article 24.3 which mandated the foreign technology transferor to indemnify the Chinese transferee for third party infringement claims. This leaves the general provisions of the Contract Law to govern both technology import and other technology transfers alike, under which the parties are free to negotiate the allocation of infringement liabilities to third parties. Although the amendment does not address contracts that were entered into under the old TIER, it does restore leverage to the foreign licensor in its further negotiation with the Chinese domestic licensee.
Ownership of improvements
The amendment also deleted Article 27 of TIER which effectively required domestic ownership of domestic improvements to foreign technology. It further deleted Article 29, which prohibited the foreign licensor from abusing its intellectual property in various ways, such as restricting the licensee from making improvements to the technology. Those provisions precluded, for example, the foreign licensor's automatic ownership of any improvements by the Chinese licensee, and other straightforward approaches for the foreign technology transferor to consolidate its control of improvements to its technology.
However, following the revocation of those two TIER provisions, parties to a technology import transaction are still not free to negotiate the ownership of improvements, as the matter is still subject to Article 329 of the Contract Law and its interpretation by the Supreme People's Court. Now, all technology transferors under PRC law, whether foreign or Chinese, are likewise required to make reciprocal arrangements on ownership of improvements and are likewise prohibited from imposing anticompetitive conditions on technology transfer.
Term of the JV technology transfer contracts and JV's right of continued use
Where a foreign JV partner transfers technology to its JV in China, Article 43 of the JV Regulations mandates a number of technology contract terms in favor of the joint venture and at the expense of the foreign party. The latest amendment revokes Article 43.2(3) and (4) which respectively capped the term of any technology contract with the Chinese joint venture at ten years, and provided a statutory right for the Chinese joint venture to continue its use of the technology after the technology contract expires or terminates. Such provisions in the prior JV Regulations obviously are in contradiction with the principle of autonomy of will under the PRC Contract Law, which applies to both foreign and domestic entities.