The Flanders-China Chamber of Commerce / EU-China Business Association, in cooperation with the China IPR SME Helpdesk, organized a webinar on the best practices for technology transfer in China from an IP perspective. The session was held by IP Business Advisor Matias Zubimendi, who gave a presentation on a successful IP strategy when transferring technology in China.

Peter Sczigel of the China IPR SME Helpdesk first gave an introduction to the webinar and the services of the Helpdesk, an EU-funded initiative providing free services to European SMEs who want to do business in China. The Helpdesk is specifically focussed on IP-related issues. Companies asking questions will receive a confidential reply from the Helpdesk’s legal experts within three working days.

Next, Ms Gwenn Sonck, Executive Director of the Flanders-China Chamber of Commerce and the EU-China Business Association introduced both organizations to the participants to this third webinar jointly organized with the EU IPR SME Helpdesk.

A quickpoll among the participants to the webinar showed that 25% of them were conducting technology transfer activities in China. Almost half of the participants voted “no, but we plan to”.

Mr Matias Zubimendi is IP Business Advisor at the China IPR SME Helpdesk. He has a Master’s degree in Chinese Civil and Commercial Law from Peking University as well as a Master’s degree in Intellectual Property Law from Austral University. Before joining the Helpdesk, he worked for various law firms.

Mr Zubimendi: We will have a look at precautions SMEs must take before deciding to do technology transfer to China. The main intellectual property rights (IPRs) are innovation patents & utility models; design patents; trademarks; copyright; trade secrets; and know-how. The two main principles of IPR are registration and territoriality. In China, the first company or person to register any of the intellectual property rights will have priority over any other. It is also difficult in China to take down a registration, especially for copyrights. It is more common in the case of trademarks, but it is still very complicated and the process could take several years. The first company to file an application will have a huge advantage over any other company. For example, more than 10 years ago somebody registered in bad faith the “Michael Jordan” trademark and it took more than a decade for Jordan and Nike’s lawyers to recover the ownership of that trademark. It is very important to have a clear strategy and to act in advance. Territoriality means that any registration done in a country will provide protection in that country, but not in others. So you will need to decide in advance in which countries to do a registration. If an innovation patent is registered for example in the EU, it will be published, and novelty will be lost, so it cannot be registered elsewhere.

Technology transfer is technology that goes from one party to another one. What is transferred is any kind of knowledge, that is intellectual property rights. There are different ways to transfer technology, not only through a contract but also through consulting; graduating students, collaborative research; patenting and licensing; service and outreach; and spin-off companies or joint ventures, which is the most common form of technology transfer in China. There are three main types of technology: emerging, innovative and established technologies. When negotiating technology transfer with another company we should be able to determine the value of the technology. Innovative technologies are more valuable compared to established ones, while emerging technologies would be risky.

There are two main laws covering technology transfer in China: the Foreign Investment Law (2020) and the Regulation on the Administration of the Import and Export of Technologies (TIER – 2019). The Foreign Investment Law came into effect on January 1 and it is still a bit uncertain how it will be implemented as there are not many cases to study. Important to take into account is the principle of national treatment, meaning foreign companies will be treated as nationals when applying for any permission or license in China. There will be no discrimination and equal access to funds, tax exemptions etc. Investment protection means that companies will be able to remit capital gains, income, royalties etc. out of China and there will be no restrictions on the currencies they can use. It is also stipulated that local governments will not be allowed to force a technology transfer in order to deliver a license for example. The government is also publishing negative lists about which technologies can be imported and exported. The Foreign Investment Law has made modifications to the type of companies, now there are only wholly foreign-owned companies and joint ventures.

Talking about bureaucracy, there are two catalogues: the Catalogue for Prohibited and Restricted Technology Imports and another one for Exports. Technology can be freely importable, restricted or prohibited. “Restricted” means that in order to import or export the technology the company should ask permission from the government. How to obtain permission? In the case of technology transfer there will always be Chinese party, either a Chinese company or the branch of your company in China, which should apply for a technology transfer license to the competent foreign trade department. It should be granted or denied within 30 working days. If granted, the Chinese party will be authorized to sign the technology transfer contract. After it is signed it should be submitted to the same office to be approved within 10 working days. For prohibited technologies such a cyber security or military technology, there is no possibility at all to transfer the technology, but normally SMEs do not work in these fields. Important to know is that both catalogues are not exactly the same. It is possible that a technology can be imported to China but not be exported out of China. In the case the company improved the technology in China, it would not be able to export it back to Europe. So it is important to carefully check both catalogues.

There are also negative lists and encouraged lists. Negative lists are also catalogues of technologies in which investment or research is restricted or prohibited. If a company plans to do R&D it should also check those negative lists because they do not always match with the import and export catalogues. So maybe you are able to import the technology, but not to do research or invest in it, nor export it, and you will lose your IPRs. For investment, you don’t need to apply for permission, but there may be restrictions about what type of company can invest. Certain technologies can only be invested in by foreigners through a joint venture. Technologies that the Chinese government wants to be imported are included in the Encouraged Industries Catalogue.

Another important topic is how to study your Chinese partner and know that that company is reliable. You can get to know them through meetings or inquiring at embassies and chambers of commerce. You can also consult the Chinese-language website of the National Enterprise Credit Information Publicity System (NECIPS), which is a public database of Chinese companies. You can check for example who the legal representative is, who will be able to sign in the name of the company. It also includes the capital of the company, the size, the business scope and so on. You can also see it the company has been sanctioned in the past, for example for violating IPRs.

Keep your trade secrets secret. Trade secrets are non-public information that is valuable and provides a competitive advantage. Protective measures include physical measures such as marking documents as confidential and introducing access restrictions. Technology measures include the use of blockchain and encrypted communications. Contractual measures include confidentiality agreements. It is also important to train your personnel how to identify, recognize and manage trade secrets. How to transfer trade secrets if there is no registration? Most important is to have a non-disclosure agreement. If your technology transfer is primarily based on trade secrets it is preferable not to use a joint venture, because your trade secrets would be diminished.

Concerning company type, there are two options: a Wholly Foreign-owned Enterprise (WFOE) and a joint venture. The WFOE has the advantage that there is no other party, while in the case of a joint venture the Chinese partner can bring some knowledge, particularly about the Chinese market, but you won’t have full control over your intellectual property rights. The law also says that every five years the joint venture agreement has to be renegotiated. The most important clauses of a joint venture agreement are the nature of the relationship; the company type and share; the parties’ contributions; the sharing of profits, risks, liability and taxes and fees; decision making and control issues; and finally who is going to be the owner of improvements to R&D. If the improvement is made by Chinese employees, they have to be reasonably rewarded if the company is to retain the ownership of IPRs. If improvements are done only by the Chinese side it should be compensated if you want to keep the ownership of IPRs.

How to license a technology? The principal clauses include the territory; the duration; the content such as licensed IPR or trade secrets; royalties; control that your rules are being respected; damages in case of an infringement; conflict resolution methods; and finally a clause on the return of documentation once the contract ends. You can set limitations on the license, such as not allowing the Chinese partner to make improvements. You can limit sub-licenses, competition and reverse engineering. In Europe you can have a non-disclosure agreement (NDA), in China you usually have an NNN: no use, no disclosure and non circumvention. For those who are licensing to sub-contractors, you can use modular production, that means using several sub-contractors and give each a specific task so that they cannot know how to manufacture the final product and compete against you.

The take-away messages are: check the Technology Import and Export Catalogues; check the Negative Lists for Foreign Investment; study your partner; protect your trade secrets; choose the company type according to your business plan; license smartly; protect the ownership of future improvements; and finally contact your embassy or the EU IPR SME Helpdesk for assistance. The Helpdesk’s email is question@china-iprhelpdesk.eu.

The webinar concluded with a short Q&A session.

Is intellectual property less protected in areas that are of strategic importance to the Chinese government and how to prevent technology to be used in military applications by the Chinese army? The Chinese government considers certain areas important to the future of the nation, so maybe you are allowed to import a certain technology but not to export it. You can’t prevent your technology to be used by the military.

In Europe it is assumed that 51% and above ownership of the joint venture gives you decision making control; however in China it requires 80% to 90% ownership to have decision making control? It is not possible for the foreign company to have full control over the decision making. Your Chinese partner will be very protective and conservative. If you perform improvements, you will have to compensate them. It is better to give the Chinese partner a say in everything and at least respect them.