China's New Technology Import And Export Legislation: A Step Toward a Freer Market

EXCEPTIONS TO FREE IMPORTATION

The principle of free importation of technology applies only to those technologies that are not subject to prohibition or restriction. Pursuant to the New Technology Import and Export Regulations, the importation of technology may be prohibited or restricted if the technology to be imported falls within the categories as set out in Articles 16 or 17 of the PRC Foreign Trade Law (中华人民共和国对外贸易法).

To recap, under Article 17 of the Foreign Trade Law, the State shall prohibit the importation of any technology if: (i) the importation of the technology will endanger State security or public interest; (ii) the importation of the technology endangers people's lives or health; (iii) the importation of the technology will destroy the ecological environment; or (iv) the importation of the technology needs to be prohibited on the basis of an international treaty or agreement to which China is a contracting party. Pursuant to Article 16 of the Foreign Trade Law, importation of any technology may be restricted if: (i) as above with Article 17, the importation of the technology threatens State security or public interest; (ii) the importation of the technology needs to be restricted in order to establish, or to speed up the establishment of, a particular domestic industry; (iii) import needs to be restricted in order to safeguard the State's international financial status and international payment balance; or (iv) the restriction is based on an international treaty or agreement to which China is a contracting party.

As a way of clarifying the New Technology Import and Export Regulations, on December 30 2001, MOFTEC and the State Economic and Trade Commission (SETC) jointly issued the List of Technologies That Are Prohibited or Restricted from Being Imported (the List). The List is by no means comprehensive. However, it is indicated in the List that this is the first batch of technologies that are prohibited or restricted from being imported. There is no indication as to how many more batches will be issued, when these subsequent batches will be issued or how extensive they will be. A problem those in the business and legal communities face is what will happen if certain technology licensed to a Chinese company by a foreign company after January 1 2002 does not fall into the first batch of the List but does fall into a subsequently issued batch. The licensor may argue that the subsequent change of law may not be retroactively applied to a contract entered into prior to the enactment of such law. MOFTEC's position on this point is not clear.

ELIMINATION OF THE APPROVAL REQUIREMENT FOR TECHNOLOGY NOT SUBJECT TO PROHIBITION OR RESTRICTION

Pursuant to the 1985 Regulations and the 1987 Implementing Rules, all technology import contracts were subject to approval (and would become effective upon approval) by MOFTEC or other entities authorized by MOFTEC. The 1996 MOFTEC Tentative Procedures introduced the system of registration. However, under that legislation, the contract would become effective only upon the issuance of the registration certificate, and the registration certificate would not be issued until MOFTEC or the local department in charge of foreign trade and economic cooperation authorized by MOFTEC conducted a substantive review of the contract. As such, the system of registration was, in fact, an approval process. Pursuant to the New Technology Import and Export Regulations, a contract for the importation of technology not subject to prohibition or restriction becomes effective upon the formation of the contract. While the contract is still subject to registration, the issuance of the registration certificate is no longer a necessary condition for the effectiveness of the contract.

Under the Measures of the People's Republic of China on the Administration of Registration of Technology Import and Export Contracts (the MOFTEC Registration Measures) promulgated by MOFTEC on December 30 2001, upon a technology import contract becoming effective, the importer should first carry out the registration on the internet (http://info.ec.com.cn) and thereafter submit to the relevant department of foreign trade and economic cooperation an application for the registration of a technology import contract together with a duplicate copy of the technology import contract and documents evidencing the legal status of the parties for the completion of the registration formalities. The relevant department of foreign trade and economic co-operation is required to issue the registration certificate within three working days from the receipt of the required documents.

THE APPROVAL REQUIREMENT FOR THE IMPORTATION OF TECHNOLOGY SUBJECT TO RESTRICTION

For any technology the importation of which is restricted, a strict two-phase approval process is required under the New Technology Import and Export Regulations and the Measures on the Administration of the Importation of Technology That Are Prohibited or Restricted from Being Imported jointly issued by MOFTEC and the SETC on December 30 2001. The first phase of the approval process involves the filing of an application with MOFTEC for the importation of technology, the review of the application by MOFTEC and the SETC and, if the application is approved, the issuance of the letter of intent on the granting of the technology import permit by MOFTEC. The second phase of the approval process takes place after the signing of the technology import contract by the parties and involves the filing of an application for the issuance of the technology import permit, the verification of the technology import contract by MOFTEC and the issuance of the technology import permit by MOFTEC if the application is approved. The technology import contract will become effective on the date on which the technology import permit is issued.

Given that the application for the importation of technology subject to restriction needs to be reviewed and approved by MOFTEC and the SETC and the technology licence contract is subject to verification and approval by MOFTEC, obtaining approval for the importation of such technology may prove to be difficult.

DURATION OF THE CONTRACT AND TECHNOLOGY USE AFTER EXPIRATION OF THE TERM

Under the 1985 Regulations, the duration of a technology import contract was required to conform to the time needed by the licensee to assimilate the technology provided and, unless specifically approved by the examination and approval authority, the term could not exceed 10 years. The same legislation further provided that, unless specifically approved by the examination and approval authority, a technology import contract could not prohibit the licensee from continuing to use the technology provided after the expiration of the term of the contract. As a result of these restrictions, technology license contracts entered into between foreign licensors and Chinese licensees under the old regime were typically for a term of 10 years. Although the foreign licensors often required the inclusion of a clause to the effect that the licensee may not continue to use the technology provided under the contract in the event of the expiration of the contractual term or early termination of the technology license contract, the validity of such a clause was questionable.

The New Technology Import and Export Regulations have now removed these limitations. The licensor and licensee will be able to enter into a technology licence contract for a term longer than 10 years. The licensor will be legally allowed to prohibit the use of any technology provided after the expiration of the term of the contract or upon the early termination of the contract.

PROHIBITIONS ON RESTRICTIVE CLAUSES

Although the New Technology Import and Export Regulations no longer require that the term of a technology licence contract be less than 10 years and the licensee be allowed to use the technology provided upon the expiration of the term of the contract, other prohibitions on restrictive clauses remain. Pursuant to Article 29 of the Regulations, a technology import contract may not contain any clause:

• requiring the licensee to accept conditions which are not absolutely necessary for the importation of the technology, including the purchase of technology, raw materials, products, equipment or services which are not necessary;
  
• requiring the licensee to pay royalties or to undertake relevant obligations for patented technology when the valid term of the patent has already expired or the patent has been declared invalid;
  
• restricting the licensee from improving the technology provided by the licensor or restricting the licensee from using the improved technology;
  
• restricting the licensee from acquiring technology similar to, or in competition with, the technology provided by the licensor from other sources;
  
• unreasonably restricting the channels or sources from which the licensee may purchase raw materials, parts and components, products or other equipment;
  
  
• unreasonably restricting the production volumes, types or sales price of the licensee's products; or
  
• unreasonably restricting the export channels of the licensee's products manufactured with the imported technology.

Given that a technology licence contract for the importation of technology not subject to prohibition or restriction no longer needs approval, the consequences for the inclusion of any restrictive clauses in such technology licence contracts are not clear. When there is a dispute, the licensee will likely argue that Article 29 of the New Technology Import and Export Regulations is a mandatory provision, and therefore, any contractual term in violation of such provision is invalid pursuant to Article 52 of the PRC, Contract Law. The validity of such an argument may very well depend on where the case is litigated.

CONCLUSION

Eagerly anticipated by investors, multinational companies and industries involved with China's technology needs, and counsel advising on technology issues, the New Technology Import and Export Regulations give some reasons for optimism as they form a substantial step forward towards free trade involving technology products. The Regulations have removed the rigid and often confusing approval requirements for technology import contracts involving the importation of technology not subject to prohibition or restriction. It will no longer be necessary, for example, for foreign licensors to go through the painful process of having to deal with changes proposed by the approval authorities after the signing of their technology licence contracts. This change, together with the removal of the requirement that the term of a technology import contract may not exceed 10 years and that the licensee must be allowed to continue to use the technology provided after the expiration of the contract, will no doubt facilitate the transfer of technology from multinational companies to Chinese companies. However, the list of technology subject to prohibition or restriction is not yet complete. The extensiveness of the complete list remains to be seen, and will have a large impact on the scope of technology that may be freely imported to China.