New SPC Interpretation Fleshes Out Key Issues in Technology Contracts

The Interpretation, for the first time, defines the scope of technological achievements. According to the definition, a technological achievement is a concept similar to but different from "intellectual property". For one thing, intellectual property law cannot protect certain technological achievements such as technology consultation. For another, some intellectual property that is the result of intellectual effort but that does not consist of technological elements (e.g., trademarks and art work) cannot be taken to be technological achievements.

Specifically, the Interpretation defines a technology secret, which is a type of technological achievement, as technological information that is: (i) unknown to the public; (ii) commercially valuable; and (iii) subject to certain steps, by the person lawfully in control of the information, to keep secret. Similar to the language of TRIPs, the commercial value factor, as provided in the Interpretation, replaces two factors in the PRC Anti-unfair-competition Law. These are the economic benefit for the information holder, and practicability. To a certain degree, such replacement widens the scope of technology secrets.

Distinction between Employment and Non-employment Technological Achievements

According to the Contract Law, it is the employer rather than the employee who has the right to use and the right to assignment over an employment technological achievement. An employment technological achievement is defined in the Contract Law as a technological achievement accomplished in the process of carrying out tasks for an employer or primarily with the use of the materials or technological conditions thereof. The Interpretation expounds on the definition by elaborating what constitutes "the process of carrying out tasks for an employer" and what falls into the category of "using materials and technological conditions of an employer".

According to the Interpretation, "carrying out tasks for the employer" includes performance of employment duties or carrying out a task that is assigned by an employer, and unless otherwise provided by relevant law and regulations, carrying out, within one year of the termination of employment, technological developments related to the duties of the former position or to a task assigned by the former employer. It thus appears that the Interpretation extends the scope of employment technological achievements to include not only achievements accomplished during employment but also to those following termination of employment. It should be noted that such extension may, de facto, impose non-competition obligations on technological employees; it may impact their ability to seek new employment because normally a new employer will not tolerate arrangements under which the rights to the achievements of its employees belong to their former employer. Such obligation, de facto, is unreasonable because it appears regulatory and may survive without consideration.

Further, the term "materials and technological conditions" includes, as explained in the Interpretation, funds, equipment, apparatus, raw materials, undisclosed technological information and data. As such, "use of materials and technological conditions of an employer" is expanded to comprise: the use, in whole or in part during the development of a technological achievement, of the funds, equipment, apparatus or raw materials of an employer that has substantial influence on the outcome of said technological achievement; and development of a technological achievement based on undisclosed technological achievements or any step in the process of an achievement of an employer. Notwithstanding this stipulation, the following circumstances do not fall into the category of "use of materials and technological conditions of an employer": using an employer's materials and technological conditions on the condition that equivalent funds or a reasonable use fee will be repaid to the employer (e.g., rent or royalty); or using an employer's materials or technological conditions only for the purpose of verifying or testing a technological achievement that has already been accomplished.

In addition, the Interpretation confirms the validity and enforceability of agreements concerning employment-related achievements by stating that the court "shall" confirm the agreement between an employee and an employer in connection with the ownership of and interests related to the employee's technological achievements accomplished either within the period of his/her employment with the employer or thereafter. It is not clear whether such an agreement that requires that the right to technological achievements of an employee, even after the employee finds new employment, belongs to the previous employer is valid and enforceable. If so, the Interpretation is in conflict, de facto, with a labour regulation that stipulates that a period of non-competition may not extend longer than three years from the termination of employment.

Validity of Technology Contracts

The Interpretation reduces the possibility of the occurrence of invalid technology contracts and thus gives parties to these contracts more freedom to perform them.

Firstly, technology contracts entered into by research and development organizations that are divisions of another entity and that do not have independent legal person status (Dependent Organization(s)) remain valid and enforceable. The Interpretation sets forth three rules regarding the assumption of obligations under technology contracts with Dependent Organizations: (i) if a technology contract with a Dependent Organization is authorized or confirmed by the entity to which the Dependent Organization belongs (the Head Entity), the Head Entity must bear the obligations and liabilities of this technology contract; (ii) if the Head Entity does not authorize or confirm a technology contract entered into by a Dependent Organization, all the members of the Dependent Organization must bear, jointly and separately, the obligations and liabilities of this contract; and (iii) if a Head Entity does not authorize or confirm a technology contract entered into by a Dependent Organization but benefits therefrom, the Head Entity must bear the obligations and liabilities under said technology contract within the scope of the benefits it receives therefrom.

Secondly, the lack of a permit to perform a technology contract does not impact the validity of the technology contract itself. According to the Interpretation, if an approval or permit for the provision of certain services or for the manufacture of certain products has not been obtained, a contract for such provision of services or product manufacture is still valid. Unless otherwise provided in a contract, the party that is to use technology obtained under the technology contract has the obligation to obtain the approval or permit.

Thirdly, a patent application assignment contract does not necessarily become invalid and unenforceable if the State Intellectual Property Office (SIPO) refuses the patent application. According to the Interpretation, if the refusal occurs prior to the filing of the patent application assignment contract with SIPO, the assignee may appeal to the courts for modification or termination of the patent application assignment contract. If the refusal occurs after the filing of the patent application assignment contract, the assignee cannot appeal to the courts for modification or termination of the patent application assignment contract.

Lastly, a patent licensing contract licensing a technology for which a patent has been applied but has not been approved is valid. According to the Interpretation, such patent licensing contract will be deemed to be a technology secret licensing contract prior to publication of the subject technology. Following publication of the technology subject to patent application but prior to the approval thereof, a patent licensing contract will be dealt with as if the patent has been approved.

Preventing Monopolies

According to the Contract Law, a technology contract that monopolizes use of a technology or impedes technological progress is invalid and void. The Interpretation further states that the following circumstances constitute a monopoly of technology or an impediment to technological progress:

(i) restricting one party from improving on a technological achievement or from using such improved technological achievement;

(ii) requesting that one party assign, in whole or in part and free of charge or for unreasonable consideration, an improvement made to a technological achievement ;

(iii) restricting one party from sourcing technological achievements from any other providers that are similar to or in competition with a subject technological achievement;

(iv) restricting one party from fully applying technological achievements, e.g., unreasonably restricting the quantity, variety, price, sales channel, or export market of products manufactured or services provided by utilizing a technological achievement;

(v) requiring that one party accept additional conditions that are unnecessary for the application of a technological achievement, e.g., purchasing unnecessary raw materials, technologies, products, equipment, and services or accepting unnecessary staff;

(vi) unreasonably restricting the channel of one party to purchase raw materials, parts and components, products or equipment; or

(vii) prohibiting one party from questioning the validity of a technological achievement or imposing conditions on the questioning of the validity of a technological achievement.

Protection of Innocent Parties

According to the Contract Law, a technology contract that infringes upon the technological achievement of another (an Achievement Owner) is invalid and void. In order to protect parties acquiring the use rights to technology under invalid technology contracts and having no knowledge of an infringement (Innocent Party), the Interpretation stipulates that the use right of the Innocent Party survives the invalidation of a technology contract provided that the Innocent Party pays a reasonable use right fee (e.g., royalty) to the Achievement Owner and keeps confidential the technology information of the subject technological achievement.

If an Innocent Party and an Achievement Owner cannot reach an agreement with respect to the amount of a use right fee, competent courts may decide the amount by considering, among other things, the following factors: (i) the amount of royalty in consideration for which an Achievement Owner would usually licence the subject technological achievement; (ii) the price that an Innocent Party has already paid for a technological achievement; (iii) the cost of the development of a technological achievement; (iv) the practicability of the subject technological achievement; (v) the scale of business to which the subject technological achievement is applied; and (vi) the economic benefits brought to an Innocent Party through the use of a technological achievement.

It is not clear, however, whether an Innocent Party may acquire the ownership of a technological achievement if it has entered into a technology assignment agreement and has paid a reasonable price under the agreement.

Promotion of Application of Technological Achievements

The Interpretation, generally speaking, interprets the Contract Law in such a way as to promote the use of technological achievements.

Firstly, the Interpretation confirms the right of a party to a technology co-development contract to licence technology. According to the Contract Law, unless otherwise agreed in a contract, either party to a technology commissioned development contract or a technology co-development contract has the right to use and to transfer technology that is the subject of such contracts. The Interpretation expands the meaning of the phrase "right to use and transfer the subject technology" to include the right to grant a non-exclusive or non-monopoly licence to a third party. Thus, multiple users can share a technological achievement.

Secondly, a licensor under an exclusive technology licensing contract may, subject to certain conditions, grant a non-exclusive licence to a third party. An exclusive technology licensing contract is a contract pursuant to which a technological achievement can be licensed to a single entity but for which the licensor retains the right to use the subject technological achievement. The Interpretation, however, stipulates that, unless otherwise agreed to in an exclusive technology licensing contract, if a licensor does not retain the ability to use the subject technological achievement, it may grant a non-exclusive licence to a third party in lieu of its use of the subject technological achievement. Such a non-exclusive licence will be deemed by the courts to be a use of a technological achievement by the licensor.

Thirdly, the Interpretation allows an assignor under a technology secret assignment contract to apply for a patent on the subject technological achievement. According to the Contract Law, the assignor of a technology secret assignment contract has the obligation to keep confidential such technology secrets. The Interpretation, however, provides for an exception wherein an assignor may, in spite of its obligation of confidentiality, apply for a patent on a technological achievement and may publicize such a technological achievement during the application procedures as required by the Patent Law. This interpretation encourages the relevant parties to disclose their technological achievements in exchange for patent protection.

Technology Contracts Dispute Resolution

The Interpretation details relevant provisions in the Civil Procedure Law in the context of hearing disputes arising out of or related to technology contracts. Generally speaking, the Interpretation expounds on the rules regarding jurisdiction, third party litigation, and the suspension of lawsuits.

With respect to jurisdiction, as in intellectual property disputes, intermediate courts have jurisdiction over first instances of all disputes arising out of or related to technology contracts. However, in some cases, higher courts may also hear first instances of certain technology contract-related disputes and competent intermediate courts may instruct that certain technology contract-related disputes be heard by district courts.

The Interpretation also contains a provision regarding third-party practices. If, in a technology contract-related dispute, one party claims or the court finds that the technology contract that is the subject of a lawsuit infringes upon or might infringe upon the rights of another party, the court must notify such other party to participate in the lawsuit as an impleader. Thus, the impleader has the opportunity to have a voice in a lawsuit in which its interests are involved. However, an impleader's failure to participate in a lawsuit does not impact the court's ability to hear or judge a technology contract-related dispute.

In order to be consistent with the Patent Law, the Interpretation provides that, if a party applies to SIPO for nullification of a patent during a lawsuit in which a dispute concerning the patent is being heard by a court, the court may choose not to suspend the lawsuit. If a patent is nullified following the granting of a judgment in a lawsuit, the judgment will survive the nullification of the patent provided that a party that has assigned or licensed such a nullified patent in bad faith must compensate the other party for damages suffered as a result of the nullification.