How a Foreign Partner Secures its IPR Transfer in China

When a foreign entity enters into any deal that involves the transfer of IPR ownership, they must first make a determination to see whether the industry of the business and category of technology falls under the Technology Export Catalogue and the Foreign Investment Industrial Guidance Catalogue (外商投资产业指导目录), jointly promulgated by MOFCOM and the National Development and Reform Commission (NDRC).

Fang also points out that, in light of the new Measures as a modification issued under the State Council, the former regulations governing import and export trade should also be examined, namely the 2011 Regulations.

GOVERNING BODIES AND REVIEW

The relevant governing body in charge of the review of applications within the 2011 Regulations is MOFCOM, and its branch offices in different parts of the country. In practice, while MOFCOM makes proper commercial and business determinations, it is questionable whether it is properly equipped to determine whether or not certain IPRs fall within a restricted technology.

This modification essentially adds a new step to the process: although a company still needs to file its application with MOFCOM, it also needs to be reviewed under the four new technology categories of patents, integrated circuits, computer software and new species of plants. For these new categories, the new Measures ask MOFCOM to consult with another agency. For example, for patents or the layout designs of integrated circuits, MOFCOM will need to consult with the Patent Office; for computer software, they will work with the technology administrative agency for conducting the examination; and for new species of plants they may need to work with the Ministry of Agriculture and Rural Affairs and the Ministry of Natural Resources. With this mechanism in place, these agencies can help MOFCOM and related commercial administrations build their expertise and so, over the years, will be more able to better determine whether any new applications of species, patents or software are important, critical or sensitive (or not) to the country's national security and interests. As a result, MOFCOM will need to work with other authorities and agencies to reach a determination decision. This is one important change from the new Measures.

CAN A FOREIGN TRANSFEREE SECURE THE TRANSFER OF AN IPR FROM A DOMESTIC (CHINESE) TRANSFEROR?

For an IPR transfer from a domestic company to foreign company, the transfer will constitute a technology export, whereas a transfer from a foreign entity to a domestic entity would be a technology import. Thus, there needs to be either an existing assignment or license to trigger the law under the 2011 Regulations.

There is another scenario whereby a domestic entity is being bought or purchased by a foreign entity. In this case, the foreign entity will be the owner of everything the domestic entity owns.

Under the 2011 Regulations, this will not actually constitute a technology export/import as there is no legal contract. The contract found may only be in the form of equity interests in the company or in the contract of assignments for any patents etc.

The prevalent and dominant view from industry specialists is that if you have a change of control over the IPR, then that change of control turns into the change of control of the owner of the IPR, and in this situation, the mechanisms of review are covered under the new Measures. If the business transaction in question is a foreign acquisition, there already exists a procedure of review as to whether the domestic IPR can be purchased by a foreign company. Under the new Measures, the agency in charge will review these new kinds of cases, in light of their significant impact on national security and market behavior or competition, as well as their influence on any key technical sectors for the country.

The new approach is to look at the perspective of technology export and to examine whether the foreign entity becomes the controlling owner of the technology IPR, which is owned by the domestic entity. If the foreign entity becomes the controlling owner of the IPR after the transaction, then the Measures essentially add a new step to the review: to consider whether the transfer of the IPR falls under the restricted or prohibited category and if so, it will become an issue. This differs from the review of the same types of transactions under the 2011 Regulations, and therefore represents the second important change in the new Measures.

When asked whether the respective agencies and offices will present further hurdles or scrutiny to the process, Fang explains that this new mechanism of specific review will take time to develop and streamline. Furthermore, the pace of review will depend on the facts of each specific case and so it is hard to predict the exact impact from the Measures themselves. Nonetheless, the spirit of the law is to help companies to find clarity for their IPR and to involve other specific government bodies and offices in the hope that this will provide better, consistent and more predictable results. This change is welcome and the consensus is that, in practice, a tighter scope of review by specialist agencies should actually lead to an easier and faster process.

WHAT SHOULD WE EXPECT TO SEE IN FUTURE, AND WHAT IS THE OUTLOOK FOR IPRS IN CHINA?

Looking to the grand scheme of things, Fang believes there will not be a new trade war between the US and China. In terms of IPRs in China, he expects protection to become stronger. “The issue [of trade wars] may be a contributing factor, but more important is the trend coming from local domestic companies moving up,” he says. “They are becoming more innovative businesses, and when more domestic companies move away from low level manufacturing businesses, they become aware of legal protection and commercial and IP rights. By natural progression, domestic companies are becoming the larger IP holders in China. We have seen the highest number of patent filings within the last few years as compared to the same period in the US.”

Fang also expects to see more transactions, both inbound and outbound. He notes that as the economy in China continues to grow, local companies will look to investment abroad more frequently. As it will take time in practice to see if the new steps under the Measures will affect the overall IPR transfer process, in essence this does not change the fundamental issue. It does not affect the scope of restricted technologies and one is still required to file the relevant and proper paperwork. “Remember that the first step is to file your IPR and the second step is to enforce it,” Fang reminds us.

In conclusion, Fang says: “There will always be risks in doing any business and a foreign or domestic company still needs to take the necessary steps. Whether the new measures clarify or complicate the process, depending on which way you see it, I would think that regardless of the outcome, they clearly amend the review process especially for controversial cases. So in terms of whether it will be easier or more difficult for foreign companies to acquire IPRs from domestic companies, we will still have to wait and see.”

Fang Qi, Partner

Fangda Partners, Beijing