What are the overall changes in the newly issued IPR transfer measures?

The newly issued Measures aim to formulate concrete measures to secure a better business environment by strengthening IP protection. Former laws and regulations about technology export include the PRC Regulations for the Administration of Technologies Import and Export (revised in 2011) (中华人民共和国技术进出口管理条例), Measures for the Administration of Technologies Prohibited or Restricted from Export (2009)(禁止出口限制出口技术管理办法), Regulations for the Protection of New Varieties of Plants (revised in 2014) (中华人民共和国植物新品种保护条例), and Ministry of Commerce, Tentative Provisions on Matters Relevant to the Implementation of the System for Security Review of Acquisition of Domestic Enterprises by Foreign Investors (商务部实施外国投资者并购境内企业安全审查制度有关事项的暂行规定), etc. However, none of them focuses on the legislative purpose of protecting national security.

Under the new Measures, technology transfers include IP transfers that are part of acquisitions made by foreign entities involving four types of IP assets, which are patents, integrated circuit layout design, computer software copyright, and plant varieties; and these will be assessed in terms of their impact on national security and the country's “key technology innovation capability in key areas”. The Measures have clarified the authorities of examination for these four new types of intellectual property. Although the articles look complex, the principle is the same as that of the old regulations; the divisions are based on the types of intellectual property.

The main impacts of the Measures to foreign investors are as follows:

Firstly, the acquisition of Chinese technology by a foreign-invested company constitutes as an IP transfer for the purposes of the Measures. Subject to Article 2 of the PRC Regulations for the Administration of Technology Import and Export, the transferring of technology means transferring by means of trade, investment, or economic and technical cooperation, and the acts including assignment of the patent right, assignment of the patent application right, licensing for patent exploitation, assignment of technical secrets and technical services, and transfer of technology by other means. The explanation of “by other means” is vague, and in practice, the acquisitions by foreign-invested companies do not fall under the regulation of this rule. Therefore, the Measures include acquisitions under examination, which is an expansion of the scope in the Measures.

Secondly, a foreign-invested company is defined by its source of capital. The Measures' scope appears to include transfers “to foreigners” of Chinese IP, and in previous regulations, by contrast, such as the PRC Regulations for the Administration of Technology Import and Export, the focus is on the transfer to enterprises overseas. The term “foreign investors” in Article 1.1 of the Measures should be interpreted together with Article 1.2, which provides “including changes to the right owners, changes to the actual controllers”. So, this could be  viewed as the Measures may impact foreign companies based on their source of capital rather than the presence of foreign nationalities.

Thirdly, the interpretation of “actual controllers of intellectual property” needs further clarification. Article 1.2 specifies the outbound transfer of intellectual property rights including changes to actual controllers of intellectual property. However, the term “actual controller” has a different definition under different laws and regulations. According to Article 217.3 of the PRC Company Law (中华人民共和国公司法), ”actual controller” refers to one that is not a shareholder but is able to hold actual control of the acts of the company by means of investment relations, agreements or any other arrangements. In contrast, subject to Article 1.3 of the Ministry of Commerce, Tentative Provisions on Matters Relevant to the Implementation of the System for Security Review of Acquisition of Domestic Enterprises by Foreign Investors, “actual controller” is defined according to the percentage of shareholdings. So, the “actual controller of IP rights” in the Measures still needs clarification by further provisions in judicial interpretations or other relevant laws and regulations.

Apart from the factors mentioned above, the Measures have not set up a new censorship system but just a perfection of the former examination system, which means the authorities will take into consideration the element of national security during examination, which was already provided in old regulations. In practice, we must also look at the PRC Regulations for the Administration of Technology Import and Export and the Measures for the Administration of Technology Prohibited or Restricted from Export, which have specified the detailed requirements and procedures on censorship and are still the main important laws regarding outbound technology transfer.

Under the current laws, even after the implementation of the new Measures, the casting vote of whether a technology or intellectual property right is to be transferred or not, lies in the Catalogue of Technologies Prohibited or Restricted from Export by China (中国禁止出口限制出口技术目录), promulgated by the Ministry of Commerce and Ministry of Science and Technology. However, one of the most important considerations when interpreting the Catalogue is the element of national security. So, the new Measures have not changed the IP transfer censorship system of China, but rather have influenced the recent modernization of Chinese IP practice, and foreign investors are advised they should still consider consulting legal counsel on Chinese IP transfers due to the comprehensive procedures of censorship.

Ms Yuan Li,

Senior Associate of Shanghai Co-effort Law Firm,

Intellectual Property Department