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Technology Leakage Prevention Difficult Under Chinese Antitrust Framework

By William F. Heinze

According to McDermott Will & Emery's latest on "Technology Transfer Under the PRC Antitrust Framework":

Under the current PRC legal framework, "technology transfer" is a very broad concept, covering both assignments that involve the transfer of intellectual property and licensing that does not involve the transfer of intellectual property. It includes the assignment of patent rights, patent licensing, and transfer of know-how or other technology. . . .

. . . The Supreme Court?s Opinion on Application of Law in the Adjudication of Technology Contract Disputes (the Supreme Court Opinion) is widely recognized as a milestone in the regulation of technology transfer, particularly with respect to technology monopolies misused by multinational companies in the course of their cooperation with Chinese businesses. . . . The Supreme Court Opinion specifies the following circumstances as illegal monopolies of technology or impediments to technological progress:

• Preventing a counterparty from conducting research and development on the
  basis of the subject technology; restraining that party from using improvements to the technology; creating non-reciprocal conditions for the exchange of improvements, such as requiring a party to share improvements that result solely from the efforts of that party without compensation; transferring improvements to the transferor on a non-reciprocal basis; or exclusively or jointly holding the rights to the improvements without compensation (this clause is hereinafter referred to as the Improvement Provision)
• Preventing a counterparty from acquiringtechnologies similar to, or in competition with, those of the supplying party
• Preventing a counterparty from using the subject technology in a reasonable manner as required by the market, including unreasonably restricting quantity, variety, price, distribution channels and export markets of products or services
• Imposing additional conditions that are unnecessary for utilizing or applying the technology, including purchasing unnecessary technology, raw materials, products, equipment or services, or requiring a transferee to accept unnecessary personnel
• Unreasonably restraining a transferee?s channels or sources of procuring raw materials, parts, products or equipment
• Prohibiting a technology transferee from filing oppositions against the validity of the rights in the subject technology, or imposing additional conditions on filing such oppositions

. . . In practice, the Improvement Provision is perhaps the most controversial of the statutorily prohibited restrictions and has often troubled practitioners attempting to abide by it. It is helpful to analyze relevant issues frequently encountered in the practice. It can be inferred without much difficulty that the following arrangements shall be prohibited:

• . . . Creating non-reciprocal conditions for the exchange of improvements, such as requiring a transferee to share improvements that result solely from the efforts of said transferee without compensation, transferring improvements to the licensor on a non-reciprocal basis, or exclusively or jointly holding the intellectual property rights to the improvements without compensation

. . . As for technology improvements, the Supreme Court Opinion specifies that it would be an unreasonable restriction if a contract entitled a licensor to use improvements developed solely by the transferee without compensation or on a non-reciprocal basis. Put another way, an exchange of improvements or use in exchange for fair compensation will not be regarded as unreasonable.

According to Chinese law, if a technology transfer contract is entered into by a foreign party and a PRC party, it is possible for the parties to choose the law of a jurisdiction outside the PRC as the governing law of the contract. Given the aforementioned restrictions imposed by Chinese law on the technology transfer, a foreign party may wonder whether it is possible to circumvent the aforesaid restraints by applying foreign law to the agreement. However, choosing a foreign governing law will not necessarily allow the parties to include provisions in the contract that would otherwise be unenforceable. This is because contracts that do not comply with mandatory PRC law are not enforceable against a Chinese party in China.

Full post as published by I/P Updates on July 31, 2008 (boomark / email).