China's new technology transfer regime
China recently issued a number of regulations (which all took effect on January 1, 2002) to revamp its administrative regime for the transfer of technology between foreign and local parties in accordance with its WTO commitments,
These regulations include the Regulations for the Administration of Technology Import and Export issued by the State Council, and a number of implementing regulations from the Ministry of Foreign Trade and Economic Co-operation (Moftec).
Scope of application
Under the PRC definition, the term 'technology transfer' encompasses both assignment and licensing of technology. In a 'technology assignment,' the originating party no longer owns the technology after the transaction, akin to a sale and purchase transaction. In a 'technology licensing' arrangement, on the other hand, the originating party merely gives the receiving party permission to utilise the technology for a particular period of time, roughly comparable to a leasing arrangement for tangible assets. Both import and export of technology, whether assigned or licensed, are covered under the PRC technology transfer regime.
Moftec is generally responsible for the administration of technology transfer at the national level. Moftec's local counterparts, generally called Commissions of Foreign Economic Relations and Trade (Cofert), handle the administration of technology transfer contracts at the local level. Most of the contract approval or registration activities happen at the local level, but in certain circumstances the formalities need to be carried out with Moftec in Beijing.
Three categories of technology
The Technology Regulations specify three categories of technology in several Catalogues:
- prohibited technology, which cannot be imported or exported at all;
- restricted technology, the import or export of which is subject to an approval regime; and
- freely tradable technology, the transfer of which only needs to be filed and registered.
Any technologies not listed in these Catalogues as being 'restricted' or 'prohibited' technologies are now categorised under the newly-created 'freely tradable' category by default. Although (perhaps to be expected) categories of restricted technology exports are much more extensive than those set out for imports, as a whole the catalogues are relatively limited in scope, and most types of technology transfers are now 'freely tradable.' This is a significant policy departure from the 'control everything' mentality evidenced in the previous regime.
Approval of restricted technology
Both import and export of technologies categorised as 'restricted' will be subject to an approval and licensing regime. For technology export contracts, the approval process would involve two applications, including a preliminary approval prior to the parties' negotiation of the relevant contract, and a separate approval of the final executed contract, whereas for technology import contracts the two processes can be combined into a single approval of the executed contract. A contract for transfer of restricted technology takes legal effect only upon application for and the eventual grant of an approval from Moftec or Cofert. Under the relevant rules the approval process should take no more than a few months.
Material amendments to an approved or registered contract would require a repetition of the original approval or registration process, although termination of technology license contracts merely requires registration (regardless of whether the technology license originally required approval or registration).
Freely tradable technology and contract registration
Technology import and export contracts for freely tradable technology become effective upon signing of the relevant contracts. However, after the parties' execution of the contracts, they must register the contracts with the relevant Cofert online.
Special registration requirement for technology transfers involving patents
Apart from the technology transfer regime, any technology transfers involving PRC patents (including contracts transferring an inventor's right to apply for a patent registration in China) must in addition be registered with the State Bureau of Intellectual Property or its local counterparts within three months of the contract's effective date. Proper registration of a patent license is also a prerequisite for foreign exchange remittance (along with any technology import contract approval) as explained below.
Penalties and other consequences
Legally speaking, technology transfer contracts involving restricted technology will not take legal effect until approved by the competent authority. In other words, if the transferee in an unapproved contract chooses to stop paying the transferor after having already received confidential know-how, intellectual property rights and other useful materials, the transferor could face a lengthy and uphill legal proceedings to enforce its IP rights.
Practically speaking, perhaps the most powerful enforcement tool for the technology transfer administration regime, at least for technology import contracts, is China's strict foreign exchange control policy. Under the regulations, evidence that a technology import contract has been properly approved or registered is strictly required to facilitate the remittance overseas of royalties and other payments under technology import contracts. In other words, if the requisite formalities have not been completed, the foreign transferor cannot receive its payments.
Other violations of the import or export restrictions under the new regime may expose the contracting parties to broad-ranging legal consequences, ranging from a warning for technical violations to possible criminal penalties for exportation of prohibited technologies. However, as the relevant penalties provisions are quite vague, it is unclear how the new regime will be effectively enforced for contracts, which requires neither approval for effectiveness nor payments overseas.
Statutory requirements on terms of the contracts
Under the relevant statutes there are certain requirements in relation to the essential terms of the technology import contracts, compulsory warranties to be made by foreign transferors, and restrictions on the foreign transferor' rights to contractually limit the Chinese transferees' use of licensed technology. Perhaps not surprisingly, similar restrictions upon the transferors are not found in relation to technology export contracts where the Chinese parties are the transferors.
Compared to the regime before, however, the new regulations do provide fewer requirements with respect to some very important terms of the contracts. For example, under the previous regime, the duration of technology-import contracts was limited to ten years. The authorities were also broadly empowered to comment on the terms of the contract and use their power to decline approval to pressure the parties into changing their commercial terms. Most significantly, the authorities used to be able to control the maximum percentage that the transferor could obtain for the technology transfer.
All these requirements have now been removed. The parties will be free to agree on most terms of the contract, unless special industry requirements apply. Likewise, under the new regime, the contracting parties can determine for themselves how licensees can continue to use licensed technology after the license expires. Finally, the parties may now agree to the scope and duration of the confidentiality obligation for as long as they desire.
Language and translation issues
Under the old regime, all technology transfer contracts needed to be reviewed by the authorities, who would require the parties to present Chinese versions of the contracts to facilitate their review. This requirement could add significant time and expenses to the parties. While the new rules are silent on whether the documents used in the new registration procedures, which are not intended to be reviewed by officials, will need to either have a Chinese original or a Chinese translation, initial inquiries with MOFTEC suggest that the state officials would be willing to accept an English only version for registration - and this could mean significant cost saving for the parties.
The new technology import/export regime appears to include a number of improvements over the old regime, particularly the creation of the 'freely tradable technology' category and the introduction of the online registration process. Perhaps more importantly, the range of technologies described as 'restricted' or 'prohibited' is now relatively narrow. The Chinese government has effectively removed approval requirements for most technology transfer contracts and replaced them with a more streamlined registration system. At the same time, it appears that the authorities will now have very little say as to the content of most contracts (those concerning freely tradable technologies), such as the royalty rate agreed to by the parties.
At the end of the day, foreign companies need to bear in mind that completion of governmental formalities in one form or another is still required to facilitate the remittance overseas of payments under technology import contracts. In addition, although the new regulations represent a significant relaxation of the authorities' control over the parties' freedom of contract, various statutory restrictions remain, and it remains to be seen how these requirements can be enforced for contracts that do not require review and approval.