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US-China Trade Friction and China Technology Import / Export Control Ordinance Revision and Contents

March 20, 2019

By Paul Hastings Professional

In China, the “Foreign Investment Law” was passed on March 15, 2019, and it is scheduled to come into effect next year. The law stipulates that “the conditions for technical cooperation are negotiated by the parties involved in the investment in accordance with the principle of fairness and equitable consultation” 

 . As part of the legislative work that is in line with the provisions of the Foreign Investment Law, the “Technology Import and Export Control Ordinance” was amended on March 18, 2019.

The former “Technology Import and Export Control Ordinance” (hereinafter referred to as the “Old Ordinance”), which has been in force since 2002, unilaterally protects the interests of licensee Chinese companies, There were some articles that have been criticized for discriminating foreign companies that are licensors. The US and the EU, Old ordinance violates the national treatment or the like of the TRIPS Agreement, was sued China in the WTO 

 . In addition, in the Trade Report of Article 301 of the Trade Act by the US Trade Representative, the enforcement of specific clauses in license agreements was pointed out due to discriminatory technology export / import control regulations. There was a problem raised by companies forcing technology transfer.

The amendments to the Foreign Investment Law and the Technology Import and Export Control Ordinance that China has been able to achieve at an unusual rate this time are considered to have been taken as a countermeasure for the US-China trade discussion. It has a great impact on trading practices.

This amendment is groundbreaking in the sense of giving domestic treatment to foreign companies regarding technology imports into China, but as a result, foreign licensors are free to impose conditions in license agreements. It is not. This paper analyzes the revision of the “Technology Import and Export Management Regulations” and summarizes the points to be noted in the practical use of the license agreement in the era after the new management regulations.

First, revision points

With this revision, the following provisions in the old ordinance were deleted.

Article 24 ( 3 ): If the recipient of the technology import contract uses the technology provided by the donor in accordance with the provisions of the contract and infringes on the legal interests of a third party, the provider is responsible.

Article 27 : The improved technology belongs to the improved side within the validity period of the technology import contract.

Article 29 : The following restrictions shall not be imposed on technology import contracts.

  1. Asking the host for incidental conditions that are not essential for technology imports, including the purchase of non-essential technologies, raw materials, products, equipment or services.

  2. Requesting the accepting party to pay a license fee or perform related obligations for technology for which the validity period of the patent right has expired or the patent right has been declared invalid

  3. Restricting the host to improve the technology provided by the donor, or restricting the use of the improved technology by the host

  4. Restricting the acquisition of technology similar or competing with technology provided by the donor from other suppliers to the recipient

  5. Unreasonably restrict purchasing routes or suppliers of raw materials, parts, products or equipment on the receiving side

  6. Unreasonably restrict the product output, type or selling price to the receiving party

  7. Unreasonably restricting the export route of products produced using technology imported by the recipient

So far foreign companies as a technology donor has been plagued greatly to the provisions of the old regulations of the above-mentioned 

 . In particular, there were often foreign companies who gave up their technology provision in Article 27 of the former ordinance on the attribution of improved technology. That is because if the licensee makes minor improvements and the improved part and the license technology are inseparable, all the improved technology, including the license technology, may be attributed to the licensee.

In practice, sublicenses by subsidiaries and work-for-hire (consignment development) were often used to circumvent the application of Article 27 of the former ordinance. Sub-licensing by a subsidiary means that a foreign company first grants a license for re-licensing technology to its subsidiary in China, and that subsidiary enters into a sub-license agreement with the receiving company in China. In that case, since the sub-licensor Chinese subsidiary and the sub-licensee receiving party are domestic companies, the technical import / export control regulations are not applied and the attribution of improved technology is more freely determined based on the contract law. Will be. Work-for-hire (consignment development) is a scheme often used by foreign companies that do not have a subsidiary in China. All improvements are commissioned by licensors under the command of licensors. It means that it belongs to the licensor for a certain price. However, these diversions were always at risk of being invalidated by the court as violating enforceable laws in the event of a dispute.

Second, the impact of the revision and points to note in practice

This amendment will allow foreign licensors and Chinese licensees to negotiate and negotiate more freely the terms of technology imports based on the principle of freedom of contract. If the technology provider is only a foreign company, it will be impossible to impose conditions that are more disadvantageous than technology transactions between domestic companies.

However, licensors cannot impose any conditions on the license agreement. Regardless of whether it is cross-border or not, the “Contract Law”, “Anti-Monopoly Law” and related laws and regulations that apply to all technology transactions include provisions prohibiting technical monopoly, so we concluded a license agreement. It is necessary to keep these provisions in mind when doing so.

Liability for infringement of third party interests

As a result of the deletion of Article 24, Paragraph 3 of the former ordinance, licensors will be subject to the agreement between the parties in accordance with Article 353 of the "Contract Law" regarding liability for infringement of the rights of third parties by the use of technology by the licensee. It is entrusted to. Therefore, it has become possible to include a provision in the license agreement that the third party is not liable for infringement. However, Licensor will ensure that it owns the rightful owner or license to the technology it grants, and will cooperate with Licensee if Licensee files a lawsuit for infringement by a third party. There is an obligation 

 .

Improved technology attribution

With the deletion of Article 27 of the former ordinance, Article 354 of the "Contract Law" is applied, that is, the attribution of improved technology is left to the autonomy of the parties based on the principle of reciprocity. Only if there is no provision in the contract or the provision is unclear, cannot be separately agreed, and is not clear from the relevant clauses or trading practices of the contract, it belongs to the party that made the improvement.

Here, the principle of reciprocity is the keyword, and the licensee's improvement research itself or the use of the improved technology is restricted, or the right to transfer the improved technology to the licensor for free (assignment) or the implementation of the improved technology free of charge. If the terms of the transaction are determined to be mutually exclusive and unfair, such as imposing an obligation (grant back) on the licensor to the licensor 

 , it may be invalidated as a contract that prevents technological progress  . If the parties cannot agree on the attribution of the improved technology after the technology contract has been invalidated, the court may decide to belong to the party that made the improvement . Therefore, when signing a license agreement, it will be necessary to carefully consider and draft the provisions relating to improved technology.

Restrictions on technical contracts

As for the restrictive conditions in technology contracts, Article 329 of the “Contract Law” and “Interpretation of Some Problems of Law Application in the Examination of Technical Contract Dispute Cases” (hereinafter referred to as “Technical Contract Interpretation”) Article 10 apply. Article 329 of the "Contract Law" has the principal principle of illegally monopolizing technology, invalidating technology contracts that impede technological progress or infringe on third party technology results. The following are specific examples of illegal monopoly on technology and impediments to technological progress.

  1. Restricting one of the parties from conducting new research and development based on the contract technology or using the improved technology, or the exchange conditions for the two improved technologies are not equal.

     

    This involves providing one of the parties the technology that the person has improved to the other party free of charge, transferring it to the other party without following the principle of reciprocity, and monopolizing or sharing the intellectual property rights of the improved technology for free. Including requesting to do.

  2. Restrict one party from acquiring similar or competitive technology from a third party;

  3. Prevent one of the parties from fully implementing the contract technology in a reasonable manner based on market needs.

     

    This includes clearly unreasonably restricting the quantity, type, price, distribution channels and export destinations of the products or services provided by the recipient implementing the contract technology.

  4. Require the host to accept incidental conditions that are not essential to the implementation of the technology.

     

    This includes purchasing unnecessary technologies, raw materials, products, equipment, services, and accepting unnecessary personnel.

  5. To unreasonably restrict the purchase route or purchase source of raw materials, parts, products or equipment on the receiving side.

  6. The receiving party prohibits or conditions the objection of the validity of the intellectual property rights of the contract technology.

These applicable matters are basically the same as the restrictions listed in Article 29 of the former ordinance, but since there is a major premise that “technical monopoly, impediment to technological progress”, the court decided that Not all of these restrictions are illegal, as in Article 29 of the old ordinance, but it can be said that case-by-case analysis and judgment can be expected from the viewpoint of competition law. On the other hand, we must pay attention to how the business is managed.

Furthermore, in the “Antimonopoly Act” and “Rules on the Elimination of Competition due to Abuse of Intellectual Property Rights or the Prohibition of Restricted Actions”, operators with a dominant position abuse the intellectual property rights and eliminate competition.・ There are provisions on restricted activities. In particular, a licensor with a dominant position will not give the licensee an exclusive grant back of the improved technology, a non-conflict obligation not to challenge the validity of the intellectual property rights, restriction of use, the exercise of intellectual property rights is the right period received an expired or invalid certification, should not impose unreasonable restriction conditions of the prohibition of transactions with third parties 

 .

When negotiating a license agreement, foreign licensors must consider the restrictions that may be imposed and the conditions that may be invalidated from the perspective of competition law.

Third, conclusion

Some legal provisions that have been enacted and implemented for the purpose of protecting domestic companies as licensees have been deleted so that cross-border technology transfer agreements are in the same manner as those between domestic companies, and competition laws In terms of being able to analyze and judge the terms of the contract from a perspective that includes In the event of a dispute, the court must respect the autonomy of the parties and watch the future trends in law enforcement to see if it can make decisions from the angle of competition law. In particular, it will be up to the future operation whether the bias to foreign companies has been removed by this amendment. In addition, it is necessary for Japanese companies that want to export technology to China to understand the relevant provisions of China's current laws and regulations and to receive advice from experts from the viewpoint of competition law at the negotiation and draft stages of license agreements. .


  Article 22 of the Foreign Investment Law

 See   DS542,   . See DS549,  .

 “Technology Import and Export Control Ordinance” is a forced law, even if the parties choose foreign law as the governing law and foreign arbitration as the dispute resolution method, they apply for the enforcement of the foreign arbitration award in the Chinese court. In doing so, there is a risk that enforcement will be refused on the grounds that it violates Chinese enforcement laws and violates public order and morals. Therefore, it was said that the provisions in the “Technology Import and Export Control Ordinance” cannot be avoided.

   "Technology Import and Export Control Ordinance" Article 24

   "Interpretation of some problems of application of law in hearing of technical contract dispute case" Article 10, Paragraph 1

   Article 329 of the Contract Law

   "Interpretation of some problems in the application of law in the hearing of technical contract dispute cases" Article 11, Paragraph 2

   Article 10 “Rules Concerning the Elimination of Competition due to Abuse of Intellectual Property Rights or the Prohibition of Restricted Acts”