How to Use Contracts for IPR Protection in China

7 December 2011

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Philippe Healey

China IPR SME Helpdesk Project Manager

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Today’s Speaker

• Troy Rice

• Of Counsel at Bird & Bird, Beijing office

• e-mail: Troy.Rice@twobirds.com

• Direct Dial: +86 10 5933 5690

Agenda

• Types of Contracts that Involve IP Issues

• “Governing Law” Considerations

• Key IP-related Contractual Provisions

• Contractual Provisions to Avoid

• Key lessons learnt

A. Yes, always.

B. Yes, when in writing, but oral contracts are never

enforceable.

C. Usually yes, when they don’t violate the law.

D. No. As a practical matter, contracts in China are

not worth the paper on which they are printed.

Poll #1

Are contracts enforceable in China?

Types of Contracts that Involve IP Issues

• Technology Development, Transfer, Consultancy or Services

– Patent / Technology Licensing

– Trade Secret/Know-How Licensing

– Technical Consulting / Services Contracts

– R&D Contracts

– Computer Software Licenses

• Trademark and Copyright License Contracts

– Franchise Contracts

– Publishing and Distribution Contracts

• Manufacturing, Distribution and Sales Contracts

– Advertising-related aspects of these contracts often involve use of IP

• Employment Contracts

– Special rules apply when PRC employees create IP

Types of Contracts that Involve IP Issues

• Technology Contracts – Important Points to Know – PRC Contract Law has entire Chapter devoted to Technology Contracts

– Important for your contract to adhere to the provisions of the PRC Contract Law – to aid enforceability efforts, in court or arbitration

– “Technological achievement” includes patents, patent applications, technological secrets, computer software, IC layout designs, new plant varieties, etc.

– “Technological secret” means technical information that is not in the public domain, has commercial value, and in respect of which the rights holder has taken confidentiality measures [basically, a “Trade Secret”]

– Tech transfer contracts require statutory warranty that subject technology is complete, free from error, effective and capable of achieving the prescribed goals – cannot be agreed otherwise by parties

– Licensor is liable for infringement when licensee exploits the patent or uses the technical secret – unless parties agree otherwise in contract.

Types of Contracts that Involve IP Issues Continued…

– Improvements to Technology

• Parties may provide in the contract for method of sharing improvements to the subject technology resulting from exploitation of the patent or use of the trade secret

• If the method is not prescribed or clearly prescribed, neither party can share any subsequent improvement made by the other party – so be sure to address improvements issues in your contract. Later in this webinar we discuss limitations related to technology improvements provisions.

– Maintenance of Patents

• Patent licensor is obligated to maintain validity of patent during term of contract (maintenance fees and response to invalidations, etc.) – unless the parties agree otherwise in the contract.

– Time Limit on Patent License or Trade Secret Use

• If the parties fail to specify or do not expressly specify the patent license term or trade secret use term, the licensee is not subject to a time limit, so be sure to include express provision for the term for use of the IP.

Types of Contracts that Involve IP Issues Continued…

– Computer Software Licenses – are subject to technology contracts provisions of PRC Contract Law, but also can take advantage of PRC Copyright Law-related protection and provisions

• Trademark and Copyright License Contracts

– High degree of freedom to include provisions that prevent the licensee from taking actions to harm your IP – less likely to run afoul of PRC law limitations on IP protection provisions discussed later in this webinar

• Manufacturing, Distribution and Sales Contracts

– Although these types of contracts are not often “express” licenses of IP rights, they often involve goods that incorporate IP, involve the use of IP to create the goods that are the subject of the contracts, and/or result in the creation of IP in the performance of the contract, so it is important to include IP-related provisions to address related concerns

Types of Contracts that Involve IP Issues

• Employment Agreements

– Contractual IP protections may not jump to mind immediately in the employment context, but maintaining confidentiality of trade secrets, having employees disclose inventions they create, and keeping records of creation of copyrighted works are important to address

– Patents – Special rules on payments for “service inventions”

• “service invention” is one made in the course of employment duties or mainly using the material and technical resources of the employer. Default position is that service invention belongs to employer, but employee has right to apply for patents on non-service inventions; companies can override the default rules by contract.

• Revised patent law implementing rules require all companies in China to provide reward and remuneration to employee inventors

– Default statutory scheme -- minimum reward of RMB 3,000 for invention patent, RMB 1,000 for utility model or design patent, paid within 3 months after patent grant date; remuneration related to commercial exploitation during patent term -- 2% of profits from invention or utility model patent, 0.2% of profits from design.

– Statutory defaults may be avoided, so long as substitutes are reasonable

Types of Contracts that Involve IP Issues

• Employment Agreements continued

– Copyright – “occupational works”

• “occupational work” is where a PRC citizen creates a work to accomplish a task assigned by a legal entity (employer)

• Copyright in occupational works vests in author, but employer has priority right to use such work within business scope; for 2 years after completion of work, author may not authorize 3rd parties to use in same way as employer, without employer’s consent

• Exception – For the following occupational works, moral rights vest in author, but other copyright rights vest in employer (and employer may reward the author/employee):

– engineering design drawings, product design drawings, and their explanations; computer software; maps; etc., created mainly by using material and technical resources of employer and responsibility for which employer bears; or occupational works the copyright in which vests in employer pursuant to the provisions of a law, administrative regulation or contract.

• PRC Copyright Law allows for commissioned works – permits commissioning party to own the copyright without further assignment by the creator

Poll #2

Must contracts in China adopt PRC law as the governing law?

A. Yes, always.

B. Yes, if you wish to enforce the contract in China

C. Not always, though there may be benefits to

adopting PRC law

D. No. Any contract in China can adopt non-PRC

governing law

“Governing Law” Considerations

• PRC Contract Law Article 126

– Parties to contract with foreign element may choose law to apply to handling of disputes, unless otherwise provided by law; where parties fail to choose, law of state with closest connection to contract applies

– Exceptions for certain contracts, such as Sino-foreign joint ventures

– IMPORTANTLY – PRC IP rights under the contract will always be governed by and protected in accordance with PRC law, no matter what parties state in the contract

– Other mandatory PRC laws may apply (e.g., tech import and export regulations) and need to be taken into consideration when drafting provisions for an IP-related contract

• Statute of Limitations to Sue for Breach/Apply for Arbitration

– For contracts for the international sale and purchase of goods or contracts for the import or export of technology – 4 years, counting from when party knew or should have known rights were infringed

– Other types of contracts – 2 years is typical time limit.

Key IP-related Contractual Provisions

• License Grant Scope

– What does the license include? Identify IP subject matter, limitations on use, types of rights being licensed, whether exclusive or not

• Prior Review by Licensor

– Obligation to supervise quality of goods produced under a licensed trademark

– Control of advertising and promotional uses of IP

• Certain Prohibitions on Licensee Seeking to Obtain IP

– Within important limitations to be discussed later in this webinar, include provisions that licensee will not apply to register your marks, apply for patents on improvements, reverse engineer your technology, or challenge your rights in your IP

• Assignment or Transfer of Contract to a Third Party

– Make sure your contract includes controls on other party’s ability to assign or transfer the contract, or your IP may end up in the wrong hands

Key IP-related Contractual Provisions

• Proprietary Markings/Notices

– Obligate licensee to use such markings/notices where appropriate to indicate copyright or trademark ownership, patented product, or confidentiality of trade secret

• Carve-out from Dispute Resolution

– If contract adopts arbitration or other non-court method to resolve disputes, important to include a carve-out that permits IP owner to file in courts where IP rights issues are involved

• Confidentiality Provisions – Critical for Trade Secrets / Know-How

– Require recipient to maintain confidentiality, limit scope of authorized parties involved, not use for any purpose outside of the contract, not disclose unless compelled by legal process, provide usual exceptions

• Infringement Indemnity

– Provide that other party indemnify you for IP infringements that are not a result of the IP you provided

Poll #3

Can IP-related protections in a PRC contract render it unenforceable?

A. Yes, if the protection illegally monopolizes

technology, impedes technological progress,

infringes upon the technological achievements of

others, or violates other laws or regulations

B. No. IP protections do not impact the

enforceability of a PRC contract

C. No. The parties may adopt whatever IP

protections they wish

Contractual Provisions to Avoid

• Technology Contracts

– Do not include any of the following types of provisions in technology contracts, or there is a serious risk the contract will be void:

• restricting a party from conducting new R&D on the basis of the subject technology, or restricting it from using improvements made thereto

• terms for exchange of improvements made to technology are not equitable, including

– requiring a party to provide to other party without consideration an improvement that the party made to the technology

– transfer it to the other party on a non-reciprocal basis, or

– take exclusive possession of or jointly enjoy IP rights in the improvement without consideration;

• restricting a party from obtaining from another source technology similar to, or that competes with, that of the providing party;

Contractual Provisions to Avoid continued…

• preventing a party from fully working the subject technology under the contract in a reasonable manner as required by the market, including restricting in a markedly unreasonable manner the quantity, type or price of, or sales channels or export markets for, products produced or services provided by technology recipient in working the technology;

• requiring the technology recipient to accept attached conditions that are not necessary for the working of the technology, including purchasing unnecessary technology, raw materials, products, equipment, services or accepting unnecessary personnel, etc.;

• unreasonably restricting the channels through, or sources from, which the technology recipient purchases raw materials, parts and components, products or equipment, etc.; or

• prohibiting the technology recipient from challenging the validity of the intellectual property rights in the subject technology under the contract or attaching conditions to such challenge.

– Even non-technology contracts should avoid similar problematic provisions

Contractual Provisions to Avoid continued…

• General Contracts

– A contract is void if it violates mandatory provisions of laws or administrative regulations – so IP protection provisions must account for this – example: PRC Tech Import & Export Administration Regs

– Also avoid clauses that exempt liability where bodily harm is caused to the other party, or property losses are caused to the other party wilfully or due to gross negligence (think exploding smartphone batteries)

• To the Fullest Extent Permitted under Applicable Law…

– It can be hard to predict what a PRC court may decide, so if you include an IP protection provision that might be deemed unenforceable, use softening language

• Importance of Severability Provisions

– Even if a given IP protection provision is found to be unenforceable or void, if you include a well-crafted severability provision, it can help to limit the scope of unenforceability and avoid contract being held void

Key Lessons Learnt

• The default position of many PRC law provisions relating to contractual protections for IP can be varied by agreement of the parties

• Choice of foreign governing law does not greatly impact protection of underlying IPR – safest to have your contract also comply with PRC law even when you adopt foreign governing law

• Certain IP protection provisions are unlawful and can render a contract void, but the risks can be mitigated somewhat with proper contractual language

Q&A

• Troy Rice

• Of Counsel at Bird & Bird, Beijing office

• e-mail: Troy.Rice@twobirds.com

• Direct Line: +86 10 5933 5690

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