Exporting Technology from China: Is It Legal?

Just when China is starting to look promises for foreign companies looking for a higher educated workforce, they go and change their patent laws. As of a few weeks ago, Beijing has decided to issue “compulsory” licenses to domestic companies looking to manufacture patented drugs in China. The changes are said to be “for public health” and is allowed under the WTO for nations where expensive drugs are unaffordable. With a burgeoning middle class, China clearly intends the generic drug licenses for export markets.

China’s MNC licensing and operating regulations aim to keep the export-to-import ratio high, block foreigners from marketing competing products in China, and develop the Chinese economy into a global competitor. Although Chinese IP laws have become increasingly reliable with a few major cases such as the WTO U.S. versus China win on movie licenses, the tech industry continues to struggle. Apple is facing a lawsuit over its iPad trademark while Chinese phone manufacturers are warned of impending suits thanks to their rapidly expanding Andriod export market.

合作项目: Right to Produce

A common model for foreign companies has been a 合作项目, hezuo xiangmu, sharing-the-work mutually: “是指专利权人将其所拥有的专利技术许可他人实施的行为”; “The law allows says the licensor allows the licensee to exploit the patent”, exploit meaning implement or carryout the patent. These are often manufacturing agreements and the foreign company retains protection for its patents. These type of relationships are tricky because the intellectual property transferred has been very difficult to protect, and Chinese courts historically sided with domestic companies in order to facilitate domestic development.

WOFE: Right to a Factory

In order to protect technology, beginning in the eighties some companies chose to set up WOFEs, wholly owned foreign enterprises, located in SPZs, special economic zones. SPZs can offer lower taxes and local government investment in infrastructure. WOFEs can only take advantage of Chinese labor for manufacturing and are not allowed to sell their products in the Chinese market. Protecting intellectual property is easier in a WOFE, because not only is there complete sharing of patented technology with a Chinese firm, but the MNC can keep tabs on exactly who else may have access to technology, such as suppliers and temporary workers.

合资企业: Right to Sell

When looking to sell products domestically, foreign companies found the easiest entry was through 合资企业, “hezi qiye”, joint ventures or “mutual earnings enterprises”. Most original ventures were with a 国有企业, guoyou qiye, state-owned enterprise. In a Communist country, all companies were state-owned. In modern times privately owned Chinese companies not only exist, but are doing extremely well. Joint ventures with any Chinese companies usually allow 51%+ ownership by the foreign firm, and contracts may stipulate the foreign enterprise is allowed managerial control.

As the Chinese name implies, 合资企业 financial gains are shared based on the percent ownership, but what about the intellectual gains from products developed in China? In a joint venture, the enterprise which is established is a new company. Board members represent both the Chinese and the foreign company. Intellectual property developed by the enterprise belong to the newly created Chinese-based company, and joint venture contracts with the companies may span decades, effectively tying the foreign company to the Chinese firm.

Conversely, in recent years foreign companies are feeling less attractive to Chinese entities, and more of a short-term partner. The change is coming as China comes into itself and has begun to think of itself as a global competitor. The joint ventures which once helped Chinese the government through 国有企业 share profits from foreign businesses operating in China, now are consider a training process for Chinese companies looking to acquire technology and go global. Companies entering these type of relationships first should register IP with Beijing.

R&D: Right to Innovate

In order to win over the Chinese government, many MNCs have created R&D centers in China. L’Oreal, Seimens and Merck are a few. The Chinese government often builds R&D centers with the latest infrastructure, design and telecommunications systems to cater to foreign MNCs. The trade-off is giving the foreign MNC access to domestic markets while giving educated Chinese workers experience in high technology and science industries.

Right to Remunerations?

What began as a show of good will, has turned into a battle for rights to the innovations coming out of developed R&D centers. According to article 20 of Chinese patent law, a Chinese entity or individual looking to file a patent abroad must first file in China. China’s patent laws are a first-come-first-serve basis and do not require proof of invention. Although an R&D center may be a WOFE, as long as it is on PRC soil, it is subject to the PRC’s patent law.

The Chinese government assumes a right of the Chinese entity to any improvements made, meaning any contractual or joint-work done in China allows the Chinese counterpart to claim IP rights, equity, profit-sharing or some other ownership of any invention done by them. This rule even applies to Chinese citizens employed by a foreign firm!

In order to file for a patent abroad, the foreign firm must then go through the Chinese patenting procedure. The process begins with finding a Chinese patent agent to represent you, then obtaining the right to file a patent claim. According to article 10: An assignment, by a Chinese entity or individual, of the patent application right, or of the patent right, to a foreigner must be approved by the competent authorities designated by the State Council. This process can test a company’s guanxi, or political connections, and may subject it to bribery requests.

Once patent filings are made, the Chinese patent bureau will investigate the claim in a similar way as the U.S. government does – however the patent will be liable to Chinese export-import laws which regulate technology and industries considered advantageous or unique to China. The laws also take into account technology such as computer security, which may be considered a domestic threat if exported to foreign countries.

If the patent is approved, the Chinese employees working on the development may still claim royalities or payouts for their work. MNCs employing Chinese workers need to stipulate in contracts that the rights to patent filings and any work done under their employment belongs to the foreign MNC’s parent company. A compromise may be joint patent ownership in China and full ownership abroad.

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2 comments on “Exporting Technology from China: Is It Legal?

    • Hi Danny,

      Thanks for the clarification. What I can see of your blog is it uses similar language:
      Reuters’ Tan Ee Lyn asserts that China “overhauled parts of its intellectual property laws”.

      It was always part of the WTO agreement that certain developing countries had the right to grant compulsory licenses, but the overhaul for China meant 1) using those rights and 2) policies to the purpose of developing China’s drug manufacturing export market (rather than to serve an impoverished population’s medical needs.)

      For the most part China has protected pharma rights in the hopes of boosting it’s domestic R&D and providing jobs to an educated workforce. This seems to be changing…I think we’re entering a new era for foreign companies operating in China.

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