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China Distribution Agreements: Exclusivity Is NOT Required

Posted in Legal News

I spoke last week on China IP at Columbia University. During my talk, I mentioned how common it is for the Chinese side in a licensing or a joint venture deal (or really any deal) to claim that the law requires the foreign company to transfer ownership of IP for the deal to go through.  I talked of how when my law firm is confronted with such a situation we ask the Chinese side to provide us with the legal cite to the law that allegedly requires this. To which we typically get one of the following in response:

  1. An English language translation of a law that does not exist;
  2. A Chinese language version that does not say what the Chinese side says it says;
  3. A claim by the Chinese side that it is an unwritten law.

I then stressed how there is no such law, though we have on more than one occasion seen American companies turn over their IP because they believed otherwise.

After my talk, Andrew Hupert told me of how on more than one occasion he has worked with American companies that have entered into exclusive distribution arrangements with Chinese companies based on the assertion by the Chinese company that Chinese law requires such agreements between foreign companies and Chinese companies grant the Chinese company exclusive distribution for all of China.  Andrew described one situation where an American had signed a long-term China exclusivity deal with a Chinese company that had no capabilities outside Shanghai.

There is no such exclusivity requirement!

In fact, as commentators love to point out, (see for example, Patrick Chovanac’s Nine Nations of China), China is a very large and very diverse place and a really good distributor/marketer/seller of a product or service in one region might very well not know anything about distributing/marketing/selling in another region.  The good news though is that you are not required to use the same distributor throughout China, no matter what you are told.

We have found this exclusivity claim particularly common with wine and with food products where the Chinese party claims that the approval to sell these items in China is restricted to only one seller/distributor.  There are though some product areas (such as pharmaceuticals) where it is very common for a distributor/reseller to require nationwide distribution even though it is not legally required.

Bottom Line:  Chinese companies love claiming something has to be done a particular way in China whether that is really the case is not.  This holds true with respect to the law as well.  Your job is to confirm or deny.

For more on distribution agreements in China, check out the following: