Archives: licensing agreements

I am going to be speaking at USC this weekend and in poring over old PowerPoints (to create a new PowerPoint for my talk), I came across one with a fairly extensive China law bibliography of some of our most helpful posts.  This bibliography is definitely slanted towards the legal issues that confront foreign companies doing business in China.

Here it is:

CHINA CONTRACTS

CHINA LICENSING AGREEMENTS/CHINA DISTRIBUTOR AGREEMENTS/CUSTOMS

CHINA COMPANY FORMATION/CHINA WFOE FORMATION/CHINA JOINT VENTURES

NEGOTIATING WITH CHINA

CHINA —INTELLECTUAL PROPERTY

Back in April last year, I spoke at an Economist Magazine Business Without Borders event on China.  I mostly spoke about intellectual property protections in China, but my introduction dealt with China’s legal system as a whole.  Video of my introduction (but not the whole talk, near as I can tell) is online and was referred to me today.  I watched it and liked what I saw and I had it transcribed, per the below.

What I liked is how I try to put China and its legal system in their proper perspective, which is sometimes necessary.  It is sometimes necessary because we Westerners too often compare China to from whence we come, rather than to other countries closer to where China is socioeconomically.  This causes China to seem worse than it is, and also tends to exaggerate the difficulties in doing business in China.

Here’s my spoken intro, transcribed:

I’m going to start out not really focusing so much on intellectual property, but talking about China’s legal system generally. I’ve been dealing with emerging market countries for the last 20 years or so, mostly helping American companies navigate emerging markets. And my focus in the last 10 years has mostly been on China. In comparing China to other emerging market countries, my conclusion is that China’s legal system is actually more advanced and less corrupt than just about any other emerging market system.

And I’m not the only person who believes this.

As I was driving in this morning I was listening to BBC interviewing a Russian oligarch who was talking about how great Russia is for business, and he mentioned that Russia is actually better than China for business. And the interviewer called him out on that and said well you’re saying that, but no one else seems to say that. And he quoted a number — which I was going to quote today — which is that Transparency International (which is the most respected and the leading ranking of countries on corruption) ranks China 75 out of 176 countries, so it’s actually in the top half in terms of the least corrupt countries. The World Bank ranks China 91 out of 183 in terms of ease of doing business. And in my firm’s own experience, China is not that bad.

We have registered thousands of things with the Chinese government — trademarks, copyrights, licensing agreements — and not once have we ever been hit up for extra money. That’s not true in a lot of other emerging market countries where you do get hit up for a fee to expedite things. But you’re not really being hit up with a fee to expedite things; what they’re essentially telling you is if you don’t pay the fee to expedite your trademark application, your company trademark application is going to go into that “dark corner” over there.  And that generally does not happen in China.

Now, just yesterday, the new AmCham China member survey came across my desk. This is a survey of American companies that do business in China, and one of the questions asked of the members who have been involved in intellectual property litigation in China was what their impression was. And 63% of those members said that they were either satisfied or very satisfied. Now to me that’s an amazing number, because here in the United States, the word “satisfied” is usually not a word that’s associated with litigation.

So, I’m not saying China is perfect, it definitely is not and there are major issues there, major issues of corruption, major issues with its legal system, but what I am saying is for the average American company, it’s not that bad at all. And those are the sorts of things I am going to be talking about later.

 

What do you think?

On February 20 at 2:00 p.m. Eastern, I will be co-presenting a China law webinar, along with Andrea Charters, Vice President and Associate General Counsel of Rosetta Stone Inc. LexisNexis is sponsorig this webinar and, incredibly enough, it is entirely free.

We will be gearing our presentations towards in house counsel and together we will be addressing the following issues, with a view towards protecting IP and providing some basic legal information for those doing business in China:

  • Choosing a Chinese partner
  • Identifying what you need to protect
  • Structuring your deal or contract
  • Writing an arbitration clause
  • Understanding the China International & Arbitration Trade Commission
  • Executing key elements in employee contracts
  • IP registrations: trademarks, patents, copyrights and licensing agreements

Click here for more information and to sign up.

This is the final part of a series arising from a speech I gave last month at a biotechnology conference in Washington DC.

In How To Protect Your IP From China. Part 1, I mostly looked at the risks China poses to intellectual property and very generally on how companies can determine how those risks should influence their actions.

In How To Protect Your IP From China. Part 2, I mostly focused on what I, as a lawyer, look at in trying to protect my clients’ IP from China and what you, the company, should be looking at and doing to protect your own IP.

In How To Protect Your IP From China. Part 3, I looked at the negotiating tactics Chinese companies so often employ in an effort to take advantage of your intellectual property.

In How To Protect Your IP From China. Part 4, I wrote on the basics of what goes into Chinese contracts, particularly those related to protecting your intellectual property.

In this part 5, I discuss some of the most common situations companies face where they must focus on protecting their IP.

  • Employees

Confidentiality agreements. In China, unlike in the United States, it is the norm to have a written employment contract with all employees. This is because not having a written agreement can lead to having to pay a year or more in salary to anyone you terminate.  You should use the written contract to your advantage by putting in a confidentiality provision that sets out your company information that must be kept confidential. Confidentiality agreements can protect company information that may not rise to the level of a trade secret, but they cannot be so broad as to protect everything.  China actually has very sophisticated trade secret laws — they come the US’s Uniform Trade Secrets Act — and the courts there are not bad at all in ruling favorably in favor of employers on confidentiality and trade secret cases.  But for you to be able to prevail, just as in the United States, the information you are seeking to keep confidential must have commercial value and you must make a reasonable effort to keep it away from the public.

Non Compete Agreements – These generally work in China only with very high level employees.  Very high level. And even then, they are enforceable only if they are: (1) not too long in duration and no longer than two years; (2) not too large in terms of geographic scope: and (3) do not restrain too much the employee’s opportunity to pursue his or her occupation.  Now here’s the real kicker on these:  you must pay your employee for the non-compete after his or her termination.  Limited to two years.  Typically, you must pay 20 to 50% of the employee’s salary, with the amount depending on the location in China.

Nonsolicitation agreements. Nonsolicitation agreements prevent employees from soliciting customers, former co-workers and/or agents upon separation from the company. These are usually enforced by China’s courts so long as they only prevent solicitation of the employer’s customers or accounts that existed at the time the employee left and so long as they are limited in duration and in geographic area.

It can be critical — especially for your employees doing R&D — that your employee contracts set forth who owns any intellectual property your employees help develop. You want a provision in your contract making clear that all IP developed by your employees belongs to the company and you want that because in China you run the real risk of your employees claiming ownership of what they developed. We also like to see a provision in the employee manual saying that any IP developed by company employees belongs to the company.

Contracts with your Chinese Distributers, Manufacturers, Joint Venture Partners, and Licensees should include the same sort of provisions relating to non-compete, non-solicition, and non-disclosure and they also should be clear about who owns what with respect to any IP.

 

  • Licensing Contracts

Three things you should be thinking about if you are licensing your IP to a Chinese company.

  1. Be careful about getting paid based on sales, unless you have some really good way of knowing what the sales really are.
  2. Get what you need to do the deal before you relinquish the technology.  Figure that the Chinese company will stop paying you after it has secured your technology.
  3. Register your licensing agreement with the proper governmental agency.  If you don’t, you run the risk of not being able to sue on it.
  • IP Registrations 

Just as in the US, you should register your IP in China to protect it.  There is no way can I go into great detail on what you can and should do to protect your IP in China through registration, but what I can tell you is that it almost always makes sense to do something.  Earlier I talked about how bad China is on IP and that is true, but if you have not done the proper registrations, you pretty much have zero chance of protecting your IP.  If you have done the proper registration, your chances are considerably better.

China’s IP registration and protection system is in many ways not all that different from that in the US.  Just as is the case here, China has patents, trademarks and copyrights.

Patents. China has invention patents, utility patents and design patents.  Invention patents are thoroughly reviewed before they are granted and so they can take quite a while.  Because of this, many companies will secure a quicker utility or design patent while waiting until their invention patent comes through.  Couple things you need to know about patents in China. First, if you do not file for your patent in China within a year of filing for it in the United States, you will be too late. China is a signatory of the Patent Cooperation Treaty and the Paris Convention, but Chinese patent lawyers tell me that it is better to file your patent in China.

China has had compulsory licensing of patents since 2001, but earlier this year the Chinese government came out with detailed criteria for the granting of compulsory licenses and that threw many into a panic, believing that the government was instituting compulsory licensing for the first time. These new rules really did not change much of anything and as far as I know, China has not in the last ten years required any company to compulsorily license its IP.

Trademarks are unique names, symbols, or logos. Can include colors. We trademarked a particular color of screws for a client. Don’t underrate trademarks in China. These work in China. China is a first to file country, not a first to use country, so generally, whoever files first for a trademark gets it. Trademarks cannot be place names. This is a bigger problem than you might initially think.  Another problem is that the people at China’s trademark office usually view acronyms as images and so if your company name is something like EVO and someone else has already registered the company name ECO, there is a very good chance your EVO name will be rejected as conflicting with ECO, because to someone who cannot read English, the two names look too much alike.  What this means is that if you have a two or three letter company or brand name, you had better try to register it now because it will only get tougher.  We used to get these approved all the time, but in the last year, we are succeeding only around 50 percent of the time.

Copyrights.  A lot cheaper and easier to obtain than patents and they last a lot longer. Very similar to the US. You do not need to file for a copyright in China to have a China copyright, as they arise automatically upon creation of a work created or first published in China, but you do need to have a registered copyright to sue on it and that’s the catch. In China, it takes so long to secure the registration of a copyright that if you are going to want to protect your copyright in China, you should file for it right away, because if you wait until you have a problem to file for the copyright, you may have a one-year lag before you can do much about it. Just like in the US, you don’t have to reveal all of your material in the copyright filing.  This is particularly important for something like computer code.

Stopping IP Theft.  If you have registered IP, and someone in China tries to use it without authorization, you can seek an administrative remedy by trying to get the Chinese government to do something about it or you can sue for damages. You also can try to get Chinese customs to stop any violating goods from leaving the country and, if you have your IP registered here, you can try to get US customs to stop it from entering into the US.

 

Twice in the last week, clients told me that their China sales had greatly increased in the last few months due to (not in spite of) China’s economic and other problems.  One of these companies sells a high end (but definitely not top of the line) home item.  The other sells industrial testing equipment. Both have been doing business with China for years.  Both are getting not only seeing increasing sales, but they both are getting all sorts of new (and real) offers to distribute their products.

Why?

I think it is because Chinese companies and consumers are starting to focus more on quality and value (defined as cost to quality/durability), as opposed to just price. I (and both of our clients) also think China’s new-found desire not to buy from Japan is also playing a major role.

Co-blogger Steve Dickinson recently wrote an article for Stratfor on how to negotiate with Chinese companies in which he talked of how our law firm’s China licensing practice has been growing at warp-speed:

We have been drafting an increasing number of contracts for foreign companies licensing their concept or technology for use in China. In the old days, this type of licensing was primarily in the industrial sector. These days, most of our work has been on licensing agreements in the services sector in China. Much of this licensing is for operations in China that are prohibited from direct participation by foreign companies, such as in publishing, media, telecom, insurance and finance.

I would add that our writing of all types of China licensing agreements has increased and this too I attribute to an increased desire of China buyers for American goods and services.

Needless to say, I am not the only one seeing this impressive uptick for American companies.  China negotiation expert Andrew Hupert (and author of an excellent book on Chinese negotiations) asserts in his post entitled, How I Learned to Stop Worrying and Love the Rocky Landing that “the bargaining position for US negotiators in China hasn’t been this strong in years”:

1. USA is the calm, steady safe haven again.    Remember back to 2008 when all the globo-pundits were talking about the end of the American Generation? The Asian Age? The China Generation? The Bo Dynasty? They were predicting riots and unrest in US cities as chaos forced anyone of means to flee for his life. We may have our issues, but we’re still standing. China, however, has been a little quick to hit the panic button. At least our rich kids keep their passports.

2. The China middle-class market is no longer a lock-out that you can’t touch. In the post-crash days, it was briefly cool for well-heeled Mainlanders to buy local – but as China Inc. stumbles, confidence is down and investment has dried up. Even if the trend shifts from ostentatious super-lux brands to low-profile value buying, Western labels are still the first choice.

3. Brands, brands, brands. In China, the low cost model has crapped out, and the SOEs are drowning in their own inventory. Climbing the tech ladder is a long, slow slog. Chinese companies from automakers to oil companies want to build or buy name brands that they can take global. Western names and know-how are in demand again.

4. A new wish list for China business owners – export markets and international presence. What’s old is what’s new as Chinese look for Western expertise to keep their economy churning. It’s not capital or manufacturing technology this time – branding, international sales and process R&D are the deal points that count.

5. You’re (relatively) rich again.The local flippers are pulling up stakes. Chinese who made money in real estate or from cheap labor are cashing out and heading for the exits. Banks are cutting back and international investors are getting nervous. The China Miracle is looking a little risky for the first time in recent memory. American expanders have traction again for the first time in half a decade. But this time, don’t play the sucker game of driving prices to the bottom – pay a fair price but find ways to push quality up.

What are you seeing out there?  Ignoring how China continues to step up its weeding out of any foreigner or foreign company that is not in China completely legally, are happy times for American companies really here again?

We have been drafting an increasing number of contracts for foreign companies licensing their concept or technology for use in China. In the old days, this type of licensing was primarily in the industrial sector. These days, most of our work has been on licensing agreements in the services sector in China. Much of this licensing is for operations in China that are prohibited from direct participation by foreign companies, such as in publishing, media, telecom, insurance and finance. Most of these foreign companies are choosing to license, rather than to participate in a China Joint Venture.  This post describes the negotiating tactics I so often see from the Chinese side and sets forth how foreign companies can counter those tactics.

The Chinese government is internally conflicted on how to treat this new form of licensing. In industrial sector licensing, the Chinese government is eager for the technology transfer to occur. The same is not true in the service sector. On the one hand, the Chinese government formally welcomes the transfer of Western expertise in the service sector. On the other hand, the Chinese government fears that U.S. participation in China’s service sector will result in unacceptable control of the Chinese system. As always, the Chinese government is uncomfortable with the introduction of Western intellectual concepts into China.

This ambivalence is mirrored by many of the potential licensees that we deal with in the service sector. Industrial licensees bargain hard, but the bargaining is similar to any commercial negotiation. In the service sector, we are finding that the Chinese side works to strike a much harder deal. This often surprises our clients, since they expect the service side to be softer than the industrial.

As part of this process, in service sector licensing contracts we are starting to see the Chinese side dust off negotiating tactics that were common in the 80’s and 90’s when the Chinese were negotiating their famously dysfunctional joint venture agreements.  In negotiating service sector licensing agreements with Chinese companies, we are seeing the following tactics from the Chinese side:

  • The most common tactic is for the Chinese company to seek to wear the foreign side down with endless issues. This tactic actually has two variants. In the first variant, the Chinese side raises a series of issues. As these issues are resolved, the Chinese side then raises a series of unrelated new issues. The list of issues is endless and the process never stops. The second variant is for the Chinese side to make a several unreasonable demands and then refuse to address the concerns of the foreign company on the other side. As in the first variant, the discussions proceed with no attempt at all by the Chinese side even to pretend to address the concerns of the other side. All of this is designed to simply wear down the foreign side in the hopes that the other side will simply concede. When the other side concedes, the Chinese side then inserts provisions in the agreement that are beneficial to the Chinese side, under the assumption that the foreign side is simply too tired to object. The success of this strategy rests on the negotiators on the foreign side being busy people with a lot to do, while the negotiators on the Chinese side are functionaries who have no other job but to involve themselves in the endless negotiation.
  • My favorite tactic is the artificial deadline. It is my favorite because it is such an obvious manipulation of the foreign side and yet it seems to work extremely well. The tactic works like this. At the very beginning of the negotiating process, the Chinese side sets a fixed date for executing the contract. It then sets up a public signing ceremony on that date, at which high-level officers from both sides will participate amidst much pomp and circumstance. The date is set far enough in advance to ensure that parties negotiating in good faith can reach agreement on the contract. The Chinese side then ensures that no agreement is reached. This results in panic on the foreign side, since failure to get an agreement that the bosses will sign is seen as a loss of face. The Chinese side then uses this concern to extract concessions from the already exhausted foreign side negotiator.  This tactic also has two variants. The first variant is the crude approach. The Chinese side simply refuses to concede on key points under the quite reasonable assumption that the foreign side will crumble when faced with the fixed signing deadline. The second variant is much more subtle. In this variant, the Chinese side initially concedes on key points, while still holding its ground on numerous minor points, consistent with the “wear them down” tactic. Then, just a day or two before the signing ceremony, the Chinese side announces that the contract must be revised on one or more key issues in a way that entirely benefits the Chinese side. The Chinese side usually justifies this by refering to the demand of a “government regulator” or an outside source such as a bank or insurance company. The claim is “we don’t want to go back on our word, but these other folks have forced us to do this.” Again, the plan is that the combination of the pressure of the impending signing ceremony and the general fatigue of the negotiators will result in a crucial concession favoring the Chinese side.
  • The final technique is to come back to the key issues after the lawyers have left the room. Again, though this is an obvious technique, it seems to work very well with service businesses. This tactic involves the Chinese side signing a contract, conceding on the key issues. By virtue of the contract having been signed, the key negotiators, China advisors and most importantly the lawyers, are off working on other projects. The Chinese side then waits a reasonable time and works to get the project started. Once the project is started, the foreign side is then invested in the project. Since service projects involve people, rather than machines or product, this means certain key persons on the foreign side are now fully committed to the project. Once this happens, the Chinese side then comes to the committed parties on the foreign side and announces that certain key provisions of the contract must be changed. The Chinese side usually claims this change is mandated by law, government regulators or banks and insurance companies. The only people left at this point are the “committed parties” with a strong incentive to allow for the change so the project can proceed. Often, these people do not even fully understand the implications of the change the Chinese side is now demanding. The foreign side then presents the change to busy upper level management as a minor technical revision and it gets signed. Everyone remembers how the initial negotiation was so troublesome and nobody wants to bring in “legal” to start the process over again.

Though crude and obvious, the three tactics work wonderfully well and so Chinese companies do not hesitate to employ them regularly (pretty much always).  There is one simple antidote for each tactic:

  1. If the Chinese side uses the “wear ’em down technique,” the foreign side should refuse to participate. The foreign side should firmly state its position and not bend unless and until the Chinese side agrees or at least moves closer to the foreign side’s position.
  2. Never agree to a fixed signing date. Make it clear that the signing ceremony will be scheduled only after the contract has completed final negotiations. If that takes forever, then it takes forever. Never allow the Chinese side to use a deadline as a tool. This seems like obvious advice, but we see the rule constantly violated. Chinese companies love signing ceremonies and foreigners fall into the trap because they do not want to cause offense at the start. The Chinese have contempt for a sucker, so refusing to go along on this obvious technique will not cause offense: it will instead earn the respect of the Chinese side.
  3. Make it clear to that there will be no changes to the contract after signing and any attempt by the Chinese side to change the contract will be treated as a material breach, leading to termination and a lawsuit for damages. Chinese companies are well known for using the signing of a contract as the start of a new negotiating process, not the termination. If the foreign party is willing to accept this approach, then a clear procedure must be instituted on the foreign side that brings back in the legal and China advisory team. The neutral players on the foreign side must make the decisions. The decisions should not be made by the foreign side players who have already become committed to the project.

Negotiating a good licensing agreement with Chinese companies is difficult and time consuming, but not so much if you know how to handle Chinese negotiating tactics.  There is no reason to make the situation worse by falling for the simple negotiation tactics discussed above.