Licensing your technology to another company is always fraught with risks. But licensing your technology to a company in China has its own special challenges.

China technology licensing agreements
China technology licensing agreements

The first thing you should do before licensing your technology to a Chinese company is to make sure that you may legally do so under your own country’s laws and under China’s Regulations on the Import and Export of Technology. If you are a US company, make sure that US export control laws allow you to transfer (very loosely defined) your technology to China.

China divides technology licensing into three categories: prohibited, restricted, and transferable. Prohibited technologies may neither be imported nor exported. Restricted technologies may be imported or exported if the Chinese government has granted its approval to do so. A transferable technology may be imported or exported but the agreement licensing the technology (or at least the fact that there was a licensing agreement) must be recorded with the appropriate Chinese government agency.

It is crucial that your licensing agreement properly identify your Chinese counterparty (in Chinese) and that the party identified in your contract actually exists as a registered Chinese entity. Typically, the easiest way to confirm identity is to request a copy of the Chinese company’s business license and then use the information on that license to confirm necessary details with the local AIC office. This can now be done online (in Chinese) through an excellent database system provided by the Chinese government.

The other day a client asked me how it could guarantee getting paid for each “widget” made by the Chinese company to which it was contemplating entering a licensing agreement. The answer is that is nearly impossible and in most cases it is foolish even to try. In fact, working to tie a royalty payment to each individual item sold is the ultimate mistake in Chinese licensing law. Chinese companies are masters at under-reporting their production figures, and no amount of independent auditing is likely to get at the real numbers. It is almost always better to accept a theoretically lower royalty number based on an independently verifiable metric. For example, every Chinese company files a tax return. Royalties can then be based on some percentage of the official gross income as stated in the tax return. It is also possible to break the royalty into two amounts: a fixed amount that will be paid each year and then a more specific amount based on some sales metric. Regardless of the method chosen, it is critical to make the calculation simple, certain and independently verifiable. Any royalty system that is complex and fine grained is doomed to fail when dealing with a Chinese company on a licensing agreement.

The license agreement should include a Chinese language translation and the Chinese language should be the controlling language. The agreement should be governed by Chinese law and written so as to be enforceable in a Chinese court or before the appropriate arbitral body. This requirement goes beyond the issue of enforcement of the agreement in China. As noted above, license agreements must be registered. Registration requires a Chinese language version. In addition, we have found that many agencies in China will not register the licensing agreement if it is not controlled by Chinese law. Further, and even more important, payment of royalties requires that the Chinese entity make use of a Chinese foreign exchange bank. The process requires that the license agreement be presented to the Chinese bank in the Chinese language. As with government agencies, many Chinese banks will refuse to make payment if the license is not subject to Chinese law and jurisdiction.

For more on China licensing agreements, check out the following:

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Photo of Dan Harris Dan Harris

Dan is a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

He primarily represents companies doing business in emerging market countries, having spent years building and maintaining a global, professional network. 

Dan is a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

He primarily represents companies doing business in emerging market countries, having spent years building and maintaining a global, professional network.  His work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, setting up a legal framework to move slag from Canada to Poland’s interior, overseeing hundreds of litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt.

He was named as one of only three Washington State Amazing Lawyers in International Law, is AV rated by Martindale-Hubbell Law Directory (its highest rating), is rated 10.0 by AVVO.com (also its highest rating), and is a recognized SuperLawyer.

Dan is a frequent writer and public speaker on doing business in Asia and constantly travels between the United States and Asia. He most commonly speaks on China law issues and is the lead writer of the award winning China Law Blog. Forbes Magazine, Fortune Magazine, the Wall Street Journal, Investors Business Daily, Business Week, The National Law Journal, The Washington Post, The ABA Journal, The Economist, Newsweek, NPR, The New York Times and Inside Counsel have all interviewed Dan regarding various aspects of his international law practice.

Dan is licensed in Washington, Illinois, and Alaska.

In tandem with the international law team at his firm, Dan focuses on setting up/registering companies overseas (via WFOEs, Rep Offices or Joint Ventures), drafting international contracts (NDAs, OEM Agreements, licensing, distribution, etc.), protecting IP (trademarks, trade secrets, copyrights and patents), and overseeing M&A transactions.