When one of our China lawyers is contacted to “draft a contract” we usually must first determine whether it is time to draft the contract or not. For example, if a client wants us to draft an OEM Agreement to have its widgets manufactured by Chinese Company A, there is no point in our even starting on such an agreement if the parties are not even close to agreeing on the price for those widgets.
We often find ourselves giving clients and even potential clients a list of the items on which they should reach agreement before they pay us to draft their agreement. There have been plenty of times where we as lawyers have been able to bridge the gap between our client and a Chinese company to make a deal happen, but there are some gaps we simply cannot bridge. If a Chinese manufacturer insists on charting $5 per widget and our client will pay no more than $3 per widget, there will be no deal and there is no point in our drafting an agreement as though there will be one.
But on something more complicated like a Joint Venture deal, where neither side is usually familiar with common terms, we often start drafting the joint venture agreement before the parties have reached a clear agreement, in part to help the parties determine what remains for them to agree upon for an agreement to get signed.
Licensing agreements are usually more complicated than manufacturing agreements but less complicated than joint venture agreements and I was recently cc’ed on an email from one of our China lawyers to a potential client contemplating licensing its technology and brand name to a company in China. This email was in response to the potential client having requested we help them with the “things we should be doing to prepare for our upcoming meeting with our potential licensee.” The email list was as follows:
- Make sure any IP (trademarks, patents, copyrights) that your licensee may use is registered in China. Now. You do not want a situation where your potential China licensee files for “your” trademarks so as to gain negotiating leverage against you. If such IP is not already registered, get it registered. We can help you with this.
- Make sure your potential licensee is legitimate. Is it financially capable of paying your licensing fees? Does it have experience with your sort of product? Is it the sort of company that will preserve, enhance or destroy your reputation? We can help you with this.
- Are you going to allow this potential licensee to sub-license, and if so, to whom?
- What sort of controls are you going to want over this licensee’s use of your technology and your name?
- Who is going to pay what in terms of marketing your technology and your name in China? I’m guessing it is going to be the Chinese company, but you should get clear on this.
- Who is going to be responsible for paying Chinese taxes on the royalties? For a whole host of reasons, you are going to want this burden to fall on your China licensee.
- How long will the duration of your licensing agreement be and on what grounds may you unilaterally terminate it early? Make sure that you include grounds that involve your need to protect your brand and your reputation.
- Make sure that your potential licensee agrees to comply with all Chinese laws regarding the need to register your licensing agreement. This should not be a problem, but occasionally it is.
- Do not sign an MOU or an LOI unless you run it by us first. I urge you read this post on China MOUs and LOIs
Once they have reached tentative oral agreement on the above, we can start drafting the licensing agreement.