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:

Going through my emails and came across one from co-blogger Steve to a client on how to handle exclusivity on a China distribution agreement for a retail product. Nothing earth shattering here, but since our clients for whom we do China distribution agreements frequently ask us about exclusivity, I figured putting this up on the blog makes sense.  

This responds to your questions about how exclusivity issues in these sorts of distribution agreements are usually handled in China. These are the ways it is typically addressed from the perspective of the manufacturer of the product:

1. Provide for a non-exclusive agreement. Note, however, that two distributors in the same market is usually not a workable situation. Option two below is therefore more common.

2. Limit the territory. You could limit this particular distributor to City1/City2/City3.

3. Limit the term to one year, with you having the exclusive right to renew. This is a very common solution when the product does not require the distributor to put in extensive time or money to create the sales market. This solution is not common if the distributor will need to put in extensive time or money to create the market.

4. Provide for a specific sales target. If the distributor reaches the sales target, renewal is automatic. If the distributor fails to reach the target, you have the option to terminate and appoint other distributors. Usually the sales term is for three to five years, with the sales targets set for each year.

Some agreements provide for automatic renewal at the end of the initial term with a fixed percentage increase in sales targets. Other agreements require negotiation of a new agreement with negotiation of new sales targets as part of that process. This approach is most common where the distributor will expect to invest considerable time and expense in the early years of the distribution cycle to create a market for the product.

In our experience, option 3 is the most common in China. Chinese companies seem to have a problem with negotiating specific sales targets. Worldwide, options 3 and option 4 are common, depending on the specific circumstances.

What have you done?  What have you seen?