On March 15, 2019, the National People’s Congress (China’s highest legislative body) adopted the new Foreign Investment Law to unify and optimize the structure of foreign investment in China. One of the Law’s main focuses is the further strengthening of intellectual property rights protection for foreign investors in accordance with Chinese legislation. In particular, the Law calls for stricter penalties for intellectual property (IP) rights infringements and encourages “voluntary and fair” technology cooperation between foreign investors and their Chinese partners. The Law is also intended to prohibit Chinese government agencies from “forcing” foreign investors to transfer technology to China as a condition for investment.

After the Law enters into force on January 1, 2020, the Chinese government must additionally adopt specific legislation to detail and implement these principles of strengthened IP protection for foreign investors. This process has already begun, and below we describe the initial stage of these legislative changes.

Technology TransferOn March 18, 2019, i.e. three days after the Law came into force, the State Council of China issued Administrative Circular No. 709, announcing amendments to the Regulations for the Implementation of the Law on Chinese-Foreign Equity Joint Ventures and the Regulations on the Administration of Technology Import and Export, which took effect immediately.

These amendments removed several provisions of the former regulations that had previously been criticized by foreign market participants and foreign government authorities, including the Office of the United States Trade Representative, as burdensome, discriminatory and providing less favorable treatment to foreign organizations than to Chinese organizations. A brief summary of the provisions that have now been repealed is provided below.

Term of technology transfer. Articles 42(3) and (4) of the Regulations previously provided that the term of any technology transfer agreement between a foreign assignor and a Chinese joint venture as the transferee should generally not exceed ten years. Upon expiration of the technology transfer agreement, the Chinese joint venture was to be granted the right to use the transferred technology indefinitely. The terms of transfer may now be freely negotiated.

Indemnification terms. Article 24(3) of the Regulations required the foreign licensor to bear liability in the event of any reasonably asserted third-party IP infringement claims against the Chinese licensee resulting from the use of the licensed or transferred technology. Under the new Regulations, the parties may agree on the allocation of such liabilities.

Rights to technology improvements. Article 27 of the Regulations provided that all technological improvements made during the term of a technology import agreement belonged to the party that made such improvements. Article 29(3) also provided that foreign organizations could not prohibit Chinese transferees from improving the technology. However, in domestic technology transfers, the parties could freely agree on ownership rights to improvements. Following the repeal of this provision, a foreign party may now also negotiate ownership rights to improvements with its Chinese licensee.
Other restrictive provisions. In addition to the restrictions on improvements described above, Article 29 of the Regulations provides that a technology import agreement may not contain certain other restrictive provisions. These include:

• requiring recipients to purchase unnecessary raw materials, products, equipment or services;
• requiring royalty payments for expired and/or invalid patents;
• restricting recipients from acquiring similar or competing technologies from others;
• unreasonably restricting the channels through which recipients acquire raw materials, parts or components, products or equipment;
• unreasonably restricting the sales volume, product models or prices of products manufactured by recipients; or
• unreasonably restricting the export channels for products manufactured using the relevant technology.

At the same time, it should be noted that China’s Contract Law, its judicial interpretations and the Anti-Monopoly Law continue to contain similar restrictions from an antitrust perspective, which apply on a reciprocal basis to both Chinese and foreign assignors/licensors under technology import and export agreements.

For example, the Contract Law generally provides that a technology transfer agreement must not restrict competition or technological development. In particular, under the 2004 judicial interpretation of the Supreme People’s Court on the application of law to technology contracts, technology transfer agreements must not contain provisions restricting the recipient’s right to make improvements or use any improvements, or establishing unfair exchange terms for improvements, such as requiring their exclusive or non-exclusive unconditional grant-back.

Foreign investors should therefore continue to bear such restrictions in mind when entering into cross-border technology transfer agreements governed by Chinese law.

In addition, on April 23, 2019, the National People’s Congress amended the Administrative Licensing Law. The revised Law specifically states that Chinese government authorities may not require technology transfer as a precondition for granting any administrative licenses, such as regulatory permits or licenses.

Stricter Liability for Intellectual Property Rights Infringements in ChinaIn accordance with the provisions of the Foreign Investment Law on the protection of foreign investors’ IP rights, the Chinese government also amended its intellectual property legislation to increase civil liability for IP rights infringements.

On April 23, 2019, the National People’s Congress published an amendment to the Trademark Law, which was to enter into force on November 1, 2019.
Under the revised Law, in cases of malicious infringement, the maximum punitive damages that a trademark owner may claim from an infringer increase from three to five times the amount of actual losses, any economic benefit obtained by the infringer, or any royalties that the trademark owner could have received.

Where this amount cannot be determined, the new Law also increases the maximum statutory damages from RMB 3 million to RMB 5 million.
The amendment also gives the people’s courts the power to order the destruction of goods bearing counterfeit trademarks, whereas previously only the market regulation authorities had such powers. The new Law also explicitly provides that counterfeit goods may not be distributed or sold on the market after the counterfeit trademarks have been removed.

Under the revised Law, in cases of malicious infringement, the maximum punitive damages that a patent or trademark owner may claim from an infringer increase from three to five times the amount of actual losses.
A similar amendment was also proposed for the Patent Law. According to the draft amendment published for public consultation from January 4 to February 3, 2019, the maximum punitive damages awarded to a patent owner were to be increased from three to five times the amount of actual losses, any economic benefit obtained by the infringer, or any royalties that the patent owner could have received.

Where this amount cannot be determined, the new Law would also increase the maximum statutory damages from RMB 3 million to RMB 5 million. The draft amendment remained subject to further consideration by the National People’s Congress and was expected to be published at the end of 2019.

ConclusionsChina’s latest legislation concerning intellectual property protection appears to be a response by the Chinese government to continuing allegations from the international community regarding “forced” technology transfer, as well as IP theft and infringement.
The measures are aimed at creating a more equitable and viable intellectual property protection environment for foreign investors. The actual effect of these provisions remains to be tested in courts and in commercial negotiations between foreign investors and their Chinese partners in the coming years.