This article was originally published on IAM Media.
In January, we published an article to address red flags for global companies signing licensing agreements in China. We now turn our attention to some other essential issues. Please note that while many of these issues are not unique to doing business in China, companies need to be aware of the specific consequences there.
Protection of confidentiality
A non-disclosure agreement (NDA) should be the first step taken by any business before entering into material discussions with Chinese partners, because in order for the discussions to be practical and efficient, you will likely need to disclose details of your core knowledge about the subject matter to them. A well-prepared NDA will contractually protect any know-how, trade secrets and intellectual property disclosed during this initial stage, regardless of whether the discussion leads to the next step of cooperation.
Parties should understand the relevant connotations of the particular type of licensing model they choose – this is especially true for sectors where an exclusive licensee leads to market access. If an exclusive licence must be granted for commercial reasons, the licensor should ensure that they retain some level of contractual control over the exclusive licensee, as well as a flexible exit strategy from the exclusive licence, to avoid being taken by the throat if cooperation goes sour.
When licensing agreements also have a distribution aspect, licensors tend to request their licensees to sell the products at a pre-agreed price. Precautions should be taken when drafting the pricing clause. If the Chinese anti-competition authorities regard pre-agreed pricing policies as excluding or limiting competition, they will violate the anti-monopoly regulations and therefore be void.
China has strict foreign exchange control policies in place. To ensure that you receive your royalty fee, your licence agreement with Chinese partners must be filed with the China National Intellectual Property Office (CNIPA). Once lodged you will obtain a filing certificate, which will be required when the licensee transfers the royalty fee to a bank account outside of China.
In recent years, China has adopted a significant number of data protection laws and regulations. If a foreign entity collects and processes any personal data connected to an individual located in China (eg, you receive data from your licensee, which might contain personal data), you will need to pay extra attention to compliance with the Personal Information Protection Law 2021 and other relevant rules in the area.
Moreover, in certain restricted industries in China, additional compliance obligations may apply. Transferring genetic data of Chinese people outside of China, for example, must go through a specific approval process and may result in close investigation.
Clients frequently ask about this issue.
Parties may file litigation with a Chinese court that has jurisdiction over the dispute; usually the court where the defendant resides. The cost of litigation is higher than arbitration. A judgment can be directly enforced upon the defendant, if the defendant is a Chinese entity, without any need for the procedure of recognition as would be the case in arbitration. That said, the litigation process is usually long and the must be carried out in Chinese.
For foreign companies dealing with Chinese partners, we often suggest opting for arbitration to resolve disputes because:
- the parties can select arbitrators with the relevant practical experience in their business area;
- the arbitration procedure is more flexible than court proceedings; and
- arbitration proceedings and decisions are confidential, resulting in less publicity over the dispute and its award, and mitigating the risk of disclosing commercial secrets.
Another strong factor making arbitration more attractive than court proceedings is the enforceability of arbitration awards. As China is a signatory to the New York Convention, subject to the reservation made by China and procedural flaws, Chinese courts recognise arbitration awards made by overseas institutions and they can therefore be enforced against Chinese parties.