The first of this two-part report by the China IPR SME Centre outlines contract provisions to include and avoid to intelligently protect your intellectual property in China. 

The establishment of the new China (Shanghai) Pilot Free trade Zone (CSPFTZ) presents an opportunity for the Chinese authorities to experiment with a new administrative system for enforcement of intellectual property rights. To this end, the Shanghai Intellectual Property Administration has stated that patent and copyright issues will be examined by a single administrative institute, rather than the current system in which copyright and patent issues are dealt with separately by two government agencies.

Nevertheless, in both the new CSPFTZ and wider China best practice for drawing up contracts to protect against infringement remains the same. It is one of the most important considerations for businesses from every industry operating in China and will remain so regardless of changes to the administrative structure relating to IP enforcement.

Tailoring contracts to suit your intellectual property rights (IPR) is an important way to ensure that your company’s specific intellectual property (IP) assets are adequately protected. Since trade secrets and confidential information are critical to a company’s business and operations, it is also essential to include provisions to protect them in contracts with third parties. In China, ‘trade secret’ is defined as “any non-public technical or business information with commercial value that is guarded by confidentiality measures”. ‘Confidential information’, on the other hand, generally refers to “any non-public information pertaining to a company’s business”, and is therefore broader in scope than ‘trade secret’. However, no protection is afforded to ‘confidential information’ under Chinese law, unless it is otherwise specified in a contract.

Important contract provisions to include

The key provisions in a licence agreement or employment contract should address the following:

• Definition of licensed rights

These clauses define the scope and uses of the licence, and identify the IP subject matter and the type of rights being licensed.

• Monitoring of the licensee’s activities: prevent unauthorised use of the licensed rights

These clauses usually identify the parties who will have permission to use the licensed rights, as well as the security procedures that are in place to prevent unauthorised use or misuse of the IP assets.

• Challenges of validity: ensure the validity of your agreement

It is important to include clauses on the severability of validity of the licence agreement. This will ensure that even if one or more of the licensed rights in the licence agreement expires, the validity of the entire agreement and the licence granted within that agreement may not be challenged.

• Protection of new IPR generated: address ownership issues

In the absence of a clear contract on ownership rights, the law generally recognises the creator of a work as the owner. Under China’s Patent Law, however, the party who makes improvements to a technology based on the licensed patent or technology automatically owns the IPR on such improvements.

• Assignments or transfers: prevent your IPR from being transferred to third parties without your permission

Clauses can be included to restrict and prohibit the contract from being assigned and transferred without your express written authorisation, and you may add a further clause to bind all successive transferees and assignees to your agreement.

• Warranties: guarantee your technology is fit for transfer

Warranties are a kind of guarantee that should be provided by the licensor on the licensed technology. You may need to guarantee in your contract that your product is complete, free from error, effective and capable of achieving the prescribed goals or, alternatively, specify that the warranty cannot be amended or omitted by the parties.

• IPR produced by employees: avoid future disputes

It is important to make sure that the inventions of your employees will belong to you as the licensor, and that you, the licensor, will be entitled to grant a licence for such inventions.

• Confidentiality: protect your confidential information

These clauses usually define the confidential information to be acquired or exposed and outline the exact nature and length of the protection. Alternatively, a separate and more detailed non-disclosure agreement (NDA) may also be entered into by the parties.

• Dispute resolution: plan ahead, just in case

Like any other contract, the licence agreement should specify the law that governs the disputes of the agreement along with the chosen methods of dispute resolution. It is important to note that the sections in the contract relating to the protection and dealings with IPR in China specifically should be governed by Chinese law. If your contract adopts arbitration or other non-judicial methods of dispute resolution, it is also important to include a clause that permits you to file in courts where you can seek injunctive relief or claim damages against IP infringement.

• Termination: specify what happens when the agreement comes to an end

You should always include terms on the consequences of termination.

Important contract provisions to avoid

A contract may be void in whole or in part if it contains any provisions in contravention of Chinese law or administrative regulations. Set forth below are examples of IP provisions you need to avoid in China, particularly in technology and employment contracts, because they may well be in contravention of the Chinese laws.

Technology contracts

Provisions to avoid in technology contracts include those that:

• Prohibit a licensee from making improvements to the licensed technology and using the improvements;
• Restrain a licensee from obtaining from other parties technology similar to, or competing with, the licensed technology;
• Under PRC law, a licensor cannot make any ‘unreasonable’ restraints on a licensee’s procurement channels, such as the sources from which the licensee purchases raw materials, equipment, etc;
• Prevent a licensee from making full use of the licensed technology in a reasonable manner as required by the market;
• Require a licensee to accept additional conditions that are unnecessary for the use or working of the licensed technology;
• Prohibit a licensee from challenging the validity of the IPR of the licensed technology or from attaching additional conditions to such a challenge.
• Waive the provision of warranty, which states that the licensed technology is complete, free from error, effective and capable of achieving the prescribed goals; and
• Include unfair terms for the exchange of improvements made to the licensed technology.

Employment contracts

Provisions to avoid in employment contracts include those that:

• State that the employer owns the patent rights and/or copyright of any non-employment-related work or creation made by employees on their personal time and using their own personal resources;
• Exclude any remuneration to an employee for his or her patented creation;
• Impose unreasonable non-compete and non-solicitation obligations upon employees; and
• Waive monthly compensation to employees fulfilling their non-compete obligations.

General contracts

Provisions to avoid in a general contractual context include those that:

• Exempt a party from liability for causing the other party bodily harm or property losses (resulting from wilful misconduct or gross negligence); and
• Require Chinese IPR to be governed or protected by the laws of other jurisdictions (i.e., non-Chinese law).

Take-away messages

• Tailor your IP contracts to suit the IPR you are protecting, and make sure you include sufficient specific detail in the contracts’ key provisions.
• Certain IPR protection provisions are unlawful under Chinese law, and may render a contract void if you include them in your agreement, so be cautious when drafting these provisions.

The China IPR SME Helpdesk is a European Commission funded project that provides free, practical, business advice relating to China IPR to European SMEs. To learn about any aspect of intellectual property rights in China, visit our online portal at www.china-iprhelpdesk.eu. For free expert advice on China IPR for your business, email your questions to: question@china-iprhelpdesk.eu. You will receive a reply from one of the Helpdesk experts within seven working days. The China IPR SME Helpdesk is jointly implemented by DEVELOPMENT Solutions and the European Union Chamber of Commerce in China.