Important considerations for IP in China

A host of foreign enterprises have seen the opportunity for conducting research and development (R&D) in China. However, business have repeatedly run into problems when it comes to ensuring they are guaranteed the credit for their hard work. Navigating the ins and outs of ownership in IP can be complicated, which is why the China IPR SME Helpdesk clarifies what businesses should do when faced with IP problems that stem from conducting cutting-edge research in China.

Many European small and medium-sized enterprises (SMEs) may not consider their conduct in China R&D, since they do not have a laboratory or research facility located in the country, but in reality, a high proportion of these companies engage in activities which do fall under this category. For instance, an SME might engage in R&D by entering into a contract with a local company to use their engineers for the purpose of developing a commercial prototype.

Intellectual property is a critical consideration for European SMEs wishing to do business in China. When undertaking R&D in China, new intellectual property (IP) is being created so a company’s intellectual property rights (IPR) need to be clearly defined.

IP ownership
If the primary inventors are non-Chinese citizens, European SMEs will have much more leverage in deciding how to control their IPR. However, if members of their team are Chinese, and they are expected to make key contributions, IPR ownership will become more sensitive when negotiating the terms of an agreement. To retain their rights to a product, SMEs will need to sufficiently reward individuals for their contributions if ownership is not granted. Additionally, SMEs will need to consider the legal status of individual Chinese inventors. For example, if the inventor is an employee of another organisation or a researcher at a local university, the inventor may be under a contractual duty to assign his/her IPR to that employer. Ignoring the inventor’s existing legal duties can cause serious problems, as an SME might actually lose ownership of a prototype due to pre-existing obligations.

Ownership of IP is less of an issue if European SMEs set up their own entity in China to conduct all R&D activities. These SMEs can instead choose to file patent applications under a Chinese entity, or its affiliates outside China. Placing IPR under an overseas entity can allow for greater flexibility which can suit the future needs of a business’s operations. Furthermore, companies have also increasingly applied for IPR under Chinese entities in order to qualify for the incentive plans offered by the local Chinese Government.

If European SMEs go in this direction and rely on their local business partner, IPR ownership may become more complicated. Some common choices in IPR can be seen below:

• sole ownership of all IPR by European SMEs
• sole ownership of all IPR by Chinese business partners
• co-ownership between European SMEs and their Chinese business partners

The terms of co-ownership is largely defined by contracts and can be a sensitive issue between foreign SMEs and Chinese business partners. Excessive fighting over ownership will increase the amount of risk associated with future business co-operation, so it is therefore advisable to revisit the business models one has in place, and make sure that contracts on ownership are signed and mutually agreed upon. That way, licensing and other legal tools that could be used if a dispute arises could be clearly defined from the start. For instance, if an SME realises that the software it has developed can be used for another business model that their Chinese business partner is not directly involved with, that SME may need to craft an agreement that will allow it to use that software in China. Failure to do this will likely lead to future disputes.

IP licensing
An IP licence is a contract to permit where, when and how IP can be used by another party. This can be done for free, for royalties, or in exchange for other services. In most R&D contracts, licensing is key. The greater the leverage a Chinese business partner has in marketing and executing a product, the more consideration is given when considering licensing options.

In practice, licensing is one of the most important legal tools that SMEs overlook. Part of the reason is that SMEs are not always confident about the effectiveness and enforceability of contracts they entered into with Chinese partners. People may be afraid of unfair court rulings and difficulties with enforcing judgements and while such considerations may be justified, SMEs should not overlook the importance of using contracts. Despite these fears, IP licensing options should be well-thought-out prior to engaging in negotiations.

In China, common types of licences, including exclusive and non-exclusive, are permitted. Existing laws and regulations are designed to give a large amount of autonomy to groups that are deciding what to do with their IP licences. Parties can negotiate and reach a mutual agreement on the following key terms:

• Territory of the licence: Does the licence cover China or is it applicable worldwide? Is it better to have a licence that covers a certain specified geographical area in China?
• Duration of the licence: When does the licence expire? How should it be renewed? Can the licence be terminated under certain clearly-defined circumstances?
• Licensed IP: Are you only going to license your patents? What about copyrights and trademarks? How about less familiar types of IP that deal with graphical user interfaces, sensitive client information or special skills? Some innovations may not be fully protected by the patent, trademark or copyright laws.
• Royalties: You can choose a lump-sum payment, running royalties, or even operate royalty-free for a limited period of time and then proceed to charge. Issues like tax and auditing should be addressed as well.
• Limitations of the licence: Do you have to give a warranty or indemnify everything asked for by your Chinese partner? Think of ways to limit your exposure to liabilities.

European SMEs should be aware that some licensing contracts need to be registered with the appropriate Chinese authorities in order to be fully enforceable in China. For example, a trademark license agreement needs to be registered with the China Trade Mark Office and the patent licence agreement must be registered with the State Intellectual Property Office. Extra costs will be incurred when registering licence agreements with different Chinese IP authorities.

In the context of joint-IP development, European SMEs should keep in mind that Chinese laws do not allow foreign companies to retain ownership of improvements made by Chinese parties, unless the Chinese parties are remunerated in some way for these inventions. This remuneration could be in the form of cash, shared profits, equity interest, or some other form of IPR. Chinese law also requires that the foreign company provide the technologies to the proper authorities in order to authorise its quality and usefulness, as well ensuring that the foreign enterprise is liable if the technology turns out to have infringed on another’s legal rights. Therefore, European SMEs and their Chinese business partners should decide on a fair and workable solution for remuneration before proceeding with a deal.

The China IPR SME Helpdesk supports small and medium-sized enterprises (SMEs) from European Union (EU) member states to protect and enforce their IPR in or relating to China, Hong Kong, Macao and Taiwan, through the provision of free information and services. The helpdesk provides jargon-free, first-line, confidential advice on intellectual property and related issues, along with training events, materials and online resources. Individual SMEs and SME intermediaries can submit their IPR queries via email (question@china-iprhelpdesk.eu) and gain access to a panel of experts, in order to receive free and confidential first-line advice within three working days. The China IPR SME Helpdesk is co-funded by the EU.

To learn more about the China IPR SME Helpdesk and any aspect of intellectual property rights in China, please visit our online portal at http://www.ipr-hub.eu/.