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According to WIPO’s information, China has overtaken Japan to claim the second place as a source of Patent Cooperation Treaty (PCT) applications in the passed year. In 2017, U.S.-based applicants numbered 56,624 PCT, followed by China (48,882) and Japan (48,208). Another positive statistics comes from the State Administration of Foreign Exchange, which reveals the volume of trade of Chinese IP royalties totaled 33.384 billion USD in 2017, a 32.7 percent increase from 2016.
Despite the significant increase in the above statistics and China’s endeavor in promoting IP commercialization and utilization in the passed several years, foreigners continue to view China as a very challenging IP environment. Under the background of the Sino-U.S. trade war, the issue of the Measures on Work Relating to Transfer of Intellectual Property to Overseas Parties (Trial Implementation) (hereinafter refers to as the “Regulation”) does not intended to upset foreign investors. The scrutiny of IP transfers to foreign firms on national security grounds is a common practice of many developed countries and it is also in accordance with international conventions. The Agreement on Technical Barriers to Trade of The World Trade Organization provides clearly that “should not prevent any countries from implement necessary measures to protect its fundamental security interests”.
As it comes to China, the new issued Regulation is aimed to formulate concrete measures to secure a better business environment by strengthen IP protection. The former laws and regulations regarding technology exportation includes Regulations on the administration of the Import and Export of Technology(amended in 2011), Administrative Measures on Technologies Prohibited and Restricted for Exportation (2009), Regulations on Protection of New Varieties of Plants (Amended in 2014), and Provisions of Ministry of Commerce on Implementation of Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, etc. However, none of them were issued with the legislative purpose of protecting national security. The new issued Regulation has not set up a new censorship, but just a perfection of the former examination system.
Under new issued Regulation, technology transfers include IP transfers that are part of acquisitions made by foreign entities involving four kinds of IP assets, which are patents, integrated circuit layout design, computer software copyright, and plant varieties, will be assessed in terms of their impact on national security and the country’s “key technology innovation capability in key areas”. The main impacts of the new Regulations to investors including the following aspects:
Firstly, foreign-invested company’s acquisition of Chinese technology constitutes an IP transfer for the purposes of the Regulation. Subject to Article 2 of the Regulations on the administration of the Import and Export of Technology(amended in 2011), the transferring of technology means transferring means by trade, investment, or economic and technical cooperation, and the acts including assignment of the patent right, assignment of the patent application right, licensing for patent exploitation, assignment of technical secrets and technical services, and transfer of technology by other means. The explanation of “by other means” is vague, and in practice acquisitionby foreign-invested companies do not under the regulation of this rule. The new Regulation includes acquisition under examination is an expansion of regulation scope.
Secondly,foreign-invested company was defined by source of capital. The Regulation’s scope appears to include transfers “to foreigners” of Chinese IP, and earlier regulations, by contrast, such as the Regulations on the administration of the Import and Export of Technology, focused on transfers to enterprises overseas. The phrase of “foreign investors” in Article 1.1 of the Regulation should be interpreted together with Article 1.2, which provides “including change to the right owners, change to the actual controllers ”. So, to my understanding, the Regulations may impact forging companies based on their source of capital rather than the presence of foreign nationalities..
Thirdly, the interpretation of “actual controllers of intellectual properties” needs further clarification. Article 1.2 of the Regulation provides the outbound transfer of intellectual property rights including change of actual controllers of intellectual properties.However, the phrase of “actual controller” has different definition under different laws and regulations. In accordance with Article 217.3 of the Corporation Law of P.R.C., "actual controller" refers to anyone who is not a shareholder but is able to hold actual control of the acts of the company by means of investment relations, agreements or any other arrangements. To the contrast, subject to Article 1.3 of the Provisions of Ministry of Commerce on Implementation of Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, “actual controller” was definite according to the percentage of share holdings. So, the phrase of “actual controller of IP rights” still needs clearly defined by further provisions in judicial interpretations or other relevant laws and regulations.
Besides the above mentioned factors, the Regulation has clarify the authorities of examination of the four kinds of intellectual property rights under the Regulation. If the acquisition involves any patent right or the exclusive right of layout-designs of integrated circuits, the competent authority of intellectual properties of the State Council shall take charge of the examination; if the acquisition involves the copyright of computer software, the competent copyright authority of the State Council shall be in charge of the examination; if the acquisition involves the right to new varieties of plants, the competent agricultural authority and the competent forestry authority of the State Council shall be responsible for the examination respectively according to their own duties. The regulation authorities for the other outbound transfers are a bit more complex, but the division principle is the same, which is based on the types of intellectual property, and is also similar to the previous censorship of IP export system. Foreign investors, who are not familiar with the Chinese IP environment, should consider consulting counsel on the impacts of the Regulation.