In this edition of Talklaw EUROPE™ Alcatel Lucent Networks Group General Counsel Iohann Le Frapper unites leading specialists across Europe to discuss practical tips, opportunities, and traps to avoid when European companies contemplate doing business in China.

The experts joining him on this panel, in alphabetical order by country, are from Gide Loyrette Nouel in France, White & Case in Germany, DLA Piper in Italy, Hogan Lovells in Spain, and Morrison Foerster in the United Kingdom..

The questions are answered in four parts over the coming weeks.

DISCLAIMER: Any opinions, advice, statements or other information expressed in Talklaw Europe are those of the respective author(s) and do not necessarily state or reflect those of EuropeanGC.com, the chairperson or his employer.

Part 1 Question 1

Iohann Le Frapper, Chair: Please discuss briefly the following questions about investing in mainland China:

1.1 - Which investment vehicle do you recommend in your jurisdiction: Wholly foreign-owned Enterprises, different types of joint-ventures?

1.2 - Pros and cons of investing via an offshore (e.g. Hong Kong) intermediate vehicle to buy assets or companies?

1.3 - New Foreign Investment Industrial Guidance Catalogue (into effect from end January 2012): Which key changes? Which opportunities? 

1.4 - M&A maze of government approvals (e.g. National Security Review; antitrust).


FRANCE: Thomas Urlacher and Rebecca Silli

1.1 - Except in a few instances, a foreign investor must set up a Chinese legal entity to carry out commercial activities in mainland China. This is mainly in the form of a WFOE [i] or a joint venture.

A WFOE provides significant advantages, including not having to negotiate with Chinese parties and organizational flexibility. However, not all activity sectors allow the use of WFOEs, and Chinese regulations sometimes require that foreign investors team up with Chinese partners in a joint venture [ii].

Equity joint ventures are the most widely used form of joint ventures, though cooperative joint ventures may offer more flexible arrangements as profits and losses can be allocated in accordance with the shareholders' agreement.

1.2 - Structuring a foreign investment in the PRC through an offshore vehicle [iii] can have benefits and disadvantages, as summarised below.  Suitability of such structuring will turn on the characteristics of the planned investment. 

(iii) M&A transactions can also be subject to approval by the authorities in charge of specific sectors (e.g. banks, insurance, etc.).

Footnotes
[i]  Wholly foreign-owned enterprise.
[ii]  The main restrictions in this respect are listed in the Foreign Investment Industrial Guidance Catalogue.
[iii]  This involves the foreign investor setting up a company in a jurisdiction with a low taxation and where setting-up a company and opening bank accounts is a relatively easy and fast process.
[iv]  Closer Economic Partnership Agreement (CEPA) entered into between the Government of the Hong Kong SAR and the Central Government of the PRC. The CEPA allows investments or activities in some sectors that are usually restricted. However, the benefit of the provisions of the CEPA is usually conditioned to having substantial and established business activities in Hong Kong for a minimum number of years.
[v]  The Foreign Investment Industrial Guidance Catalogue was promulgated by the National Development and Reform Commission and the Ministry of Commerce of the PRC on 24 December 2011. It came into effect on 30 January 2012 and replaces the previous version that was issued in October 2007.
[vi]  For example, the production of certain new vaccines for diseases like cervix cancer and malaria.
[vii]  This residual category covers foreign investment projects not listed in the encouraged, restricted or prohibited categories.
[viii]  The Ministry of Commerce
[ix]   National Development and Reform Commission.


GERMANY: Christoph von Einem

1.1 - Foreign investors, in particular those from Europe and my home jurisdiction Germany have different possibilities to operate their China-based business: The conventional business entities are the wholly foreign-owned enterprise (“WFOE”), the equity joint venture enterprise (“EJV”), the contractual joint venture enterprise (“CJV”) and holding companies.

An EJV is regularly established as a limited liability company with foreign and Chinese parties as its shareholders. A CJV is an entity established by the respective parties pursuant to a cooperation agreement, which deals inter alia with rights and responsibilities under such an agreement as well as with the distribution of profit and loss. Therefore, the profit and loss distribution among the parties of a CJV may not be equivalent to their respective investment ratio.

As per our experience we strongly recommend to use the WFOE as the most common and suitable vehicle. First of all, in a WFOE the entire management can be efficiently kept under complete control of the investor. Secondly, in order to be independent from domestic Chinese partners, a WFOE is the entity of choice to avoid disputes due to deviating interests. Additionally  the WFOE can effectively be used to increase protection against infringements of intellectual property in China. 

Although the WFOE has recently increased its popularity in China, there are still industry sectors in which you cannot be operate as a wholly foreign owned company, e.g. in automotive manufacturing and insurance. In these cases, the foreign investors are still forced to establish an EJV or CJV with a domestic Chinese partner.

1.2 - To avoid the confrontation with complex governmental approval requirements, the structuring of an acquisition odf a mainland Chinese operation might under certain assumptions be structured using an intermediate offshore holding company, such as a Cayman, BVI or Hongkong entity. This might provide the utmost flexibility, e.g. for subsequent transfers of such share interests but it might increase complexity and transaction costs as well and therefore we recommend such structures only after a very detailed legal and tax analysis.

In contrast to the “classical” offshore ventures like Cayman or BVI, also Hongkong as offshore intermediate recently faced increased corporate governance requirements. Thus, Cayman or BVI are preferable intermediate vehicle venues. Further, the investment via an offshore intermediate may, in some scenarios qualify for tax reduction and effective asset protection in favor of the respective investors.

1.3 - The Catalogue for Guidance for Foreign Investment (“Catalogue”), issued by China's National Development and Reform Commission (“NDRC”) and the Ministry of Commerce (“MOFCOM”), classifies foreign investments in China into four categories: permitted, encouraged, restricted or prohibited.

This new Catalogue is the fifth revision since 1995. In comparison to the 2007 version, the latest versionencourages sectors  like inter alia vocational education and training, venture capital enterprises, intellectual property services, construction and operation of water treatment plants, construction and operation of vehicle charging stations and battery changing stations, manufacturers of key components and parts for new energy automobiles.

Restrictions have been softened for numerous industries, inter alia natural food activities, specialized components for new energy vehicles, medical treatment establishments and common high school education mechanism.

In return the newly prohibited sectors are postal services within China and parts of the real estate sector, i.e the construction and operation of golf courses and villas in China.

1.4 - The scope of required governmental approvals depends on the type and the size of the M&A transactions, e.g. for an indirect acquisition conducted offshore mostly no Chinese approval will be required, except for certain antitrust cases. For direct cross-border acquisitions into China, the approval procedures are similar to those for the incorporation of a new Foreign-Invested Enterprise (“FIE”). The Ministry of Commerce (“MOFCOM”) and/or its local counterparts are responsible to review and approve such transactions. Due to the security review system for M&A established last year the National Development Reform Conference (“NDRC”) as well as other related ministries are to be involved if foreign investors intent to take control of a Chinese military or military-related enterprises or an enterprise in certain national security-related sectors such as agricultural product, energy and resource, infrastructure or transportation key technology or major equipment manufacturing.

 

ITALY: Betty Louie

1.1 - The decision to choose an appropriate investment vehicle depends on a large number of factors.  For an Italian company (or any foreign company), it must first analyze (i) whether it has the financial resources, (ii) whether it has the human resources (both in terms of the everyday operations of the intended business in China, and also any local contacts that may be useful in the smooth operations of the business), and (iii) its projected timeline to enter into the Chinese market.  

Of course, if an Italian company has the financial resources and the human resources to enter into the Chinese market alone, a wholly-foreign-owned enterprise (WFOE) would provide the Italian company with the most control over its operations and financial affairs in China.  In recent years, an increasing number of Italian companies have been entered the Chinese market as WFOEs (with the caveat that it must be operating within a sector where sole foreign ownership is permitted).

Alternatively, Italian companies can form equity joint ventures (EJVs) or cooperative joint ventures (CJVs) in China, so long as they are operating within one of the permitted sectors and can find a suitable Chinese partner.  In general for a variety of reasons, CJVs are not commonly used by foreign investors;

Under current PRC laws, the amount contributed by a foreign investor in an EJV or a CJV shall generally not be less than 25% of its registered capital.  In the event the foreign investment is less than 25%, (1) the foreign investor must expressly note that the foreign investment is less than 25% on the approval certificate and the business license of the EJV/CJV; and (2) the investors in the EJV/CJV will be subjected to a more stringent timeline to complete their capital contributions.  Specifically, in such a case, if the foreign investors intend to make a capital contribution in cash, the capital must be fully-paid within three months of the incorporation of the EJV/CJV.  If the foreign investors intend to make a capital contribution in-kind, the capital must be fully-contributed within six months of the incorporation of the EJV/CJV.

Furthermore, the establishment of an EJV or a CJV is subject to the examination and approval of MOFCOM (whether central MOFCOM or its local counterparts).  The level of governmental approval required depends on the following two factors: (a) whether the EJV/CJV intends to engage in an “encouraged”, “permitted”, “restricted” or “prohibited” sector; and (b) the total investment value of the EJV/CJV.   Any significant changes of an EJV or a CJV is also subject to the approvals of the relevant MOFCOM that issued the original approvals for establishment of the EJV/CJV.

There are a variety of factors to consider when choosing an appropriate local PRC partner – ranging from finding a partner that is a stated-owned/controlled entity with strong connections in China, to finding an independent PRC partner who may not have strong connections with the governing authorities, to finding a smooth and trusting relationship between the foreign investor and the local PRC partner.  In some circumstances, in our experience, the stronger and better connected the PRC partner may be, the more difficult it may be for the foreign investor to actively participate in the operations of the Chinese joint venture.

1.2 - Although there are many objective benefits for using an offshore intermediate vehicle, such as a Hong Kong-based investment structure, or one based in the Cayman Islands or the British Virgin Islands, it is extremely difficult and rare for an Italian company to establish a Hong Kong intermediate vehicle to buy assets or companies in China as Hong Kong is on the Italian tax authority’s black list.  This is true as well for any intermediate investment vehicle formed in the Cayman Islands or the British Virgin Islands.

In any case, some of the objective benefits are the following:  the investment vehicle can facilitate the foreign investors’ management of the PRC entity, there could be increased flexibility in selling shares/interests in a Hong Kong vehicle, it may be easier to arrange for certain type of financing with a Hong Kong entity, communications may be facilitated, an Italian company (or any multinational corporation) can use Hong Kong as a distribution center, not only for its products in China but also for distributing its products throughout Asia.

 
1.3 - There are many changes arising from the new Foreign Investment Industrial Guidance Catalogue (the 2011 Catalogue).   As a general overview, the 2011 Catalogue can be interpreted to reflect China's intention to further open up to foreign investors.  It also reflects a shift from China's prior focus on traditional industries to a focus on increasing foreign investments in advanced technology, energy conservation and environment protection.

The changes arising from the 2011 Catalogue are numerous and detailed.   In general, below is a list of some of the new "encouraged" industries.  This list below should not be read as exhaustive.  In addition, there are other changes in the "permitted", "restricted" and "prohibited" categories. 

New "Encouraged" Sectors

• The 2011 Catalogue highlights high-end manufacturing as a main "encouraged" sector for foreign investment.  In particular, the 2011 Catalogue adds textile, chemical and machinery manufacturing sectors which adopt certain new technologies or produce certain new products to the "encouraged" category.

• The 2011 Catalogue encourages foreign investment in the recycling industry, such as the recycling of plastics, electronic products, electro-mechanical equipment, rubber and batteries.

• Foreign investment in new strategic industries are also encouraged in the 2011 Catalogue.  In general, these industries include energy saving, new generation of information technology, biology, high-end equipment manufacturing, new energy, new materials, clean-energy automotive industries.

• Encouraging foreign investment in modernizing the services industry is another highlight in the 2011 Catalogue. It includes the following new encouraged sectors:
(1)  charging stations for electric vehicles;
(2) venture capital enterprises;
(3) intellectual properties service;
(4) development of offshore oil pollution cleaning technology; and
(5) vocational skills training.

1.4 - There is a large number of PRC governmental approvals required for M&A transactions, many of which vary depending on the type of M&A transaction involved.  In general, PRC governmental agencies will typically review the transaction from the perspective of protecting a national industry, or from a social and political perspective.  This type of review may often extend far beyond the commercial aspects of a transaction. 

As a very general overview, below is a chart reflecting the general PRC governmental approvals required for each type of transaction:

CSRC = China Securities Regulatory Commission
MOC  =  Ministry of Commerce (Central)
MOFCOM = Ministry of Commerce
NDRC = National Development and Reform Commission
SASAC = State Asset Supervision and Administration Commission
SAIC = State Administration for Industry and Commerce
SAFE = State Administration of Foreign Exchange
SAT = State Administration of Taxes
* = an approval at the time of listing


SPAIN: Alex Dolmans, Gaston Fernandez

1.1 - Wholly foreign-owned enterprises (commonly referred to as “WFOEs”) are often preferred by foreign investors generally and Spanish multinationals in particular -- if they are allowed in the target industry. The starting point for determining which industries are “prohibited”, “restricted” and “encouraged” for foreign investment is the Foreign Investment Industrial Guidance Catalogue, which was most recently updated effective 30 January 2012; industries not included in the catalogue are deemed to be “permitted” for foreign investment. In certain industries that are officially “restricted” for foreign investment, such as the value-added telecommunications industry, foreign investors often participate in the market through establishing WFOEs that contractually siphon revenue from domestically owned enterprises holding the relevant operating licenses which are controlled by cooperative nominees, in an attempt to extract the benefits of equity ownership. While these arrangements may not be formally compliant with PRC law, they are widely used in certain industries and their use is disclosed in the prospectuses of many listed companies. However, the China Securities Regulatory Commission (“CSRC”) reportedly issued an internal report in 2011 addressing methods for eliminating offshore equities listings based on such structures to promote listing domestically, suggesting that certain authorities are interested in curtailing this practice – it is important for Spanish and European investors to keep this in mind when structuring the investment.

On occasions the involvement of a domestic partner is required to achieve business goals in China -- equity joint ventures and cooperative joint ventures with such local partners are also vehicles available to foreign investors, however they are less frequently used due to their inflexibility (unanimous shareholder consent is required for key matters such as termination of the joint venture, amendment to the joint venture agreement or changes to the registered capital of the joint venture). Other less commonly used investment vehicles include companies limited by shares, partnerships and trusts.

1.2 - The primary benefits of investing through an offshore vehicle are avoidance of many time consuming PRC registrations and approvals that are required when the equity in a PRC entity changes hands and increased flexibility in corporate governance afforded by foreign laws. For example, certain merger and acquisition approvals from the Ministry of Commerce (“MOFCOM”) and registrations with the State Administration of Industry and Commerce (“SAIC”) would not be required for changes in the equity structure in an offshore investment vehicle with an interest in PRC subsidiaries. Offshore investment vehicles also allow for multiple classes of equity (with varying voting and dividend rights) which can be difficult to replicate using PRC legal structures.

Historically, offshore structures were often used to avoid PRC tax liabilities. However, in recent years the State Administration of Taxation (“SAT”) has focused on collecting tax revenue from sales of offshore holding companies of PRC entities. In some instances the SAT has assessed tax on non-PRC persons transferring shares in such holding companies. Hong Kong is often chosen by foreign investors for establishing intermediate investment vehicles due to a favorable tax agreement with the mainland, but recent SAT regulations have clarified that offshore Hong Kong entities must have independent business activity to justify taking advantage of tax benefits. PRC tax authorities have also been moving to capture additional revenue by collaborating with authorities in traditional tax haven jurisdictions, such as through a tax information exchange agreement between the PRC and the British Virgin Islands in 2010.

Regulations issued by the State Administration of Foreign Exchange (“SAFE”), such as SAFE Circular 75, require registrations when PRC persons hold an interest in a domestic entity through “round-trip” investments offshore. SAFE registration can often be a time-consuming process, especially when attempting retroactive registrations to bring legacy structures into compliance. This would be an important factor to consider when a PRC person would have an equity interest in the offshore vehicle.

1.3 - Recent revisions to the Foreign Investment Industrial Guidance Catalogue were mostly incremental, with changes reflecting industrial policy to encourage more efficient energy use, use of renewable energy and recycling. Descriptions of technologies in certain industrial categories were also updated to reflect advances since the last revision of the catalogue in 2007.

1.4 - National security and merger control approvals are both relatively new developments in the PRC, with the Anti-Monopoly Law enacted in 2008 and the Circular on Establishing the Security Review System of Mergers and Acquisitions of Enterprises within China involving Foreign Investors issued in February 2011. Merger control approvals are administered by MOFCOM, while the national security review approvals are administered by a joint conference of officials from the National Development and Reform Commission (“NDRC”) and MOFCOM. The national security review approval regime was reportedly modeled partially on the CFIUS approval for foreign acquisitions in the US. In many areas, the national security rules remain vague and could add another layer of delay and uncertainty to the process of completing transactions in the PRC. This is in stark contrast with the clearly defined processed that Spanish and other international players can find in EU merger clearance and other regulatory approval procedures in the EU or its Member States.

ENGLAND and WALES: Sherry Yin

1.1 - The wholly foreign-owned enterprise (“WFOE”) is by far the most widely used investment vehicle for foreign investors, at least in those sectors in which sole foreign ownership is permitted. The principal advantage of a WFOE is that the foreign investor has complete control over the management and financial affairs of the company.

There are certain industrial sectors in which complete foreign ownership is prohibited but in which foreign ownership through a joint venture is permitted (e.g. telecommunications, media and the exploitation of natural resources). There are two kinds of joint ventures: equity joint ventures (“EJV”) and cooperative joint ventures (“CJV”). In an EJV, all profits, losses and liabilities are allocated according to the parties' respective equity ownership percentages, while in a CJV they are allocated according to the provisions of the joint venture contract. While CJVs provide flexibility, EJVs remain more common due to their relative simplicity of establishment. Compared to WFOEs, EJVs and CJVs are subject to additional corporate governance requirements, including unanimous shareholder consent for termination, amendment of the articles of association, increasing or reducing the registered capital, or merging with another entity. 
 
1.2 - Adding an intermediary entity can provide an investor with an additional layer of protection in order to avoid potential corporate veil piercing liability at the onshore level. Additionally, if the investment has an offshore holding company, the investment can be structured in a way to maximize flexibility of the corporate governance rights and the creation of preferred shares.  In addition, the issuance or transfer of equity in an offshore entity would be less encumbered by PRC government approvals (although certain PRC regulations will continue to apply, such as SAT 698, SAFE 75, and the notice requirements under the Anti-Monopoly Law).  Note that the typical offshore enterprise is a Cayman or BVI company, and not a Hong Kong company.  While a Hong Kong company may be useful from a PRC/Hong Kong tax perspective as an intermediate subsidiary, Hong Kong companies are not ideal platforms for offshore private equity/venture capital investment due to increased corporate governance requirements, and the existence of a stamp duty for secondary transfers.

1.3 - The Catalogue for Guidance of Foreign Investment in Industry (the “Catalogue”) was effective January 30, 2012.  The Catalogue represents relatively limited changes to its predecessor, issued in 2007, and the technical changes that were made vary from industry to industry.  An important development was the general encouragement of clean energy and clean technology.  Non-exhaustive examples of industries or products that saw reduced restriction include mining (exploration and development of “unconventional natural gas resources”), natural food additives, specified components for new-energy vehicles, “nonmetal mineral” products used in the manufacture of clean energy or clean tech products, specialized clean tech equipment, venture capital, logistics consulting services, vocational training, wholesale and retail sales of pharmaceuticals, and investment in medical institutions. Industries that saw increased restriction include textile manufacturing, chemical manufacturing, pharmaceutical manufacturing, manufacture of complete automobiles, manufacture of specified nuclear power plant equipment, mining of alumina refractory cement, wollastonite and graphite, extraction and refining of lithium and sulfur iron ore, and edible oils and grains processing, inter alia.

1.4 - The Ministry of Commerce ("MOFCOM") is the most important governmental agency involved in the approval of cross-border M&A deals in China. Depending on the nature of the transaction, additional various governmental approvals may also apply. For example, approval from the National Development and Reform Commission must be obtained for foreign invested projects involving fixed assets and the State-Owned Assets Supervision and Administration Commission will be involved if the target involves state-owned enterprises and assets. In addition, all M&A transactions, regardless of whether they take place within or outside of China, are subject to PRC anti-monopoly review by MOFCOM so long as certain criteria are met. If a deal leads to foreign investors participating in national defense and military sectors or controlling other industries essential to state security, a separate national security review will be needed by a special panel under the direction of the State Council.
 


Part 2 Question 2

Iohann Le Frapper, Chair: Protecting your intellectual property. Please discuss briefly:

2.1 - Trade name and trademark (including in Mandarin language);
2.2 - Do not forget domain names for on-line marketing & business;
2.3 - How to tackle copyright infringements: Litigation challenges?
2.4 - Filing of patents and registration of software: Pros and cons?
2.5 - Need to handle inventor’s entitlement to compensation;
2.6 - Transfer/licensing of technologies.


FRANCE: Charles-Henri Leger

2.1 - Like in several other jurisdictions (including France), trademarks in China are protected only if registered - mere use without registration does not create trademark rights.

A limited exception to prior registration exists for well-known trademarks, to which China is bound to afford some degree of protection under international conventions (such as the Paris Union Convention of 1883) to which it has acceded.

Irrespective of this, foreign companies investing in or selling to China (and those fearing counterfeiting originating from China), should seriously contemplate registering their trademarks in China.

For trademarks consisting of words (in whole or part), the issue of Chinese language issue arises - in China, a foreign trademark will be pronounced in Chinese and such pronunciation may be put into Chinese characters that could be registered by a third party.

Foreign companies using foreign word trademarks in China would be prudent to also register each such trademark in the Chinese language. Such companies will also enjoy the advantage of defining and controlling their Chinese language trademarks, because a given foreign word (or words) has a multitude (not single) Chinese "translation". Choosing a good translation is an art that combines matters of sound (if an equivalent is sought in one of the Chinese languages, generally Mandarin), meaning, appeal to the public and distinctiveness (the latter taking into account, among other elements, the necessity to avoid closeness to already existing Chinese language trademarks).

Protection of trade names should be approached in the same way, with an emphasis on protecting them as trademarks whenever feasible, given that protection as a trade name only is weaker and relies on unfair competition-type actions.

2.2 - The registration strategy for domain names in China is similar to other major jurisdictions - companies actively involved in international business must determine to what extent they need to register domain names locally with ".cn", ".com.cn" and variations.

Chinese law only permits entities registered in China (including a foreign company’s Chinese subsidiaries or representative offices)to register ".cn" names.

Foreign companies wanting to register a ".cn" domain name but who have no local presence are thus in a difficult situation. Arrangements with some local agents are the only, although possibly risky, solution.

Chinese language domain names may also now be registered, which requires the same strategic thinking for domain names as for Chinese language trademarks.

2.3 - Copyright in China is protected under a regime closer to European "droit d'auteur" than US "copyright".

The protection of copyright extends widely, and includes software.

Action may be taken against copyright infringers through various methods, including administrative, civil or criminal procedures.

Specific problems may arise in providing evidence of copyright ownership. Chinese courts may be quite demanding on this account, while international practice in respect of copyright is (due to the absence of a registration requirement) less straightforward than for other IP rights, in the sense that the creation and transfer of copyright are sometimes not documented. Foreign jurisdictions often make up for the lack of documents with presumptions, allowing the ownership of rights to a given work to be derived from circumstantial evidence. Chinese courts usually require stronger evidence, such as assignment or license contracts, which may be difficult (if not impossible) to provide.

Foreign companies contemplating action in China against copyright infringers should carefully check the available evidence of their copyright ownership or license rights, in order to collect (if possible) additional evidence, or build up alternative strategies such as having the author in person take action.

2.4 - In China, as in other jurisdictions, patent protection will be only granted further to the filing of a patent application, enclosing a full description of the invention which, after some time, will be published and become publicly available.

Corporate strategies in respect of inventions are thus devised, for China (as elsewhere), as a choice between two types of uncertain protection: the protection afforded by a patent - if it is issued and can sustain challenges - and the protection resulting from keeping the invention confidential - if confidentiality can be maintained for a reasonable period of time in view of the probable duration of the usefulness of the invention.

When a company has already elected to apply for patent registration outside China, then whether or not to apply for patent registration in China involves the following factors:

While a case by case assessment is necessary to take into account matters such as the particulars of Chinese competitors and their ability to make up for the know-how omitted from the invention description in the patent application, it is generally preferable to apply for a patent registration in China when patent protection is applied for outside China. This is because if a patent is granted outside China, its description will be available on databases (although not in Chinese) so that competitors/infringers may have access to it and their implementation of the invention in China, on the basis of such publicly available data, will be considered as legally valid.

As regards software (other than software related to a patentable invention), registration in China is not required as a condition of protection - copyright automatically covers software which fulfils the requirements of a protected work. Registration is nevertheless available in China and will be useful for evidence purposes, since it may be difficult to prove, when taking action against infringers, the content of particular software at a given date.

The software registration regulations provide for a degree of confidentiality of the registered software, allowing for redaction of certain parts.

While we are not aware of confidentiality problems arising out of registration of software in China, foreign companies often decide against registration on the basis of confidentiality fears.

2.5 - Chinese patent law requires that employees who are inventors in the course of their employment should be rewarded if a patent is issued on their invention and remunerated if the patented invention is used. Chinese law provides that the reward and remuneration shall be as agreed between employer and employee or in accordance with the employer’s internal regulations. The law also sets out minimum amounts of reward and minimum percentages of remuneration that apply in the absence of such an agreement or regulations. Identical provisions apply, but with lower minimum amounts and percentages, for designs that are granted design patents.

Company regulations and employment agreements for positions that entail the possibility of inventions should therefore include provisions in the nature of an agreement in this respect, and should take into account the possibility that these laws and regulations may change. The existing rules actually entered into force in 2010 - previously minimum rewards and remuneration provisions only applied to employees of state-owned enterprises.

These laws apply irrespective of the employee’s nationality. Consideration should be given to group employees seconded from mother companies to Chinese subsidiaries, as these employees may thus enjoy rights on Chinese service inventions different from those granted in their home jurisdiction.

2.6 - Chinese law has specific rules on international technology transfers and licenses, which it considers "imports" or "exports" of technology. These rules apply irrespective of any contractual provision on choice of law and thus cannot be evaded. "Technology" under these regulations is widely defined. These rules aim to prevent possible abuses by the foreign licensors and, in general, do not detract from international practice regarding unfair clauses in license agreements.

It is generally recommended that companies not contribute technology to the equity of a China subsidiary, in order to avoid situations where the ownership of the technology may appear unclear, including questions as whether the contributor has transferred its entire worldwide rights, matters of joint ownership, and the possibility for the contributor to recover the technology upon liquidation of the subsidiary - which would require compliance with legal provisions on technology exports from China. This recommendation is all the more valid where the Chinese subsidiary is a joint venture company.

It should be noted that improvements to a licensed technology belong to the person who performed them and Chinese law forbids automatic or free or non-equitable grantbacks of improvements to the licensor.

Companies should also bear in mind that when technology may affect competition on specific markets, the effect of the Chinese Antimonopoly law on technology agreements or refusals of transfers or licenses, is not yet stabilised.

GERMANY: Christoph von Einem

2.1 - A trade name is the name under which an individual, business organization or other legal entity runs its business although its ristered name may deviate. Although the trade name can be registered in many jurisdictions, it does not provide any trademark rights.

A trademark is a distinctive sign used to identify products or services to consumers as belonging to a unique source and to distinguish products or services from those of other business organizations or legal entities. Registration of trademarks is not required but most helpful. Proprietary rights in relation to trademarks can be established through actual use, however only registered trademarks are protected in the People's Republic of China; No common law protection for unregistered trademarks is provided except for well-known-trademarks which are recognised and protected under Chinese law since 2001. A well-known-trademark is a mark which is known to a substantial segment of the relevant public in the sense of being associated with the particular goods or services.

Unlike other types of intellectual property a registered trademark lasts not only for a lomited period like patents, but as long as it is used continuously and kept registered.

A registered trademark confers various exclusive rights, in particular the right to exclusive use of the trademark in relation to products in a country like China for which it is registered as well as to prevent any unauthorized use of that trademark. However, trademark rights are basically only enforceable in the jurisdiction in which the trademark is registered or well-known. Although there are systems to work towards facilitating the enforcement of trademark rights in more than one jurisdiction, it is currently not possible to file and obtain a single trademark registration which will apply globally.

If a Mandarin language trademark is required there are two basic strategies to choose an appropriate Mandarin language trademark. If a trademark has an actual meaning the easiest manner of creating a Mandarin language trademark is translation. The second manner is to register a transliterated trademark. Transliterations approximate the name of the respective product. Transliteration is the common method if the mark which is to be filed is an invented word or proper noun. Problems can arise from different pronunciation of names in Mandarin on the one hand and Cantonese on the other hand. In addition to that, the translation of a trademark bears the risk of not accurately reflecting the full German meaning of the trademark.


2.2 - If a company has concrete prospects for an investment in the People's Republic of China, it is very important to take care of the registration for respective domain names at a very early stage before future distribution partners may become aware that no protection exists. Domain names can be registered in short order. If an other company or, worst case scenario, a potential joint venture partner securs respective domain names at first, the company is in an unfavorable negotiation position or at least has to pay substantial license fees.


2.3 - If an intellectual property infringement occurs, a company has the choice between tackling the infringement via administrative or judicial way. Both possibilities exist for copyright infringements as well as for patent and trademark infringements.

The administrative way is in most cases the quickest and least expensive way to battle a copyright infringement. A complaint which describes the infringement has to be filed to a local administrative agency, generally at the district or county level. As a result of an copyright infringement the local agency can order the infringer to stop the ingringing activity and levy an administrative fine. As appeal against the local agency ruling, the intellectual property holder as well as the infringer can file an administrative suit to the Supreme People's Court.

If its intellectual property rights were infringed, in addition to the administrative channel a company has  the possibility to take a legal action either to conduct the civil case or the criminal case. Special tribunals are set up to handle intellectual property rights disputes at the court of first instance. Criminal cases are heard first by Criminal Tribunals in the People's Court. Despite the advantages of the judicial channel, in particular stronger penalties and the opportunity to claim monetary damages, the number of court cases cannot even come close to the number of complaint to the administration. Court cases are far more expensive and time-consuming than administrative cases. Court cases often take a year or longer and normally a local advisor is necessary. Local protectionism as well as a lack of transparency and the associated unpredictability of the outcome of the procedure is still difficult to handle. Furthermore in an intellectual property infringement suit the plaintiff has the burden of proof, thus with the rights holder. It is difficult for plaintiffs to obtain evidence about the infringement. Additionally, evidence must be notarized and admitted to the court, a process that can take even longer if the evidence was produced overseas. Finally, monetary damages are hardly to recover. In theory rights holders have suitable action possibilities, however, have to remain realistic.


2.4 - A main difference between patent protection and copyright protection is that the copyright only protects the expression of a work but not the creative idea. However, if someone obtained the such ideas from the software developer, they could easily develop some software with the same or similar function by reverse engineering, reverse coding, etc. Thus, the developer might tend to seek patent protection for software.

However, not all kinds of software are allowable subject matters of patent protection in China. According to  the Guidelines to Patent Examination (“Guidelines”), promulgated by the State Intellectual Property Office (“SIPO”), only if the computer software refers to the solutions for solving the problems of the invention which are wholly or partly based on the process of computer programs and control or process external or internal objects of a computer by the computer executing the programs according to the above mentioned process, then it does fall within the purview of patent protection.

2.5 - It refers to Rule 77 and Rule 78 of Implementing Regulations of the Patent Law of the People's Republic of China (“Implementing Regulations”) which went into effect on February 1, 2010. In case of service inventions, although the employer to whom a patent right is still granted, he shall, within three months from the date of the announcement of the grant of the patent right, pay the inventor or creator of a service invention-creation a sum of money as prize. This one-time reward for a patent for invention shall not be less than RMB 3,000, while for a patent for utility model or design shall not be less than RMB 1,000.

In addition to the one-time prize, the employee-inventor shall be entitled to  (1) a percentage of all profits derived from exploiting the patent equal to 2% for invention or utility model patents and 0.2% for design patents, and (2) 10% of all royalties related to any licenses granted to a third party regarding the patent.

Only under two circumstances the above statutory compensation rules do not apply: if there is an agreement between the employer and an employee-inventor in this regard, or if the compensation and remuneration system is provided in the internal rules and regulations of the employer, then such provisions shall prevail.

2.6 - The transfer/licensing of technologies are heavily encouraged under the current Chinese government policy as well as legal frameworks, e.g. according to Article 90, Regulation on the Implementation of the Income Tax Law of the People’s Republic of China the portion not exceeding RMB 5 million obtained by a resident enterprise from technological transfer shall be exempted from income tax, and the excess shall be taxed at the reduced half rate, so it is not surprising that the “Technology Trade Markets” have been booming over last years.

There are also potential risks and problems associated with transfer/licensing of technologies in China, e.g. there are generally three types of license in China, exclusive, sole, or non-exclusive license. Only the sole license, not the exclusive license could prevent the owner from using the intellectual property within the geographic scope and during the term specified in the license. For cross-border technology transfer business are certain technologies prohibited or strictly restrict from export, such as national security related technologies.

ITALY: Betty Louie

2.1 - China is a "first-to-file" country, meaning that the first entity to file and register a given mark - regardless of whether another company may have used it first in China -  has priority rights for the mark.  While trademark registration is not mandatory (except for pharmaceutical and tobacco products), use of unregistered trademarks within the PRC market can only obtain a very limited degree of protection, and even then only when the mark is recognized as “well-known” in China. 

Applications for trademark registration should be made for all key brand names or logos, if operating in China, it is recommended to register the design and Chinese-character version of the mark.

The enterprise names (including trade names) are legally protected in China under the General Principles of the PRC Civil Code and the Anti-Unfair Competition Law. However, do note that the trade name of a foreign-invested entity in China will not automatically be protected as trademark.

 
2.2 -Domain names (including top-level “.com.cn” and “.cn” domains and their Chinese-language equivalents) and enterprise names are legally protected in China under the General Principles of the PRC Civil Code and the Anti-Unfair Competition Law.

A business should consider registering the key domain names in China even if it has registered the domain name as a trademark in China. Legal caselaw have found that even a registered trademark holder under Chinese laws could fail in successfully establishing its complaint under China Internet Network Information Centre ("CNNIC") Domain Name Dispute Resolution Policy ("CNDRP") where the respondent conducts itself in a particular manner so as to acquire rights or interests over the disputed ".cn" or Chinese character domain name.

2.3 - Under PRC law, the owners of intellectual property rights (IPR) (including copyright) may bring infringement claims by using either administrative or judicial channels.

Using an administrative channel to pursue an IPR claim (especially for trademark or copyright) infringement in China is faster and less expensive than judicial channels but tends to result in weaker penalties that may not be effective deterrents to future violations.

The number of IPR cases pursued though litigation is likely to increase as a result of Chinese IPR legal regime being strengthened and increasing focus to strengthen it. However, in its current stage, judicial enforcement of IPR rights continue to face certain challenges in practice.

2.4 - Filing of patents:

Pros - A patent can act as a deterrent, making defense unnecessary.

Cons - In applying for patent, you need to make publicly available certain technical or know-how information about your invention;

A patent is territorial and the holder can only stop competition in the country in which it holds the patent;

Applying for a patent can be a time-consuming and costly process.

Since China does not provide extended protection time for patents, once a patent expires, the patent holders interests might be seriously compromised.

Registration of software:

Pros - While copyright registration of the software is not a precondition for enjoying copyright protection in China, it will be deemed as a prima facie evidence of copyright to the owner in legal proceedings;

Cons - In the registration procedure, certain source code need to be disclosed.

2.5 - According to the PRC Patent Law, an employer is the lawful owner of an issued patent for any invention or creation made by an employee in the course of his employment. However, it also provides statutory compensation for the employee. Furthermore, the Implementation Rule of Patent Law details that, in the absence of a prior agreement between an employer and an employee, the employer shall, within the term of the patent right and in utilizing the invention or innovation patent, draw no less than 2% of the operating profits derived from the utilization of the invention or utility model (or 0.2% of the operating profits derived from the utilization of the industrial design) and pay the same to the inventor or designer by way of remuneration, or shall remunerate the inventor or designer through a one-off payment calculated by reference to said percentage; where the entity granted a patent right licenses other entities or individuals to utilize the patent, no less than 10% of the royalties received shall be paid to the inventor or designer by way of remuneration. This is in addition to a one-off award of no less than RMB 3,000 for any issued invention patents, or RMB 1,000 for issued utility model or design patents.

Accordingly, it is important that foreign enterprises with a presence in China, particularly with R&D or manufacturing functions, be aware of these statutory compensation rules and put in place a system that clearly and formally defines the amount of compensation that an employee-inventor shall receive.

2.6 - Foreign investment in China is commonly accompanied by the transfer of advanced technology in the form of patents, trade secrets or other proprietary technology China.  This is usually done by either licensing or transfer.  Either of these is treated as an import of technology to China.

Forbidden, Restricted and Permitted Technology - In China, technologies may be classified as forbidden or restricted from export.  If neither forbidden nor restricted, the property is deemed permitted.  From time to time, the Ministry of Commerce promulgates and updates the catalogue of forbidden and restricted technology.

License for and Registration of Technology Importation - Import of restricted technology is subject to a two-tier licensing procedure overseen by provincial-level authorities.  The first license is obtained by filing an application for a Technology Import License Proposal.  The second license is the Technology Import License.  The import contract takes effect only upon issuance of the Technology Import License, however.

While permitted technology may be freely imported, online registration of the transfer or licensing contract with authority is required.  Registration of technology transfer or licensing contracts is a precondition for remission of royalties and  other payments due under the contract.

Capital Contributions - Foreign investors may also contribute registered capital to FIE in the form of technology.  This requires the foreign investor to transfer—and not merely license—the ownership of the technology involved to the FIE. The total amount of non-monetary property (including technology) that can be provided as a capital contribution cannot exceed 70 per cent of the total registered capital for the FIE.

 

SPAIN: Alex Dolmans, Deanne Wong

2.1 - China is a "first-to-file" jurisdiction and as such, it is important for companies to register their trademarks as early as possible. Many European and other international brands entering the PRC are now having to deal with recovering their associated trademarks and trade names which have been registered by unscrupulous third parties, many of which with the aim of eventually selling the said marks to the rightful owners at a profit – this is otherwise known as trademark hijacking.

For a foreign company looking to invest in China, it is also important for it to develop a Chinese language version of its trademarks and trade names – domestically, many international brands are more well known by their Chinese names rather than their English (Latin) equivalent. Once a foreign company's Chinese language trademark and trade name has been developed, it should again make sure to file it as a trademark in the relevant classes.

In relation to trademark registration, we note that China adopts its own unique sub-classification system. According to this system, goods and services in each International Class of goods (as adopted internationally by the Nice Convention) are further divided into sub-classes. As such, it is important for foreign companies to consult with PRC counsel to ensure that sufficient coverage is given across the subclasses.

In China, trademark owners also have the option of recording their trademarks with the PRC Customs together with the names of their authorized manufacturers/exporters/licensees. As part of their checks, should Customs find goods bearing the recorded trademark which are being exported by a party not on the list of authorized entities, they will carry out a preliminary detention of the goods and notify the trademark owner.

2.2 - Companies in China should be mindful of on-line infringement threats as part of their overall IP protection strategy. On-line infringement could lead to diversion of web traffic, loss of business, brand dilution, and, in worse case scenarios, legal action taken by consumers against the (genuine) IPR holders for substandard goods and services.

One of the most common forms of online infringement is known as 'cyber-squatting', that is, when a party with no legitimate legal rights to a trademark or trade name registers an identical or similar domain name in bad faith. Often, such cyber squatters seek to sell the domain name back to the rightful owner at a profit.

As a preemptive step, companies looking to enter the Chinese market should consider registering domain names incorporating their brands and trademarks under Chinese top-level domains including 'cn', '.??', '.??.' and '??' ahead of time even if they are not actually using the domain names for the moment.

2.3 - While IP litigation in China is significantly cheaper than in the EU and to some extent, faster, it also presents its own set of unique challenges. In respect of copyright litigation, it may prove difficult to establish copyright ownership in a given work. In PRC Courts, witness evidence given by the Plaintiff to assert his right is given little weight and as such, personal declarations of copyright ownership by the creator of a work is not taken as substantial evidence.

In addition, evidence originating abroad must also be notarized (by a public notary in that country) and legalized (by the Chinese Consulate in that country) before it is submitted to Court; the notarization and legalization process can sometimes be a lengthy and costly affair. Unlike trademarks and patents, copyright in a work, such as an artistic or literary work, arises automatically and upon creation of the work. Nevertheless, for the purposes of establishing ownership in a copyright work before PRC Courts, we typically advise clients to formally register their copyright work with the National Copyright Administration of China upon which a certification will be issued. This will make it easier to substantiate copyright ownership in copyright litigation proceedings.

More generally in respect of IP litigation, while Courts in PRC 1st tier cities may be more well-versed with IP laws and principles, courts in other parts of the country that have jurisdiction over IP matters (many of these have just recently been granted jurisdiction) may lack the experience in trying such matters resulting sometimes in questionable decisions. As the defendant should be sued at the place where the person or company is domiciled or where the infringing act takes place, local protectionism may also be an issue if the defendant has a strong economic influence in the city or province which has jurisdiction in the case.

2.4 - When software is concerned, from a Chinese perspective, the question should rather be whether the software is patentable at all.  Therefore we cannot really talk about the pros and cons of whether to choose to file a patent for software as opposed to registering it as a copyright.  It comes down to what is and what is not patentable subject matter.  In China, software is generally registered as a software copyright rather than a (software) patent. Software that is patent-eligible may be protected by both the copyright laws and by patents. Computer programs as such cannot be patented, but are protected under the "Regulations on Computer Software Protection", which is formulated in accordance with the Copyright Law.  Software copyrights are registered by the Copyright Protection Center of China (under the National Copyright Administration of China).

Regarding patent-eligibility, China applies a test to determine whether the invention represents an advance in technology, i.e., whether it solves a technical problem using technical means and therefore has technical effects.  Under this test, software related inventions are patent-eligible if it is determined that they are technological innovations.   According to the SIPO Examination Guidelines regarding patent-eligibility of software, the following are not patent eligible:

• Algorithms, computer programs, and mathematical computing rules by themselves.
• Methods and systems of managing organization, production, commercial activities, or economy, etc.

However, if an invention involving the execution of computer programs uses technical means to solve technical problems, and therefore have technical effects, the invention is patent-eligible.

2.5 - It is important to consider inventor remuneration of employees. This is increasingly so as European and other international companies invest more in R&D in China. Multi-nationals and other companies often have their own inventor remuneration schemes in place but many companies do not. In either case, it is important to ensure that employee inventors in the companies' Chinese corporate entities are compensated in accordance with Chinese laws and regulations.

Article 16 of the Patent Law provides that an employee inventor shall be paid a reasonable award according to the scope of application and the resulting economic benefit. This basically means that in cases where inventions are made by using the materials and technical conditions of an employer, Chinese law allows companies to draft their own incentive policies and sets of individual agreements, while keeping within the limits of the law. In the absence of a prior agreement, the Implementing Regulations to the PRC Patent Law provide that each year the employer shall pay the employee-inventor: (1) a percentage of all profits derived from exploiting the patent equal to 2% for invention or utility model patents; or 0.2% for design patents, or (2) where licenses are granted to third parties, 10% of such royalties. These amounts are in addition to a one-time award of no less than RMB 3,000 for any issued invention patents, and RMB 1,000 for issued utility model or design patents, which must be paid within three months of the date the patent was publicly announced.

While detailed rules exist, the system still presents uncertainties. In particular with regard to the relationship between the principle of reasonableness and the freedom to contract. Uncertainties also exist concerning the fact that, in many cases, the entity to which the patent is granted is not the employer of the inventor to be remunerated.

2.6 - Technology can be either transferred (whereby ownership is transferred) or licensed. In China, technology transactions from a foreign party to a Chinese party are also called "technology imports". Technology imports (and exports) in China are divided into ‘freely importable’, ‘restricted’, and ‘prohibited’ technology.  In most cases, technology is freely importable. Some technologies related to for example national security are restricted or prohibited from export. Licensing of technology is more common than transfer as the ownership of the IP is still held by the licensor after the transaction.

Usually transfer of technology takes place by way of licensing of patents, designs, software, trade secrets, and know-how. Often the purpose is to manufacture a product in China.  The transfer or licensing can take different forms such as transferring/licensing to an unrelated company; to a joint venture (this usually happen in restricted industries); or to an enterprise which is wholly owned by the foreign company. In some restricted industries, such as telecommunications, technology is transferred in order to enable the foreign company to enter the Chinese market at all.  Where a business partner is involved, undertaking due diligence before the transfer of any technology is a must.

In each type of transfer, the risks concerning IP are different but the basic rule is to prevent loss and leakage. Pro-active steps for companies to take include registration of invention patents, utility models or design patents prior to entering the Chinese market; signing non-compete and confidentiality agreements with business partners and employees to protect know-how and trade secrets; ensuring limited security access to sensitive information; document tracking etc. Another key point is ensuring that the licensing agreement is detailed and includes mandatory provisions as well as clauses regarding IP ownership; territory; extent of use; and ownership of improvements in the technology.  In this regard it is noteworthy that Chinese law provides that improvements are owned by the party that makes the improvement and continued use of it shall be negotiated by the parties. Where manufacturing and the safe guarding of IP is concerned, it is worth considering splitting the manufacturing and assembly between factories. This way companies can avoid "putting all eggs in one basket".

It is necessary to register technology transfer agreements with Ministry of Commerce and, when patents are concerned, with the State Intellectual Property Office.

ENGLAND and WALES: Gordon Milner

2.1 - It will be particularly important for the business to register its trademarks with the China Trademark Office (“CTMO”) as early as possible. China does not recognise or afford protection to unregistered trademarks. This, coupled with the fact that the CTMO operates on a first-to-file basis, means that the business will not usually be able to assert any priority over (and will generally have no legal recourse against) a third party who registers the trademarks in China before the business. However, China is a signatory to the Paris Trademark Convention and it is possible to claim priority if the CTMO application is filed within 6 months of first filing in any other signatory jurisdiction.

Although the CTMO has adopted the international Nice system of trademark classes, these are further divided into a unique system of sub-classifications. As a result, it is possible for unconnected registrants to register an identical mark within the same class provided that the marks are registered in different sub-classes.

The practice of ‘trademark ‘squatting’ is unfortunately very common in the PRC. Indeed, there have been several cases in which Chinese trademark squatters have successfully sued international businesses for infringement of their own house marks in China.

It is good practice to register a range of Mandarin language translations and phonetic equivalents of each of the business’ key marks as there will not normally be a single unique transliteration and choosing the best version is rather a black art. The additional registrations can help mitigate the risk of trademark squatters capitalizing on market confusion before the preferred Mandarin version becomes established.

2.2 - If anything, internet domain name ‘squatting’ by unconnected third parties is even more prevalent in China than trade mark squatting. In order to bring a complaint under the dispute resolution procedure operated by the PRC authority responsible for administering the .cn domain (“CNNIC”), a complainant will generally need to hold a registered trademark in connection with the disputed name. It is also important to note that when working with a local partner in certain industries in which foreign investment is restricted (for example the operation of commercial websites) the Chinese operator of the business must own the trademark and domain names used – they cannot merely be licensed from the foreign party.

2.3 - Copyright infringement is rife in China – a problem which has been exacerbated in recent years by the tremendous growth of home-grown Internet-based file sharing sites. In theory, copyright can be enforced by means of administrative action commenced through the National Copyright Administration. However, as with any administrative action, damages are not available as a remedy and it can be difficult to persuade the administrative authorities to take action (particularly where the infringer has political connections or is a significant local employer).

As a consequence, most foreign business elect to enforce copyright through the Chinese civil courts. Chinese civil litigation procedure presents numerous challenges. Unlike common-law jurisdictions, there is no mandatory discovery process and an infringer cannot be compelled to disclose evidence which might be detrimental to its case. As such, the copyright owner will need to undertake its own evidence gathering – which will normally need to be complete before the case is filed in order to convince the court to accept the case. During this exercise, care must be taken to comply with PRC evidence rules. Sample purchases should be made in the presence of a notary and evidence gathered by foreign or unlicensed investigation firms will be inadmissible.

In addition to compiling evidence of the infringement, the plaintiff will also need to adduce a paper-trail demonstrating its root of title to the copyright in question. It is not uncommon for infringement proceedings to fail due to missing documents in the chain of title.

2.4 - Patent Filing
The Chinese IP system is heavily geared toward the protection of registered rights and as such, businesses are well advised to seek registration in most cases.

The China State Intellectual Property Office (“SIPO”) operates a ‘first to file’ patent application system which is based to a large extent on the European model. Three types of patents are available: invention patents, design patents and utility-model patents. The latter are not subject to substantive review, proceed to grant much more quickly than full invention patents and have become increasingly popular in the last five years as both a speedy way of building a defensive patent portfolio in China for cross-licensing purposes and as a form of ‘bridge’ mechanism to afford a degree of protection for technology while the full invention patent application is under examination.

Software Registration
A foreign copyright owner may apply to the China Copyright Protection Centre (“CCPC”) to register the copyright in its software. Registration is voluntary and is not a requirement for protection or enforcement in the PRC of copyright.  Registration is, however, taken as prima facie evidence of copyright ownership by the PRC courts and can therefore avoid the otherwise onerous burden of proving ownership of copyright in any enforcement action (see above).

The process requires the registrant to disclose a significant portion of the software’s source code to the CCPC. While the CCPC will permit confidential sections of the source code to be blacked-out under its ‘enhanced’ registration procedure, this disclosure requirement has resulted in a limited take up of the registration scheme by foreign companies licensing object code who are often keen to maintain 'security through obscurity'.

2.5 - In common with many European jurisdictions, Chinese law contemplates that employees who make innovative contributions to substantive features of an invention should be compensated by their employers. However, the default statutory arrangements in China are potentially substantially more onerous than those found in other jurisdictions and it is essential that any business looking to employ R&D staff in China address these matters appropriately in its employment terms. Article 16 of the Patent Law (and its implementing rules) provides that, in respect of each invention patent an employee inventor should be compensated as follows:

* a lump sum of RMB3,000 within 90 days of grant;
* an annual reward of 2% of any after tax profit earned; and
* 10% of the after tax royalties generated from any license of each patent to a third party

In addition, under Article 326 of the PRC Contract Law an employee inventor has a statutory right of first refusal in the event that the employer seeks to transfer his/her technical innovation to a third party.

It is possible to contract out of these default provisions by agreeing alternative arrangements in the inventor’s employment contract, but any alternative to Article 16 of the Patent Law must satisfy a ‘reasonableness’ test in order to be valid.

2.6 - The transfer of technology into and out of China is regulated by the PRC Ministry of Commerce (“MOFCOM”) under the PRC Technology Import and Export Regulations. The Regulations apply to a wide variety of cross-border transactions including patent assignments and licenses, know-how disclosures, software licenses and the provision of technical services. As such they are frequently relevant to foreign businesses looking to work with a Chinese partner or service provider.

MOFCOM publishes two catalogues, the first detailing ‘prohibited technologies’ which cannot be imported into China. The second lists ‘restricted technologies’ which require government approval for import. If a technology does not appear in either catalogue it is sometimes described as ‘unrestricted’. However, this label is somewhat misleading as contracts for the import of ‘unrestricted’ technology are still subject to several key requirements, in particular:

* The contract must be registered with MOFCOM within 60 days of becoming effective;
* The foreign transferor is required to provide certain onerous warranties in the contract, including that the technology does not infringe third party rights and is complete, free of error, effective and able to attain the objectives stated in the contract; and
* Any improvements made to the imported technology by the Chinese importer will vest in the importer upon creation by operation of law. Assignment or license back provisions will only be enforceable if they satisfy a ‘reasonableness’ test.

Check back next week when we start posting the answers to Part 3 Question 3


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About Talklaw EUROPE™
Talklaw EUROPE is the virtual ‘round table’ organized by EuropeanGC.com. Each discussion is led by a general counsel who poses questions to panellists who are experts ‘talking’ about their area of expertise

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