Legal systems surrounding cross-border tech transfer

By Lu Lei and Han Yufeng, Run Ming Law Office
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Even though mainland China’s economy is weakening, high-tech exports are reportedly riding a wave of expansion. Compared with traditional tangible goods, technology import and export transactions are playing an increasingly important role in relevant international trade for China.

The technology import and export system. The major PRC laws governing cross-border technology transfers include the Foreign Trade Law, the Administrative Regulations for the Import and Export of Technology, the Administrative Measures for the Registration of Technology Import and Export Contracts, and the Administrative Measures for Technologies the Import of Which is Prohibited or Restricted. Pursuant to the laws, “an act of transferring technology into the PRC, or out form the PRC, by way of trade, investment or economic and technological co-operation, is the import or export of technology”; technology transfer includes “transfer of patents, transfer of patent filing rights, patent licensing, transfer of technical secrets, technical services, and other means”.

Lu Lei, Partner, Run Ming Law Office
Lu Lei
Partner
Run Ming Law Office

In practice, software licence contracts, trademark licences and transfer contracts with elements of patent or proprietary technology licensing, co-operative design contracts, co-operative research contracts, co-operative development contracts, co-operative production contracts and other such contracts including an element of cross-border transfer of technology, all fall within the scope of those subject to laws relating to the import and export of technology, whereas pure trademark licence agreements, general work copyright licences and transfer agreements fall outside of this scope.

The Ministry of Commerce (MOFCOM) is in charge of the examination, approval and administration of the import and export of technology. As authorized by the State Council, provincial-level authorities for foreign economic relations and trade are responsible for the administration of the import and export of technology in their jurisdictions. But the requirements regarding registration procedures of competent commerce authorities vary from place to place, an issue for which a party needs to apprise itself of before proceeding.

Categories of technology imports and exports. Based on the regulations of imported and exported technologies, mainland China divides technology into three categories – prohibited, restricted and free – each of which is subject to different approval or registration procedures. On the whole, technology import and/or export is prohibited or restricted for such reasons as national security, the public good, protection of human health, environmental protection, etc. Technologies not enumerated in the catalogues of prohibited and restricted technologies can freely be imported or exported.

The import and export of prohibited technologies is strictly prohibited. Pursuant to such regulations as the Administrative Measures for Technologies the Import and Export of Which Is Prohibited or Restricted, with respect to a restricted technology, the importing or exporting party is required to apply to MOFCOM or the provincial-level commerce authority for a permit before it can carry out the cross-border transaction. A freely traded technology does not require approval, and the only thing that needs to be done is record-filing.

Relevant laws that impact the validity of contracts. The entry into effect of a contract is a condition precedent to the parties’ achievement of their contract objectives, and all of the laws, statutes, rules and regulations of mainland China have provisions relating to the validity of technology import and export contracts. Pursuant to the Legislation Law, the legislative system in China is divided into laws, administrative statutes, local statutes, autonomous regulations, standalone regulations, rules etc., based on their hierarchy of validity.

Han Yufeng IP Counsel Run Ming Law Office
Han Yufeng
IP Counsel
Run Ming Law Office

There exists a difference in the validity of these laws and regulations depending on their ranking. First, the Contract Law is a fundamental law formulated by the National People’s Congress, and its ranking is second only to the Constitution. This law specifies that “a contract that unlawfully monopolizes technology, inhibits technological progress or infringes another’s technological achievement, must be invalid”. Based on this, a technology import or export contract violating this provision is naturally invalid.

Second, the Administrative Regulations for the Import and Export of Technology, formulated by the State Council, and the Administrative Measures for Technologies the Import and Export of Which Is Prohibited or Restricted, formulated by MOFCOM, also contain provisions on the issue of the validity of technology import and export contracts. However, their impact on the validity of contracts differs due to their different rankings. The Contract Law specifies that a contract violating a mandatory provision of a law or administrative statute is invalid.

The administrative regulations fall within the category of “administrative statutes”, and contain the provision that “a technology import contract may not contain restrictive terms that restrict the transferee from improving the technology provided by the transferor, restrict the transferee from using improved technology, etc.” Accordingly, if the parties violate the mandatory provision when drafting the relevant technology contract, the contract or relevant terms will normally be found to be invalid.

In contrast, the MOFCOM administrative measures are administrative rules and regulations formulated by an authority. They provide that “the import contract for a technology, the import of which is restricted, must enter into effect on the date on which the technology import permit is issued”. However, in practice, if a permit for the import of technology is not secured, is a contract that has already been formed naturally invalid? The authors would argue that this is worth discussing.

The Contract Law specifies that a contract that violates a mandatory provision of a law or administrative statute is invalid, but does not mention “administrative rules and regulations”. In light of the authors’ actual experience, notwithstanding the fact that the administrative measures contain the above-mentioned provision, it is very possible, in judicial practice, that a court will not render a ruling determining that a technology import or export contract is invalid merely on the grounds that a permit has not been secured, and will, instead, render its determination based on the actual circumstances. For example, in respect of a contract the performance of which has actually been completed, the judicial authority is very unlikely to deny its validity on the grounds that the procedures for an import or export permit were not carried out.

In short, the cross-border transfer of technology is an area strictly regulated in mainland China, involving various laws and regulations. Both domestic and foreign parties must have a solid grasp of the relevant regulatory requirements.

Lu Lei is a partner and Han Yufeng is an IP consultant with Run Ming Law Office

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