China tightens scrutiny over external transfers of IPRs

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Introduction

The Chinese State Council recently released the Notice on Promulgating the Relevant Measures for Transferring Intellectual Property Rights (IPR) Overseas (For Trial Implementation) (the “Measures”) on 29 March 2018. The Measures aim to build a fairer and more transparent regulation process for technology exports and foreign investment. As a result, the Measures have the effect of tightening scrutiny of the transfer of intellectual property rights to foreign parties on national security or public interest grounds. Under the Measures, public interest means the development of core innovation capacity in major technology areas. The Measures could potentially impact multinational corporations that engage in research and development activities in China or those who are parties to IPR licensing transactions.

The Measures

Scope

The Measures apply to external transfers of IPR. The IPR that the Measures apply to include: (i) patent and its application, (ii) integrated circuit layout design and its application, (iii) software copyright, or (iv) new plant variety and its application. According to the Measures, a “transfer” includes the following activities: (i) assigning IPR from a Chinese entity or individual to a foreign entity or individual; (ii) changing the control of the IPR from a Chinese entity or individual to a foreign entity or individual; or (iii) licensing the IPR exclusively from a Chinese entity or individual to a foreign entity or individual.

Furthermore, the Measures only apply to export activities associated with technologies categorised as “restricted” from export under the Regulations of the PRC on the Administration of Technology Import and Export, which have been in place since 1 January 2002 (the “Administrative Regulations”). The definition of “restricted” can be found in the Catalogue of Technologies Prohibited or Restricted for Export issued by China’s Ministry of Commerce (“MOFCOM”) in September 2008 (the “Catalogue”). According to the Catalogue, technologies may be restricted from export on the following grounds: (i) to safeguard national security, societal interest or public morality; (ii) to protect human health or security, the life or health of animals and plants, or the environment; (iii) in accordance with laws and administrative regulations; or (iv) pursuant to the international treaties or agreements to which China is a contracting party or a participating party.

Evaluation process

In general, the IPR transfer will be assessed according to the transfer’s potential impact on China’s national security and core technology innovation capacity in major areas. To trigger the review process as stipulated in the Measures, MOFCOM would need to receive an application for export of a technology classified as “restricted” under the Administrative Regulations. Depending on the type of IPR involved, China’s Ministry of Commerce will transfer the relevant application and materials to different government authorities for review.

In relation to the transfer of IPR involving patent and integrated circuit layout design, the local MOFCOM office will consult the local State Intellectual Property Office for a written opinion. The written opinion will be relied upon by the local MOFCOM office in deciding whether to approve the application in consideration of the Administrative Regulations.

If the transfer of IPR involves computer software copyright, the local MOFCOM office together with the science and technology bureau will assess the transfer and issue a decision in accordance with the Administrative Regulations. The decision will be passed to the computer software registration authority, the Copyright Protection Centre of China, which will process an application in accordance with the issued decision.

For the transfer of IPR involving new plant varieties, the agriculture of forestry administrative agency will evaluate the transfer in accordance with the Regulations on Protection of New Plant Varieties, focusing on the transfer’s impact on national agricultural security, such as grain and seed security.

Conclusion

It is foreseeable that the Measures will lengthen and complicate the review process for the external transfer of restricted technologies under the Administrative Regulations. The limited application scope of the Measures shows that cross-border IPR transactions are still encouraged, while home-grown innovation is simultaneously promoted. However, considering China’s broad concept of national security, and the ambiguous assessment criteria of whether an external transfer of IPR will have an impact on China’s “national security and core technology innovation capacity”, the Measures may ultimately result in various areas of technology generally considered to have no direct relationship to national security to fall within the scope of the Measures. Until detailed guidance is provided on how the Measures will be enforced, the extent of the Measure’s effect on external transfers of China’s IPR remains unclear. For foreign parties considering acquiring technology in China or any activity that may fall under the Measures, due diligence and early consultation with the relevant administrative agencies may be conducted to assess if the technology in question might be subject to the restriction under the Measures.

 

 

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.
Published by ONC Lawyers © 2018