Transferring Technology in China – Understand Your Obligations and Reduce Legal Risks

Cross-border technology transfers can be challenging to navigate in China. As China categorizes technology transfers into three groups (prohibited, restricted, and free), the transfer can be subject to certain limitations or requirements. For foreign companies transferring technology in or out of China, it is crucial to understand obligations and reduce legal risks.

In China, technology transfers are primarily regulated by the Civil Code of the People’s Republic of China adopted on 01 January 2021 (Civil Code), and the Foreign Trade Law of the People’s Republic of China (Foreign Trade Law”), adopted by the Standing Committee of the NPC on 12 May 1994 and last revised on 07 November 2016. We provide a Q&A on technology transfers in China.

What is the definition of technology transfer?

Technology transfers (exporting or importing technology) refers to the acts of transferring technology from outside the territory of China into the territory of China or vice versa. Transfer can conduct through trade, investment, or economic and technical cooperation. Technology acquisition may include any of the following:

• assignment of patent rights;
• assignment of the rights to apply for patents;
• licensing of patent exploitation;
• assignment of technical secrets;
• provision of technical services; and
• other forms of transfer of technology.

What are the categories of technology transfers?

Technology transfers are classified into three categories; prohibited import and export technologies restricted import and export technologies, and free import and export technologies. Importing and exporting restricted technology is subject to license control. Whilst free import and export technology may be imported or exported without a license, it is important to note that import or export contracts shall be registered.

The technology transfer may be prohibited or restricted under any of the following reasons:

• Safeguarding national security, the public interest, or public morals;
• Protecting human health and safety, lives and health of animals and plants, or protecting the environment;
• Implementing gold and silver import/export measures;
• Where there is a shortfall in the domestic supply of natural resources or to effectively protect important natural resources that are in danger of depletion;
• Where there is limited market capacity in the importing country or region;
• Where there are serious disruptions to the order of export operations;
• Establishing or speeding up the establishment of specific domestic industries
• Where there is an involvement of agricultural, livestock, or fishery products;
• Securing China’s international financial status and a balance of payment;
• Complying with international treaties and agreements to which China is a signatory or participant; or
• Other reasons are under the relevant laws and administrative regulations.

What qualifies as a technology transfer?

Technology transfers are required to fulfill the following criteria:

• conform with State industry policies
• conform with science and technology policies and social development policies;
• benefit the promotion of China’s scientific and technological advancement and the development of foreign economic and technological cooperation; and independence
• beneficial to safeguard China’s economic and technological rights and interests.

What to include in technology transfer contracts?

Transfer contracts must be written and contain mandatory clauses including the name of the project, the content, scope, and requirements of the object, the plan, place, and manner of performance, the confidentiality of technological information and materials, the ownership over the technological achievements and the method of proceeds distribution, the criteria and method of the inspection for acceptance, interpretation of terminologies, and the like.

Lawful owner obligations

The technology transferer shall guarantee it is the “lawful owner” of the technology or obtained the right to transfer or authorize the use of the technology.

Technology requirement

The technology provided by the transferer must be complete, accurate, and effective, and fulfill the technical objectives specified in the contract.

Technology improvement

Improvements conducted to technology during the term of the contract shall belong to the improving party. Thereafter, parties may negotiate the continued use of the technology under the principles of fairness and equity.

Confidentiality

The Technology Transfer Regulations oblige the technology recipient to preserve the technology as confidential. Such obligation is based on the condition that the technology is not publicly disclosed. Moreover, the confidentiality obligation is limited to the “scope and duration” agreed in the contract.

Illegal monopolies

A technology contract that illegally monopolies technologies or infringes upon others’ technological work product is invalid. Illegal monopolies are defined as the following:

• Restricting one party from conducting new research and development based on the technology of the contract, restricting its use of the improved technology, or the conditions for the exchange of improved technology between the two parties are not equal, including requiring one party to provide the other party with its improved technology free of charge, non-reciprocal transfer to the other party, free monopoly or sharing of the intellectual property rights of the improved technology;

• Restricting one party from obtaining technology similar to or competitive with the technology provider from other sources;

• Hindering a party from fully implementing the technology of the contract reasonably according to market demand, including obviously unreasonably restricting the quantity, variety, price, sales channel, and export market of the products or services provided by the technology recipient by implementing the technology;

• Requiring the technology recipient to accept the attached conditions that are not essential for the implementation of the technology, including the purchase of non-essential technology, raw materials, products, equipment, services, and the reception of non-essential personnel;

• Prohibiting the technology recipient to raise an objection to the validity of the technical intellectual property rights of the subject matter of the contract or attach conditions to the objection.

Contract registrations

All technology import/export contracts shall be registered at the Ministry of Commerce or the competent authorities in charge of commerce at the provincial level or cities.

At Horizons, we have advised on several cross-border transfers, especially in dual-use technology led by Managing Regional Partner Roberto Gilardino. If you would like to discuss more technology transfers in China, please contact us at talktous@horizons-advisory.com

Get the latest legal news and updates at Global Law Experts