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IPR: Protecting Your Intellectual Property in China Through Contracts: Part 1
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altTailoring contracts to suit your intellectual property rights (IPR) is an important way to ensure that your company’s specific intellectual property (IP) assets are adequately protected.
 
Since trade secrets and confidential information are critical to a company’s business operations, it is also essential to include provisions to protect them in contracts with third parties. In China, ‘trade secret’ is defined as “any non-public technical or business information with commercial value that is guarded by confidentiality measures”. ‘Confidential information’, on the other hand, generally refers to “any non-public information pertaining to a company’s business,” and is therefore broader in scope than a ‘trade secret’. However, no protection is afforded to ‘confidential information’ under Chinese law, unless it is otherwise specified in a contract; part 1 of this two-part article series outlines provisions to include and protect your intellectual property intelligently in China.  
 
Important Contract Provisions to Include

Since different types of contracts are used to cover different IPR in China, the content and focus in each type of contract varies according to the specific IPR to be protected. Usually, however, all such contracts contain basic provisions that should not be missed. To illustrate this, the key provisions in a licence agreement or employment contract should address the following:
 
• Definition of licensed rights

These clauses define the scope and uses of the licence, and identify the IP subject matter and the type of rights being licensed.
 
• Monitoring of the licensee’s activities: Prevent unauthorised use of the licensed rights

These clauses usually identify the parties who will have permission to use the licensed rights, as well as the security procedures that are in place to prevent unauthorised use or misuse of the IP assets.
 
• Challenges of validity: Ensure the validity of your agreement

It is important to include clauses on the severability of validity of the licence agreement. This will ensure that even if one or more of the licensed rights in the licence agreement expires, the validity of the entire agreement and the licence granted within that agreement may not be challenged.
 
• Protection of new IPR generated: Address ownership issues

In the absence of a clear contract on ownership rights, the law generally recognises the creator of a work as the owner. For example, the translator of an original licensed literary work would be the owner of the copyright of the translated work, even though the copyright of the underlying licensed work belongs to the original owner.
On the other hand, under China’s Patent Law, the party who makes improvements to technology based on the licensed patent or on technology, automatically owns the IPR on such improvements. 
 
• Assignments or transfers: Prevent your IPR from being transferred to third parties without your permission

Clauses can be included to restrict and prohibit the contract from being assigned and transferred without your express written authorisation, and you may add a further clause to bind all successive transferees and assignees to your agreement.
 
• Warranties: Guarantee your technology is fit for transfer

Warranties are a kind of guarantee that should be provided by the licensor on the licensed technology. For example, the warranty may state that you have the right to grant the licence, and that by doing so you are not infringing anyone else’s IPR in China. You may need to guarantee in your contract that your product is complete, free from error, effective and capable of achieving the prescribed goals, or alternatively, specify that the warranty cannot be amended or omitted by the parties.
 
• IPR produced by employees: Avoid future disputes 

It is important to make sure that the inventions of your employees will belong to you as the licensor, and that you, the licensor, will be entitled to grant a licence for such inventions. 
 
• Confidentiality: Protect your confidential information

These clauses usually define the confidential information to be acquired or exposed and outline the exact nature and length of the protection. Alternatively, a separate and more detailed non-disclosure agreement (NDA) may also be entered into by the parties. 
 
• Dispute resolution: Plan ahead, just in case

Like any other contract, the licence agreement should specify the law that governs the disputes of the agreement along with the chosen methods of dispute resolution. It is important to note that the sections in the contract relating to the protection and dealings with IPR in China specifically should be governed by Chinese law. If your contract adopts arbitration or other non-judicial methods of dispute resolution, it is also important to include a clause that permits you to file in courts where you can seek injunctive relief or claim damages against IP infringement.
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• Termination: Specify what happens when the agreement comes to an end

You should always include terms on the consequences of termination; for example, the licensee shall cease to have access to, or must return, all the licensed rights, or the licensee shall destroy or return all inventories bearing the licensed trade mark to the licensor.
 
Important Contract Provisions to AVOID

A contract may be void in whole or in part if it contains any provisions in contravention of Chinese law or administrative regulation. Set forth below are examples of IP provisions you need to avoid in China, particularly in technology and employment contracts, because they may well be in contravention of the Chinese laws.
 
Technology Contracts

Provisions to avoid in technology contracts include those that:
• Prohibit a licensee from making improvements to the licensed technology and using the improvements.
• Restrain a licensee from obtaining from other parties technology similar to, or competing with, the licensed technology.
• Under PRC law a licensor cannot make any ‘unreasonable’ restraints on a licensee’s procurement channels, such as the sources from which the licensee purchases raw materials, equipment, etc.
• Prevent a licensee from making full use of the licensed technology in a reasonable manner as required by the market. For example, the licensor cannot unreasonably restrain the quantity, price, sales channels, etc., for products or services provided by the licensee when using the licensed technology.
• Require a licensee to accept additional conditions that are unnecessary for the use or working of the licensed technology, e.g., engaging with unnecessary consultants.
• Prohibit a licensee from challenging the validity of the IPR of the licensed technology or from attaching additional conditions to such a challenge.
• Waive the provision of warranty, which states that the licensed technology is complete, free from error, effective and capable of achieving the prescribed goals.
• Include unfair terms for the exchange of improvements made to the licensed technology, such as requiring a licensee to provide or transfer an improvement that he or she has made to the licensed technology, back to the licensor for free or without any non-monetary compensation (i.e. technical assistance).
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Employment Contracts

Provisions to avoid in employment contracts include those that: 
• State that the employer owns the patent rights and/or copyright of any nonemployment related work or creations made by employees on their personal time and using their own personal resources.
• Exclude any remuneration to an employee for his or her patented creation.
• Impose unreasonable non-compete and non-solicitation obligations upon employees.
• Waive monthly compensation to employees fulfilling their non-compete obligations.
 
General Contracts

Provisions to avoid in a general contractual context include those that:
• Exempt a party from liability for causing the other party bodily harm or property losses (resulting from wilful misconduct or gross negligence).
• Require Chinese IPR to be governed or protected by the laws of other jurisdictions (i.e., non-Chinese law)
 
Case Study

Background

Company A, a wholly foreign owned enterprise, entered into a manufacturing contract with Company B, a Chinese company, in which Company B agreed to utilise Company A’s patent to manufacture computer motherboards. The manufacturing contract expressly prohibited Company B from making improvements on Company A’s patent and required Company B to purchase raw materials only from suppliers appointed by Company A. After the deal was signed and work began, Company B improved Company A’s patent and purchased raw materials from other suppliers without first notifying Company A.
 
Action Taken

After discovering the patent improvement and purchases, Company A requested the court to enforce the manufacturing contract and prohibit Company B from making further patent improvements and purchasing raw materials from other suppliers.
 
Outcome

The court held that the provisions specified above were unenforceable, as they contravened relevant Chinese law. In this situation, Company B was allowed not only to make improvements to Company A’s patent and use such improvements under Chinese law, but also to purchase raw materials from suppliers as it saw fit. It was further held that in the absence of any clear contract, Company B, as the creator of the improvements, was the owner of the improvement rights.
 
IP Lessons

Do not include any provision in contravention of Chinese law in your IP contract, particularly those listed above. If there are any contradictions, those clauses in your contract will become void (in some cases the entire contract can be held void), and the default rules under Chinese law will be implemented instead.
 
Take-Away Messages

• Tailor your IP contracts to suit the IPR you are protecting, and make sure you include sufficient specific detail in the contracts’ key provisions.
• Certain IPR protection provisions are unlawful under Chinese law and may render a contract void if you include them in your agreement, so be cautious when drafting these provisions.
• Pick up a copy of next month’s Business Tianjin which will outline key contract tips for your business including, Non-Disclosure Agreements, confidentiality clauses and important employee remuneration laws. 

By Philippe Healey
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