Legal issues to consider when entering into technology transfer contracts

Technology transfer contracts have become an important subject in resource and energy projects, but several legal issues are often overlooked by the contracting parties, and particularly by the parties bringing in the technology.

Import/export restrictions

The state controls technology imports/exports pursuant to the Catalogue of Technologies the Export from China of Which Is Prohibited or Restricted and the Catalogue of Technologies the Import into China of Which Is Prohibited or Restricted. Technologies listed in the prohibited catagory may not be imported or exported, and those listed in the restricted catagory are subject to a permit system.

Furthermore, if a patent or a patent application right is to be transferred to a foreign entity, approval procedures additionally need to be carried out with the foreign economic relations and trade authority, and a technology export permit (for technologies the export of which is restricted) secured or the procedures for a technology export registration certificate (for technologies that can be freely exported) carried out.

When carrying out foreign-related technology transfers, enterprises, particularly those in sensitive industries, should refer to the catalogues to guard against their transfer contracts being found invalid due to violation of a mandatory provision.

Vesting of technology rights

In general, technology transfers involve the transfer of patent application rights, patents, know-how or patent licences. It is important to clarify whether the transferor has the right of transfer.

Patents are good for 20 years, and may be transferred, licensed or pledged. The parties to a transaction may conduct an inquiry with the patent authority to verify details of the ownership of a patent. However, details of patent licensing rights generally can only be determined from the provisions of the patent licence contract obtained from elsewhere by the transferor. If a foreign patent licence and foreign laws are involved, the difficulty in determining whether the licensor has licensing rights is even greater. The transfer and licensing of patents often involves the transfer and licensing of know-how, but there is no registration and announcement system for know-how, making the confirmation of rights ownership relatively more difficult.

The first author was once involved in the resolution of a technology introduction dispute, where the history of the ownership of the technology involved was extremely complicated and a pending dispute over the vesting of the rights therein was also involved. The client had previously separately engaged two US law firms to investigate whether the transferor had licensing rights, but the conclusions of their investigations were not identical. This amply illustrates the complexity of confirming rights ownership in foreign-related technology transfers.

Accordingly, we recommend that when an enterprise is contemplating the execution of a technology transfer contract it first needs to verify the status of the rights to the technology to be transferred. Second, a provision for an undertaking by the transferor concerning a rights guarantee needs to be inserted into the contract, while additionally providing for the method for calculating damages, for liability for breach of contract and a scheme for dealing with infringement by third parties. Finally, in the course of performance of the contract, it is important to retain the written documents exchanged with the transferor, which, in the event of a dispute, may serve as evidence for lodging a claim against the transferor or for contesting, in the capacity of a bona fide third party, the demands of the rights holder.

Guarantees

In technology contracts, the technology transferor will generally give certain guarantee type undertakings, e.g. a performance guarantee and a rights guarantee. The term “performance guarantee” means a warranty given by the technology transferor in respect of the technology achieving certain metrics such as production volume and quality. To ensure the practicability of the performance guarantee provision, the parties need to provide the following: 1) clear and specific performance metrics; 2) the time and method for performance tests, and the acceptable range of error: and 3) remedies for, and liability for breach of, contract in the event that these performance metrics are not achieved.

The term “rights guarantee” means that the transferor is required to warrant that it lawfully has ownership of, and the right to license, the technology, and that the technology itself, or its application, does not infringe the rights of third parties. We recommend that a transferee consider such factors as the scope of use of the technology, the sales territory of the product, and the enterprise’s development plan for utilisation of the technology, and propose more practical requirements in respect of the scope of the non-infringement guarantee to avoid a stalemate in the negotiations.

Improvement terms

The provisions on issues relevant to the vesting of the rights in improvements – improvements to, enhancements in, and optimisation of a technology; collectively referred to as improvements – and the licensing of such improvements constitute the improvement terms of a technology contract.

Defining the scope of improvements. The parties should specify in advance in the contract which technical improvements fall within the scope of technical improvements, in particular where the contract involves continued grant provisions and/or grant-back provisions. Failure to do this will greatly increase the potential for disputes over whether a technical improvement falls within the agreed scope, further giving rise to a dispute over whether the continued grant provisions or grant-back provisions are applicable.

Clear specification of the vesting and use of rights. The parties need to expressly provide for such issues as whether the improvements of the transferor and transferee can be mutually licensed, and the term and charges therefor. Special attention should be paid to improvements that reach such a level that an independent application for a patent may be filed, in which case the parties need to specially stipulate whether the right to apply for a patent may be mutually licensed.

Attention to disclosure obligation. The party that makes an improvement is required to bear the obligation of prompt disclosure to the other party and provide the relevant technical information, particularly in an “improvement pool” type of licence. The term “improvement pool” means that the licensor licenses the technology to multiple licensees and specifies that the technical improvements made by the licensees and the licensor are to be mutually cross-licensed within the group to which they jointly belong.

Wang Jihong is the executive partner and Fang Xing is a legal assistant at Grandway Law Offices