With the rollout of the Science and Technology Innovation Board (STAR Board) and second board registration systems, core technologies that mainly take the form of patents are becoming ever more prominent during company listings. On 20 June 2020, the China Securities Regulatory Commission (CSRC) issued the Guidelines for Assessing Scientific Innovation Attributes (For Trial Implementation).
Two out of the three conventional indicators, which the guidelines put forward to help enterprises get listed on the STAR board, are technology-related: The ratio of research and development outlays to operating revenue; and the number of invention patents. Meanwhile, all of the five exception indicators relate to technology or technical personnel. Therefore, it can be seen that technology has become the most basic and important consideration determining whether a company can list on the board.
Additionally, the author has noted that, in the course of applying for the listing of a science and technology innovation or start-up enterprise, whether title to the company’s core technology is free and clear or not has become the key factor in determining the success of the listing, and disputes over IP ownership have become a roadblock hindering the smooth realization of an IPO by a significant number of enterprises.
For example, Chongqing Jinshan instituted multiple patent infringement suits against ANKON Technologies, ultimately blocking its path to an IPO. Lawsuits are happening between listed companies, including GoerTek v Suzhou MEMSensing, Silergy v Bright Power, Sungrow v Sineng Electric, and Appotronics v XGIMI. Although these patent suits instituted by competitors in the same industry did not lead to the same consequences experienced by ANKON Technologies, they nonetheless slowed down the pace of the enterprises’ listings.
Furthermore, with the rise of Chinese tech enterprises, Chinese enterprises in general are not only facing competition from domestic rivals. Foreign competitors and industry giants are also keeping a close eye on the issue of whether rising Chinese enterprises are committing infringements. Accordingly, the erection by enterprises of systems of IP protection is particularly important for sustaining their operations.
In light of the points of focus of the CSRC and the stock exchanges in their reviews, as well as the fields in which practice issues frequently arise, the author advises companies proposing to list to pay particular attention to the following matters.
Pay close attention to the non-compete and non-disclosure obligations of core technical personnel. Technology is generated by personnel, and accordingly, whether the service of the company’s core technical personnel poses legal risks contributes directly to whether title to a company’s technology is free and clear.
First, when recruiting technical personnel, attention should be paid to whether they have executed non-disclosure agreements or non-compete agreements with their former employers, or whether their previous employment contracts contained non-disclosure or non-compete provisions. On this basis, the provisions and the scope of their non-disclosure or non-compete obligations can be further clarified.
If a prospective employee has an express non-competition agreement with his or her former employer that conflicts with his or her proposed position or job description, the author would recommend that the company, before formally employing the person, first set a certain interval to determine whether his or her former employer has actually performed its compensation obligation concomitant with the prospective employee’s non-compete obligations. If the former employer has paid the non-compete compensation as required, the non-compete requirement will effectively bind the prospective employee, and the company should carefully weigh its hiring of such a person.
If there is no effective non-compete restriction between the prospective employee and his or her former employer, the company should actively inform and confirm in writing with the prospective employee that, while working for it, he or she may not infringe any other entity’s trade secrets or technology, nor breach his or her non-disclosure or non-compete obligations toward another entity.
Additionally, he or she should keep in mind the details in the course of his or her work, e.g., not bringing the letterhead or notebooks of his or her former employer, to avoid the mistaken impression that he or she is bringing such documentation to use for the company, thereby raising a suspicion of infringing his or her former employer’s trade secrets.
With the increasing mobility of technical personnel, the related issue of technology flow has also drawn greater attention, with the numerous restrictions imposed by the US on Chinese technical personnel being one manifestation. Accordingly, it is imperative when an enterprise is hiring someone from the same industry, or an upstream/downstream one, to pay particular attention to this issue to avoid any unnecessary problems in its operations brought about by personnel mobility.
Documentation of the process of IP creation. Where the research and development projects in which a company’s research and development personnel (especially new hires) are involved, the company should focus on keeping a detailed record of the project and the project stages in which the relevant personnel are involved, the parts of the project for which they are responsible, the source of the relevant basic technology, the relevant technical achievements achieved, and the methods and means used, so that there is reviewable evidence of the creation of the company’s technical achievements, which, in the event of a future dispute, can promptly evidence the source of the company’s technology to minimize the impact of a potential technology dispute on the company.
Creation of a sound IP protection system. The above-mentioned two points are mainly based on the objective of defence, but for a company the establishment of its own IP protection system should be considered even more important. The establishment of a multifaceted IP creation and achievement protection system to guard against infringement is the more effective means of defence.
A sound internal IP protection system should be created, which should include the independence and separation of the research and development department, and the research and development materials, a system for the constitution of project teams, a system for the separation of information of different projects, a system for documenting the involvement of project members, a secrecy system for research and development achievements, a patent application system, etc. Through such means it is possible to effectively protect the company’s research and development information and achievements, both internally and externally.
Wang Yuepeng is a partner at Grandway Law Offices
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