China Licensing Agreements: The Extreme Basics

Licensing your technology to a company in China

Licensing your technology to another company is fraught with risks. Licensing your technology to a company in China has its own additional challenges.

The first thing you should do before licensing your technology to a Chinese company is to make sure you may legally do so under your own country’s laws and under China’s Regulations on the Import and Export of Technology. If you are a US company, make sure US export control laws allow you to transfer (very loosely defined) your technology to China.

China divides technology licensing into three categories

China divides technology licensing into three categories: prohibited, restricted, and transferable. Prohibited technologies cannot be imported or exported. Restricted technologies may be imported or exported if the Chinese government has granted approval to do so. A transferable technology may be imported or exported, but the agreement licensing the technology (or at least the fact that there was a licensing agreement) must be recorded with the appropriate Chinese government agency.

It is crucial your licensing agreement properly identify your Chinese counter-party (in Chinese) and that the party identified in your contract actually exists as a registered Chinese entity. Typically, the easiest way to confirm identity is to request a copy of the Chinese company’s business license and then use the information on that license to confirm necessary details with the local AIC office. This can now be done online (in Chinese) through an excellent database system provided by the Chinese government. I also recommend you do your due diligence on your potential licensee.

A client recently asked me how it could guarantee getting paid for each “widget” made by the Chinese company to which it was contemplating entering a licensing agreement. That is nearly impossible and in most cases it is foolish even to try. Chinese companies are masters at under-reporting their production figures, and no amount of independent auditing is likely to get at the real numbers. It is almost always better to accept a theoretically lower royalty number based on an independently verifiable metric. For example, every Chinese company files a tax return. Royalties can then be based on some percentage of the official gross income as stated in the tax return. It is also possible to break the royalty into two amounts: a fixed amount that will be paid each year and then a more specific amount based on some sales metric. Regardless of the method chosen, it is critical to make the calculation simple, certain and independently verifiable. A complex and fine grained royalty system usually fails when dealing with Chinese companies.

Chinese language translation

The license agreement should include a Chinese language translation and the Chinese language should be the controlling language. The agreement should be governed by Chinese law and written to be enforceable in a Chinese court or before the appropriate arbitral body.

This requirement goes beyond the issue of enforcement of the agreement in China. As noted above, license agreements must be registered with the Chinese government and registration requires a Chinese language version. In addition, many agencies in China will not register the licensing agreement if it is not controlled by Chinese law. Further, and even more important, payment of royalties requires the Chinese entity use a Chinese foreign exchange bank and that in turn requires the license agreement be presented to the Chinese bank in the Chinese language. Many Chinese banks will not make payment if the license is not subject to Chinese law and jurisdiction.

For more on China licensing agreements, check out Eight Tips For Your China Licensing Agreement and China Technology Licensing.