How to do Business with China Without Having to go to China: Licensing Deals

Both here on the blog and in real life with our clients, our China lawyers are always touting the benefits of licensing products, intellectual property, brands, technology and content to China. Licensing deals make sense under many circumstances, but they make particular sense in situations where it is difficult or impossible to get your product, technology or content into China any other way. With the coronavirus, getting product into China has become more difficult.

Register your intellectual property in China

As a preliminary matter, before you license anything to anyone in China, you should register your intellectual property in China. This means registering not only your English-language trademarks but also the Chinese-language versions of those trademarks. If the Chinese-language versions don’t exist, it’s time to create them. That also means registering copyrights for any meaningful content. China is a signatory to the Berne Convention and therefore a valid copyright in the US or Europe is valid in China without registration, but for practical purposes, it’s much easier to enforce a copyright in China if you have registered it in China. This often means registering your patents in China as well.

Do not delegate the task of registering your IP in China to your Chinese licensee. The licensee’s interests may not always be aligned with yours.

Once you have registered your IP in China, you should draft an enforceable contract to protect your interests in China as against  your Chinese licensee. A contract with the licensee’s Hong Kong affiliate, with disputes resolved by arbitration in Hong Kong (or any other country other than Mainland China), does not achieve these goals for mainland China.

What a China content licensing agreement should address

A properly drafted China content licensing agreement should address the following issues:

1. It should make sure the licensee is the actual China entity  that will be licensing the product or technology or content, and not a Hong Kong affiliate. As a corollary, you should choose the right law and the right jurisdiction for your dispute. If you want to sue a Chinese company for breaching your contract by using your IP in China, choose Chinese law and dispute resolution via Chinese courts in the hometown of the Chinese licensee. See China Contracts: Make Them Enforceable Or Don’t Bother and China Contracts. Watching The Jurisdictional Sausage Get Made.

The issue with contracting with a Hong Kong company is not so much that the Hong Kong company may be a shell company with no assets (although that is usually  the case). Rather, the issue is that any legal resolution in Hong Kong is unlikely to be effective in the PRC and if you are licensing content to China, China is where the action is going to be. You might argue: we will arbitrate in Hong Kong but provide that Chinese law governs. For a variety of reasons that almost never works, particularly if the defendant is a Hong Kong company. Meanwhile, the infringement in China continues.

2. Provide for upfront payment of the license fee in an amount that makes the deal worth it to you even if the contract is terminated early. See China Licensing Agreements: The Extreme Basics. Provide for substantial contract damages for late or non-payment of the license fee, and do not provide the Chinese side with any of your content until it has paid the license fee and the funds are in your bank account.

3. Provide for substantial contract damages for (1) early termination and (2) each instance of infringement. Do not bother with lengthy provisions about injunctive relief. Unlike the common law systems of the United States, Canada, Great Britain and Australia, contract damages are not disfavored under Chinese law. In fact, contract damages are well established in China and favored by statute. On the other hand, though Chinese judges may be legally empowered to issue injunctive orders, they have virtually no power to ensure those injunctions are implemented. For this reason, Chinese judges are hesitant to issue an order they know is likely to be ignored. Instead, they will seek to convert every decision to an order to pay a sum certain in damages. Including a contract damages provision gives a China judge the roadmap. Most importantly, since Chinese companies know well the power of contract damages provisions, your merely having one in your contract greatly increases the odds of your Chinese counter-party abiding by that contract.

4. The contract damage amounts must be a good faith estimate of the actual amount of income that would be lost by the licensor in the event of early termination. These amounts are not guaranteed even if the plaintiff prevails: at trial, the defendant can argue that the contract damage amount is too high and the plaintiff can argue that the amount is too low. See China Contract Damages Done Right. The utility of contract damages is that when a plaintiff seeks pre-judgment attachment of assets China’s courts will almost always allow attachment in an amount equal to contract damages if such damage amount is specified in the contract. In contrast, if the contract provides for injunctive relief and monetary damages in an amount to be determined at trial, it is virtually impossible to obtain a writ of attachment. To repeat: Chinese companies do not like putting their assets at risk of being seized and so having a contract damages provision is a great deterrent to that company breaching your China content licensing agreement.

Note also that an arbitration body cannot issue an enforceable assets seizure order and it is also virtually impossible to obtain such a order from a court outside the district where the assets are located. That is why we normally want to sue in the “home town” of the defendant, even though that sounds counter-intuitive to lawyers who have been taught to avoid getting “home-towned.” China’s court systems minimizes home town favoritism by providing an automatic right of de novo appeal to a higher court in a different town.

5. The general rule of China contract interpretation is whatever is not in a contract does not exist. This means you need to put whatever protections you want against your Chinese licensee stealing your IP into your contract. Your contract with your licensee is your best chance to control your Chinese licensee and to protect yourself. Take advantage of it by using a contract that actually achieves those things.

If your Chinese counter-party refuses to sign a contract that addresses the above, you probably should reconsider whether to do the deal.

For more on China licensing contracts, check out China Licensing Agreements: The Extreme Basics and Nine Tips for China Licensing.

In addition to needing a China-specific contract for your China licensing deals, you also need to be sure to register your licensing agreement with the appropriate Chinese governmental authorities. The other day a company asked me what happens with licensing agreements that are not registered and I wrote back with the following:

The Chinese government likes to see any licensing deals and so it requires they be registered. What happens if they are not is not entirely clear, but we hear that Chinese companies use this an excuse not to pay and that Chinese courts have used the failure to register as an excuse not to hear a dispute about the licensing contract.

We therefore always register our licensing agreements – it’s easy and very inexpensive. We also do this as a way to let the Chinese licensee know that our client knows what it is doing and to thereby further discourage breaches

If you are having an issue with your Chinese licensee, it might make sense to just register your licensing agreement now. I’m not sure if this can be done – I think it can – just because we’ve never had to do this. But I think it would be better late than never.

What are you seeing out there by way of China licensing deals these days?