China Licensing Agreements: Protecting Your IP and Technology
One of the worst China licensing agreements our lawyers have ever seen would have given a Chinese company exclusive, perpetual, worldwide rights to a foreign company's intellectual property in exchange for 10 percent of sales proceeds. The Chinese company had no meaningful obligation to generate sales. It could sit on the technology indefinitely, pay nothing, and prevent the foreign company from licensing it to anyone else. It could even assign its rights to another company.
This was one of several proposed licensing agreements our lawyers have encountered that were so one-sided we wondered whether the Chinese companies were deliberately trying to lock foreign competitors out of the market. Some of the foreign companies came to us after their regular lawyers warned them against signing. Our clients wanted us to draft better agreements, as though putting reasonable terms in front of their Chinese counterparties would somehow magically persuade these companies to accept them. We suggested a simple test: ask each Chinese company to commit to minimum sales. Not one agreed, and our clients walked away. I wrote about these sorts of negotiations in China Licensing Deals so Horrible They Are Hard to Believe.
Yet the China lawyers at my law firm like licensing deals. A Chinese manufacturer that already has the factory and the customers pays your company to use a manufacturing process you spent years developing. You earn money from your technology without building a factory or setting up a Chinese subsidiary. In manycases, licensing makes considerably more sense than establishing a Chinese joint venture or forming a company in China. Similar opportunities exist for companies with valuable software, recognized brands, and other intellectual property.
The trouble starts when the foreign company concentrates on projected revenue without appreciating how much control it is surrendering. Licensing means giving a Chinese company access to something that may have taken you years and millions of dollars to develop. The licensee needs enough information and rights to make the deal profitable, but you need to keep enough control to protect your business. I want a client's licensing deal to make economic sense even after the Chinese company has learned everything the license permits it to learn.
1. What Is a China Licensing Agreement, and When Does It Make Sense?
A China licensing agreement is a contract under which an intellectual property owner grants a Chinese company permission to use specified intellectual property for an agreed purpose, usually in exchange for licensing fees, royalties, or both. The licensed intellectual property can include patents, trademarks, copyrights, trade secrets, manufacturing know-how, proprietary formulas, technical processes, software, industrial designs, or combinations of these rights. Some arrangements also require the foreign company to provide technical training, continuing engineering assistance, or access to specialized equipment.
Licensing makes particular sense when you own intellectual property that a Chinese business can commercialize more efficiently than you could on your own. The Chinese company gets access to technology that would otherwise take substantial time and money to develop, while you receive compensation for intellectual property you already own.
Under a license, the owner generally retains ownership while granting another company defined rights to use the intellectual property. An assignment transfers ownership of the assigned rights. The distinction sounds straightforward, but some proposed licenses give the Chinese company such extensive rights that the foreign owner keeps little meaningful commercial control. The licensing proposal I described at the beginning of this post is an extreme example of what can happen.
Licensing can also be a useful way to resolve intellectual property disputes. Our lawyers once sent cease-and-desist letters to several Chinese companies that were infringing a client's intellectual property rights. Three reputable Chinese companies responded by entering into licensing agreements with our client. When we wrote about the matter in 2023, all three licenses remained active. The fees were lower than what the client received in other markets, but the client told us it was earning considerably more than it had ever expected from China. I like this story because it shows what licensing can accomplish when the economics work. The foreign company was already facing infringement. Rather than spend a fortune litigating against every infringer, it converted three Chinese companies into paying customers.
Be Careful About Giving Your Chinese Licensee Rights Outside China
Chinese companies sometimes ask for licensing rights covering all of Asia, or at least several Southeast Asian countries, before they have demonstrated that they can successfully commercialize the technology in China. We like seeing a Chinese company prove itself in its home market before giving it valuable rights in Vietnam, Malaysia, or elsewhere. There is little reason to surrender those markets to a company that has not shown it can develop them.
The agreement also needs to distinguish between where the Chinese company can manufacture products and where it can sell them. Those are different rights. And the word "China" can create problems of its own. Suppose you grant one company an exclusive license for Hong Kong and later grant another company an exclusive license for "the People's Republic of China," without expressly excluding Hong Kong. You have potentially granted overlapping rights and exposed yourself to claims from both licensees. Similar problems arise with Macau, Taiwan, and territories outside China that a Chinese licensee wants included in its agreement. We want each territory defined precisely, with manufacturing rights, sales rights, and exclusivity addressed separately. We also pay attention to the politically sensitive language surrounding Taiwan. The goal is to identify exactly what each company can do and where, without creating unnecessary political or contractual disputes.
Licensing Versus Manufacturing, Distribution, and Joint Ventures
Companies sometimes begin negotiating with a Chinese business before deciding what sort of legal relationship they want. This gives the Chinese side considerable influence over the structure of the deal and can lead to unnecessary complications.
A conventional manufacturing arrangement generally has you paying a Chinese factory to produce goods you then sell. With distribution, a Chinese company typically buys your products and resells them at a profit. A license gives the Chinese company the right to exploit specified intellectual property in exchange for paying you. A joint venture involves shared ownership of a business, with the accompanying questions about management, capital contributions, governance, profit distributions, and how the parties eventually separate. We often see companies begin negotiations convinced they need a Chinese joint venture, only to discover that licensing would accomplish their objectives with less expense and fewer complications. We have also seen companies negotiating what they call a license when the deal includes enough joint development or shared operations to warrant a different structure. Sometimes a carefully structured international manufacturing agreement, a distribution relationship, or another commercial arrangement better serves the foreign company's interests.
Licensing can require considerably more work than the foreign company expects. Some licenses involve extensive technical assistance, employee training, product development, or continuing engineering support. Those obligations can become expensive. Before agreeing to them, you should understand exactly what your Chinese partner expects you to do and what you will receive in return.
2. Check Government Approvals and Export Controls Before You Negotiate
It is a mistake to assume that signing a licensing agreement is all you need to do before transferring technology to China. Depending on the intellectual property and technology involved, China can impose approval, registration, recordal, and other regulatory requirements. These requirements do not apply identically to every licensing transaction, and they need to be understood before the parties settle on the commercial terms of the deal. Under China's Technology Import and Export Administration Regulations, technology imports are generally classified as prohibited, restricted, or freely importable. Prohibited technology cannot lawfully be imported. Restricted technology imports require approval, and the regulations tie the effectiveness of the relevant technology import contract to issuance of the required license. For freely importable technology, China establishes a contract-registration system but expressly provides that registration is not a condition for the contract to become effective.
Other licensing transactions raise separate questions. Trademark licensing has its own recordal and quality-control requirements, patent licensing can involve different formalities, and franchise arrangements can trigger another regulatory regime. Learning only after transferring your technology that the parties overlooked a required approval or registration can lead to serious problems with performance, payment, or enforcement. One complication is that registering a technology import contract, recording a trademark license with China's trademark authorities, and recording intellectual property rights with China Customs are different procedures. Depending on the transaction, more than one can be relevant. If licensed products will cross China's borders, we also consider whether Customs recordal is appropriate and whether the authorities have accurate information about who is authorized to use the intellectual property. We want to know who is responsible for completing the required filings and to confirm that they have been completed. These are not details to discover only after your Chinese licensee announces that its bank cannot process the first royalty payment.
Software, SaaS, and AI Licensing
Software, cloud services, and artificial intelligence bring additional complications. A Chinese company receiving permission to distribute finished software is in a different legal and commercial position from one receiving source code, training data, model weights, or the ability to modify and deploy proprietary systems. These transactions can involve China's cybersecurity, data protection, software, and telecommunications requirements. Export controls imposed by the licensor's home country also need attention.
For American companies, the Bureau of Industry and Security's Export Administration Regulations, Part 734, can regulate releases of certain controlled technology or source code, including some transfers that do not involve shipping a physical product. These rules can apply to electronic transfers and disclosures of controlled technical information. Before licensing software or other advanced technology to a Chinese company, determine which U.S. (or home country) and Chinese restrictions apply, whether the proposed licensee can lawfully receive and use the technology, and what approvals are required. There is little point negotiating an attractive royalty arrangement if the proposed technology transfer cannot legally proceed.
3. Protect Your Intellectual Property in China Before You License It
Before we start drafting a China licensing agreement, our intellectual property lawyers want to establish exactly what you own and where those rights are protected. A company can have excellent intellectual property protection in the United States or Europe and very little in China. For example, patents and trademarks are territorial. A U.S. patent does not create patent rights in China, and registering a trademark in the United States does not give you a Chinese trademark registration. For brand licensing, China's first-to-file trademark system makes early registration particularly important. Your Chinese licensee, a distributor, a competitor, or an unrelated third party can do real damage by registering your trademark before you do. We have handled cases in which foreign businesses discovered that someone else had registered their brands in China. Recovering those rights can be expensive, and sometimes the commercial damage cannot be undone.
The Chinese-language version of your brand deserves attention as well. If you let your licensee develop and control the Chinese name, you can discover years later that you have lost control over an important part of your identity in the Chinese market. Our complete guide to China trademark registration explains why protecting the right marks in China matters even when you have no plans to sell directly to Chinese consumers.
Under Article 55 of China's Revised Trademark law, the licensor must supervise the quality of goods bearing the licensed trademark, and the licensee must guarantee their quality. The revised law expressly allows the licensor to terminate the trademark license if the licensee fails to fulfill its quality obligations. The law also gives CNIPA authority to initiate certain trademark cancellation proceedings for non-use without waiting for a third party to apply. For foreign brand owners, these changes make quality oversight and evidence of legitimate trademark use particularly important. We discuss the changes further in Five Practical Steps Foreign Brands Should Take to Prepare for China's New Trademark Law.
Patents, Trade Secrets, and Technology Ownership
A technology license often involves several forms of intellectual property protection, and you need to know which rights you actually have. A patented manufacturing process can also depend on valuable trade secrets. Software includes copyright-protected code and sometimes patented technology. A proprietary product can incorporate technical information developed by employees, consultants, or outside engineering firms, and you need to confirm that you have the rights to license that information.
The absence of a Chinese patent does not mean you have nothing valuable to license. A company can license proprietary know-how, software, copyrights, and other rights without owning a Chinese patent. Foreign patents can also matter when products made in China are sold into countries where those patents are enforceable. But you need to understand what legal protection supports the license. If the technology is valuable because of information the Chinese company does not possess, its confidentiality can be central to the entire transaction. Once that information becomes widely known, its value as a trade secret can disappear.
A licensing agreement cannot create intellectual property ownership that you never had. Nor can it reliably repair years of failing to protect information that other companies already possess.
4. Investigate the Chinese Company That Wants Your Technology
We regularly see foreign companies spend months evaluating the commercial possibilities of a licensing deal without adequately investigating the Chinese company that will receive their intellectual property. That is a mistake, especially when the transaction gives the Chinese company access to technology it can continue exploiting after a dispute. Before recommending that a client transfer valuable intellectual property, we want to know who owns and controls the proposed licensee, whether it has the operating capabilities the deal requires, and whether its finances support the obligations it is taking on. Its litigation history, regulatory problems, and relationships with affiliates or subcontractors can matter too. A financially weak company with little experience or few assets can still do enormous damage once it has access to valuable technology. Chinese companies often set up shell companies to license technology to extract its value and then stop paying licensing fees.
One problem we see repeatedly is confusion over which company is actually signing the contract. You negotiate with managers and engineers from a substantial Chinese manufacturing operation, only to discover that the contract names a Hong Kong trading company or another entity that neither owns nor operates the factory. The people who will use your technology have participated in the negotiations, but their company has assumed no contractual obligations to you. Without naming names, my law firm has handled roughly a dozen deals involving one of China’s largest and best-known companies. Not one contract was actually with that company. Most were with special-purpose entities formed just weeks before signing. If your licensee takes your technology and stops paying, you can find yourself chasing an empty shell while the corporate giant whose reputation persuaded you to sign bears no contractual liability. Sometimes accepting that risk makes business sense, but you should know exactly who is on the hook before you hand over your technology.
For a Mainland Chinese company, we want its exact registered Chinese legal name and identifying registration information. We also want to know which entity will actually use the licensed technology and where any assets available to satisfy a judgment are located. We discuss the contracting-party problem in China Contract Templates and Getting Your China Counterparty Right. How deep the investigation goes should match the deal. Licensing a modestly valued trademark to an established distributor does not call for the same scrutiny as transferring proprietary industrial technology worth millions of dollars. But I would be reluctant to give any Chinese company access to valuable intellectual property without first knowing considerably more about it than what its own representatives tell me.
5. The Risk of Creating Your Own Chinese Competitor
One of our greatest concerns in China technology licensing is that the licensee eventually becomes a competitor. That risk begins during negotiations, when the foreign company is trying to demonstrate the value of its technology and the Chinese company is trying to learn enough to decide whether it wants the deal.
Protect Your Technology During Licensing Negotiations
The parties start exchanging technical documents, product specifications, manufacturing information, software demonstrations, and other proprietary material. Negotiations drag on for months. By the time they break down, the Chinese company has learned enough to develop a competing product or reproduce much of your technology without ever entering into the license or paying you anything. We usually recommend preliminary confidentiality and restricted-use protections before substantial technical information changes hands. Depending on the relationship, that can be a China-specific NNN Agreement, a preliminary evaluation agreement, or another arrangement tailored to what is being disclosed.
Think hard about how much the Chinese company needs during negotiations and when. A prospective licensee evaluating a manufacturing process does not necessarily need the complete process, and a software company considering a distribution relationship does not automatically need to hand over its source code. Some information eventually has to be disclosed for the licensee to perform. Deciding how much to disclose, to whom, and when can be one of the more difficult parts of the transaction.
What Your Licensee Learns Over Time
The competitor problem does not require bad faith. A Chinese company that licenses foreign technology naturally learns from the experience. Its engineers and other employees build skills and practical knowledge, while the business develops relationships that support future products. Over time, the Chinese company becomes less dependent on you. A licensor that receives sufficient compensation can accept that outcome. The situation is considerably more dangerous for a foreign company whose business still depends on the licensed technology.
A Chinese licensee will sometimes ask for rights to make improvements, develop related products, or obtain steadily broader access to proprietary information. Some of those requests are commercially reasonable. Others would leave you with little control over technology that remains central to your business. We are skeptical of licensing arrangements that rely on broad noncompetition provisions to keep the Chinese company from becoming a competitor. A contractual restriction can be valuable, but you still need to understand what your licensee will learn and what it will be able to do with that knowledge.
There is also a legal problem with some of these restrictions. Article 10 of the Supreme People's Court Interpretation on Technology Contract Disputes identifies contractual restrictions on obtaining similar or competing technology from other sources as a form of unlawful technology monopolization under Article 850 of China's Civil Code. It also addresses certain unreasonable restrictions on technological improvements. The enforceability of a particular provision depends on its wording and the applicable legal rules. A foreign company should never assume that a broad restriction borrowed from a foreign country agreement will be enforceable in China.
6. Getting Paid Is Often the Hardest Part
Foreign companies frequently focus on negotiating the largest possible royalty percentage. We spend just as much time thinking about whether the company will receive the money. Suppose a Chinese manufacturer agrees to pay an American technology owner $2 for every product made with the licensed technology. The manufacturer controls production, keeps the accounting records, sells the finished products, and reports how many units it has made. The American company receives attractive-looking royalty reports but has no reliable way to tell whether they are accurate.
We have seen just how badly things can go when a Chinese partner controls all the financial information. A pet products company contacted us after spending six years in a Chinese joint venture established to manufacture and sell one of its products in China. The Chinese partner handled production and sales and kept telling the American company the business was losing money. The American company never received anything and had essentially written off the venture. Then it discovered its exact product being sold into the United States for half its own selling price and for less than it cost the American company to manufacture. I discussed this matter in This Is (Still) China. This was a joint venture rather than a licensing deal, but the financial problem was much the same. The Chinese partner controlled the production and sales information, while the American company had no meaningful visibility into what was happening. Licensing royalties based on figures supplied by the Chinese company create the same vulnerability.
If your licensee underreports production, sells through related companies, or makes extra products outside the agreement, the problem can be hard to detect. Audit rights do not automatically solve this. An audit is only as useful as the records available, the licensee's cooperation, and your practical ability to investigate discrepancies. We like licensing arrangements that reduce our client's dependence on royalty figures it cannot realistically verify. We also usually want a meaningful upfront payment before the Chinese company receives access to valuable technology. That payment accomplishes something beyond reducing your financial risk: it helps establish whether the Chinese company can actually pay you. We generally want the payment to come from the company signing the licensing agreement. If the Chinese company says its owner, an affiliate, or some other company will pay instead, we want to know why. There are legitimate reasons for third-party payments, but they raise questions about who is responsible for the payment and whether the licensee itself can complete the necessary banking procedures. We would rather discover those problems before our client hands over its technology.
For exclusive licenses, it usually makes sense to require minimum annual royalties or measurable sales commitments. If the Chinese company misses those targets, the agreement should give our client the right to eliminate exclusivity or terminate the license, subject to any agreed cure period. We also want royalty reporting and audit provisions that account for sales through affiliates and sublicensees. Exclusivity should be something the Chinese company gets to keep only if it performs.
Getting Licensing Fees and Royalties Out of China
Even a Chinese licensee that fully intends to pay can have trouble getting the money out. China imposes tax, foreign-exchange, banking, and documentation requirements on payments to overseas intellectual property owners. Depending on the transaction, royalties can be subject to withholding income tax, value-added tax, and related obligations. Applicable tax treaties and the nature of the intellectual property can affect the treatment. Before signing, determine how these requirements affect what you will actually receive and confirm that your licensee can complete the necessary payment procedures. Chinese banks can require licensing agreements, invoices, tax documents, and other supporting materials before processing international remittances.
Chinese licensees sometimes tell foreign companies they cannot send more than $50,000 overseas, but there is no general $50,000 ceiling on legitimate royalty remittances. The figure comes from a tax filing rule. A Chinese company making a single outbound payment of more than $50,000 for royalties and certain other items must generally complete a tax filing before payment, subject to specified exceptions. Under the State Taxation Administration's 2021 supplementary rules, repeated payments under the same contract generally require only one filing, before the first payment for which filing is required. Some payment problems arise because the parties never investigated the tax and banking requirements before signing. By the time the first payment comes due, the foreign company has already delivered valuable technology and lost much of its bargaining power. That is a particularly bad time to discover that your licensee has not figured out how to pay you.
One issue we negotiate carefully is who bears the Chinese taxes on licensing payments. Suppose your licensing agreement calls for $100,000 in royalties. Does that mean you receive $100,000, or does the Chinese company deduct applicable withholding taxes and send you the balance? The difference can be substantial, especially when payments continue for years. If the commercial deal assumes you will receive a specified net amount, the agreement needs to address whether the Chinese company must increase its payment to cover applicable withholding taxes. We also want the contract to allocate other applicable taxes, address available treaty benefits, and require documentation proving that amounts withheld were actually remitted to the tax authorities. These questions need to be resolved before the royalty percentage is finalized.
Invoicing presents another problem that catches foreign licensors by surprise. In many licensing arrangements, the Chinese company calculates the royalties based on its sales or production and reports the amount due. The foreign licensor then issues an invoice based on those figures, which the Chinese company uses to arrange payment through its bank. That process can create serious delays if the agreement does not specify when the Chinese company must deliver its royalty report, when the foreign licensor must invoice, and when payment must actually arrive. We want the Chinese company to confirm its bank's documentation requirements before the contract is signed. A foreign licensor should not discover months into the relationship that it cannot get paid because the parties never worked out the paperwork.
We have seen proposed licensing agreements that excuse Chinese licensees from making payments when they claim government regulations, foreign-exchange restrictions, or banking requirements prevent them from sending money overseas. Some of these agreements nevertheless require the foreign company to continue supplying technology, technical assistance, or other services. That is a dangerous arrangement. We generally want the Chinese company to provide documentation establishing the specific restriction, pursue available legal procedures for making payment, and notify us promptly when problems arise. We also want the right to suspend further performance when payments are not made, subject to applicable law, and to terminate the agreement when the problem continues. China's Civil Code recognizes force majeure in appropriate circumstances, but that does not mean every claimed government restriction excuses a Chinese company from paying. A licensing agreement should not give the licensee an open-ended excuse for nonpayment while requiring the licensor to continue performing.
7. What Happens When Your Chinese Licensee Stops Paying or Keeps Using Your IP?
Your licensee stops paying royalties, sells outside the licensed territory, transfers your technology to an affiliate without permission, or keeps manufacturing after the license expires or is terminated. Those are the sorts of problems that need to influence the agreement long before anyone signs it. Contractual rights to termination, damages, and other remedies are only useful to the extent that you can obtain effective relief.
Chinese Courts or Arbitration?
The right dispute-resolution structure depends heavily on where the relevant assets and activities are located. When the Chinese licensee's principal assets, manufacturing facilities, and alleged intellectual property misuse are in Mainland China, Chinese courts can provide a more direct route to certain forms of relief. In our China manufacturing contracts, we generally prefer Chinese courts. Litigation against a Chinese company in China can provide a more direct and less expensive route to relief, particularly when the defendant's assets are there. Much of that reasoning carries over to licensing arrangements involving Chinese manufacturing operations and China-based intellectual property misuse.
Chinese courts can order preservation measures, including freezing bank accounts, when the applicable requirements are satisfied. A party generally applies for preservation, and the court can require security. Applications made before litigation or arbitration are subject to additional requirements. A credible contractual damages provision can help establish the amount the claimant seeks to preserve, but the existence of that provision does not automatically entitle anyone to have the other party's accounts frozen. The court must still determine whether preservation is warranted under Chinese law. Chinese companies understand the commercial consequences of having their assets frozen, and the possibility of effective property preservation can give a foreign company useful leverage in a dispute.
International arbitration is another option, particularly for disputes involving licensing payments and other contractual obligations. CIETAC, HKIAC, SIAC, and SCIA are among the institutions we consider. We think highly of CIETAC, but arbitration involves costs and enforcement considerations that need to be weighed against Chinese court litigation. Depending on the circumstances and arbitration arrangements, court assistance with interim measures can also be available. We have seen too many companies assume that choosing arbitration or a court in their home country will protect them, without thinking through how they will enforce the resulting decision. Foreign court judgments are not categorically unenforceable in China, but recognition and enforcement depend on Chinese law, applicable treaties, reciprocity, and other requirements. Arbitration awards have their own enforcement framework, including the New York Convention and relevant arrangements involving Mainland China and Hong Kong.
Because the choice turns on so many factors, we usually do not draft the dispute-resolution clause until the end. We sometimes convene a meeting of several of our lawyers just to decide jurisdiction and governing law. Chinese governing law often makes sense for arrangements centered on Mainland China, but it is not universally required. The right choice depends on the transaction, mandatory legal rules, the available forums, and the anticipated enforcement needs. Our China litigation and arbitration lawyers regularly deal with the consequences of contracts that gave these questions too little thought. Some disputes become substantially more difficult and expensive because of decisions made while the parties were still on good terms.
Ending the Relationship Can Be Harder Than Starting It
Termination is where the competitor problem is hardest to manage. You terminate for unpaid royalties or another serious breach, and your former licensee still has the technical documents, software, manufacturing equipment, and operational knowledge to keep producing. Depending on the contract, the rights involved, and what the licensee does after termination, its continued use of your intellectual property can give rise to contractual claims, infringement claims, or both. The difficulty is often greatest when the licensed technology includes know-how that the Chinese company's engineers have already mastered. A trademark registration can give you a means of challenging continued use of your brand, but stopping unauthorized use of a manufacturing process presents different problems, particularly when the Chinese company has developed the ability to operate independently. Once you have taught a company how to make your product, you cannot make its engineers forget what they learned. We want our clients to understand that before agreeing to a license.
The agreement also needs to address what happens if your Chinese licensee is acquired, merges with another company, becomes insolvent, or transfers operations to an affiliate. You selected your licensee for a reason. You may not want its new owner, particularly a competitor, acquiring access to your intellectual property. We therefore consider restrictions on assignment and sublicensing, consent rights triggered by changes in control, and contractual protections if the licensee encounters serious financial difficulties. We also need to determine what happens to sublicenses, confidential information, remaining inventory, and existing payment obligations if the relationship ends. Bankruptcy introduces additional legal complications because contractual termination provisions may not override applicable insolvency laws. These possibilities should be addressed while the parties are still negotiating, rather than after the Chinese business is sold or begins failing.
8. China Licensing Agreements: They're Really Complicated
China licensing agreements are some of the most difficult contracts we draft. The parties can agree on the technology and the royalty fairly quickly; the hard work starts when we examine what the licensee will be allowed to do, what it will learn, and what the foreign company can actually stop if the relationship falls apart. Those questions rarely have one obvious answer. A restriction that protects the licensor can make the deal commercially unworkable, while a concession that seems harmless can give the licensee more control than the foreign company intended. Sometimes two perfectly reasonable provisions produce a bad result when read together. We spend a lot of time sorting through those tradeoffs.
This is why we sometimes bring several of our lawyers together to work through a proposed licensing arrangement. Our intellectual property lawyers see issues that our transactional lawyers might approach differently. Our China lawyers understand the local legal and commercial problems, while our litigation lawyers are thinking about what happens when the deal falls apart. Technology lawyers bring another perspective. Depending on the deal, we also involve lawyers who work on international tax, regulatory compliance, export controls, or data privacy. Sometimes we spend considerable time working through the implications of a provision that appears fairly routine. The value of the agreement lies largely in these decisions. They determine how much control you retain, whether you get paid, what happens to improvements, and how effectively you can protect your intellectual property when the relationship deteriorates. The drafting matters, but getting the legal and business decisions right matters at least as much.
A licensing agreement that worked beautifully for one company can be completely wrong for another, even when both are licensing similar technology to Chinese businesses. That is why we strongly discourage companies from using licensing templates or adapting agreements from other transactions. The hardest problems are often the ones nobody realized the agreement needed to address.
Watch for Last-Minute Changes and Post-Signature Renegotiation
One problem we have encountered in China licensing negotiations is the repeated reopening of issues the parties thought they had already resolved. Sometimes a Chinese company raises an endless series of new demands. Other times it sets an artificial signing deadline, perhaps tied to an elaborate ceremony or the supposed requirements of a government agency, bank, or investor. As the deadline approaches, the Chinese side insists on concessions that substantially change the deal. These tactics are hardly unique to China, but we have seen them often enough in Chinese licensing negotiations that we prepare our clients for them. We advise clients to investigate claimed regulatory requirements, resist artificial deadlines, and be willing to postpone signing rather than accept unfavorable changes merely to get the deal finished.
An even more dangerous problem arises after the agreement is signed. Once the lawyers have finished their work and the companies begin implementing the arrangement, the Chinese licensee sometimes approaches the foreign company's business people about changing terms that were carefully negotiated. These changes are often presented as minor adjustments required by a bank, regulator, or the practical demands of doing business. What sounds like a routine operational matter can substantially weaken payment obligations, exclusivity restrictions, or intellectual property protections. We want any proposed changes reviewed by counsel and approved through the contract's agreed amendment process. The foreign company's managers also need to understand that they should not informally give away rights their lawyers spent months negotiating.
9. Frequently Asked Questions About China Licensing Agreements
Can a Foreign Company License Technology to China Without Establishing a Chinese Subsidiary?
Yes. A foreign company can generally license intellectual property directly to a Chinese company without establishing its own Chinese subsidiary, subject to applicable regulatory and transaction-specific requirements. Whether that makes commercial sense depends on the technology, the Chinese partner, and your continuing obligations. Some licenses involve relatively limited ongoing work, while others require extensive technical support or operational involvement.
Can a Foreign Company Give a Chinese Company an Exclusive License?
Yes, subject to applicable law and the rights involved. Exclusive licensing is common where the Chinese company will make substantial investments to develop the market or commercialize the technology. But exclusivity limits your ability to license the same rights to anyone else, and we are particularly cautious when a Chinese company wants broad exclusivity without offering meaningful financial commitments or evidence that it can exploit the rights it wants. The perpetual licensing proposal described at the beginning of this article illustrates why we worry about exclusivity that bears little relationship to the Chinese company's commercial performance.
Should a China Licensing Agreement Be Written in Chinese?
Often, yes. A Chinese-language agreement or a controlling Chinese version makes sense in many deals that will be performed or enforced in Mainland China, but no universal rule requires every international licensing agreement involving China to use Chinese as its controlling language. The right choice depends on the governing law, dispute-resolution forum, regulatory requirements, and the parties' practical needs. If the agreement has both English and Chinese versions, inconsistent language between them can create serious problems when a dispute arises.
Who Owns Improvements Made by the Chinese Licensee?
The foreign licensor does not automatically own improvements made by the Chinese licensee, and you should not assume you can automatically acquire every improvement your Chinese licensee develops. Ownership and usage rights depend on the nature of the improvements, the applicable law, and the parties' legally effective arrangements. This matters most when the licensee develops improvements that substantially increase the technology's commercial value. Chinese technology-contract law can restrict certain arrangements involving improvements, and a requirement that the licensee hand its improvements to you for free or on a non-reciprocal basis can be treated as an illegal monopolization of technology, which can make that provision void.
Who Is Responsible for Enforcing Licensed Intellectual Property Rights in China?
A China licensing agreement should specify who is responsible for identifying infringements, investigating counterfeit products, sending cease-and-desist letters, and pursuing litigation or administrative enforcement proceedings. It should also establish who pays those costs, who controls enforcement decisions, and how the licensee must cooperate. A Chinese licensee can be an important source of information about local infringement, but the foreign intellectual property owner needs to protect its own interests. We generally want clear obligations requiring the licensee to notify the licensor of suspected infringement and cooperate in enforcement efforts. Depending on the intellectual property involved and the applicable law, the licensee can also have enforcement rights of its own. Those rights should be addressed expressly rather than left to chance.
Does Licensing My Technology to a Chinese Company Protect Me from Product Liability?
Not necessarily. Licensing your technology or brand to a Chinese company can reduce your direct involvement in manufacturing and selling products, but it does not automatically eliminate product liability exposure. Depending on the product, your role, and the countries where the products are sold, you can still face claims involving defective designs, unsafe products, or inadequate warnings. The licensing agreement should allocate responsibility for product testing, regulatory compliance, quality control, recalls, insurance, and indemnification. For trademark licenses, the licensor's legal obligations concerning product quality also need to be considered. And remember that an indemnification provision is only as valuable as the Chinese company's ability to honor it.
10. Get Legal Advice Before You Transfer Your Technology
Our international intellectual property lawyers work with our China, transactional, technology, and litigation lawyers to structure and negotiate licenses of patents, trademarks, manufacturing technology, trade secrets, software, and other intellectual property to Chinese businesses. If you are considering a China licensing deal, we can assess the proposed arrangement and your prospective Chinese partner before you commit. We can also help determine whether licensing is the right arrangement for your business and, if it is, negotiate an agreement that protects your intellectual property and gives you a realistic way to collect what you are owed.
