China Difficulties, Netflix, and Why We Love Licensing

In Netflix finally finds a way into China, CNN’s Sherisse Pham explains how “six months after admitting defeat in its bid to crack China, Netflix has found a way to tap into the vast market.”

For years, Netflix was trying to set itself up in China.

For years, Netflix was trying to set itself up in China. To quote from Netflix’s own site, “Netflix is not yet available in China, though the company continues to explore options for providing the service. It also is not available in Crimea, North Korea, or Syria due to U.S. government restrictions on American companies.” Netflix is not available in China because China tightly regulates foreign content and foreign publishing.

So how did Netflix manage to all of a sudden make its way into China? By licensing its content to China.

And that makes total sense.

Licensing content to China

Our China IP 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 “widget” into China any other way. In other words, it makes particular sense for content. And because of this, much of my law firm’s China media and entertainment work involves drafting content licensing agreements for written, visual and audio content for magazine, newspaper and book publishers, and for television and movie producers and studios. Just by way of an example, virtually all the China-language editions of foreign magazine titles you see in China are there via licensing. In the typical magazine licensing deals we do, our client (usually a US or European magazine publisher) will license its magazine’s name and a certain amount of content (to be translated into Chinese) to a Chinese publishing house. Our movie and television and gaming deals are similar.

Before you license anything to anyone in China you should register in China any of your intellectual property worth litigating over. That 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. For television shows, that means — at the very least — securing China copyrights on the show bible, scripts, and any produced episodes. It’s true that 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.

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 against the 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), will likely not give you the protection you need. Yet this is what we often see from companies that don’t trust or don’t understand the Chinese court system. The problem is usually not that Chinese law won’t protect foreign content owners; the problem is usually that content owners (and their lawyers) often decline to take advantage of the protection Chinese law offers. They write contracts designed to be unenforceable in China, and then they complain about China’s legal system when their contracts prove worthless.

China content licensing agreement

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

1. It should make sure the contracting party on the licensee side is the actual Chinese entity that will be licensing the content, and not a Hong Kong affiliate. It should have 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.

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 often the case). The issue is that any legal resolution in Hong Kong is not likely to be effective in China. And if you’re licensing content to China, China is where the action is going to be. Hong Kong still has the common law system passed down from its days as a British colony; it favors injunctive relief and disfavors liquidated damages (aka contract damages). China is the opposite. What good is injunctive relief in Hong Kong if you’re trying to get the judgment enforced in China, which disfavors injunctions? You might argue that you 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. Your China licensing agreement should provide for upfront payment of the license fee in an amount that makes the deal worthwhile 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. Your China licensing agreement should provide for substantial contract damages for (1) early termination and (2) each instance of infringement. Unlike the common law systems of the United States, Canada, Great Britain and Australia, contract damages are not disfavored under Chinese law. Contract damages are well established in China and favored by statute.

Do not mess around with lengthy provisions about injunctive relief. Though Chinese judges are 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 will likely 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 will give your China judge a damages roadmap. Most importantly, since Chinese companies know well the power of contract damages provisions, merely having one in your contract increases the odds oyour Chinese counter-party will abide by that contract.

4. The contract damage amounts set forth in your China licensing agreement should be based on a good faith estimate of the actual amount of income the licensor will lose from an early termination. The utility of contract damages is that China’s courts will usually allow a plaintiff to attach the defendant’s assets in an amount equal to the contract damages amount 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 difficult to obtain a writ of attachment. 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 difficult 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 “hometown” of the defendant, even though that sounds counter-intuitive to most U.S. and European lawyers, who have been taught to avoid getting “hometowned.”

5. Your China licensing agreement should not rely on the default provisions of Chinese intellectual property law to protect you against your licensee. Chinese IP law and your IP registrations will protect you against random third-party infringement, but if you want protection against your licensee stealing your IP, you should put those protections into your licensing contract. Your contract with your licensee is your best chance to control your Chinese licensee and to protect yourself and you should take advantage of this by drafting a contract that actually achieves those things.

6. Your China licesning agreement should have a relatively long license term, say, five years. If the term is too short, the penalty for early termination becomes less relevant.

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