Using China Licensing Agreements to Give Your Technology a New and Profitable Life

This past week has been one of the busiest/most horrible weeks for three of the China lawyers on my law firm’s “China team.” It has been horrible because they have been working on two China technology licensing agreements, both of which this week involved a particularly hard-edged China negotiating tactic, which tactic we described in Antidotes to Chinese Negotiating Tactics as follows:

Artificial Deadline. This tactic works like this. At the beginning of the negotiating process, the Chinese side sets a fixed date for executing the contract. It then sets up a public signing ceremony on that date, at which high-level officials from both sides will participate amidst much pomp and circumstance. The date is set far enough in advance to ensure that parties negotiating in good faith can reach agreement on the contract. The Chinese side then ensures no agreement is reached. This results in panic on the foreign side, since failing to get an agreement the bosses will sign is seen as a loss of face. The Chinese side then uses this concern to extract concessions from the already exhausted foreign side negotiator.

This tactic has two variants. The first variant is the crude approach. The Chinese side simply refuses to concede on key points under the quite reasonable assumption the foreign side will crumble when faced with the fixed signing deadline. The second variant is more subtle. In this variant, the Chinese side initially concedes on key points, while still holding its ground on numerous minor points, consistent with the “wear them down” tactic. Then, just a day or two before the signing ceremony, the Chinese side announces that the contract must be revised on one or more key issues in a way that entirely benefits the Chinese side. The Chinese side usually justifies this by referring to the demand of a “government regulator” or an third party such as a bank or insurance company. The claim is “we don’t want to go back on our word, but these other folks have forced us to do this.” Again, the plan is to use the pressure of the impending signing ceremony and the general fatigue of the negotiators to extract crucial concessions favoring the Chinese side.

These three China attorneys have had to deal with this tactic on two licensing deals at the same time. What that means in practical terms is the following:

1. Ultra-complicated agreements with a large number of exhibits (all in two languages) were revised by the Chinese side at the last minute and provided to our lawyers in pdf format, making it difficult to track the changes. Yes, we know we can convert them to Word documents and run “compare docs,” but still.

2. The Chinese side would change the terms of the agreements in Chinese and then we would need to rapidly translate them into English for our clients.

3. 16 hour+ work days for our attorneys.

I am nontheless about to tout the benefits of you licensing your product, technology or even your name to China. I am touting this not because I want the attorneys in my firm to keep working 16 hour+ days, but because licensing these things to China can be an amazing economic stimulant for many companies.

The Wall Street Journal essentially just touted China licensing deals in its article, Second Pipeline: Some Drugs Looking for a New Chance in China. The article talks about Western drugs that were never approved in the West or simply never sold well there. Western companies are licensing some of these drugs to China pharmaceutical companies, which prefer them to far more expensive competitor drugs. These are win-win deals because the Chinese companies and Chinese citizens get perfectly fine medicines (I presume) at a good price and the Western companies get a revenue source from a formerly moribund product.

Many of the licensing deals my law firm has been handling have been similar to the Pharma deals described in the WSJ article, but have mostly involved technology, including medical technology. Ours have mostly been licensing deals involving expensive and complicated computer and industrial technologies where the Chinese company wants to use the licensed technology to jump-start its own technology development. These Chinese companies initially plan to license the technology to build their own, cheaper products in China, and then eventually use the technology and the funds they receive from new product sales to further develop and refine (and perhaps localize) the technology and their own products to compete better with other Western companies on the high end. These licensing deals are often limited to giving the Chinese company use of the technology in Mainland China, and Hong Kong, and/or Taiwan, and sometimes even all of Asia as well.

For more on what goes into a China licensing contract, check out China Licensing Agreements: The Extreme Basics.