IP Observer

At a recent conference in Taipei, United States Patent and Trademark Office China Counsel Mark Cohen talked to NAIP about patent monetization efforts in China:

2: Judge Sidney Stein, United States District Court, Southern District of New York; Photo by Conor Stuart.

Judge Sidney Stein of the United States District Court of New York was also present at the conference and addressed what he sees as government interference with contract law when it comes to international licensing. In his speech he stated how two articles of China’s 2002 Technology Import Export Regulations (TIER), Article 24(3) and Article 27, inhibit the ability of Chinese companies to secure licenses from overseas, due to the heavy risks they impose on licensors and the lack of flexibility in contract negotiation that results.

Article 24(3):

If use of the technology provided by the transferor as agreed by the transferee under a technology import contract infringes the lawful rights and interests of a third party, the transferor shall bear liability therefor.

Article 27:

During the valid term of a technology import contract, the fruits of improvements to the technology shall belong to the party making the improvements.

Stein stated that, although on the surface this may appear to benefit the licensee, it was likely to prevent licensors from issuing licenses to Chinese companies, given the liability that they would have to bear and the lack of incentive in terms of sharing in the rights to improvements on the licensed technology by the licensee.

Professor Cohen picked up on this same topic at the conference, explaining that the TIER rules override the Chinese Contract Law, as a clause in the contract law states that if other laws stipulate otherwise on contracts, those other laws should govern. Cohen stated that this has created some confusion in China, especially as the Ministry of Commerce’s Sino-German Model Contract for Know How and Patent License (December 11, 2002) appears to contradict the TIER rules, when it states as follows

“Licensor’s liabilities and limitations thereof as well as indemnification of Licensee in respect of infringement shall be agreed by the Parties according to the governing law of the Contract as well as the relevant international practices” (Article 10.1.2)

This provides mixed signals for rights holders, wherein they cannot be sure if they can be protected from liability using a contract.

“It is disruptive, in a way that hurts China. China complains that it’s not getting the leading technology, but they stuck a knife in themselves. And this is really the place where it is most acute, because small companies, the most creative part of the overall ecosystem, in Silicon Valley or Boston or whatever, are not going to license if they have to bear that risk,” said Cohen

This is one of the factors that leads to China being “a severely under-licensed market” when compared to Taiwan and Japan, according to Cohen, who stated:

“If you look at China as the largest high-tech export market in the world, [...] about 20% or 25% of US high-tech exports -- Taiwan has a much smaller share -- or even if you compare it to Japan, which is about one quarter of the high-tech exports but twice the licensing payments to the United States. The receipts from China, largely come from affiliated entities that are subsidiaries of US companies operating in China, paying back the parent company and in Taiwan they are largely unrelated entities. Taiwan is the No. 1 market for unaffiliated licensing receipts for US entities.”

Cohen stated that there is little litigation on this matter, but that this does not mean that it isn’t influencing licensor behavior.

The regulations stipulating that improvements on internationally licensed inventions be granted to the licensee, are not in line with international standards, nor are they compatible with open-source licensing, wherein, you have to transfer any improvements in the technology back to the open source community.

In her opening speech at the conference vice minister of economic affairs Wang Mei-hua made reference to recent comments by US president Donald Trump, stating:

“Of all the technology licensing, Taiwan obtained over 17% [...] from the US. So Taiwan’s is the US’s largest market for the IP import and the number one market for the US licensing to affiliated companies. So when Donald Trump mentioned about the trade deficit with many countries, including Taiwan, I think the statistics only cover the manufactured goods sector, not including the service sector. If you calculate with the service sector, it’s more balanced between Taiwan and the US, because we pay a lot. Of course this also reflects the strong partnerships between our companies, as well as the trust that US industries have for the Taiwan IP protection environment.”