As IP protection in China continues to improve, foreign companies are seeking to access the Chinese market in increasingly sophisticated ways. For many such companies, a license agreement makes the most sense, and to no one’s surprise at our law firm, we have been drafting more than ever before. But just because a license agreement makes sense doesn’t mean ANY license agreement will work. You need an agreement specifically drafted for use in China.
1. Require an upfront payment. It makes sense to require Chinese licensees to make an upfront payment. An upfront payment shows good faith on the part of the licensee, and also motivates the licensee to monetize the licensor’s IP. Even more important, an upfront payment establishes that the Chinese side is actually able to make payments. This sounds trivial, but we have stopped counting the number of deals that fell apart because the Chinese side’s bank refused to make payment because of a license agreement’s content. (Deals involving Chinese educational institutions are particularly tricky.) Even a payment as small as a few thousand dollars can be sufficient to provide an adequate test, but ideally it would be more than $50,000 so you can be sure the payment was not made under the annual $50,000 exemption. And the payment should be from the company that executed the agreement. If you get a payment from an individual (like the licensee’s CEO) or a related company, chances are that the company is just playing games.
2. Register the agreement with the relevant Chinese authorities. Every license agreements in China should be registered, and in many cases registration is mandatory. For instance, any technology transfer agreement for technology on MOFCOM’s “restricted” list must be approved by MOFCOM before the agreement can become effective and the technology can be imported legally. Almost every bank in China requires license agreements to be registered with the relevant IP authority before approving payments: trademark license agreements must be registered with the Chinese Trademark Office (CTMO); patent license agreements must be registered with the State Intellectual Property Office (SIPO); and copyright license agreements must be registered with the Copyright Protection Centre of China (CPCC). And any patent, trademark, or copyright license agreement must be registered before it can be recorded with Chinese customs – which is particularly important if you want Chinese customs to help with anti-infringement work and if you don’t want them to seize your licensee’s goods.
In general, you want the Chinese side to handle all registrations and for the license not to be effective until they have provided proof of such registration. The one exception to the former is trademark licenses, which are required by regulation to be handled by the licensor. Either way, the license agreement should provide that the license will not be effective until proof of registration is provided. This requirement goes hand in hand with requiring upfront payments, and serves as a good test of whether the agreement was properly registered. Registration takes at least a few days, so if you receive payment on the same day the agreement was executed, you know the agreement was not registered and the licensee is not being straight with you. Though you want the Chinese side to handle all license registrations (except trademark licenses), it is incumbent upon you to make sure that this was actually done.
3. Limit the territory to China. This is not an absolute requirement but often makes practical sense: Chinese licensees will often ask for rights to numerous ASEAN countries, but it generally makes sense for you to make them prove themselves in China before granting them rights to Malaysia or Vietnam or wherever. Also, China may not statutorily prohibit gray market sales, but you can contractually prohibit your licensee from selling extraterritorially via a well-drafted contract provision.
4. Include strong language on confidentiality and IP protection. Your license agreement should make clear that the IP belongs to you, not to your licensee, and that your licensee is not allowed to misuse the IP or to take any actions that would interfere with your ownership of the IP. And upon termination, the IP will all return to you. The proper language is critical to protect you from someone challenging your trademark three years down the road for non-use.
5. Make sure you own the relevant IP. This should go without saying: you can’t license something you do not actually own. But I am still going to say it, because we are regularly asked to help companies license IP they don’t actually own in China. For patents and trademarks, ownership in the U.S. or Europe is of little or no relevance to ownership in China; the way to own IP in China is to register it. Putting this requirement in the license agreement places the obligation on the licensor, but it’s an obligation you should be happy to shoulder.
6. Ensure the agreement is written in Chinese, governed by Chinese law, and requires dispute resolution in Chinese courts. For all the usual reasons.