China Licensing Agreements: The Key Provisions

The International Business Law Advisor Blog did a post, entitled, 6 Key Provisions You Should Include in Your International Licensing Agreements. I borrow extensively from that post for this one, which is tailored more towards China. I list out IBLAB’s tips in bold and then provide its explanation in normal font and then my comments in italics explain how they relate to licensing agreements with a Chinese entity. This post is formulated towards assisting a Western company looking to secure royalty payments by licensing its technology to a Chinese entity.

Again, please note, all of the below in normal font is directly from the IBLAB post. My comments are italicized.

Exclusive Property Rights.  
Preliminarily, before you start negotiating a license agreement, make sure you have exclusive property rights.

While the law often changes in this area, the best way to lock in your rights is to register for any or all of the following that apply to your situation:

Copyrights – original works of authorship fixed in any tangible expression form

Patents – inventions

Trademarks – words, names or symbols identifying goods made or sold, distinguishing them from others

The application process can be rigorous, and you may have to disclose your ideas publicly. So you may also want to further protect your intellectual property by relying on laws. Generally, these laws protect internally guarded ideas, formulas, codes or other information giving a business competitive advantage. A good example is source code to software.

All this is true for China, only more so. It borders on suicide to license your IP to a Chinese company without doing everything you can both outside of and within China to protect your IP through registrations or otherwise.

Six Key Provisions  I’ve selected 6 key provisions that should be included in your foreign license agreements:

1. Approval of licensed goods.
When major US manufacturers license products to companies abroad, they often arrange periodic inspections of the manufacturing facilities to ensure the quality of the goods (and also to monitor whether the licensee is siphoning off products or engaging in illegal labor practices). This offers you some assurance of consistency and quality for your work.

2. Royalties and accounting.
Payment of royalties from a foreign licensee can get tricky, especially when you consider issues like:

• currency conversion rates (probably best to always insist on payment in US currency)

• how the money will be paid (best to use wire transfers), and

• what taxes may be applied against your sales or royalties (before signing the license, inquire into national or local tariffs or taxes that may apply). Also, it’s wise to include an audit provision (which allows you to inspect the foreign licensee’s books).

Western companies often license their technology to Chinese companies based on the sales of the Chinese company’s product containing the licensed technology. In other words, the licensing agreement provides for the Western company to get $2 per widget sold. This sort of per product deal makes sense only if the Western company truly has the ability to audit sales. I have seen far too many instances where the Western company is not able to discern the sales of the Chinese company and then ends up getting paid way way less than it expected. I usually counsel my clients to get as much upfront as possible and to figure that amount may be all that is ever received.  

I find royalties/accounting to be the key issue in a good China licensing agreement.

3. Jurisdiction.
Sometimes referred to as personal jurisdiction, jurisdiction is the power of a court to bind the parties by its decision. Unless the company does substantial business in the states, the only way to get a foreign licensee into a US court is to include a provision in the license agreement that requires the licensee to consent to US jurisdiction.

Think long and hard about where you want to have your disputes against the Chinese company to whom you are licensing your technology. The problem with United States courts is that Chinese courts pay absolutely no mind to their judgments. In many situations, a Chinese court or Chinese or Hong Kong arbitral body will be your best choice. It really varies with the individual situation.  

4. Choice of law.
Every country (and every state) has laws as to how contracts are interpreted. The licensee will want the disputes to be resolved under the laws of its country. Try to include in your agreement that disputes will be resolved under US law for copyright purposes and the laws of your state when it comes to contract issues.

I am more neutral than most on these provisions. I take the position that contract law is generally contract law and the contract law among countries is typically not all that dissimilar. Having said that, one should absolutely research any particular contract law issues peculiar to the individual licensing agreement so as to be able to choose the law that will be most favorable. Mostly, it makes sense to have the law match the jurisdiction. In other words, if your jurisdiction will be China, the law almost always ought to be China as well. It does not make sense to ask a Chinese judge or arbitrator to deal with British or Spanish law

5. Arbitration.
In arbitration, instead of filing a lawsuit, the parties hire a neutral arbitrator to evaluate the dispute and make a determination. You’ll almost always benefit by agreeing to have disputes arbitrated and inserting this in your agreement. If possible, your agreement should award attorneys’ fees to the prevailing party in the arbitration.

Try to get the licensee to agree to arbitrate the matter in the United States. If the licensee does not agree, there are three popular spots for international arbitration:

• London (The London Court of International Arbitration)

• Paris (The International Court of Arbitration of the International Chamber of Commerce), and

• Stockholm (The Arbitration Institute of the Stockholm Chamber of Commerce).

Putting a more Pacific Rim focus on this, I note that I like Hong Kong (expensive but top of the line), Singapore (less expensive, but really good) and Vancouver, Canada (Not terribly expensive, yet still really good).  More importantly though, I also note that arbitration is oftentimes NOT the best way to go when dealing with China.  

6. Foreign registrations.
If your works are protected by US intellectual property laws like copyright or design patent law, you should determine whether it’s worth your while to obtain foreign copyright or patent registration in the countries where your work is being manufactured or distributed (this will be the subject of a future post).You may be able to require that the licensee handle these administrative tasks.

As mentioned above, this step can be absolutely critical for China. There is one other step that is also absolutely critical (and for those who are counting, this is the eighth tip, with the preliminary tip being the first one — sorry but for good luck reasons, I had to get it to eight!) for China and that is registering the licensing agreement itself, which is required pursuant to Chinese law.  

With China licensing deals, one of the major issues is getting paid. The below is some of the advice our international licensing lawyers often give our clients to help ensure payment:

  • Base your pricing on the assumption your Chinese counter-party will not make the last few required payments. In other words, do your utmost to front-load the licensing payments.
  • Do whatever you can to make sure the Chinese company still needs you at the end of the deal so that it has no choice but to keep paying you.
  • Put killer provisions in your contract to deal with a situation where the Chinese company stops paying at the end.

What are you seeing out there in the world of China technology licensing?