For companies seeking access to the China market, an IP license is often the best way forward. However, companies need to be smart about it. Specifically, they should resist the temptation to recycle licensing agreements used in other contexts, and instead use agreements specifically drafted for use in China, taking into account China-specific conditions.
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 it also motivates the licensee to monetize the licensor’s IP (keeping in mind that sometimes Chinese companies use licensing agreements as a ruse to neuter a competitor). Even more important, an upfront payment establishes that the Chinese side is actually able to make payments. This sounds trivial, but deals often fall apart because the Chinese side’s bank had issues with the license agreement’s content. And the payment should be from the company that executed the agreement. If the payment comes from an individual (like the licensee’s CEO) or a related company, chances are the Chinese company is just playing games (just like when a supplier asks a customer to pay into a personal account or some random company’s).
2. Register the agreement with the relevant Chinese authorities
Every license agreement in China should be registered, and in many cases registration is mandatory. In addition, Chinese banks virtually always require license agreements to be registered with the relevant IP authority (such as the China National Intellectual Property Administration) before approving payments. And any patent, trademark, or copyright license agreement must be registered before it can be recorded with Chinese Customs – a necessary step to have Customs on the lookout for counterfeits and to prevent them from seizing a licensee’s goods.
In general, it is best to task the Chinese side with all registrations (NOT to be confused with letting them register your IP!) and for the license not to become effective until they have provided proof of registration. However, note that China’s Trademark Law requires the licensor to register a licensing agreement. 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 a licensor receive payment on the same day the agreement was executed, it is clear that the agreement was not registered and the licensee is not being straight. Though they want the Chinese side to handle all license registrations (except trademark licenses), it is incumbent upon foreign licensors 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. Make sure your agreement is clear on what constitutes China, because what the world sees as constituting China is not necessarily what China sees as China.
4. Include strong language on confidentiality and IP protection
License agreements should make clear that the IP belongs to the licensor, not the licensee, and that the licensee is not allowed to misuse the IP or to take any actions that would interfere with the licensor’s ownership of the IP. And upon termination, the IP will all return to the licensor. The proper language is critical to protect foreign licensors from future challenges to their trademark registrations three years down the road on the basis of non-use.
5. Make sure you own the relevant IP
This should go without saying: a party can’t license something it does not actually own. But we still say it because, well, we are regularly asked to help companies license their IP to China when they don’t actually own the IP 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 they 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.