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 particular hard-edged China negotiating tactic, which tactic we described in Antidotes to Chinese Negotiating Tactics as follows:

Artificial Deadline. This is my favorite because it is such an obvious manipulation of the foreign side and yet it seems to work extremely well. The tactic works like this. At the very 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 also 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 much 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 outside source 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 all that more difficult for us 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.

Number three above causes me to fear those in my firm seeing this post.

You see, I am about to tout the benefits of licensing your product, technology or even your name to China. I am touting this not because I want the attorneys in my firm to work 16 hour+ days, but because licensing these things to China can be an amazing economic stimulant for so many companies. And as much as I would have liked to have waited to write this post so as not to anger these three lawyers, I could not hold back after 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 either 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 better selling but 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.

The licensing deals our firm has been handling in the last year or so 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 their own technology development. These Chinese companies initially plan to license the technology to build their own, cheaper products in China and then later use that technology and the funds they receive from new product sales to further develop and refine (and perhaps even 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 oftentimes Hong Kong, Taiwan, and Macao or even all of Asia as well.

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