When one of my law firm’s China lawyers is retained to “draft a China contract,” we usually first must determine whether or not it is premature to draft the contract. For example, if a client wants us to draft a manufacturing agreement to have its widgets manufactured by Chinese Company A, there is no point in our starting on such an agreement if the two parties are not yet close to agreeing on the widgets’ price.
We often find ourselves giving clients and even potential clients a list of the items on which they should reach agreement before they pay us to draft their China contracts. There have been plenty of times where our lawyers have been able to bridge the gap between our client and a Chinese company to make a deal happen, but there are some gaps lawyers simply cannot bridge. If a Chinese manufacturer insists on charging $7 per widget and our client will pay no more than $5 per widget, there is no point in drafting an agreement because there will be no deal.
But on something more complicated like a joint venture deal, where neither side typically is familiar with common terms, we often start drafting the joint venture agreement before the parties have reached a clear agreement, in part to help the parties determine what remains for them to agree on for an agreement to get signed.
China licensing agreements usually fall between manufacturing agreements and joint venture agreements in terms of complications. With China licensing agreements, we usually try to “arm” our client with the basic terms it should be discussing with its Chinese counter-party before we licensing agreement. We typically encourage them to get clear on the following when negotiating a China licensing deal:
- Make sure any IP (trademarks, patents, copyrights) your potential China licensee may use is registered in China. You do not want your potential China licensee to file for “your” trademarks so as to gain negotiating leverage against you. If you have not already filed to register such IP in China, do it now.
- Make sure your potential licensee is legitimate. Is it financially capable of paying your licensing fees? Does it have experience with your sort of technology or product? Is it likely to preserve, enhance, or improve your reputation, rather than destroy it?
- Are you going to allow this potential licensee to sub-license, and if so, to whom?
- What sort of controls are you going to want over this licensee’s use of your technology, your product and/or your name?
- Who is going to pay what in terms of marketing your technology, your product, and/or your name in China?
- Who is going to be responsible for paying Chinese taxes on the royalties? For a whole host of reasons, you are going to want this burden to fall on your China licensee.
- For how long will your licensing agreement last and on what grounds may you unilaterally terminate it early?
- Make sure that your potential licensee agrees to comply with all Chinese laws regarding the need to register your licensing agreement. This should not be a problem, but occasionally it is.
- Do not sign an MOU or an LOI unless you run it by us first. China MOUs and LOIs have very different legal significance than those in the West.
Once our client has reached tentative agreement on all or most of the above, we can start drafting their China licensing agreement.