As many European SMEs are considering having their R&D-intensive business in China, so in today’s blog post, we are taking a closer look on how to protect your inventions that require research and development in China. The article discusses the common issues relating to IP ownership and IP licensing.
Many European SMEs may not consider that they conduct any R&D activities in China because they do not have a laboratory or research facility there, but in reality, a high proportion of these companies engage in activities which fall under at least one of the terms: research or development. An example of R&D might include an SME that enters into a contract with a local company to use their engineers to develop a prototype into a commercial product or application.
Intellectual property is a critical consideration for European SMEs that come to China wishing to tap into the market potential for business growth, or the talent pool for technology development. When engaging in R&D in China, new intellectual property is being created, the rights to which need to be clearly defined from the outset to avoid disagreements later.
Ownership of IP
If the primary inventors are non-Chinese citizens, European SMEs will have much more leverage in deciding how to control the IPR. If, however, the Chinese team is expected to make key contributions, IPR ownership will be a more sensitive issue when negotiating the terms of an agreement. To retain the innovators, SMEs will need to include a sufficient amount of rewards and incentives for them as individuals if the ownership of the innovation will not be granted to them. Additionally, SMEs will need to consider the legal status of the Chinese individual inventors. If the inventor is an employee of another party, for example a researcher at a local university, the inventor may be under contractual duty to assign his/her IP rights to that employer. Ignoring the inventor’s existing legal duties can cause serious problems.
IP ownership is less of an issue if European SMEs simply set up their own entity in China to conduct all R&D activities. SMEs can choose to file patent applications under the name of the Chinese entity, or its affiliates outside China. Placing the IPR under an overseas entity may provide greater flexibilities to suit the future needs of business operations and financing. However, companies increasingly apply for IPR under their Chinese entities to qualify for the incentive plans offered by local Chinese governments.
If European SMEs rely on their business partner to some extent, IPR ownership may be more complicated. Some common choices can be seen below:
- Sole ownership of all the IPR by the European SME
- Sole ownership of all the IPR by the Chinese business partners
- Co-ownership, shared between the European SME and the Chinese business partner.
Terms of the co-ownership can be largely defined by contracts. The ownership issue can be sensitive between foreign SMEs and Chinese business partners. Excessive fighting over ownerships will produce risks for future business co-operation. It is therefore advisable to keep revisiting the business models one has in place, and to always sign mutually agreed contracts on ownership, licensing and other legal tools to support shared business interests, so that ownership is clearly defined from the start. For example, if an SME realizes that the software tool it has developed can be used for another business model, to which their Chinese business partner has no relation, they may need to carefully craft the agreement in a way that will allow the SME the freedom to use the technology in other fields. Failure to do this will likely lead to disputes in the future.
An IP licence is a contract to permit where, when, and how IP can be used by another party, for free, for royalties, or in exchange for other services. In most R&D contracts, licensing is a key aspect. The greater leverage the business partner in China has in terms of knowledge about the market and execution ability, the more consideration is likely to be given to licensing options.
In practice, licensing is probably one of the most important legal tools that SMEs often overlook. Part of the reason is that SMEs are not always confident about the effectiveness and enforceability of the contracts they enter into with Chinese partners. For example, people may be afraid of unfair court rulings and difficulties with the enforcement of judgments. While such considerations may be justified in some cases, SMEs should not overlook the importance of using contracts, as the lack of an agreement in writing will inevitably lead to disaster. IP licensing options should be well thought out prior to negotiations.
In China, common types of licences such as exclusive and non-exclusive licences are permitted. The laws and regulations are designed to give a large amount of autonomy for the parties to decide what to do with their IP licences. Parties can negotiate and reach a mutual agreement on the following key terms:
- Territory of the licence: Does the licence cover China or is it applicable worldwide? Is it better to have a licence that covers a certain specified geographical area in China?
- Duration of the licence: When does the licence expire? How should it be renewed? Can the licence be terminated under certain clearly-defined circumstances?
- Licensed IP: Are you only going to license your patents? What about copyrights and trade marks? How about less familiar types of IP such as graphic user interface, sensitive client information, special skills? Some innovations may not be fully protected by the patent, trade mark or copyright laws, but you may use the contract to protect yourself. To obtain more information about the protection of trade secrets, please refer to the Helpdesk guide for Protecting Trade Secrets in China and the Helpdesk guide to Using Contracts in China
- Royalties: You can choose a lump-sum payment, running royalties, etc., or even operate royalty-free for a certain period and then start charging. Issues like tax and auditing should be addressed as well.
- Limitations of the licence: Do you have to give warranty or indemnify everything asked for by your Chinese partner? Think of ways to limit your exposure to liabilities.
European SMEs should be aware that some license contracts need to be registered with appropriate Chinese authorities in order to be fully enforceable in China. For example, trade mark license contract needs to be registered with the China Trade Mark Office (CTMO) and the patent license contract must be registered with the State Intellectual Property Office (SIPO). Extra costs will incur when registering license contracts with different Chinese IP authorities.
In the context of joint IP development, European SMEs should keep in mind that Chinese laws do not allow foreign companies to retain ownership of improvements that are made by Chinese parties, unless the Chinese parties are being remunerated in some way for these inventions. This remuneration could be in the form of cash, shared profits, equity interest, or other types of property rights. Chinese laws also require the foreign company providing the technologies to authorise the quality and usefulness of the technologies, and to bear the liabilities if the technologies turn out to have infringed others’ legal rights. Therefore, through discussions, European SMEs and their Chinese business partners should decide on fair and workable solutions before proceeding with a deal.
China IPR SME Helpdesk
The China IPR SME Helpdesk supports small and medium sized enterprises (SMEs) from European Union (EU) member states to protect and enforce their Intellectual Property Rights (IPR) in or relating to China, Hong Kong, Macao and Taiwan, through the provision of free information and services. The Helpdesk provides jargon-free, first-line, confidential advice on intellectual property and related issues, along with training events, materials and online resources. Individual SMEs and SME intermediaries can submit their IPR queries via email (email@example.com) and gain access to a panel of experts, in order to receive free and confidential first-line advice within 3 working days.
The China IPR SME Helpdesk is co-funded by the European Union.
To learn more about the China IPR SME Helpdesk and any aspect of intellectual property rights in China, please visit our online portal at http://www.ipr-hub.eu/.