Licensing Considerations for Global Enterprises in China

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In China, as in other jurisdictions, there have been numerous cases where foreign companies have filed patent infringement claims against third parties, leading to a so-called “patent battle”. A common strategy for dealing with patent infringement claims is to negotiate for a patent license. However, there are particular issues other than the common issues that may be encountered in other jurisdictions, this article raises alert issues for global companies signing license agreements in China.

Type of patent license

A patent license agreement must be formalized in writing. According to the degree of restriction imposed on the licensee, from top to bottom, the agreement can be divided into three categories, namely: exclusive license, single license and general license (独占许可、排他许可and普通许可 in Chinese). The three types of licenses have different legal effects, so it is crucial that each is used correctly. This is particularly the case when a license is written in several languages. Very often, parties confuse unique and exclusive licenses. It is therefore important to define the nature of the license, rather than simply designating it as a sole or exclusive license, as translation issues or different applicable laws may lead to different interpretations.

An exclusive license allows the patent holder to license their invention to the licensee only for a specific period of time and obliges the licensor not to share the patent with anyone else. Even the patent owner himself is not allowed to exploit the patent. A single license allows the patent holder to grant the patent to the sole license holder, but the holder himself is authorized to exploit the patent. A general or non-exclusive license does not prevent the patent owner from further exploiting or licensing the patent to other parties.

In terms of the legal status required to assert the patent in a Chinese court for a patent infringement case, in practice

  • an exclusive licensee could unilaterally sue for patent infringement by asserting the licensed patent;
  • a sole licensee could unilaterally bring patent infringement in circumstances where the patentee does not bring a patent infringement action in connection with the licensed patent or does not jointly assert the patent with the patentee; and
  • a general licensee must obtain specific permission from the patentee to enforce the licensed patent, to sue for patent infringement.

Commitments in the patent license agreement

To further protect the interests of the patentee, some patentees may incorporate a non-challenge clause into the patent license agreement to ensure that the licensee agrees not to file an invalidation. against the patent(s) in question. However, there is a risk that the relevant clauses may be considered invalid under Chinese law because they hinder technological improvements or create a monopoly on technology.

Right to improvements

The Civil Code of the People’s Republic of China clarifies that a technology agreement that illegally monopolizes technology or infringes the technological achievement of others is invalid. Therefore, a clause in a license agreement stating that all improvements shall belong unconditionally to the patentee/licensor without fair consideration may be considered void. On the other hand, if the law clause is not specific or detailed enough, the general wording (e.g. the improvement belongs to the party making a substantial contribution) is not helpful in a real law dispute. in the future.

Filing license agreements with the China National Intellectual Property Office (CNIPA)

Although the filing of the corresponding license agreement does not affect its effectiveness, it will be useful to the licensee when it comes to asserting his rights against third parties infringing the patent concerned. CNIPA approval would also strengthen the role of the patentee/licensor.

Termination of License Agreements

One of the most common disputes between licensors and licensees is the early termination of the terms of a license agreement. Careful thought should be given to the termination clause of a license agreement – ​​especially from the licensor’s perspective – so that the licensor’s patent is not trapped in an agreement from which it has no way out. A reasonably long fixed term, with some flexibility to terminate the agreement where possible, is recommended.

Overall, in China – as elsewhere – licensing is a recommended way to prevent patent infringement and can be beneficial to both licensor and licensee. The terms and conditions of the patent license agreement should be carefully drafted and reviewed by legal professionals in all relevant jurisdictions to better protect the rights and interests of the party and to avoid possible litigation. For more information, see “Crucial Clauses in Global IP Transactions and the Importance of Local Law Advice”.

This article first appeared in I AM. For more information, visit https://www.iam-media.com/corporate/subscribe

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