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Linda Liu & Partners

  
Preface
 
With the development of society and the progress of science and technology, science and technology is playing a more and more important role in economic development. For most enterprises, technology not only improves productive force, but can also make profits directly. Therefore, technology has become the source and power of the core competitiveness of enterprises.
 
Under such an economic environment, creating and utilizing technology has become an important subject of enterprises. In order to improve efficiency and save energy, the enterprises try to improve their own creativity; meanwhile, they also actively promote the technological cooperation and trade with other enterprises. In the technology market trade, technology transfer accounts for a relatively large proportion. Among them, technology licenses predominate. Thus, how to sign, perform and manage technology license contracts according to the law is of key importance to enterprises. This paper will briefly introduce the main clauses of technology license contracts as well as main issues that should be paid attention to during the execution of a technology contract. We hope it will be of some reference to you.
 
I. Patent license contract
 
The patent license contract refers to the contract that stipulates that the patentee, patent applicant or other right holder, as the licensor, authorizes the licensee to exploit its patent within the agreed scope and the licensee pays the agreed royalty.
 
The licensor can not only recover the R&D costs and gain profits rapidly through licensing others to exploit its patent, but can also enter into the region and field that it did not predominate before and enlarge the enterprise’s impact rapidly through licenses. For the licensee, through exploiting other’s patents, production can be more rapid. Thus, for those enterprises lacking research and development capability, using other’s patent is a shortcut for their products to enter into the market. Below is a brief introduction on the issues that should be known and paid attention to during the execution and performance of a patent license contract.
 
1. Types
 
Technology license contracts can be divided into three types: exclusive license, sole license and simple license. Different license types decide the licensed scope, number of licensees as well as different litigious rights.
 
(1) Exclusive license
 
This refers to the license only granted to the licensee by the patentee for exploiting its patent technology in a specific period and territory. Neither the other licensee nor the patentee is entitled to exploit the said patent technology. It actually means that the licensee obtains a monopoly on the said patent technology within the specific period and territory. Thus, for such kind of a license, the licensee usually needs to pay high royalties.
 
(2) Sole license
 
This refers to the license granted to the licensee by the patentee for exploiting its patent technology in a specific period and territory while no third licensee is entitled to exploit the said patent technology, but the patentee stills reserves the right to exploit the said patent technology.
 
(3) Simple license
 
This refers to the license granted to the licensee by the patentee for exploiting its patent technology in a specific period and territory while the patentee reserves the right to exploit the said patent technology and can also grant licenses to others for exploiting the said patent technology. This type of license will lead to multiple competitors in the market. Therefore, compared with an exclusive license, the royalties will be relatively low.
 
As the license types are different, the litigious rights enjoyed by the licensee are different. According to relevant judicial interpretations in our country, when there is a patent infringement, the licensee under an exclusive license contract can apply to the court independently; the licensee under a sole license contract can apply to the court on the condition that the patentee does not apply. Under a simple license contract, the licensee can only file litigation with the court with authorization by the patentee.
 
2. Main clauses
 
The main clauses of patent license contracts generally include the following aspects:
 
(1)patent (name, patent number, application number, term of validity of the licensed patent)
 
(2)type and scope of license
 
(3)delivery of technical documents and technical guidance
 
(4)royalty and form of payment
 
(5)ownership of improved technology
 
(6)warrant and guarantee of the flawlessness of patent
 
(7)liability when the patent infringes the right of the third party
 
(8)force majeure
 
(9)governing law and way of solving dispute
 
(10)penalty and way of computing damages
 
(11)others(e.g. definition of terms, contract period, language, signature, appendix, etc. )
 
3. Notes
 
(1) Making a thorough investigation on the right status of the patent technology and knowing about the vitality thereof before executing the contract
 
In order to ensure the effectiveness of the contract, before executing the contract, both parties under the contract should make it clear whether the licensor has the right to grant license, especially if the licensor does not enjoy independent right to grant the license. The consent of other co-owners should be obtained in advance and relevant documents showing that the licensor has right to grant the
license independently should also be provided.
In addition, both parties to the contract should know about the vitality of the patent technology, e.g. whether this patent possesses relatively high creativity and practicability?  How many advantages of the market can be occupied after the performance? How long is the remaining duration of patent? Whether anyone requested for invalidation of this patent before? Whether the foreign patent has been applied? Whether the license has been granted already?, etc. All these are beneficial for both parties to evaluate this patent correctly.
 
(2) The contract should be executed in writing and should use accurate words
 
According to the stipulation of the Article 342 of the Contract Law, the patent license contract should be executed in writing. The contents of the contract are the bases of binding the rights and obligations of both parties, moreover, in practice, the cases of disputes caused by the ambiguity of contract terms widely exist, thus when writing a contract, it is advisable to adopt definite, understandable and unambiguous language. Generally speaking, simple sentences are easy to be understood, meanwhile, the terms stipulated by laws or having explicit definition in dictionary are certain in meaning and will not easily cause ambiguity.
 
(3) Confidentiality clause should be agreed
 
The exploitation of a patent usually needs other contents besides a patent and all of these constitute technical know-how. Technical know-how is also called proprietary technology, which refers to the technical knowledge necessary for the realization of certain industrial production purposes but still not disclosed to the public. The licensee necessarily knows these contents. If there is no confidentiality agreement, it is very hard to protect the safety of the information effectively. Thus, when granting a patent license, the licensor must consider technical know-how and also agree to confidentiality on relevant technical know-how. As a matter of fact, for the technical know-how, it can either be licensed with the patent together, or be licensed independently.
 
In addition, because both parties under the contract will have relatively closed contact and will definitely know some business or management secret of the other party, this should be given proper protection through a confidentiality clause.
 
(4) The contract should clarify the type and scope of patent license
 
As mentioned above, a patent license is generally divided into: exclusive license, sole license and simple license. The type of license that should be adopted by both parties will rely on multiple factors, including technical situation, consideration, and market of the license. Special attention should be paid attention to the following aspect, according to the stipulation of Article 25 of the Interpretation of the Supreme People's Court concerning Some Issues on Application of Law for the Trial of Cases on Disputes over Technology Contracts, that if both parties have no agreement or do not agree explicitly on the type of license, it will be determined to be simple license. Thus, it is of vital importance to agree to the license type explicitly in a license contact.
 
The scope of license mainly refers to the territory and period of license exploitation. In addition, in order to avoid disputes in the future, it is advisable to write clearly on the contract whether the licensee is allowed to grant sublicense.
 
(5) The ownership and use of the improved technology achievements should be agreed to explicitly
 
According to the stipulation of Article 354 of the Contract Law, parties may agree in the contract for the method of sharing subsequently improved technology achievements. If such method was not prescribed or clearly prescribed, and therefore the ownership of the improved technology achievements cannot be determined, the improved technology should belong to the party who improves the technology and the other party has no right to share. Thus, in order to effectively make use of the improved technology obtained basing on the licensed patent, both parties should agree on the rights ownership and the use authority of the other party in advance.
 
(6) The guarantee of the validity of the patent right should be agreed to explicitly
 
Specifically speaking, this includes two aspects: right guarantee and technology guarantee. The right guarantee mainly means that the licensor should guarantee that it has the right to grant license and guarantee the validity of relevant patent rights within the licensed period. Technology guarantee means the licensor guarantees that the patent it provides is safe and practical and can reach the expected technical goals.
 
Article 344 of the Contract Law stipulates that the patent license contract should be valid only within the duration of the patent right. Thus, the patentee should start to pay the annual fees from the year when the patent right is granted. If the patentee fails to pay the annual fees according to stipulation, the patent right should cease before the expiration of its duration. In addition, even if the patentee pays the annual fees on time, the patent right still exists instability as the contract object, especially for the patent for utility model and patent for design, as they will not be examined as to substance during the examination and approval process, and it is likely that they may be declared invalid during the procedures for examination of the request for invalidation of the patent right or be narrowed the scope of protection. Thus, in order to avoid the occurrence of contract disputes, the parties should agree to a clause for the maintenance of patent right and how to deal with the problems such as when the patent is declared invalid in the contract.
 
(7) The way of computing royalties should be agreed to explicitly
 
As for the way of computing patent royalties, it is feasible to adopt the form of summing up and paying off, summing up and paying in installments, paying commission or paying commission plus paying initial fees in advance. If the commission payment is adopted, it should be agreed to that the licensor is entitled to consult the account book of the patented products sold by the licensee. However, as the financial systems of most enterprises in our country is not standard, there are different kinds of accounts, including public accounts and inner accounts, and sales without issuing invoices are also very common, it is hard to tell the genuine from the false. Thus, profit commission is the riskiest way for the licensor, and sales amount commission comes next.
 
(8) How to deal with infringement should be agreed to explicitly
 
During the performance of patent license contract, there may arise a situation where a third party files a lawsuit against the licensee, claiming that the patent exploited by the licensee infringed its right, that a third party infringes the patent right agreed to under the patent license contract. Thus, how to allot between the licensor and licensee for the fees for ceasing infringement as well as the compensation obtained should also be agreed to. For the liability for infringing the right of the third party, according to the stipulation of Article 353 of the Contract Law, where the exploitation of a patent in accordance with the terms of the contract infringes upon the legitimate rights and interests of others, the licensor shall be liable, except as otherwise agreed upon by the parties. Thus, agreement on this issue in advance and allocation of liability are of vital importance to the licensor.
 
(9) The “invalid clauses” should be avoided in the license contract
 
The Article 329 of the Contract Law stipulates that: “A technology contract which monopolizes the technology or impedes the technological progress illegally shall be null and void”. Article 10 of the Interpretation of the Supreme People's Court concerning Some Issues on Application of Law for the Trial of Cases on Disputes over Technology Contracts lists the following circumstances which belong to “monopolizing the technology or impeding the technological progress illegally” and should be avoided when the contract is concluded:
 
① restricting one party from conducting new research based on the technology
 
that is the subject matter of the contract or restricting one party from using the improved technology, or the conditions for exchanging the improved technology between both parties is not equivalent, including requiring one party to provide the technology improved by itself to the opposite party free of charge, non-reciprocal transfer to the opposite, monopolizing or sharing the intellectual property of such improved technology free of charge;
 
② restricting one party from obtaining technology similar to that supplied by the supplying party from other sources or from obtaining a competing technology;
 
③ preventing one party from fully exploiting the technology which is the subject matter of the contract in a proper way according to the needs of the market, including unreasonably restricting the receiving party from exploiting the technology which is the subject matter of the contract to manufacture products or the quantity, type, price, sales channel and export market of the service provided;
 
④ requiring the receiving party to accept any additional conditions unnecessary for the technology exploitation, including buying any unnecessary technology, raw material, product, equipment, service or accepting unnecessary personnel, etc.;
 
⑤ unduly restricting the receiving party from purchasing raw material, parts and components, products or equipment from other channels or sources;
 
⑥ prohibiting the receiving party from filing an opposition against the validity of the technology intellectual property which is the subject matter of the contract or attaching additional condition for filing opposition.
 
(10) The patent license contract should be recorded with the Patent Administrative Department under the State Council
 
The Article 14 of the Implementing Regulations of the Patent Law of the People's Republic of China stipulates that: “Any license contract for exploitation of the patent, which has been concluded by the patentee with an entity or individual shall, within three months from the date of entry into force of the contract, be submitted to the Patent Administrative Department under the State Council for recordal.” Although the recordal is not the necessary condition for the contract to become effective, the license contract that has been recorded can constitute a defense against the third party. In addition, the recordal materials can become powerful evidence to prove its licensee status when the licensee files a lawsuit or requests an administrative investigation and punishment. Meanwhile, the license scope and royalties under the recorded patent license contract can be taken as a reference when the court or the Patent Administrative Department decides the amount of damages or conducts conciliation.
 
II. Know-how License Contract
 
The major difference between the know-how license contract and the patent license contract is that the licensor grants a license to the licensee for the exploitation of know-how that is exclusively personal to the licensor and is in an undisclosed status. As an asset owned by the proprietor, the know-how is a practical asset based on the practical exclusive right formed through keeping it confidential by the proprietor.
 
As mentioned above, in most cases, the know-how is usually the most critical technology that is necessary for the production of a certain kind of patented product or the realization of certain patented production method. Thus, as for the know-how, it can either be licensed together with the patent, or be licensed independently. The type and main clause of the know-how license contract as well as the cautions to be observed during the execution and administration of such contract are more or less the same as the patent license contract. We only make brief explanations on their differences as follows:
 
(1) As the main clause of the contract, the content and scope of the licensed know-how should be agreed to explicitly
 
Compared to the patent, as the know-how is in an undisclosed status, its connotation and denotation can only be limited through the agreement by the parties. Thus, both parties under the contract should use accurate language to indicate the scope of the licensed know-how so as to avoid a dispute due to different understandings on the content of the licensed technology by both parties.
 
In addition, compared with the patent, the know-how may not be so apparent, and thus the validity, practicability and the technology effect especially the technical goal which may be reached should be even more agreed explicitly.
 
(2) In the know-how license, emphasis should be placed on the agreement of the confidentiality clause
 
One feature of the know-how lies in its secrecy. In case such technology is disclosed due to the license, the licensor will lose more than gain. Thus, the licensee’s confidentiality obligation as well as the liability for breaching the confidentiality obligation should be agreed to explicitly. Meanwhile, when providing technical materials, the licensor should mark “confidentiality” on the technical materials that involve confidential information so as to remind the opposite party to keep confidential the technical materials.
 
In addition, as for the improved technology obtained based on the know-how provided by the licensor, its right ownership and terms of use by the opposite party should be agreed to explicitly and the confidentiality obligation on the improved technology should also be agreed to. The reason is that if the improved technology is disclosed, the previous know-how will also be in a disclosed status naturally, which is relatively unfavorable for the licensor.
 
III. Notes when the technology import and export is involved
 
Regardless if it is a patent license or know-how license, if such technology license is the license between the Chinese enterprise and foreign enterprise, it should be bound by the Regulations on Technology Import and Export Administration of the P.R.C.. Thus, both parties under the contract should pay attention to the following issues:
 
(1) Whether the licensed patent belongs to the technology that is restricted or prohibited from being imported and exported should be checked in advance
 
As for the technology that is prohibited from being imported and exported, the license contract cannot be signed between parties, while for the technology that is restricted from being imported and exported, a relevant license should be obtained. Thus, the parties under the contract should confirm in advance whether the licensed technology belongs to the technology that is restricted or prohibited from being imported and exported. It is advisable to refer to the list of technologies prohibited or restricted from being imported, which is formulated and promulgated by the Foreign Trade Department under the State Council together with the relevant department of the State Council.
 
(2) The licensor should investigate in advance that whether the licensed technology will infringe the right of others
 
Article 24 of the Administration of Technology Import and Export Regulations of the P.R.C. stipulates: “the licensor under a technology import contract shall warrant that it is the lawful owner of the technology to be provided or that it is the person who has the right to transfer or license. If the use of technology provided by the licensor by the licensee under the technology import contract in accordance with the contract is accused of infringement by a third party, the licensee should notify the licensor immediately; After receiving the notification, the licensor should assist the licensee in eliminating the obstacle. If the use of technology provided by the licensor by the licensee under the technology import contract in accordance with the contract infringes upon the lawful rights and interests of another person, the responsibility shall be borne by the licensor.”
 
Based on this, it can be seen that in the technology license which involves technology import and export, the licensor should burden all the liabilities of infringing the right of the third party, furthermore, it should not agree to the burden of liability with the licensee. Therefore, the licensor should make an investigation in advance so as to avoid being sued in the future.
 
(3) The right of use with regard to the improved technology should be agreed
 
The Article 27 of the Regulations on Technology Import and Export Administration of the P.R.C. stipulates: “within the term of validity of a technology import contract, an achievement made in improving the technology concerned belongs to the party making the improvement.”
 
Based on this, it can be seen that in the technology license that involves the technology import and export, an achievement made in improving the technology concerned belongs to the party making the improvement, and the parties should not agree to the right ownership thereof. In order to ensure the legal use rights of both parties on the improved technology, it is advisable for parties to agree to the free use right on the improved technology in advance.
 
(4)  According to the stipulation of the Article 29 of the Administration of Technology Import and Export Regulations of the P.R.C., the following contents should be avoided when executing the contract:
 
①requiring the receiving party to accept any additional condition unnecessary for the technology import, including buying any unnecessary technology, raw material, product, equipment or service;  
 
②requiring the receiving party to pay a royalty for a technology when the term of validity of the patent right in has expired or the patent right of which has been invalidated, or to undertake other relevant obligations;
 
③restricting the receiving party from improving the technology supplied by the supplying party, or restricting the receiving party from using the improved technology;
 
④restricting the receiving party from obtaining technology similar to that supplied by the supplying party from other sources or from obtaining a competing technology;
 
⑤unduly restricting the receiving party from purchasing raw material, parts and components, products or equipment from other channels or sources;
 
⑥unduly restricting the quantity, variety, or sales price of the products the receiving party produces; or
 
⑦unduly restricting the receiving party from utilizing the channel for exporting products manufactured using the imported technology.
 
(5) With respect to the technology license contract that involves technology export, it should be registered with the Foreign Trade Department of the State Council.
 
With respect to the technology license contract that involves technology import and export, according to the relevant stipulations of the Regulations on Technology Import and Export Administration of the P.R.C. and the Measures for the Administration of Registration of Technology Import and Export Contracts, the license should be registered with the Foreign Trade Department of the State Council. Especially when the foreign enterprise grants a license to a Chinese enterprise, it is even more advisable to handle relevant registration procedures. If such registration procedures are not handled, the royalties cannot be remitted.
 
Conclusion
 
As a special type of contract, the technology license contract has not only the particularity of patent or know-how, which means the issues of monopoly, territoriality, administrating and intangibility will occur in the technology license contract, but also has similarities with civil contracts, which means the issues in the ordinary contract disputes will also occur in the technology license contract. Thus, it should be cautious and rigorous to execute the technology license contract. It needs the technology expert to examine the effect of such technology carefully, more important, it also needs the lawyers who are proficient in patent litigation and contract litigation to provide guidance.
 
Our firm has handled numerous cases regarding the drafting, examining and registration of technology license contracts and therefore accumulated rich experience. Based on the legal regulations as well as our firm’s experience, this article makes a brief summary on the contents, constitution and cautions of the technology license contract. It will be our honor if this article is of help to you.
 
Our firm is also very pleased to use our experience to provide legal and technical advice for the one who needs to sign the technology license contract. If you have any questions or requirements, please feel free to contact us.

（2013）