On March 2, 2019, the State Council, the top administrative body of China issued the Decision on Revision of several Administrative Regulation, which includes the revision of Technical Import and Export Regulation (the “TIER”).

Notably, the TIER was enacted nearly 20 years ago when Chinese parties were still weak in terms of technical capacity in comparison with their foreign competitors. However, the situation has been changed significantly in recent years, as a result, the issues including forced technology transfer have been increasingly criticized as an unfair treatment to foreign companies and discussed as an important topic on the table of international negotiations for years. We would like to analyze the effect of the revision as follow. 

1、Abolishment of Requisite Right Guarantee by Assignor

The abolished the Article 24.3 of TIER specifically provides Where an assignee of a technology import contract is using technology provided by the assignor in accordance with the provisions of their contract and an infringement of the legal rights and interests of any third party occurs, the assignor shall bear the liability. 

Notably, the provision specifies the obligation of assignor to guarantee the cleanness and completeness of the assigned intellectual property rights. Therefore, if an implementation of assigned technology infringes upon the legitimate right of a third party, then the assignor shall bear the legal liability. Court have ruled that the assignor bear the liability of infringement due to the use of assigned technology.[1] Such provision aimed to protect Chinese parties when they lack competitive strength against foreign competitors. However, whether such provision is compulsorily necessary and cannot be circumvented through agreements in contract remains controversial since the enactment of the law. 

Therefore, the abolishment of above-mentioned Article 24.3 clarified that the related party is authorized to arrange legal liability of infringement due to transacted technology according to their agreements.

2、The abolishment of provision on ownership of improved technology.

The abolished Article 27 of the TIER provides that the improved technology belongs to the party who conducts the improvement even such technical improvement is based on the assigned technology.

Correspondingly, Article 354 of PRC Contract Law provides that the related parties could arrange the share of technical fruits derived from the implementation of assigned patent or technological secret. If there is no agreement reached or the agreement is unclear and even cannot be affirmed according to Article 61 of the Contract Law, then the improved technology cannot be shared by other parties than the improving party. 

In addition, Article 10.1.1 of the Judicial Interpretation of the Supreme People's Court on Issues relating to Applicable Laws for Trial of Dispute Cases involving Technical Contracts (the “JI”) provides that "Illegal monopoly of technology and obstruction of technological advancement" referred to in Article 329 of the Contract Law shall include the following circumstances and should be prohibited.

(1) Restriction of a party concerned from carrying out new research and development on the technical basis of the subject matter of the contract or restriction of its use of improved technology or unequal conditions for exchange of improved technology between both parties, including request for one party to provide its own improved technology to the other party free of charge or unreciprocal transfer to the other party, exclusive possession or sharing of intellectual property of the improved technology without compensation;

On basis of the above-mentioned provisions, it should be noted that although the Contract Law provides the complete freedom of contract, the JI had already prohibited the abuse of relative dominant position and acquirement of improved technical fruits through above unfair approach.

Therefore, the abolishment of Article 27 provides the freedom to relevant parties to decide the ownership of improved technical fruits through contractual agreement, while the freedom will be subject to the above-mentioned Article 10.1.1 of the JI, which prohibits the requirement of transfer of improved technology free of charge or unreciprocal transfer or sharing to the assignor or a third party.

3、Abolishment of Restrictive Clause of TIER

(1)   The abolished Article 29.2 provides that a contract cannot require the assignee pay fees for the usage of or bear related obligations for technology where the patent rights have expired or have been declared invalid;

The abolishment of the provision will make no legal basis to prohibit the charge of royalties from invalid or expired patent. Therefore, a party will have to rely on 10.1.4 of JI to solve the issue of royalties of expired or invalid patent by possibly explaining such patent as a non-essential technology. [2]

(2)   The abolished Article 29.1 prohibits clauses requiring that the assignee must accept incidental provisions that are not essential to the importing of the technology, including the purchase of unnecessary technology, raw materials, products, equipment or services.

Correspondingly, the Article 10.1.4 of JI makes no substantial difference other than the additional prohibition of requirement that assignee to takeover non-essential personnel from assignor. In addition, the provision will be equally applicable to both assignor and assignee as well.

4、 Summary

In sum, the revision of the TIER will facilitate the direct application of Contract Law and JI to foreign related technology transfer in place of related abolished provision of former TIER. The Contract Law and JI will be equally applied to foreign and Chinese parties regardless of nationalities.

Such encouraging progress will benefit the implementation of principle of freedom of contract as well as secure the national treatment to foreign parties under agreements of WTO.

For more information, please contact lawyer below.

Charles Feng   Partner

Email:   Charles_feng@east-concord.com; fchao7847@hotmail.com

Cell Phone:  +86-13910336970 

Tel: +86-10-65107029             Wechat:  Fchao7847   

Abolished Provisions in TIER

附录：删改法律规定

[1] See Wuhan Jingyuan v. Fujikasui and Huayang  Supreme People’s Court (2008) Min San Zhong Zi No.8

[2] imposing on the assignee of the technology conditions which are not essential for the implementation of technology, including purchase of non-essential technologies, raw materials, products, facilities, services and takeover of non-essential personnel