Licensing considerations for global companies in China

In China, as in other jurisdictions, there have been many cases of foreign companies filing patent infringement claims against third parties, which lead to a so-called ‘patent battle’. A common strategy to deal with patent infringement claims is to negotiate to obtain a patent licence. However, there are particular issues other than the common issues one may experience in other jurisdictions, this article raises some red flag issues for global companies signing licensing agreements in China.

Type of patent licence

A patent licensing agreement should be formalised in written form. According to the degree of restriction on the licensee from high to low, the agreement can be divided into three categories, namely: exclusive licence, sole licence and general licence (独占许可、排他许可and普通许可 in Chinese). The three types of licences have different legal effects, making it crucial that each is used correctly. This is especially the case when a licence is drafted in multiple languages. Quite often, parties mix up sole and exclusive licences. It is thus important to define the nature of the licence, rather than merely naming it as either a sole or exclusive licence, because translation issues or different governing laws may lead to different interpretations.

An exclusive licence enables the patentee to license its invention to the licensee only for a specific period of time, and binds the licensor not to share the patent with anyone else. Even the patentee itself is not allowed to exploit the patent. A sole licence allows the patentee to license the patent to the licensee only, but the patentee itself is permitted to exploit the patent. A general or non-exclusive licence does not restrict the patentee to further exploit or license the patent to other parties.

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

• an exclusive licensee could unilaterally file a patent infringement lawsuit asserting the licensed patent;
• a sole licensee could file a patent infringement unilaterally under the circumstances that the patentee does not file the patent infringement lawsuit in relation to the licensed patent or assert the patent jointly with the patentee; and
• a general licensee needs to obtain specific authorisation from the patentee to assert the licensed patent, to file a patent infringement lawsuit.

Undertakings in the patent licence agreement

To further protect the patentee’s interests, some patentees may incorporate a no-challenge clause into the patent licence agreement to ensure that the licensee undertakes not to file an invalidation against the subject patent(s). However, there is a risk that the relevant clauses may be regarded as invalid under Chinese law, because they obstruct technological improvements or create a monopoly on technology.

Entitlement to improvements

The Civil Code of People's Republic of China specifies that a technology agreement that illegally monopolises technology or infringes another’s technological achievement is invalid. Therefore, a clause in a licensing agreement stipulating that all the improvements shall unconditionally be owned by the patentee/licensor without fair consideration may be deemed invalid. On the other hand, if the entitlement clause is not sufficiently specific or detailed, the general wording (eg, the improvement belongs to the party who makes a substantial contribution) is not helpful in an actual entitlement dispute in the future.

Filing licence agreements at the China National Intellectual Property Office (CNIPA)

Although filing the relevant licence agreement shall not affect its effectiveness, it will be useful for the licensee when it comes to enforcing its rights against third parties infringing the relevant patent. CNIPA’s endorsement would also enhance the role of the patentee/licensor.

Exiting licence agreements

One of the more common disputes between licensors and licensees is the early exit from the terms of a licence agreement. Careful thought must be given to the termination clause of a licence agreement – especially from the licensor’s perspective – so that the licensor’s patent will not be trapped in a deal that it has no way of getting out of. A reasonable long fixed term, with flexibility in terminating the agreement when it can, is recommended.  

All in all, in China – as elsewhere – Iicensing is a recommended route to preventing patent infringement and can be beneficial for both the licensor and licensee. The terms and conditions of the patent licensing agreement should be carefully drafted and reviewed by the legal professionals in all relevant jurisdictions to better protect the party’s rights and interests and avoid potential litigation. For additional insights, see “Crucial Clauses in Global IP Transactions and the Importance of Local Law Advice”.