China steps up scrutiny of IP transfers to foreign firms on national security grounds: Under new regulations issued by the State Council on Thursday, technology transfers include IP transfers that are part of acquisitions made by foreign firms involving patents, integrated circuit layout design, computer software copyright and plant varieties. Such transfers will be assessed in terms of their impact on national security and the country’s “key technology innovation capability in key areas,” said the document.
This move is not intended to “upset foreign investors” but rather to formulate “concrete measures to secure a better business environment,” said Zhang Zhicheng, director of the Protection and Coordination Department at SIPO. Zhang also noted the importance for China to strictly review core IP transfers.
Our preliminary observations: Some observers believe the measures are drafted in retaliation to the Section 301 report of the US government which addresses Chinese investment in the United States as well as the US request of China for consultations of China over the Technology Import / Export Regulations, which are also referred to in these regulations. We are also unclear at this point if these regulations were previously “in the works” or otherwise accelerated in response to the Section 301 investigation.
Companies should consider consulting counsel on the impact of these regulations. First, it appears likely that a foreign-invested company’s acquisition of Chinese technology is an IP ‘transfer’ for purposes of these regulations. Under US law, these might be considered a “deemed export“ if a foreign national obtains technology while in the United States These regulations do not use this terminology. The regulations may impact foreign companies based on their source of capital rather than the presence of foreign nationals. For example, the regulation’s scope appears to include transfers that occur wholly within China, as they refer to transfers “to foreigners” of Chinese IP, and earlier regulations, by contrast, focused on transfers to enterprises overseas. .(本办法所述知识产权对外转让，是指中国单位或者个人将其境内知识产权转让给外国企业、个人或者其他组织.) Compare with the Provisional Regulations on the Administration of Technology Exports 技术出口管理·暂行办法 (对外经贸部/国家科委) (June 26， 1990) (本办法所称的技术出口是中国境内的 公司， 企业， 研究机构以及其·他组织或者个人（不包括外商投资企业， 外国在中国公司。。。。）向境外的公司。。。。). Further clarification on this important issue would be helpful.
Another issue requiring clarification is the difference between technology transfer and an assignment or licensing of a patent. This distinction has been confusing for some time, and these regulations carry this confusion forward. The earlier 1990 regulations also regulated the transfer of patents, as well as registered trademarks (!) as a form of “technology transfer” (Art. 2). However, in most cases, any “leakage” of technology arising from a patent application occurred at the time of the publication of the patent application or grant. An added complication is that China already has procedures in place for regulating foreign filings of patents for national security purposes. Article 20.1 of the Chinese Patent Law provides for confidentiality examination of these applications. These measures may be redundant with these procedures, particularly in regulating the transfer of patent applications to foreigners.
Until further clarity is established by implementing rules, these regulations could have an impact of disrupting existing foreign-invested R&D or cooperation across national borders. Two questions come immediately to mind: if, for example, a Chinese national is under contract to conduct R&D for a foreign-invested company, or is an employee of that company, is the transfer in ownership of the patent application, from the employee to employer a “transfer of technology” for purposes of these regulations? Another question is what is the standard that applies to determine whether an invention created by individuals in China and overseas was “created in China” and is transfer is subject to these regulations? It is also worth noting that the 1990 regulations specifically exempted bilateral scientific cooperation (Article 2). These do not.
In a separate development, the State Council released measures this week to strengthen the security management of scientific data. The measures, which prioritize data security and focus on data sharing, order strengthening supervision of the use and sharing of scientific data with both domestic and foreign parties.
Finally, this blog and its preliminary observations are not a substitute for legal counsel for better understanding and actionable steps towards compliance with China’s export control regime.
Please advise of any necessary corrections.