The NPC has released a draft of the contract chapter of the draft civil code for public comment. According to the NPC Observer, this is the first draft of the entire Civil Code with the final round scheduled for consideration as early as March 2020. Comments are being accepted by the NPC through January 26, 2020. According to the NPC Observer the contracts section of the draft had previously been separately published in December 2018. This blog considers the differences between the contract law provisions and the current draft, as well as the relationship of the draft entire civil code with other legislative changes involving technology contracts.
Chapter 20 of the contract chapter deals with technology contracts. Based on a quick read, several provisions are directed to long-standing concerns, such as ownership of service invention compensation, ownership of improvements (grant backs), indemnities from infringement, and the relationship of contract regulation to China’s Antimonopoly Law and the recently amended Technology Import Export Regulations (TIER).
Some Key Substantive Provisions
Articles 847 and 848 deleted from the prior draft the part (Arts. 622, 633) that addressed mandatory service invention (employee inventor) compensation, which proposed that “[a] legal person or an unincorporated organization shall extract a certain percentage [emphasis supplied] from the proceeds obtained from the use and transfer of the service technical achievements and award or reward individuals who have completed the service technical achievements.” The draft law thereby appears to carry forward the ambiguity and debate regarding what amount of compensation is required, if any, in addition to salary and other benefits. This had also been a focus of previous bilateral discussions.
Article 847 Where the right to use or transfer a service technical achievement belongs to a legal person or an unincorporated organization, the legal person or unincorporated organization may conclude a technical contract for the service technical achievement. When a legal person or an unincorporated organization concludes a technology contract to transfer service technology achievements, the person who completed the service technology achievements has the right to receive priority transfer on equal terms. The service technical results are the technical results of performing the work tasks of a legal person or an unincorporated organization or mainly using the material and technical conditions of a legal person or an unincorporated organization.
Article 848 The right to use or transfer a non-service technical achievement belongs to the individual who completed the technology achievement, and the individual who completed the technology achievement may conclude a technology contract for the non-service technological achievement.
Articles 849 and 875 addresses ownership of improvements, providing further detail on the implications of the removal of Article 27 in the recently revised Administration of Technology Import Export Regulations (TIER). This provision also supports freedom of contract, by providing that the improving party owns the improvements unless the parties stipulate otherwise.
Article 875 The parties may agree in the contract in accordance with the principle of mutual benefit and determine how to share the technical results of implementing patents and using technological secrets for subsequent improvements; if there is no agreement or the agreement is not clear, and it is still uncertain according to the provisions of Article 510 of this Law 【regarding supplemental contractual language】 then the technical results of subsequent improvement by one party shall not be shared by the other parties.
Article 874 also supports freedom of contract by providing for a default but negotiable indemnity against third party infringements or torts. This language is consistent with the revised Art. 24 of the TIER
Article 874 Where the assignee or the licensee implements a patent or uses proprietary technology to infringe upon the legal rights and interests of others, the assignor or the licensor shall be held liable unless the parties agree otherwise.
Relationship with Other Laws
As indicated, the draft law must also be read in conjunction with the revised TIER and other laws and regulations. As a higher level, more recent legislation, the Civil Code language would generally be more authoritative than the TIER in the event of any conflict. Among the provisions that reference other laws and regulations is Article 877 which provides that these other laws and regulations shall normally govern. Moreover, Article 877 does not expressly restrict the Civil Code from “gap-filling” these other laws and regulations. It may thereby perpetuate the possibility of government intervention through its vague language such as “mutual benefit”, “monopolize technology”, “hindering technological development”, ‘infringing technological achievements”, etc.
Article 877 If there are laws and administrative regulations on technology import and export contracts or contracts for patents or patent applications, such provisions shall be followed.
The draft law also contains vague references to competition and antimonopoly law. Article 850 contains identical language to Article 329 of the Contract Law, and Article 864 is nearly identical to Article 343 of the Contract Law:
Article 850 A technology contract that illegally monopolizes technology, hinders technological progress, or infringes on the technological achievements of others is invalid.
Article 864 A technology transfer contract and a technology license contract may stipulate the scope of patent implementation or use of technology secrets, but they shall not restrict technology competition and technology development.
As with the prior Contract Law and TIER, the law does not clarify the difference between a covenant not to sue or a settlement of an infringement lawsuit on the one hand, and a patent license agreement. Lawyers drafting such settlement agreements may wish to ensure that default provisions of the Civil Law, such as those regarding indemnities and ownership of improvements do not come into play.
These provisions also further underscore the importance of thorough monitoring of changes on technology transfer, including the TIER, particularly as operational implementation by the courts and administrative agencies, through cases, judicial interpretations, and rule making, may now be more significant than legislative changes.
In addition to these revisions to China’s contract law in the proposed Civil Code, an Export Control Law has also been released for public comment by the NPC. The draft law sets up a general export control system and specifically regulates both technologies and services (Art. 2). Comments are also due January 26, 2020.
Happy New Year to all!
Note: all translations are based on machine translations with minor editing and are not intended to be authoritative. Please provide any corrections or suggestions on these translations or any additional commentary to the author. This blog was revised on March 23, 2020 with the assistance of Dr. Xu Xiaofan.
Categories: AML, China IPR, civil code, export controls, Legislation, Licensing, NPC, NPC Observer, TIER, trade war
Dear Professor Cohen, thanks for this very informative post and for linking to my blog. I just wanted to note that the Contracts Part has been incorporated into a complete draft Civil Code (https://npcobserver.files.wordpress.com/2019/12/civil-code-draft.pdf), in which the chapter on technology contracts starts with article 843 and on page 160 of the PDF. Some of the provisions you quoted above are slightly different from those in the newest draft. Happy New Year!
Dear Professor Cohen, thank you for sharing this information. Your blog continues to be a valuable reference point. Could you please advise if there is an official or unofficial English version of the draft Civil Code available. It be terrific if one is available, and make a review more efficient for many interested in this area. Thank you. I also take this opportunity to wish you a happy new year.