The Civil Code of China has now been enacted by the National People’s Congress (eff. January 1, 2021). As previously discussed in this blog, the Civil Code now incorporates the technology contract provisions of the former Contract Law, with certain revisions.
There are two significant changes in the enacted technology contract provisions from the prior public draft. One constitutes an unwelcome addition, while the other is a welcome removal.
The Unwelcome Addition
The unwelcome addition is the underlined text below:
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.
This provision is like Article 29 of SIPO’s draft service invention remuneration regulations which provided:
第二十九条 单位拟转让职务发明的知识产权的，发明人享有在同等条件下优先受让 的权利。
29. Where an entity intends to assign intellectual property rights of a service invention, the inventor is entitled to priority transfer on equal terms.
This provision is similar to Articles 339 and 340 of the Contract Law (1999), which had however established that this right was subject to other terms separately negotiated (除当事人另有约定的以外), however it is now non-negotiable. The IP and International Law Sections of the American Bar Association had commented on the non-negotiable draft regulation (April 20, 2015). It noted that such language was “contrary to international norms”, but also was contrary to the ownership rights of the acquiring company. Moreover, such a right may be in conflict with the employee’s labor contract with her company. As drafted this language may also entail an additional layer of approvals from the inventor and could impede subsequent commercialization through sublicensing or assignment to third parties by the owner by establishing a non-waivable first right of first refusal which is also not limited by time. It may thereby weaken China’s ability to commercialize higher value service invention patents at precisely the time when its technology markets appear poised to take-off. I hope that subsequent laws, regulations and court practice will limit its potentially expansive scope.
The Welcome Removal:
Article 850 addresses appears to address a long-standing contract in the technology contract law, namely its overlapping jurisdiction with China’s Antimonopoly Law. As I noted in my prior blog, an added level of ambiguity is interposed because the Civil Law is more recent that the revisions to China’s Technology Import/Export Regulations, and is at higher level of legislation than these regulations. Moreover, it is considered major legislation, as it is enacted by the NPC as a whole and therefor might be considered as having significant persuasive weight. Vague language in the technology transfer contract provisions of the Civil Code such as “mutual benefit”, “monopolize technology”, “hindering technology progress”, ‘infringing technological achievements”, create unpredictability in China’s burgeoning technology markets. The the removal of “hindering technology progress” as a basis for invalidating technology contracts (Art. 850) is therefor welcome:
Article 850 A technology contract that illegally monopolizes technology,
hinders technological progress, or infringes on the technological achievements of others is invalid.
The removal of this phrase may serve to limit discretion of courts or administrative agencies in invalidating contracts to circumstances more clearly defined by third parties. Contractual provisions that are determined to be anti-competitive under China’s Antimonopoly law or are determined in a court or administrative proceeding to infringe on the rights of third parties are now more clearly within the scope of Article 850. Moreover, the Antimonopoly Law already contains eight separate references to technology development and thus may be said to adequately reflect concerns over contracts that seek to monopolize technology. Contrariwise, there is no separate agency specifically tasked to determine what constitutes “technological progress” in a contract, so its removal makes clear that invalidity determinations may depend on separate antimonopoly or infringement proceedings.
Article 850 was originally promulgated in Article 329 of the Contract Law (1999). Its adoption occurred eight years before China enacted its Antimonopoly Law. With the passage of the Antimonopoly Law, it created an unnecessary ambiguity over its scope and role. this Civil Code revision is a welcome rejoinder to the concerns I had previously raised in a book I coauthored on the AML (2011), and in testimony before the US-China Economic and Security Review Commission (2015). At that time I expressed concern about China’s desire to pursue antimonopoly regulation in licensing contracts in the absence of an antimonopoly law. Those concerns now appear to have been addressed.
I hope you will considering joining me and several other great speakers when we discuss these and other issues in a timely webinar on Licensing and Antitrust in China, Wednesday June 3, 2020 at 4:30 PM PST.