After nearly twenty years of advocacy, China has finally revoked certain offensive provisions of the Administration of Technology Import/Export Regulations (“TIER”), effective March 18, 2019. The decision was made by State Council decision no. 709, paragraph 38 of March 2, 2019, which provides as follows:
A rough translation is:
38. Delete Article 24, Section 3, Article 27 and Article 29 of the Regulations of the People’s Republic of China on the Administration of Import and Export of Technology.
Article 41 shall be changed to Article 39 and revised as follows: “The competent foreign economic and trade department of the State Council shall, within 3 working days from the date of receipt of the documents stipulated by this Article 38 register a technology export contract and issue a technology export contract registration certificate.
The relevant provisions being modified of the TIER, as translated on the WIPO website, are as follows:
24 (3): Where the receiving party to a technology import contract infringes another person’s lawful rights and interests by using the technology supplied by the supplying party, the supplying party shall bear the liability therefore.
27: Within the term of validity of a contract for technology import, an achievement made in improving the technology concerned belongs to the party making the improvement.
Article 29 A technology import contract shall not contain any of the following restrictive clauses:
(1) requiring the receiving party to accept any additional condition unnecessary for the technology import, including buying any unnecessary technology, raw material, product, equipment or service;
(2) requiring the receiving party to pay exploitation fee for a technology when the term of validity of the patent right in which has expired or the patent right of which has been invalidated, or to undertake other relevant obligations;
(3) restricting the receiving party from improving the technology supplied by the supplying party, or restricting the receiving party from using the improved technology;
(4) restricting the receiving party from obtaining technology similar to that supplied by the supplying party from other sources or from obtaining a competing technology;
(5) unduly restricting the receiving party from purchasing raw material, parts and components, products or equipment from other channels or sources;
(6) unduly restricting the quantity, variety, or sales price of the products the receiving party produces; or
(7) unduly restricting the receiving party from utilizing the channel for exporting products manufactured using the imported technology.
This is one of 49 separate legislative provisions being modified by notice 709 of the State Council.
The TIER was itself part of ongoing WTO disputes (DS542, and DS549). In addition, it was called out by USTR in its 301 Report on China’s forced technology transfer regime . A panel had recently been composed in the US case against China (DS542). The State Council has now addressed the most onerous provisions of the TIER by removing those provisions that had most obviously violated China’s National Treatment obligations under TRIPS Article 3, including footnote 3, which addresses discrimination in “the availability, acquisition, scope, maintenance and enforcement of intellectual property rights as well as those matters affecting the use of intellectual property rights.”
The legislation is immediately effective. However, it does not address contracts that had previously been negotiated under the prior TIER. Article 84 of China’s Law on Legislation does provide for the possibility of retroactive effect where the new legislation is made in order to better protect the rights of citizens, legal persons and other organizations, and may apply in this circumstance. It will be up to the courts and/or the State Council to issue necessary interpretative guidance.
Interestingly, China did not take a “phased” or “limited” approach to revoking these terms, such as providing for limiting the application of mandatory provisions to protect smaller businesses or creating a default provision that could be waived in writing. The Chinese government, to its credit, thus intended to rely solely upon the market and any other general provisions of the Contract Law. China also did not seek to clarify the relationship between the TIER and China’s Contract Law or Antimonopoly Law, which had overlapping provisions with the TIER, and which should now apply more clearly and equally to foreign and domestic licensors. However, the TIER provision regarding non-profit oriented technical cooperation, including government to government science and technology cooperation also continues to be in effect. Specifically, article 2 of the TIER states that the legislation governs “technical cooperation” including “technical services and transfer of technology by other means.” (Art. 2).
It will be interesting to determine if the changes in the TIER have any impact on the manner in which technology is transferred by foreign companies to China, including use of affiliated/subsidiary companies of foreign companies in China to import foreign technology to avoid application of the TIER to technology imports. The majority of US licensing transactions to China had been through such intermediated/affiliated entities. After the affiliated licensee takes over the licensing activity of the licensor, any subsequent sub-license was believed to be governed by China’s Contract Law.
The amendment also comes shortly after China passed a new Foreign Investment Law on March 15, 2019, which also purports to address the forced technology transfer problem identified in the Section 301 report. These legislative efforts thus appear to be part of a package intended to address US concerns.
Blog post by Mark Cohen. Thanks to Jill Ge of Clifford Chance, Shanghai for pointing out this legislative development to me. Thanks as well to the many lawyers, companies, officials, judges, and business people over the years who have advocated for revising the TIER and to the State Council for finally undertaking these revisions.