On March 29, 2018, the State Council issued Measures for transferring Intellectual Property rights (IPR) to foreign parties (Pilot) (hereinafter called “Measures”). The Measures are effective immediately and apply to all technical IPR (i.e., patents, registered integrated circuit layout designs, computer software copyrights and new plant varieties rights). According to the Measures, in IPR export and M&A approval process, a relevant IP department under the State Council (e.g., the State Intellectual Property Office) must conduct additional review before IPR transfer to a foreign entity or before foreign investors acquire Chinese companies that include IPR transfer.  Previously, in IPR export approval process, only non-IP departments reviewed IPR transfer. In M&A approval process, no government departments reviewed IPR transfer.

IPR Subject to Measures

According to the new Measures, the overseas IPR transfer (including both export and international acquisition) will be subjected to review only if the transfer involves technical IP, such as patents, registered integrated circuit layout designs, computer software copyrights (but not other copyrights), and new plant varieties rights (including applications for same). This implies non-technical IPRs, such as trademark, design, and copyright (except for computer software) are not included in the list. While, trade secret and know-how are not included, exporters and acquirers might need to get approval according to the current Regulations of the Administration over Technology Import and Export and the Notice on Launching the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors.

IPR Transfers Subject to Measures

Overseas IPR transfer is defined as a transfer of their Chinese IPRs by Chinese companies or individuals to foreign companies, individuals or other organizations, and more specifically, only: changing right holders, changing actual control person, and exclusive licensing of IPR. The above definition implies that the Measures only apply to Chinese entities exporting IPR to a foreign entity. Foreign entities acquiring Chinese IPR from another foreign entity are not subject to the Measures. Further, inventions made in China under employment to a foreign entity are not subject to the measures.

Approval Process

Specifically, related departments under State Council will scrutinize the overseas IPR transfer by considering its impact on national security and the country’s core technology in key areas. However, the Measures do not define the meaning and scope of national security and the country’s core technology in key areas, which may result in uncertainty of the measure’s applicability.

As to IPR export, after the local trade authority receives an application submitted by the applicant (usually a Chinese company) the local trade authority will determine if the applicant is trying to export restricted technology[1] by way of IPR transfer.  If not restricted or prohibited technology (e.g., patent for cosmetics), the authority will issue a certificate of free export. If the authority determines the technology is restricted, the authority will transfer the IP related documents to IP-relevant administrative departments to conduct further assessment, and the IP-relevant administrative department includes the local intellectual property administrative agency (for patent and integrated circuit layout designs), the science and technology department (for computer software), and administrative departments for agriculture or for forestry (for new plant varieties rights). The IP-relevant administrative departments will review the documents and give their opinions or feedback to the local trade authority. The local trade authority will decide whether to issue the technology export license after considering the opinion from the IP-relevant administrative departments.

As to international acquisitions involving IPR transfer, the foreign investors shall file an application with the Ministry of Commerce. If the M&A falls under the scope of security review[2], the Ministry of Commerce shall file a request for M&A security review with the Ministerial Panel[3]. During the security review, the Ministerial Panel will transfer IP related documents to IP-relevant administrative departments by IP-type. The IP-relevant administrative department includes the State Intellectual Property Office (for patent and integrated circuit layout designs), the National Copyright Administration (for computer software), and administrative departments for agriculture or for forestry (for new plant varieties rights). The Ministerial Panel will decide after considering the opinion or feedback from the IP-relevant administrative departments.

Since the cooperative mechanism introduces potentially additional review from IP-relevant administrative departments, it may take more time for the company to get approval for IPR export or international acquisitions. Accordingly, foreign companies should conduct IP due diligence more carefully to assess whether any IPR at issue is likely to be restricted from export to foreign parties and consider their risk and possible loss if a company acquisition is not approved because of the disapproval of the IPR transfer.

 

[1] The restricted technology refers to the technology listed from the Catalogue of Technologies Prohibited or Restricted from Export at http://www.mofcom.gov.cn/aarticle/b/c/200809/20080905801122.html

[2] Scope of M&A security review covers: foreign investors’ M&As of military industrial enterprises or military industry related supporting enterprises, enterprises located near key and sensitive military facilities, and other entities relating to national defense; foreign investors’ M&As of key domestic enterprises in areas such as agriculture, energy and resources, infrastructure, transport, technology, assembly manufacturing, etc., whereby the foreign investors might acquire the actual controlling right thereof.

[3] Source: http://www.gov.cn/zwgk/2011-02/12/content_1802467.htm