Martin Harman Chairman, Pinsent Masons martin.harman@pinsentmasons.com Taking your technology into China whilst protecting your intellectual property Martin Harman Chairman, Pinsent Masons martin.harman@pinsentmasons.com

Hong Kong and China Laws Hong Kong: English Common law roots, strong intellectual property law, experienced judges China: Registration of patents and trade marks. Criminal law penalties of I.P. misappropriation Civil law remedies of injunction, damages Laws are in place in PRC but … .… not always what they seem and enforcement is slow Laws weighted in favour of Chinese party in technology J.Vs Technology has to be warranted by foreign party Improvements belong to party who “achieves” it Cannot restrict Chinese party’s rights to make “improvements” Courts relatively unfamiliar with I.P. legislation

Developing an “IP strategy” for China first, itemise and prioritise what and how risks will impact your business then, devise all the self-help measures you can third, take care to build legal remedies into your commercial contracts – without them you have nothing to complain about! limit third party access to your IP in case of infringement, use available enforcement mechanisms

Do you need a joint venture to establish your presence? Representative Office Wholly Foreign Owned Enterprise “WFOE” Equity Joint Venture Contractual (or Cooperative) Joint Venture

ENTRY VEHICLES (1) Representative Office Simplest, least expensive Restricted permissible activities, largely liaison, no profit making Requires approval of, and regulation with, Chinese authorities Short term

ENTRY VEHICLES (2) Wholly Foreign Owned Enterprise (WFOE) Investment vehicle of choice More control over own affairs, better able to protect I.P. No need for PRC co-investor BUT need to export set percentage of output “Catalogue” may restrict use of WFOE in certain sectors Application for approval and registration fairly complex.

ENTRY VEHICLES (3) Equity J.V. Contractual (or Cooperative) J.V. Profits distributed in ratio of capital invested Separate legal entity Requires registration Contractual (or Cooperative) J.V. Profits distributed in accordance with J.V. agreement Can be separate legal entity or a partnership type structure Chinese party can “provide” land, buildings as capital Foreign party must contribute at least 25% of capital Technology cannot exceed 20-35% of registered capital Registering authorities may disapprove imbalanced allocation of profit (reasonableness).

Your vulnerabilities – in terms of IP infringement should you be most worried about your joint venture partner? do you need a JV partner, or does he need access to IP? is your IP so sophisticated that it cannot readily be replicated in China? is your IP undergoing such a rapid pace of development that an isolated act of infringement could not undermine the business? are you concerned to protect the future market in China itself – do you understand how the brand can best be represented in China?

Your vulnerabilities – in terms of unexpected incidence of Chinese laws take account of laws protecting the rights of Chinese recipients of technology imports to ‘improve’ the technology note mandatory imposition of Chinese governing law in certain circumstances If contract has foreign element then theoretically can choose foreign law If technology is part of foreign capital injection, approval of authorities may require Chinese Law Overriding concept of “reasonableness” Even if Chinese Law applies, can choose Hong Kong as centre for dispute resolution consider how your IP will be treated in the event of a winding up of your JV

Self-help (examples) keep your newest IP offshore arrange for China manufacturing of basic components, with the high tech part added later, outside China (perhaps in Hong Kong) require Chinese party to purchase your ‘secret sauce’ – delivered in a way incapable of replication / reverse engineering use of an R&D formula which involves hands on supervision and development by expatriate engineers Avoid secondments, encourage direct employment Consider consultancy agreements governed by foreign law.

Legal Niceties register all your IP rights in China (patents, trade marks, copyrights) Set up the right contractual arrangements Include restrictions on the process of vetting proposed “improvements” Carefully define the “purpose”, so the technology will pass “adequacy” test Use Technology R&D Agreement in concert with Technology License Do not disclose unless you have to rights granted to China party revoked in every eventuality of default consider Hong Kong as a neutral forum for dispute resolution bear in mind administrative, as well as judicial, authorities have an enforcement role in China

Case study Proprietors of computer hardware technology seeking to inject a licence for their technology and further technology transfer, in exchange for US$ multi-million investment by an existing Chinese manufacturer structure would be via a Cooperative Joint Venture utilises: technology licence; R&D agreement; supply agreement (import); purchase agreement (export); JV agreement; trade mark agreement

Pinsent Masons in Greater China established in Hong Kong in 1983 and China (Guangzhou) in 1993 office in Shanghai (2002) and premises in Beijing focus on manufacturing; FDI; technology; infrastructure; construction over 30 highly mobile and specialist lawyers THANK YOU MARTIN HARMAN