1. Dr. Thomas Pattloch, LL.M.Eur. IP Environment for doing R&D in China and impact of industry policies Dr. Thomas Pattloch, LL.M.Eur. German Attorney at Law Senior Counsel TaylorWessing Former Intellectual Property Officer EU Delegation Beijing

2. Dr. Thomas Pattloch, LL.M.Eur. 2 Import Value of Know-how and Patent License of China 1997-2008

3. Dr. Thomas Pattloch, LL.M.Eur. 3 Value of Technology Import of China 2003-2008.06 Breakdown Countries/Regions

4. Dr. Thomas Pattloch, LL.M.Eur. 4 Types of consensual technology transfer Sales of machinery, equipment etc. to FIEs (subsidiaries, joint ventures) or local companies Licensing agreements Sale of patented technology and know-how (transfer of patent ownership) Training of local staff and business partners Joint cooperation or commissioned projects (e.g. construction projects BOT) Co-innovation projects, joint research (including under FP7 etc.), commissioned research with technical support Local R&D based on strategic and voluntary decision of the company (in particular no investment enlargement requirement)

5. Dr. Thomas Pattloch, LL.M.Eur. 5 Value of consensual transfer Increases market access in China Proximity to customers in new product development (“D”) China as a hub to other Asian countries Cost advantage Speed: time to the market, faster product cycles (including after-sales services) Cross-selling effects to other untapped markets Branding and image (“contributor to society”) High royalties, high RoI, funds for new research and product development Cross-licensing possible to gain access to new technologies through local alliances Consumer gain access to environmental friendly/safe products Reduction of EU-China trade deficit

6. Dr. Thomas Pattloch, LL.M.Eur. 6 R&D Centres Estimated number of R&D centres: Estimated to be around 1200 in 2008 (higher estimates by MOST), app. 35 by foreign MNCs –Less full-integrated research, often more product development and adaptation –Tax benefit and status of High and New Technology Enterprise incentive may lead to normal employees re-labelled as researchers, R&D may exist only on paper –High increase in number of patent applications with a big part of utility model and designs, slower growth of invention patent applications, grant and holding rate for patents still low

7. Dr. Thomas Pattloch, LL.M.Eur. 7

8. 8 Stakeholders Foreign research institutes FIEs and MNCs Universities and private inventors (including affiliated companies) Private Chinese companies State owned enterprises (including national labs, CAS institutes etc.): Drive for joint ownership or royalty free licenses

9. Dr. Thomas Pattloch, LL.M.Eur. 9

10. 10 Typical transfer scenarios Bringing the technology into China, technology import –Joint Ventures/local investment –Sale of IPRs/licensing agreement Creating the technology in China –R&D (either by investment or through commissioned research): investment-related laws, Contract Law/Patent Law/Labour Law on commissioned research –Employee’s invention Exporting hi-tech goods from China –Assembling of high-technology goods, exports into third country markets: Foreign Trade Law –Filing inventions developed in China abroad or transmitting know-how

11. Dr. Thomas Pattloch, LL.M.Eur. 11 Impact of industry policy

12. Dr. Thomas Pattloch, LL.M.Eur. 12 Non-tariff barriers For import into China: –National standards not in line with international standards –Certification requirements –Licensing requirements (e.g. special vehicle license, cosmetics etc.) –Local content requirements (e.g. wind power sector) –Excluded technology areas for import/investment: encryption technology –Approval requirements for “restricted/prohibited technology”, e.g. equipment, under administrative rules such as Technology Import and Export Administration Regulations –Investment restrictions: Investment guidance catalogue –Requirements of local partner: Exclusive local licensee requirements (copyright industry), minimum technical local requirements and approval requirements for publication of content in the Internet –Government procurement (stated objective: import substitution) –Locally registered IPRs (trademark grabbing, junk patents) –Counterfeiting

13. Dr. Thomas Pattloch, LL.M.Eur. 13 Non-tariff barriers For export out of China: –Restrictions due to quotas, policy guidelines (rare earth) –Approval requirements for transfer of IPR to foreigners, e.g. Patent Law –Administrative laws: Foreign Trade Law, Technology Import and Export Administration Regulations, Corporate Income Tax Law and related tax regulations on business tax with influence on repatriation of royalties –State Secret Law

14. Dr. Thomas Pattloch, LL.M.Eur. 14 Risk of forced technology transfer Compulsory Joint Venture for investment, e.g. car sector Market access criteria, e.g. wind power sector Indigenous innovation policy and government procurement/bidding law accreditation procedures, e.g. machine equipment sector Arbitrary decisions on investment enlargements (R&D Centre, M&A) Disclosure-related tools –First to file in China (Patent Law) –Import and export control of all technology transactions –Certification procedures? –Design institutes?

15. Dr. Thomas Pattloch, LL.M.Eur. 15 Indigenous innovation Reduce reliance on foreign technology for the sake of economic independence and national security –Ultimate objective: import substitution, lowering import rate to less than 30% Strategy: Import, absorption, assimilation, re-innovation –Standards: Proprietary technology to avoid licensing fees, but internationally orientated to gain access to export markets –Micromanagement by political leaders and government officials (MOST Special Projects Office) –The role of SOEs/national champions and access to funding-subsidies Mega-projects financed and supervised by the government/party Previous link between government procurement and IPRs

16. Dr. Thomas Pattloch, LL.M.Eur. 16 Indigenous innovation Indigenous innovation “wrong translation” (MOST Minister Wan Gang): Self-owned innovation, independent innovation Starting point: Nationality of owner, competition-based view on innovation, focus not as much on real technical innovation capability Political framework: The National Medium and Long Term Plan for the Development of Science and Technology MLP 2006 – National IP Strategy 2008 – Indigenous Innovation Circulars since 2009 Mechanisms employed are preferential treatment, award based system in government procurement and tenders

17. Dr. Thomas Pattloch, LL.M.Eur. 17 Wind power sector Earlier 70% domestic content requirements in 2005, NDRC, upgrading of domestic wind turbines requires JV (promised to be removed in 2009 after foreign market share dropped from 70% to less than 10% in 2010) 2007 NDRC Medium and long-term Development Plan for Renewable Energy in China: Local manufacturing industry primarily based on indigenous innovation March 26, 2010 Draft Standard on “Access conditions for wind power equipment industry”, issued by MIIT, NDRC and NEA –Market access is granted on the basis of case-by-case analysis of compliance –Indigenous IPR in paragraph IV.3: Design must be done in-house, but not necessarily in China – “autonomous IPR” –Only few companies would make the cut – national champions model implied, ecosystem to build up few international competitors –European chamber stated that government tenders in the fast-growing wind-power sector were deliberately designed to keep foreign companies out of the running by inserting criteria that only Chinese companies could meet. The organization also noted that not one of 25 valuable contracts awarded to companies under the government's $584 billion stimulus package went to a foreign-owned company

18. Dr. Thomas Pattloch, LL.M.Eur. 18 Car sector New rules on mandatory JV for new energy vehicles proposed : Only minority stake of 49% allowed according to draft 10-year plan of MIIT published in September 2010 Government procurement: Only nationally branded cars to be procured in the future? –Chinese authorities are publicly thinking about new regulations to increase the ratio of domestic brand cars to more than 50 percent in government procurement of official cars, http://news.xinhuanet.com/english/2009-12/31/content_12732706.htm On August 18, 2010 representatives from 16 central enterprises signed on the Central Enterprises Electric Vehicle Association Regulations, witnessing the establishment of the central enterprises electric vehicle association. Effective mechanism to share and protect the IPRs of electric vehicle technologies among the member enterprises are intended to be established. –Patent pools or state-led cooperation in innovation markets?

19. Dr. Thomas Pattloch, LL.M.Eur. 19 The IP law environment

20. Dr. Thomas Pattloch, LL.M.Eur. 20 Patent Law Transfer of patents or patent applications to foreigners require registration/approval before being valid, both by SIPO and MOST/Mofcom (Art 10 Patent Law, Art 2 et seq. Technology Import and Export Administration Regulations) Foreigners are encouraged to file first in China (Art 20 Patent Law) for inventions completed in China and need approval under the new confidentiality examination if they want to file first abroad; approval requires full disclosure of their invention to SIPO and related ministries for each industry –Criteria are national defence, security and substantial national interests –No limitation to dual use technology, all technologies concerned Compulsory licensing should be employed where enforcing a patent is legally determined as an act of monopoly (Art 48.2 Patent Law)

21. Dr. Thomas Pattloch, LL.M.Eur. 21 Technology Import and Export Administration Regulations Measures for Technology Import and Export Administration Rules require all cross-border technology transactions into and out of China to be registered and for restricted technology areas to be approved by Mofcom and MOST High liability clauses mandatory (world-wide non-infringement guarantee), government interference in terms of private contracts possible In practice can significantly delay payment of licensing fees to licensor abroad Strong sanctions possible in case of violation

22. Dr. Thomas Pattloch, LL.M.Eur. 22 Joint ownership Art 15 Patent Law and co-ownership: contractual agreements supersede statutory law Art 14 Patent Law: Invention patents belonging to SOEs or state- owned institutions may in case of public interest or great significance to the State be ordered by government authorities with approval by the State Council to be used by designated entities against a fee.

23. Dr. Thomas Pattloch, LL.M.Eur. 23 Employee’s invention Distinct from commissioned invention or joint inventions Art 8 Patent Law: Contractual arrangements supersede statutory regulations Art 6, 16 Patent Law, Rule 76-78 Implementing Rules: –Very high reward and remuneration requirement in absence of a legally binding agreement with the employee –Mother company needs to be covered by agreement if later on filing for a patent –Application of TIER rules? –Judicial Interpretation grants right to claim inventions after employees have left the company within one year: Burden of proof? –Trade secret protection, non-competition clauses, non-solicitation clauses, confidentiality clauses

24. Dr. Thomas Pattloch, LL.M.Eur. 24 Licensing agreement and Contract Law Art 329 Contract Law: “A technology contract which illegally monopolizes technology, impairs technological advancement or infringes on the technology of a third party is invalid.” –Judicial interpretation 2004 on technology contracts defines in more detail: Restricting new research or grant-back clauses without compensation Restriction to obtain technology from a competitor Restricting exploitation in a reasonable way Attaching dispensable exploitation/sourcing conditions Unreasonably restricting channels of origin of raw materials Non-challenges clauses or conditions on challenges for the licensed/transferred IPR

25. Dr. Thomas Pattloch, LL.M.Eur. Thank you! Dr. Thomas Pattloch, LL.M.Eur., German Attorney at Law Isartorplatz 8 80331 Munich, Germany T. +49 (0)89 2 10 38 0 F. +49 (0)89 2 10 38 300 Email: t.pattloch@taylorwessing.com