On 18 March 2018, China’s State Council promulgated the Measures on the Transfer of Intellectual Property Rights to Foreign Parties (for trial implementation) 知识产权对外转让有关工作办法(试行) (the Measures). These became effective immediately.

Scope of the review

Under the Measures, two forms of transfer of intellectual property will be subject to review:

1. The transfer of technology that is “restricted” under the Catalogue of Technologies Restricted and Prohibited Technologies from Export. Technology transfers are deemed to include the grant of an exclusive licence as well as an outright transfer of ownership.

2. Acquisitions of domestic companies by foreign investors that involve outbound transfers of intellectual property.

The review will focus on the intended transfer’s impact on China’s national security and on “core technology innovation development capabilities in key areas”. The types of intellectual property rights involved include patents, rights in integrated circuits, copyright in computer software, rights to new plant varieties, etc, and rights to apply for any of those rights.

The Measures loosely lay out a procedure for the review and stipulate which authorities will be involved. For example, the review of acquisitions that involve the transfer of patents or integrated circuit rights will be conducted at the level of the State Council. However, the substantive grounds of the review are not elaborated upon. It is also not clear if the parties to an acquisition are required to self-submit for review.

While there is ambiguity on this issue, acquisitions are expressed to includes a change of owner and a change of “controller” of intellectual property rights, and the reference to acquisition of domestic enterprises by “foreign investors”, indicates that the review is intended to capture acquisitions conducted through WFOEs (wholly foreign owned enterprises) and other foreign invested entities, as well as direct acquisitions by a foreign entity.

Further detail of the implementation will be needed. The relevant departments will be required to formulate more detailed review procedures, requirements and timelines. The Measures indicate that the scope of the review may vary “depending on the categories of intellectual property to be transferred”.

Controversies

The examination of overseas technology transfer is not new. The Technology Import and Export Regulations 2001技术进出口管理条例  (the TIER), also promulgated by the State Council, imposed an approval requirement on exports restricted categories of technology, and a ban in relation to certain prohibited categories of technology. Indeed, in relation to technical transfers other than through M&A, it is unclear how the Measures differ from TIER aside from the more detailed review mechanism, which will explicitly include input from the State Intellectual Property Office.

However, TIER does not apply to acquisitions of domestic companies. And the scope of affected technology on an acquisition is not limited only to prohibited or restricted categories. Any acquisition of majority stake in a domestic company that holds technology is potentially subject to review.

It is interesting to note that the Measures was published and came into effect a week before the US initiated a complaint[i] against China at the World Trade Organisation citing its intellectual property trade practices. The complaint called out TIER, among other things, claiming that it is discriminatory and inconsistent with China’s obligations under the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights.

Richard Bird, Partner, Hong Kong

Amy Zhang, Senior Associate, Hong Kong


[i] A copy of the WTO complaint can be viewed at: https://docs.wto.org/dol2fe/Pages/FE_Search/FE_S_S006.aspx?Query=(+%40Symbol%3d+(wt%2fds542%2f1+))&Language=ENGLISH&Context=FomerScriptedSearch&languageUIChanged=true.