The rationale
According to an official announcement, the new Measures purport to “improve the national security, protect public interest, and regulate overseas IP transfers.” In particular, the Measures are associated with China’s objective to transition its economy from the reliance on low-cost labor to high-tech innovation. In 2017, the royalties collected from China’s IP abroad exceeded US$4 billion, according to Zhang Zhicheng, director of the State Intellectual Property Office of China (SIPO). “If China fails to scrutinize such IP transfers, our indigenous innovation capabilities on core technologies will suffer, and we will incur huge economic losses, and impair our ability to compete internationally.”
While commentators expressed concerns about the chilling effect the Measures may have on foreign investment, Zhang clarified that “to establish and perfect the review mechanism for IP transfers overseas is not intended to upset foreign investors,” and that “the guideline has provided rather concrete measures to secure a better business environment.”
Applicability
The Measures apply to overseas transfers of IP rights, including patent rights, proprietary rights related to integrated circuit design, computer software copyrights, and rights to new plant varieties. Such outbound transfers may occur by way of technology export, from foreign acquisition of Chinese domestic enterprises, or any other technology transactions involving, for example, changes in the IP ownership or license.
The Measures mandate that certain overseas IP transfers must undergo an official review to assess the impact on China’s national security and technology innovation capabilities in certain sectors.
Technology export
Any technologies for export that fall under the “restricted” category set forth in the Ministry of Commerce Restricted and Prohibited Technologies for Export Catalogue will be subject to review.
For the export of patent rights and exclusive rights related to integrated circuit designs, an application has to be submitted to the local Commerce Commission, which will solicit written opinions from the local SIPO counterparts and make a decision in accordance with the Administrative Regulations on the Import and Export of Technology (effective January 8, 2011).
For overseas transfers of copyrighted software, the local Ministry of Commerce office and department in charge of science and technology will jointly assess the transfer. If computer software to be transferred overseas is registered with an appropriate software registration authority, the local Ministry of Commerce office shall, in a timely way, notify such software registration authority of the results of the assessment. A software registration authority cannot implement change of ownership procedures for the computer software in question if the software is found to be non-transferable.
Where the IP rights to new plant varieties are to be transferred overseas, the competent agricultural and forestry departments shall conduct the assessment, with emphasis on the impact of the proposed transfer on China’s agricultural security and safety.
Foreign acquisitions
For overseas IP transfers via foreign acquisitions of Chinese enterprises, if the acquisition triggers a security assessment under Chinese law, the foreign investment security assessment authority will make its decision after soliciting and considering written opinions from the relevant competent administrative departments under the State Council.
Similar to the technology exports, the agencies responsible for reviewing the patent rights and exclusive rights for layout designs of integrated circuits, computer software, and new plant variety rights in foreign acquisitions are the competent IP administrative department, copyright administrative department, and the agriculture or forestry administrative department, respectively. After reviewing the rights these departments shall then promptly issue written opinions to the relevant foreign investment security agency, which will make a final decision.
Analysis
The obvious effect of the Measures is the encouragement of formal involvement of various competent state departments in the IP transfer review process. Presumably, by involving those with more expertise in their fields, the Ministry of Commerce is capable of assessing the impact on national security and sector innovation capabilities more effectively. Without more precisely contoured standards to evaluate the impact, however, many remain concerned that officials will eventually adopt a risk-averse, conservative approach in conducting the review, at least during the implementation phase.
The Measures appear to render it more challenging for foreign investors to export the results of their R&D efforts or other IP-generating activities in China. Given China’s broad perception of national security and national interest in developing indigenous innovation, overseas transfers that are not traditionally understood to impact national security, including medical devices and pharmaceuticals, may fall within the scope of the Measures. The fact that the assessment criteria are broadly defined in the Measures also confirms this suspicion.
In addition to the broad scope and heightened scrutiny imposed by the Measures, multinational companies that participate in transactions or deals that involve overseas IP transfers may face delays in closing as the Measures fail to specify time limits for the review process. However, the staff members of the competent agencies are required to maintain confidentiality with respect to trade secrets that they are exposed to as a result of their review.
Conclusion
It is yet to be seen how aggressively the Measures will be enforced and the extent to which the Measures will affect the scope of overseas transfers of Chinese IP. Foreign investors or multinational companies looking to transfer IP from China should carefully assess the risks associated with an overseas IP transfer in light of the new Measures when calculating the overall value of the IP at issue. Foreign investors should also conduct due diligence and consult with the relevant administrative agencies as to how likely that the IP subject to the deal will trigger a security assessment.
Client Alert 2018-092
