Restrictive Terms in Technology Licensing Contract

Over the years, the Chinese enterprises used to be the licensee under a technology licensing contract (“TLC”), this is why the Chinese laws and regulations have stipulated provisions which are more restrictive to licenser under TLC, especially many prohibitive/restrictive provisions on the restrictive terms in TLC. For the licensers, on the one hand, they want to obtain economic benefits by licensing technology, on the other hand, they want to restrict the usage and improvement of the foresaid technology, control the sale of the products produced with the said technology and etc., so the legality and practicality are the two key points for the restrictive terms.

Current Chinese laws and regulations regulate restrictive terms in TLC mainly include “Contract Law”, “Interpretation of the Supreme People’s Court concerning Some Issues on Application of Law for the Trial of Cases on Disputes over Technology Contracts” (“Interpretation”), and “Regulations on Administration of Import and Export of Technologies” (“Regulations”). Those terms can be divided into two categories, prohibitive terms and restrictive terms. The prohibitive terms include, (a) Restraining the licensee from conducting research and development on the basis of the contractual technology or restraining that party from using improvements of the technology; (b) Restraining the licensee from acquiring technologies similar to or in competition with that of the supplying party; (c) Filing opposition on the validity of the intellectual property rights to the licensee. The restrictive terms include, (a) Restricting the amount, variety, price, distribution channels and export markets of products produced or services provided in an obviously unreasonable manner; (Note: “Regulations” has amended the restriction on export channels in an obviously unreasonable manner as in an unreasonable manner, which means the restriction on the licenser is stricter.) (b) Unreasonably restraining the licensee’s channels or sources of procuring raw materials, equipment, and etc.. (c) Requiring the licensee to purchase unnecessary technology, raw materials, products, equipment, services, and etc..

In view of this, on regulating the restrictive terms in TLC, the Chinese laws and regulations emphasis on the protection of the development and utilization of the licensed technology, and those terms which may hinder the development and utilization of the licensed technology are vetoed without reservation. However, for those restrictive terms on procuring raw materials, equipment, and selling the relevant products will be decided according to a reasonable criterion.

In practice, the judicial departments would definitely judge that the prohibitive terms are invalid. For example, in (2007) Gao Min Zhong Zi No. 592 Civil Judgment, the Supreme Court stated that, on the validity of the third paragraph, Article 8, Agreement 2, which stipulated that XX company shall not obtain the chip of Single-Chip Microcomputer with the function of target controlled infusion by other channels. Otherwise it shall be deemed as breaching the contract, and shall pay compensation to Party B amount to double amount of Party B’s loss. According to Contract Law Article 329, which stipulates that a TLC which illegally monopolizes technology, impairs technological advancement or infringes on the technology of a third person is invalid; and, Interpretation, Article 10 stipulates that restricting one party from obtaining, from other origins, the technology similar to or competitive against that of the technology provide, this circumstance belongs to “illegally monopolizing technology and impairing technological progress” mentioned in Article 329 of the Contract Law; we sustain the original court to decide this article is invalid. …….

In addition, in practice, instead of prohibiting the licensee to improve a technology, if the licenser set the scope of prohibited activities, which de facto prevents the licensee to improve the technology, these terms will be deemed as invalid normally. As an exception, where the technology is sublicensed, because the sublicense right shall not exceed the scope of the previous license right, if the previous license right has been restricted in the previous TLC, then the licensee under the previous TLC shall stipulated the same term in the sublicense TLC. Under such circumstance, to avoid be deemed as restricting the sub-licensee to improve the technology intentionally, it would be better to state the reason on the restriction, and stipulate that such restriction shall be applied in the scope permitted by the Chinese laws.

For the restrictive terms, since the reasonable criterion is not the fixed one, it is difficult for us to design a general term, and it shall be designed case by case. Here is an example for your reference. In (2003) Min San Zhong Zi No. 8 Civil Judgment, the Supreme Court stated that, According to Contract Law, Article 329, the activities illegally monopolize technology or impair technological advancement, which mean requiring the licensee to accept the unnecessary attached conditions related to the applied technology, including purchase unnecessary technology, services, raw materials, equipment or products, receive unwanted people, and unreasonably restrict the licensee to purchase raw materials, parts or equipment and etc. through different channels at its own discretion. In this case, the stone forming machine under the TLC contains patent technique, if the appellor wants to apply this technique, it shall buy this machine. According to TLC, the licensee shall build a production line valued at RMB 5 million to implement the patent technique, and this production line shall include the main engine, special mould and conveyer belt. The appellor plans to produce stone with special shape by using the respondent’s licensed technique, rather than produce the stone forming machine (the product contains patent technique). So the licenser requires the licensee to buy the equipment for special use in TLC has not violated laws and regulations.

To sum up, for the licenser, it shall try to avoid stipulating prohibitive terms in TLC, and design the restrictive terms reasonably.