| IT in Legal Practice
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A snapshot of technology transfer in China: A review of the Legal context (Part 2)
by Lirun London Rabinowitz, KPMG Legal
As you will recall, Part 1 of Lirun Rabinowitz's article "A snapshot of technology transfer in China: A review of the legal context" was published in the September 2003 edition of Computers and Law. Lirun continues his illuminating analysis in this edition, as he considers actions that stakeholders may individually undertake to enhance their trading in technology transfer, as well as key cultural, geopolitical and technical issues which arise in establishing the future of China's technology transfer regime.
Lirun London Rabinowitz is an associate in the KPMG Legal technology group in Sydney, advising primarily on technology outsourcing, IT security and privacy, and IPR protection. He is a qualified IP/IT ADR practitioner and an executive of the NSW Society for Computers and the Law. Lirun has recently completed a Master of International Laws degree at Sydney University, specialising in Technology Transfer and Software Piracy with a focus on China, for which he also studied at the Eastern China University of Politics and Law in Shanghai.
1 Introduction
Part 1 of this article was published in the September 2003 edition of Computers and Law. Part 1 examined the regime of technology transfer in China, by analysing its context, the key body of law applicable and the practical impact on companies transferring technology in China.
Part 2 concludes in this edition of Computers and Law, and makes recommendations for improving the technology transfer regime in China and examines the key issues at stake in the future.
2 Recommendations/ diligence[1]
While some of the methods of improving the technology transfer regime in China (suggested below) are currently being implemented, these may be further considered by the National People's Congress and its Standing Committee and surface as future features of the regime. However, the following are also actions that stakeholders may individually undertake to enhance their trading in technology transfer:
- Greater internal dialogue between key governmental stakeholders, including domestic agencies that deal with trade, security, commerce, technology and environment to accelerate processes for technology adoption;
- Establishment of alliances between governmental and non-governmental bodies, such as commercial research organisations, universities, private enterprise and relevant governmental agencies;
- Heightened awareness of intellectual property rights and demonstration of effective enforcement to instil confidence in the international investor community;
- Create incentives for private sector participation in the short, medium and long terms, including domestic and foreign participants. Initiatives that provide such incentive may include:
- Providing market information to reduce uncertainty levels;
- Facilitating technical and financial assistance;
- Initiating pilot projects and feasibility studies on opportunities;
- Publicising and democratically evolving and reforming policy; and
- Transparency and corporate visibility;
- Creating opportunities for private participation:
- Developing a business network to efficiently disseminate information;
- Trade missions; and
- Conferences and briefings;
- A combination of foreign legal prowess as well as local cultural, legal and language skills is an ideal and essential combination for any company seeking to deal in technology transfer transactions with China;[2]
- Consider making provisions for the use of the transferred technology after expiry of the term of the agreement.[3] Increasingly, deals are for much more than "box-drops" of foreign hardware. There may well be a lot of value in the continued/recycled commercialisation of the subject of the transfer; and
- No "handshake-agreements" policy. While relationships in China are a key element of business practice, the complexity and risk involved in a technology transfer deal requires that matters be adequately documented and agreed in writing, from point of initial discussions and disclosure of confidential information through to implementation and local self-sufficiency.[4]
3 Lingering issues
There are various key issues at stake in such deals, which should be kept in mind when considering the technicalities of the Chinese technology transfer regime.
3.1 Chinese coercion
While the views on this matter vary, it was traditionally considered that, to a certain extent, China forced companies doing business with it to engage in technology transfer, which effectively became the price of doing business in China.
The more cynical views (as evidenced by a Survey of the United States Commerce Department)[5] suggested that such practices were particularly geared to increasing military might. The holders of these views were often strong supporters of Chinese accession to the World Trade Organisation (WTO), based on the expectation that this indirect barrier of trade would collapse with the assumption of obligations associated with WTO membership. The holders of such views have also referred to the exploitation of loopholes in American export laws. Even more extreme views have suggested that links between technology transfer and spying, and the increasing vulnerability of US national interests.
This criticism is somewhat questionable in light of article 66.2 of Trade Related Aspects of Intellectual Property Rights (TRIPs), and the fact that developed nations are in fact under a positive obligation to take measures to facilitate technology transfer. Nevertheless, it is bolstered when companies such as Eastman Kodak secure a competition free market for four years by engaging in a technology transfer deal that salvages three local companies from failure.[6] At this point it becomes noticeable that market access is not only about entry, but can indeed translate into exclusivity if the terms of transfer are sufficiently sweet for the Chinese government. It would be interesting to track whether any similar arrangement today or in the future, post WTO accession, would be confronted by an aggrieved party in the WTO dispute body forum or even a local court and how such a dispute would be decided.
3.2 Fair application of exceptions by China
In addition to the explicit term under article 66.2 of TRIPs, there are additional provisions, which having become the subjects of disputes and panel rulings, are now considered to provide exceptions to the traditional stricter rules of classic intellectual property right protection. Various disputes have highlighted that the distinction between national health and industrial policy will sometimes be arguable, especially in countries with substantial generic industries, like China and India.[7]
It will be valuable to monitor China's treatment of international law exceptions to intellectual property rights (IPRs) and other obligations as they pertain to technology transfer regimes.
3.3 Interpretations of compromise
It is a commonly held view that when the WTO agreements were signed in Marakesh, that the stronger nations held the reigns.[8] However, it is increasingly evident, particularly since the recent Doha round of WTO discussions, that the voices of developing nations are being heard. Sub-Saharan Africa has finally gained WTO endorsement to its fight against the horrendous HIV illness, which affects many millions of its people[9] and clearly the paradigms within which the WTO operate are shifting. However the agreements from the outset have represented, at best, compromised views and have therefore been open to divergent interpretations.
3.4 Managing the conflict
Conflict that may arise[10] could stem from the contrast between the various evolving limbs of China's legal system. The technology import regime, as amended immediately prior to WTO accession, for example, and the regime pertaining to Foreign Invested Enterprises, as it relates to joint ventures, being a key method of foreign investment into China, most of which incorporate technology transfer, as a result of Article 22 of the new Regulations.
Chapter 6[11] of the Implementing Regulations for the Law of the People's Republic of China on Chinese-Foreign Equity Joint Ventures deals with the importation of technology.
These regulations apply to a joint venturer's acquisition of technology whether from another joint venturer or from a third party. Article 46 lists contractual requirements that are cumbersome and regressive, for example, re-instating the maximum term of 10 years, removed by the WTO-geared reform of the technology transfer regime.
It is unclear how the Courts would treat such a conflict. However, on this point, Ms Wei Xin, head of the international division of Beijing Dadi Law Office, has voiced the opinion that in practice, it is highly likely that the courts would interpret the new legislation as taking precedence in the case of conflict and apply it across the board to all technology transfer[13] scenarios.
3.5 Technical difficulties
Under the new regime, technologies that may be freely imported require registration but not approval. While the legally stipulated process may have changed, many of the commercial norms have remained the same. For example the sighting of a licence may still be required in many instances to conclude banking and finance arrangements or other commercial instruments[14] due to China's currency controls.
When the new system was initiated, it was questioned whether this system was genuinely a mere registration framework or actually an approval process in disguise. In any event, the business community queried how the system would cope with millions of registrations.
Ms Xin, a prominent lawyer in the field in Beijing, has expressed the view that technology transfer has become much easier. She confirms the veracity of the 3-day registration period for freely imported matters and the limited applicability of the restricted and prohibited categories.
4 Conclusion
China has an enormous task ahead of it, as it must continuously balance its implicit duties to:
Rectify traditional difficulties;
Address the evolving yet critical needs of its nation (described in Part 1 of this article as 'races');
Comply with a host of international treaties, only one of which relates to its WTO accession;
Keep its direct regulation current, relevant and consistent with its legal regime;
Cater for the international investment community, whose assistance it seeks to inject the required capital; and
Attend to the various associated dilemmas with the above.
In light of the above, it is the author's view that the current snapshot of technology transfer in China and the resulting legal regime carry a mixed report card, including commendable achievements on paper, such as online registration for contracts transferring freely imported technologies, compromised by the fact that, one and a half years later, the website built for such registration was still not operating smoothly.
As China's technological and innovation base strengthens and IPR protection follows suit, it is highly likely that further changes will occur. The impact in turn on the 'races' noted above will be particularly interesting and may possibly remain a significant factor in the policy determination of the government as they shape technology transfer.
There is no doubt, however, that China's new laws are much more conducive to technology transfer in a safe and equitable manner. In part reflecting China's strengthened position as a trading nation, these laws offer a friendlier environment to investors from developed nations and with solid navigation techniques can be easily harvested for mutually beneficial transactions.
Ambiguities in the regime remain, including legal inconsistencies and prolific administrative input. However, as these diminish, they reflect a nation truly honouring its own development. If the present trends persist, it may not be long before China's technology trade regime becomes the envy of other countries.
Footnotes
Fyodorova, M. (2000) Engaging the private sector in technology transfer programs, Business Council for Sustainable Energy Washington DC USA as found at http://www.bcse.org/adobefiles/engaging.pdf.
Xin, W. (2003) IP Law in China, Austrade seminar at Crowne Plaza Hotel in Sydney 29 May. Ms Xin has practiced in both Australia and Beijing primarily with international law firms and now heads the international division of Beijing Dadi.
Sheppard, Dr R. (undated) The impact of pre-existing regulations on franchising in China, China Law as found at http://www.wto-chinamart.com/english/impact.html.
Anonymous (2001) The technology transfer process as found at http://www.iia.msu.edu/absp/techtransfer.html.
Bloomberg (1999) China 'coerces' firms for technology transfer, US survey says, Free Republic 8 April, as found at http://www.freerepublic.com/forum/a370cccd60b4a.htm.
Sheridan, M. (2003) "How China has become world's new workshop" Sunday Times Newspaper (London) 26 January as found at LexisNexus.
Maskus, K. (2002) TRIPS controversies and potential reform 25 February as found at http://www.robarts.yorku.ca/pdf/doha_maskus.pdf.
Cheng, E. (2002) WTO tool to screw the world, Green Left Weekly, August 28, as found at http://www.greenleft.org.au/ back/2002/506/506p15.htm with many similar views found online particularly from New Zealand.
Anonymous (2003) Africa Recovery Vol.17 #3 (October 2003), page 23 as found at http://www.un.org/ecosocdev/geninfo/afrec/vol17no3/173brief.htm.
As identified and explained by John Jiang (2002) and cited in Part 1.
As found at http://www.lehmanlaw.com/ lib/library/Laws_regulations/investment/implement_equity.htm.
Xin, W. (2003) IP Law in China, Austrade seminar at Crowne Plaza Hotel in Sydney 29 May. Ms Xin has practiced in both Australia and Beijing primarily with international law firms and now heads the international division of Beijing Dadi.
Dai, Z. (2002) China's new technology import regime, MoFo Hong Kong, as found at http://www.mofo.com/practice/ ArticleDetail.cfm?MCatID=&concentrationID=22&ID=655&Type=3.
December 2003 contents
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