By Renaud Anjoran
Ten years ago, our China IP lawyers did maybe one or two licensing agreements a year. Five years ago, it was maybe one or two every four to six months. Fast forward to today and we are doing one or two a week. Why the big change? China wants foreign technology and it understands it must pay for it. This though is not to say China IP licensing deals are not without their own brand of major and minor pitfalls. For some examples of what can (and does) go wrong on China IP licensing deals, check out the below:
- How to Give Away your IP in China Without Realizing it
- China IP Theft: Why Pay for Technology?
- China Licensing Agreements – Look Before You Leap
- China Technology and Trademark Licensing Agreements: The Extreme Basics
One of the risky things our China licensing lawyers are constantly seeing are proposed China licensing deals (usually reflected in an MOU or an LOI) that involve the American company purportedly getting an ownership stake in its Chinese counter-party entity. This is risky for the simple reason that it cannot be done with Chinese privately held companies. See China Scam Week, Part 4: The China Stock Option Scam. As you can imagine, this means any proposed deal that calls for the foreign company to take ownership in the Chinese side must be remade to actually work. The below is the sort of email our China technology licensing attorneys send out when confronted with such a deal.
We have reviewed your China IP License Agreement Term Sheet, and our initial reaction is that it is acceptable for an agreement between two America entities, but not so good for an agreement between an American entity and a Chinese entity.
For starters, even though the term sheet says it is non-binding, the fact that both parties signed it may make it binding under Chinese law. See this post we wrote here for more details. But obviously what’s done is done and there is no way to un-sign the document.. At this point, you just need to be careful going forward in explaining your negotiating position and be sure not to sign anything else, without one of your lawyers reviewing it first.
Another issue we see right off the bat is that It will not be possible for each party to take a minority ownership stake in the other, as set out in your term sheet. Though it is generally legal for Chinese entities to own part of a US entity, the reverse is not true unless the Chinese entity is expressly set up for foreign ownership (e.g., a joint venture or a Wholly Foreign-Owned Entity). I assume you do not want to give XYZ Chinese Company a minority stake in your company without any reciprocation. If you really want to “invest” in XYZ Chinese Company’s business and have XYZ Chinese Company invest in your business, you can do so via a contractual arrangement.
I have additional comments about the specific deal terms, but before I get to them it would be helpful if you could provide us with some background about this proposed technology licensing deal. A narrative paragraph or two would be fine, with particular attention to the following:
Please explain a bit more about the ________ product. I have reviewed your website and I understand it is a _______ but that’s the extent of my knowledge. Is it a ___________? Can it do _____________? Is it the sort of _______ that __________? How long does it t________?
How did this deal get started? Did XYZ Chinese Company find you or vice versa?
I see that XYZ Chinese Company already has a similar product. Does that product compete with yours? If so, where and how well?
Have you had any previous business dealings with XYZ Chinese Company? If so, in what context, and what has been good and bad about it?
Have you sold any of your products or services in China? If so, what and to whom and how?
Have you already started selling this product in the United States? If so, for how long and with what sort of revenues?
What sort of revenue projections have you or XYZ Chinese Company made for the Chinese market?
Who drafted this term sheet?
Let’s set up a time for us to talk after you get us answers to our above questions.
Renaud Anjoran has been managing his quality assurance agency (Sofeast Ltd) since 2006. In addition, a passion for improving the way people work has pushed him to launch a consultancy to improve factories and a web application to manage the purchasing process. He writes advice for importers on qualityinspection.org.