New Rules Could Means IP Loss For Firms Doing R&D In China
Executive Summary
Multinationals and M&A deals could be adversely affected by new measures in China that could delay or even block the export of intellectual property out of the country.
Multinationals doing research and development (R&D) in China will need to be aware of new rules that could potentially prevent their intellectual property (IP) from leaving the country.
China tightened scrutiny over the transfer of IP rights to foreign companies or institutions with the publication of new External Transfer of Intellectual Property Rights Measures on March 29, which is also presumed to be the date of implementation.
As a result, foreign investors will find it harder to transfer their IPR overseas, experts say, noting this assertion of control over the field is similar to how the Chinese government is moving to manage cyberspace, by treating it as a physical territory.
The new measures specifically target the transfer of IPR when it affects China’s national security, or the development of technological innovation in key sectors, according to a review by the international law firm Hogan Lovells in April.
Though details on how the overseas transfer restrictions will be implemented in practice are somewhat nebulous, this potentially affects life science companies engaged in R&D or IPR licensing transactions that could result in improvements which may then be blocked from export.
Grounds For Blocking
In an email response to Pink Sheet giving further clarification, Hogan Lovells' Shanghai-based partner Andrew McGinty said: “Because you are required to get approval from MOFCOM [China's Ministry of Commerce] for any restricted category technology import or export, it will have visibility as to the technology.
“If you fall within the category of exporting an improvement to an overseas multinational, the export of the improvement could be subject to an industry regulator review and the export rejected on national security grounds. Thus, your contracted [IPR/technology/ know-how license] for improvement gets stuck in China.”
McGinty said that since China is still relatively inexpensive for life science companies, despite rapidly increasing labor costs, overseas companies and multinationals will continue to do R&D in the country. But when it’s time for the results to be transferred back to the parent company and out of the country, there is likely to be a much more rigorous review process for the related IPR under the new measures.
“It will also have an impact on M&A deals where foreign life sciences or medical device [companies] acquire IPR as part of an M&A deal that is treated as an export for regulatory purposes, particularly when that technology falls into the restricted category for export.”
Furthermore, even though a groundbreaking and potentially lucrative innovation may not technically fall within the “restricted” category, registration with MOFCOM will still be required. McGinty said this means it again would be visible and “you cannot exclude the possibility that pressure may be brought on the exporting party.”
Increasing Innovation, Litigation
The lawyer sees the new measures as part of a larger picture, that of China becoming increasingly innovative, evidence of which is the record number of patents and scientific papers it produces. An ever more effective IPR regime, therefore, makes sense to protect novelty that is more and more coming from domestic research rather than overseas.
In March, Premier Li Keqiang was quoted as saying: “We’re resolute in protecting intellectual property rights and will not allow infringements on the parts of overseas enterprises investing in China.”
Partner and director at Hogan Lovells (Shanghai) Intellectual Property Agency Service, Zhen (Katie) Feng, added: “If you check the number of IP litigations filed in the past a few years, you will be amazed by the numbers: about 130,000 cases in 2016 and probably 100,000 cases in 2015.
“More than 90% of these IP litigations are between Chinese parties. China is as litigious as countries like the United States. The fact that many Chinese companies are resorting to IP litigations indicates the IPR system can be effective.”
Steady Improvements
Partly in response to continued complaints from major trade partners such as the US, China has been strengthening IPR protection for more than a decade, and at the end of 2017 coordinated 10 departments across the country to apply the new protections. The State Intellectual Property Office (SIPO) claims China paid more than $28bn in IP royalties to overseas rights holders in 2017, more than 10 times the $2bn in 2001.
Fullbright Fellow William Weightman is based in Chengdu, China, and is researching IP law and enforcement and technology innovation policy. He said the new IPR Overseas Transfer Measures are a logical next step given China’s ongoing IPR reforms.
“As Chinese firms become more innovative and expand overseas, the government has an interest in ensuring that IP transfers abroad do not harm the economic viability of domestic firms. This is particularly the case as China continues to push for greater economic integration with the world through the 'One Belt, One Road' [major infrastructure] initiative.
“On another front, these changes to the technology export regulations also represent an important reform effort to professionalize and formalize the IP regulation system. China has been working to increase the number of technical experts that work in court litigation as well as in SIPO. The pairing of MOFCOM’s export review with other relevant regulatory bodies for IP is an important step in this regard.”
Protecting Interests
Weightman also warned that China tends to have a broad definition of “national security,” meaning medical devices and pharmaceuticals could fall within the scope of the new measures.
He said: “These new regulations are strategically set up to ensure the market dominance of Chinese firms. China’s national industrial policy, 'Made in China 2025', seeks to replace foreign IP with domestic IP and prepare the road for the global expansion of Chinese companies.
“This plan is especially important for the medical devices sector, which is one of the 10 sectors covered by the strategy and has grown rapidly in recent years.”
Hogan Lovells' McGinty said the main takeaway on the impact of the new rules for the life sciences/medical devices sector is that the new IPR Overseas Transfer Measures are similar to the steps China is taking under its Cybersecurity Law.
“China is asserting sovereignty over the dematerialized world and treating cyberspace and data as if they were physical territory and property. It is now moving on to asserting greater sovereignty over intangibles like IPR.”
From the editors of PharmAsia News.