Challenges with cross-border tech licensing … and how to resolve them

The core value in tech transactions is almost always the intellectual property (IP), according to Reking Chen, IP Partner at Chinese firm YaoWang.

That core value makes the exchange, licensing or transfer of IP rights a major part of any cross-border deal. It’s all the more significant given that China filed 69,601 international patent applications in 2023, dwarfing the US at 55,582 and Japan at 48,982. ¹ Meanwhile, the State Administration of Foreign Exchange put China’s cross-border IP imports at ¥6.5bn and exports at ¥26.9bn in July 2024.² Cross-border tech licensing is very big business indeed.

But with deal volumes come challenges.

What’s in the IP?

IP assets commonly traded in cross-border tech licensing transactions include patents and patent applications, copyrights, know-how, technical secrets and brands. The licensor (either the registered owner or the entity/individual with a right to use it) grants a licence to its counterparty, the licensee, to trade or use the IP asset overseas.

But there may be conditions attached. Just because the licensor has, say, a patent application in the US, the technology is not automatically eligible for protection in China, until approved by a Chinese IP authority, such as the China National Intellectual Property Administration.

Due diligence in cross-border tech licensing deals

Corners cannot be cut on due diligence. Done thoroughly, it may persuade parties to abandon the cross-border tech licensing deal if the risks outweigh the potential profits.

A simple title search for IP is unlikely to cover all the risks. Reking recommends thorough due diligence to verify:

• the identities of parties to the transaction;
• potential challenges to the validity of the rights at issue;
• annuity payments on patents at issue;
• encumbrances on rights, such as pledges;
• existing licensing that could block further licensing rights; and
• ownership disputes.

Reking also suggests caution if utility models are used instead of patents to protect new technology innovations. Utility models grant limited exclusive rights that prevent or reduce commercial exploitation of inventions. But they do not undergo the same level of substantive examination as patent applications.

“Utility models may be subject to invalidation claims. Where patent portfolios are comprised primarily of utility models, get your engineering team to fully assess the legal and technical value of the underlying technologies. This could reveal potential traps in cross-border tech licensing deals,” he warns .

Combined, these actions inform the business decision to proceed with the deal, or not.

Grant-backs on future innovation

In cross-border tech licensing deals, a grant-back clause requires the licensee to return any improvements, or local versions of the licensed technology, to the licensor, usually with rights to sub-license.

But, under Chinese law, free grant-backs to IP owners/licensors are prohibited and unenforceable. Consideration must be paid to the licensee. “In practice, it is difficult to predict the future commercial value of improvements,” says Reking. “So, build in a clause, which makes consideration subject to commercial valuation only once improvements have been made to the licensed technology.”

Alternatively, an in-kind consideration, such as provision of services between the parties in exchange for the grant-back, may be permissible under Chinese law.

What to include in cross-border tech licensing contracts

When drawing up contracts for cross-border tech licensing, Reking has three top priorities.

Scope of licence

• Clearly state the specific technology and underlying IP that is being licensed. Provide patent numbers, descriptions of the know-how, etc, to avoid ambiguity in the event of a dispute. 
• State the type of licence. Merely stating 'exclusive' is not sufficient, as the term is not defined term under Chinese law. Under Chinese law, a 'sole licence' gives both licensor and licensee rights to use the licensed IP, whereas an 'exclusive and sole licence' means only the licensee has the right to use the licensed IP, not the licensor.
• State the scope of use, such as research, clinical trial, marketing, sale, or distribution, and any restrictions on applications, markets or sectors.
• State whether the licence can be sub-licensed to another party. If so, provide guidance and restrictions. Include protections, like exit mechanisms, and require the sub-licensee to assume joint-and-several liability for breaches.

Representations and warranties

• Tailor reps and warranties to due diligence findings.
• Consider reps and warranties for non-infringement, not-subject-to-disputes and confidential-status. This is particularly relevant when licensing know-how.
• Consider a 'covenant not to sue' where due diligence uncovers, for instance, prior IP owners, or when procuring a license is not feasible commercially. This can eliminate licensing obstacles and litigation.
• Cite statutory obligations, such as articles 870 and 874 of the Civil Code, which apply to the licensor under Chinese law.

Claims and remedies

• Identify losses that may be eligible for a claim.
• Interim injunction orders by foreign courts are rarely enforceable in China. Consider alternative venues for dispute resolution, like Hong Kong, which allow mutual recognition of judicial and arbitral awards.
• IP losses, particularly those relating to reputation and goodwill, can be difficult to quantify. Liquidated damages could be useful, to the extent that court judges and arbitrators have the power to review and reduce liquidated losses under Chinese law. Protect the IP with a mechanism in the contract to exclude review and reduction.

West meets East on cross-border tech licensing deals

Cross-border tech licensing deals are complex, not least because more than one jurisdiction and legal framework are involved. "Western licensors," explains Reking, "prefer to apply their own national law and want disputes heard locally. And, unsurprisingly, China-based licensors want Chinese law and venues to apply."

Compromises must be made. And, oftentimes, Hong Kong or Singapore fits the bill.

Both employ common law, which is readily understood by Western parties. Their judicial and arbitration systems are internationally recognised, and widely used to settle global disputes. And large Chinese populations in both jurisdictions, and cultural similarities, make Chinese entities more comfortable in accepting governing law in Hong Kong or Singapore for the resolution of their cross-border tech licensing disputes.

1 https://www.wipo.int/en/ipfactsandfigures/patents
2 https://www.safe.gov.cn/safe/2024/0830/24922.html