China, Technology Transfers, Grant-Back Clauses, Grant-Back


Technology transfer occurs when the owner of a technology grants access to that technology to another party. Today, companies consider technologies—as opposed to physical assets—the most important business assets that are directly tied to their products’ competitiveness. Intellectual property (“IP”) law protects those technologies. One type of technology transfer is contract manufacturing, where foreign companies employ Chinese companies to manufacture products for the Chinese markets. Contract manufacturing is beneficial to foreign companies because it saves them shipping costs and time. To facilitate contract manufacturing in China, however, foreign companies—often the owners of the technologies—must authorize Chinese companies access to their proprietary technologies. Another type of technology transfer—foreign direct investment (“FDI”)—involves foreign companies setting up business entities in China, either as joint venture partners with Chinese companies or as wholly-owned subsidiaries. Under FDI, foreign companies maintain a lasting ownership and control over their proprietary technologies. For FDI to operate successfully, foreign companies must transfer their proprietary technologies to their business entities in China. In 2002, China implemented a provision in the People’s Republic of China (“PRC”) Regulations on Administration of Technology Import and Export (“2002 Technology Regulations”), mandating that licensees own the improvements they make to proprietary technologies to which the licensees receive authorized access (hereinafter referred to as the “prohibition on grant-back clauses”). Often, foreign licensors include grant-back clauses in their licensing agreements, providing that the foreign licensors own any improvements to the technology made by the Chinese licensees. Notably, however, the 2002 Technology Regulations prohibit such grant-back clauses imposed by foreign licensors. China’s grant-back regime is outdated and should be updated with the following proposed policy changes: China should (1) continue to prohibit grant-back clauses on severable improvements, which can be used without using the original licensed patent; (2) make grant-back clauses on non-severable improvements non-mandatory, and subject potential abuse of non-mandatory grant-back clauses to the rule of reason under antitrust law; (3) apply its grant-back rule to domestic and foreign companies equally and fairly; and (4) reform its grant-back regime now, rather than later. Prior to reaching these solutions, this Note first discusses how China’s prohibition on grant-back clauses affects its technology transfer, with an emphasis on empirical data. Then, this Note examines China’s current grant-back regulations and compares them with China’s regulatory regimes in other related areas, as well as grant-back regimes in the United States and the European Union.