China, Intellectual Property

8 Tips For China Licensing Agreements

With this knowledge at the ready up your sleeve, your clients will be in a much better situation when attempting to license their IP rights to Chinese companies.

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Chinese companies are increasingly seeking out and paying for intellectual property via licensing agreements with American companies. This post sets forth eight tips to assist American companies looking to secure royalty payments by licensing their IP to Chinese companies.

1. Protect your IP by registering it. Before you start negotiating a licensing agreement to give a Chinese company the right to use your IP in China, do what you can to protect your copyrights, patents, and trademarks in China by registering them in China.

2. Protect your reputation. If you are licensing to a Chinese company the right to manufacture or sell your product or use your brand name, you should protect your company’s reputation by including provisions that allow you both to monitor how your IP is being used and to terminate the licensing agreement if the Chinese company is putting your reputation at risk.

3. Be clear about payment. It usually makes sense to for you to be paid in dollars via wire transfer. If so, put that in your contract. If not, it still makes sense for your contract to be clear about payment.

4. Pricing is everything. Our China lawyers typically advise clients to base their pricing on the assumption that the Chinese company will not make the final payment(s) under the licensing agreement. Chinese companies oftentimes stop paying once they determine that the benefits of not paying outweigh the risks. You are more likely to get fully paid if you can structure your licensing deal so that the Chinese company still needs you at the end of the deal and so has no choice but to keep paying you. Still, it is always a good idea to put killer provisions in your contract to deal with a Chinese company that stops paying you.

5. Deal with the taxes. China collects taxes — lots of taxes — on royalty payments. Adjust your pricing accordingly or, better yet, try to get your Chinese licensee to assume responsibility for all China taxes.

6. Have some method for monitoring. American companies often license their IP to Chinese companies based on the Chinese companies’ sales. In other words, the licensing agreement provides for the American company to get X number of dollars per widget sold. This sort of per product deal makes sense if the American company truly has the ability to determine out the Chinese company’s product sales. I have seen far too many instances where the American company is not able to discern the sales of the Chinese company and then ends up getting paid way way less than it expected. If it is going to be difficult for you to monitor sales, you should seek to get as much upfront as possible or even just have the payment all come in a one-time lump sum. Needless to say, Chinese companies generally do not like this sort of arrangement.

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7. Choose the right jurisdiction and law for disputes. If you want to be able to sue your Chinese licensee company in the United States, you will need a provision in your license agreement stating that the Chinese company consents to U.S. jurisdiction — unless that Chinese company does substantial business in the United States. But unless the Chinese company also has assets in the United States, suing it in the United States probably will not make sense because Chinese courts do not enforce U.S. judgments.

Think long and hard about where you want to have your disputes resolved against the Chinese company to whom you are licensing your IP. In most situations, a Chinese court or a Chinese or a Hong Kong or a Singapore or a Canadian or a U.S. arbitral body will be your best choice, not a U.S. court. It really varies with the individual situation.

As for your choice of law, contract law is generally contract law, and the contract law among countries is typically not that dissimilar. Having said that, you should absolutely research any particular contract law issues peculiar to your licensing agreement so as to be able to choose the law most favorable to you. Generally though, if you will be litigating in a Chinese court (which often makes sense with licensing transactions) you will probably want to be under Chinese law simply because Chinese courts are not good at applying foreign law.

8. Register the license agreement. If you are going to seek to enforce your licensing agreement in China, it is critical that you have registered it with the Chinese government, as you are required to do so under Chinese law. You should be the one to register the agreement, or at least you should make sure that it actually was registered. It is not uncommon for Chinese companies to offer to register the licensing agreement and then not do so.

With this knowledge at the ready up your sleeve, your clients will be in a much better situation when attempting to license their intellectual property rights to Chinese companies.

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Dan Harris is a founding member of Harris Moure, an international law firm with lawyers in Seattle, Chicago, Beijing, and Qingdao. He is also a co-editor of the China Law Blog. You can reach him by email at firm@harrismoure.com.

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