Practical guidance on license agreement recordal at the SIPO



Along with the rapid growth of the Chinese patent filings, attention begins to focus on how to exploit the patent right in order to realize its utmost value in business. In the recent years, the Chinese government enacted and renewed the Laws and Regulations in succession, in order to propel the commercialization of the scientific and technological achievements and boost the economy in China. As one of the most-frequently used methods to enforce the Chinese patent rights, patent licensing in China is becoming more and more active in the business operations.

In order to protect a patent right, regulate the license acts and promote the proper usage of the patent right, the State Intellectual Property Office of China (i.e. the “SIPO”) enacted, under the Chinese Patent Law and Contract Law, and released the Administrative Measures for Recording a License Agreement (“Measures”), which took effect as of August 1, 2011. According to the Measures, the patent owners could record license agreements officially in order to safeguard their interests over the licensed Chinese patents in China.

Nowadays, more and more license agreements are concluded due to the various transnational cooperation, and then may need to be recorded with the SIPO. Though the above Measures have been implemented for several years, there still exist some typical neglects by licensors in practice, which lead to unsuccessful recordal acts before the SIPO. Taking those typical situations into consideration, we think the following points in recording a license agreement at the SIPO shall be kept in mind by all patent owners, especially by foreign companies and individuals.

1. The necessity to record a license agreement at the SIPO

First of all, we should mention that it is not compulsory for a licensor, typically a patent owner, to record his license agreement under the Chinese Patent Law. The license agreement shall be concluded under the Contract Law in China, and takes effect as of the effective date of the agreement. The recordal is, by no means, the condition for the license to be valid in China.

Nevertheless, the recordal is beneficial for the sake of the licensor and licensee. For example, after the recordal, the SIPO will publish the basic data (exclusive of the text of the license agreement) of the recorded license agreement, and the publication would go against any third party with good faith. Another example is that, when a local Intellectual Property Office handles an administrative conciliation in a patent infringement dispute, the type, duration, royalty and payment methods etc. of the recorded license, would be taken as the reference for deciding the compensation. Moreover, according to the Some Provisions regarding the Applicable Laws for Injunction issued by the Supreme Court, Rule 4, Para 2, the Certificate of a license agreement recordal would be served as necessary proof for the interested party to request injunction. For some Chinese licensee, the recordal of exclusive license against the Chinese patents would be one of the necessary conditions to obtain the qualification as the High and New Technology Enterprises under the related Chinese laws and regulations, with which the Chinese licensee could enjoy many benefits, such as the tax reduction and funding support by the local government.

We thus suggest foreign companies and individuals to consider the benefits of the license agreement recordal in China, and take the relevant procedures, for, with the recordal, the relevant parties are holding the obvious advantages, when their legalized rights in the license are violated.

2. Matters needing attention before the recordal of a license agreement

a) Time Frame:It is regulated under the Implementing Regulations of Chinese Patent Law, Rule 14, the recordal of a license agreement shall be made within   three months from the effective date of the license agreement. In practice, if the time frame is overdue for a short time, usually less than 6 months, it is still possible for this license agreement to be recorded, but a Declaration announcing that the agreement is still valid should be further submitted with the SIPO. In case that the three-month time limit is out of date for a longer time, it is recommended that a new license agreement be signed to effectuate a new date for the recordal purpose.

b) Co-ownership status: In the situation of co-ownership, if there is an agreement concluded on exercising of the patent right, the agreement shall apply. In the absence of such an agreement, any co-owner may independently license another party to exploit the patent but only through the non-exclusive license. Nevertheless, the royalty fees obtained from licensing shall be distributed among the co-owners. In practice, when filing the recordal request for such a non-exclusive license agreement at the SIPO, no document for attesting the consent of the other owner(s) is needed.

However, in case of an exclusive license agreement, the co-owner has to obtain the consent from the other co-owner(s), in order to grant the license to any third party. In practice, the Consent Letter from the other co-owner is necessary when making the recordal of the license agreement at the SIPO.

c) No legal defects: a Chinese patent or a patent application involved in a license agreement recordal, shall be attached with no legal defects. It is deemed that there are legal defects with the license agreement if:

– A Notification deeming as withdrawn, a Notification of Termination, a Notification of Non-Payment, or the like is issued by the SIPO to the patent or patent application, and no restoration request has been made yet;

– The patent is in the invalidation procedure;

– The patent isannounced invalid or already expired or terminated;

– For the patent or patent application, the Court adopts preservation measures as to the ownership thereof; and,

– The patent or patent application is pledged to a third party, except that the pledgee consents to the license and authorizes the patentee or applicant to proceed with the license.

3. The necessary information to be involved in the license agreement

Generally speaking, a license agreement shall include the following elements when making the recordal at the SIPO:

– The detailed information of the licensor and licensee, i.e. their full names and addresses, and the Chinese patent (application) number(s) involved in the license agreement;

– The effective date and terminating date;

– The type of the license;

– The royalty and the practical way of the payment; and,

– The place to implement the license.

The examiners usually hold the following standards,when examining the above-mentioned elements:

a.  As for licensor status: the licensor should be the patent owner; otherwise, further documents or procedures are needed. In case of a patent pool, in which various patent owners hand over their patents to one of them or a third party, in order to have the patents licensed among them or out to other entities, the licensor, usually the entity operating the patent pool, should be authorized by the patent owners, evidenced by the Letter of Authorization. Where the ownership of a patent is changed before the license agreement, but yet to be recorded, the recordal of ownership change shall be attended and completed officially before proceeding with the recordal of the license agreement. In the latter case, the examiner requires that the effective date of the license agreement should be later than the effective date of the recordal of the ownership change.

b. As for effective date: the effective date of the license agreement refers to the effective date stipulated in the license agreement. However, the license acts could be traced to the past, and such understandings could be concluded in the license agreement.

The terminating date of the license agreement shall not exceed the expiration date of the licensed patent right. The expiration date refers to the end of the lifespan of a Chinese patent, which is 20 years for an invention or 10 years for a utility model and design, from their filing dates under the Chinese Patent Law. If there are a number of Chinese patents or patent applications, the terminating date of the license agreement shall not exceed the last expiration date of the patents or patent applications.

For most transnational license agreements, they do not only include IP rights, but also a package of technologies and know-hows. The expiration date of the patents could, by no means, be stipulated as the benchmark of the whole license agreement. In this situation, our advice is to conclude the wordings for these different varieties of IP rights under the Terminating clauses, to meet the SIPO’s requirements in formality. If the accurate date is hard or not desired to be indicated in the agreement, it is suggested that a description about the expiration date as the terminating date for the patent issues be added therein.

To finish this point, we would like to draw your specific attention to an important issue. That is, in the Chinese Patent Law, a Chinese patent is deemed as invalid on its expiration date. For example, if a Chinese patent’s expiring date is Dec.30, 2015, legally, the patent right could not obtain the protection on this specific date and after. Therefore, if an accurate terminating date needs to be introduced in an agreement for a Chinese patent, it has to be a day prior to the patent’s expiring date, taking the above example, the terminating date of the license agreement for that case would be Dec.29, 2015.

c. As for license types: generally speaking, there are three types of license in the Chinese Laws. One is the non-exclusive license. As for the exclusive license, the Chinese Laws further divide it into two types as follows:

– The exclusive license, where only the licensee could exploit the licensed patent right, while the licensor and any third party could not make use thereof;

– The exclusive license, where both licensor and licensee could exploit the licensed patent right, while any third party could not make use thereof.

Before attending to the recordal, the licensor shall clarify which of the above-mentioned exclusive license it would like to record, since parts of the transnational license agreement is ambiguous on this issue, and the applicable laws are often the foreign laws, which do not subdivide the exclusive license.

d) The royalty has to be put in the license agreement and should be reasonable, since it is one of the essential conditions to validate an agreement under the Contract Law. Without the royalty, the license agreement will be deemed as invalid and will NOT be accepted by the SIPO for the recordal purpose.

The royalty in a license agreement could be a fixed fee or a running royalty or the combination. It could also be free or a nominal amount, such as 1.00 dollar. When recording the license agreement, the SIPO will not examine the reasonability of the royalty, but requests the existence of such in the agreement. Furthermore, the SIPO demands a concrete amount of royalty in the requesting form, when making the recordal of the license agreement.

In a real license agreement, due to the unpredictable sales and profits, the running royalty is usually adopted by the licensor and licensee, on the basis of, e.g. gross sale, net revenue, net profits or per unit. It is quite normal and likely that the royalty base would not be available, when attending to the recordal at the SIPO, let alone a clear figure. However, under the current provisions, there is no workaround and this requirement has to be fulfilled strictly, if the license agreement needs to be recorded officially. In order to deal with this issue, when a running royalty is reached out by the licensor and license in an agreement, we summarize three ways for the readers’ optional usage:

–  Before the execution of the agreement, draft a clause, indicating the clear amount with the descriptions to limit this figure only for the recordal purpose in China;

–  After the execution of the agreement, draft a confirmatory letter, indicating the clear amount, with the signatures of both of the licensor and licensee;

–  If a royalty base could be identified and predicted, and calculation methods could work out, it is possible to remain the agreement unchanged, but working out a figure on the basis of the royalty base and calculation methods to be submitted with the SIPO. And such figure should be evidenced by an explanation about how this figure is calculated out,which needs NOT to be signed by either licensor or licensee.

For all the efforts made above, what is on earth the importance of a concrete royalty amount for recordal? As we discuss, at the beginning of this passage, the necessity to record a license agreement at the SIPO, the royalty has the legal force as the evidence, when the local Intellectual Property Office decides the compensation in an administrative conciliation. For another point, it was a necessary document when making the overseas remittance before Sept.1, 2013, under the “Notice on the Issues for Strengthening the Management for Remitting the Payments for the Imported Intangible Assets” stipulated by the State Administration of Foreign Exchange (“SAFE”). However, this regulation was abolished and replaced by the “Notice on issuance of the Management Regulations on the Service, Trade and Foreign Exchange” by SAFE on Sept.1, 2013, in which the Certificate for license agreement recordal was no longer necessary for the Chinese banks to make the foreign remittance for the Chinese entities. But, at present, some local banks may still require this document for prudence or local regulations.

4. The alteration and cancelation of the recordal of license agreement

a. Alternation: for license agreement, which has been already recorded at the SIPO, if there are any changes on the involved Chinese patent(s), the type of the license, the royalty, the practical way of payment or the terminating date, the licensor and licensee could record the changes, with the revised agreements concluded by both of the licensor and licensee as well as the original Certificate of the license agreement recordal.

Among those alternations, in case the terminating date is desired to be prolonged, the licensor and licensee shall make recordal of this change, before two months from the terminating date of the original recorded license agreement. The necessary documents are the same as above.

b. With 30 days after the termination of the license agreement or early termination agreement, the licensor and licensee should make a request for the cancelation of the recordal at the SIPO.

If any Chinese patent involved in a license agreement terminated before the end of its lifespan or invalidated, the licensor and licensee should make a request for the cancelation of the recordal at the SIPO.

Nevertheless, at present the lateness or failure in making the request for the cancelation will not introduce any disadvantages or punishment under the Chinese laws.

5. Technology Exportation Involved in License Agreement

For Chinese entities, which license their patent rights to foreign entities, a Technology Exportation Certificate must be obtained under the Chinese Patent Law, before they record their license agreements over the Chinese patents at the SIPO.

The Technology Exportation Certificate shall be obtained by the Chinese entities at the local authority in charge of foreign trade and commerce under the “National Regulations on the Technology Importation and Exportation” promulgated by the State Council in 2002.

At present, the recordal of license agreement at the SIPO is still an examination emphasizing the formality over the content. When drafting the transnational license agreement, the above information is highly suggested for consideration, or a short-term license agreement specific to the recordal in China can be made as the supplementary documents to the master license agreement.

Hope our experiences, which have been accumulated during years of making the recordal of license agreements, could provide some helps to those who are involved in patent license in China.

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