Buying Chinese IP Just Got More Complicated for Foreigners

In releasing new rules instituting national security reviews before intellectual property (IP) may be transferred to foreign actors, the Chinese government last month underlined its view that indigenous innovation is crucial to national defense and economic security. In doing so, authorities focused on three key sectors—semiconductors, software, and new plant varieties.

The new “Work Rules on Outbound Transfer of Intellectual Property Rights (Trial),” translated in full by DigiChina below, were dated March 18—four days before the U.S. government released its Section 301 report on Chinese intellectual property and investment practices, and at a time when the U.S. and Chinese governments were engaged in an intense and public exchange on trade and investment rules, with a special focus on high-tech sectors. The rules were released on March 29.

This timing may well have been an intentional signal amidst talk of a possible technology-oriented “trade war” and following the Trump administration’s blocks of a Chinese group’s acquisition of Lattice Semiconductor and Ant Financial’s bid to take over Moneygram. The message: Two can play at the game of barring access to sensitive technologies.

Regardless, this development fits with a longer-term regulatory current of instituting security reviews for technology products with an eye to protecting national security and encouraging indigenous innovation. The rules themselves list ensuring “national security” and “innovation and development” as key objectives.

"China has mastered a series of key technology and developed some high-quality intellectual property,” State Intellectual Property Office (SIPO) official Zhang Zhicheng said, according to Xinhua. “If we fail to strictly review core IP transfers related to national security, we may put the country at the risk of losing control of key technology in important fields and suffering major financial losses."

The three sectors specifically identified in these rules can be seen as signalling the direction for future review processes. Each is an area of intense focus and large investment by the Chinese government, and Chinese firms in all three areas are beginning to make real strides in innovation.

Integrated circuits (IC).  Though Chinese semiconductor firms today can’t compete with the global leaders across the board, Chinese investment in the industry is significant. Recently, the state-backed National IC Fund reportedly sought to raise up to USD $31.5 billion in new funds to drive development, and in 2016 U.S. Commerce Secretary Penny Pritzker criticized the fund as a “$150 billion industrial policy.” In certain applications, government-linked efforts are producing market-ready chips. (See “V. Semiconductors: Attempting to Chart a Different Course” here for a DigiChina assessment of China’s artificial intelligence (AI) chip developments.)

Software.  Chinese government investments in a variety of computer technologies are increasingly substantial. Specifically in the AI area, the government may wish to apply security reviews for export as domestic Chinese innovations gain in importance.

New plant varieties.  Food security in general and China’s reliance on imports has long been viewed as a threat to Chinese government legitimacy. Thus in collaboration with scientists and entrepreneurs, the government has promoted the development of genetically modified (GM) crops since the late 1980s, with some domestically produced GM IP being commercialized since the early 1990s. Despite large investments, commercialization of GM consumables has stalled domestically, and some some actors are seeking markets outside of China. The Chinese government likely wishes to avoid losing control of the GM traits and hybrid strains to foreign purchase or exclusive licensing.

In addition to protecting indigenous innovation, the Chinese government in these and other sectors has sought to maintain some control of domestic firms as they engage global markets, hoping they will do so as Chinese firms, rather than as undifferentiated multinational actors. These rules may be only a beginning, as they leave great room for local variation and numerous details unspecified. The full translated text follows.

[Original Chinese]

State Council General Office Notice on Issuance of the "Work Rules on Outbound Transfer of Intellectual Property Rights (Trial)"

GBF No. (2018)19

To all provincial, autonomous region, and municipal People's Governments; all State Council ministries and commissions; and all directly subordinate bodies:

The "Work Rules on Outbound Transfer of Intellectual Property Rights (Trial)" have been approved by the State Council, and are hereby issued to you. Please implement them earnestly.

State Council General Office

18 March 2018

(This document is to be made public.)

Work Rules On Outbound Transfer of Intellectual Property Rights (Trial)

In order to implement the overall national security outlook, perfect national security structures and systems, safeguard national security and major public interests, and standardize procedures for outbound transfer of intellectual property rights, and on the basis of relevant laws and regulations on national security, foreign trade, intellectual property rights, etc., these Rules are formulated.

I. Examination Scope

(1) Where technology export, mergers or acquisitions of domestic enterprises by foreign investors, and other such activities involve the outbound transfer of patent rights, exclusive rights on integrated circuit plans and designs, computer software copyrights, rights on new plant varieties, and other such intellectual property rights as provided in these Rules, an examination must be conducted according to these Rules. The intellectual property rights described include their rights of application.

(2) Outbound transfer of intellectual property rights, as described in these rules, refers to Chinese work units or individuals who transfer their domestic intellectual property rights to foreign enterprises, individuals, or other organizations, including changing rights holders, changing the actual controlling person of intellectual property rights, and intellectual property right holders granting exclusive use permission.

II. Examination Content

(1) Influence of outbound transfer of intellectual property on national security.

(2) Influence of outbound transfer of intellectual property on core critical technology innovation and development capabilities in important fields.

III.  Examination Mechanism

(1) Examination of technology export involving outbound transfer of intellectual property rights.

1. During technology export activities, when the exported technology is a limited-export technology China's government identified in the catalogue of technologies whose export is prohibited or limited, and involves patent rights, exclusive rights to integrated circuit plans and designs, computer software copyrights, and other such intellectual property rights, an examination shall be conducted.

2. Where local trade authorities receive an application letter submitted by a technology-exporting operator for technologies whose export China limits, involving patent rights, exclusive rights to integrated circuit plans and designs, and other such intellectual property rights, the relevant materials shall be submitted to the local intellectual property rights management department. After local intellectual property rights management departments receive the corresponding materials, they shall conduct an examination of the intellectual property rights slated for export and produce a written opinion letter, send this back to the local trade authority, and at the same time report the matter to the State Council intellectual property rights authority for filing.

3. Local trade authorities shall, on the basis of the written opinion letter produced by the local intellectual property rights management department, and according to relevant provisions such as the "Technology Import and Export Management Regulations of the People's Republic of China," make an examination decision.

4. Where the matter involves the outbound transfer of computer software copyrights, the local trade authority and the science and technology authority will examine the matter according to relevant provisions such as the "Technology Import and Export Management Regulations of the People's Republic of China" and the "Computer Software Protection Regulations." Where the computer software copyrights to be transferred abroad have been registered with the computer software registration body, the local trade department shall timely notify the computer software registration body about the examination outcome. Where the examination finds transfer is not approved, after the computer software registration body receives notification, it may not handle rights ownership modification registration formalities.

5. Where the matter involves the outbound transfer of new plant varieties, the agricultural authority and forestry authority will, in line with their responsibilities, examine the matter according to relevant regulations such as the "New Plant Variety Protection Regulations of the People's Republic of China." The key examination content is the influence of the new plant variety mooted for export on China's agricultural security, especially food security and seed sector security.

(2) Examination of outbound transfer of intellectual property rights in the security examination of mergers and acquisitions by foreign investors.

1. Foreign investment security evaluation bodies shall, when examining the security mergers and acquisitions of domestic enterprises by foreign investors, where this falls within the scope of merger and acquisition security examination and involves the outbound transfer of intellectual property rights, transfer the relevant materials to the corresponding authority to seek an opinion on the basis of the category of the intellectual property rights mooted for transfer. Where the matter involves patent rights, or exclusive rights for integrated circuit designs and plans, the State Council intellectual property authority is responsible; where the matter involves computer software copyrights, the State Council copyright authority is responsible; where the matter involves new plant varieties, the State Council agricultural authority and forestry authority are respectively responsible according to their responsibilities.

2. Relevant authorities shall timely examine the matter, produce a written opinion letter, and return it to the foreign investment security examination body. The foreign investment security examination body shall consult the written opinion letter produced by the relevant authority and make an examination decision according to relevant regulations.

IV.  Other matters

(1) Relevant authorities shall formulate examination rules, clarifying examination materials, examination workflows, examination time limits, work responsibilities, etc.

(2) After a final decision on outbound transfer of intellectual property rights is made and the involved intellectual property rights are changed, both sides of the transfer shall conduct change formalities according to relevant laws and regulations.

(3) Staff in relevant authorities shall preserve the commercial secrets of both sides involved in an outbound transfer of intellectual property rights.

(4) Where outbound transfer of intellectual property rights involves national defense security, it will be handled according to relevant State regulations, and these Rules do not apply.

(5) These Rules take effect from the date of issuance.