China technology and trademark licensing agreements: The extreme basics

By Dan Harris

Chinese companies want Western technology and in the last few years they have become willing to pay for it. One of the things our China lawyers are seeing more and more lately are deals where the Chinese company wants to be able to use in China both the name and the technology of the Western company. This means our China attorneys must draft trademark licensing and technology licensing agreements.

Very basically, this involves the following:

1.) The Western company  should register its trademark (typically its brand name and/or its company name and perhaps a logo as well) in China in both English and Chinese.

2.) The license agreement usually should be drafted in English and in Chinese, with Chinese as the official language. This license agreement typically should be subject to Chinese law with enforcement in China.This agreement must then be registered with China’sTrademark Office. Absent this trademark office registration, no royalty can be paid because The Bank of China will not let the money leave China as a royalty payment without it.

3.) The primary focus of the licensing agreement is typically the following:

• Approved products
• Territory
• Royalty payments. The amount of the royalty and the method for calculating it are usually the main issues. If the royalty is based on per unit sales, it is often difficult to determine the number of units sold.
• Payment terms. This is usually on an annual or semi-annual basis. The payment process from China is cumbersome and because of this monthly payment systems are almost never used. To cover risk, some licensors require an annual payment in advance.
• Term and termination. The usual China trademark license is for a 20 year term, but it can and does vary. Normally, the sole basis for terminating the licensing agreement is for the Chinese company failing to pay the license fee. It is possible to provide for a minimum annual royalty payment and falling short allows for early termination, but this is fairly unusual.

If the Chinese side wants technology assistance on the product or service side, the licensing agreement becomes more complicated as it typically needs to include the following as well:

• The technology to be covered.
• If training in how to use the technology will be required, it will nearly always make sense to use a separate training agreement for this.
• If the trademark license will require the licensed product incorporate components manufactured and sold by you as the licensor, it will likely make sense to have a separate purchase and sale agreement for those components.

There you have it….