Can a Chinese licensee sub-license technology to a third party?
Whether a Chinese licensee can sub-license licensed technology to a third party is a critical question that affects the structure, value, and risk profile of technology licensing arrangements in China. The answer depends primarily on the terms of the license agreement between the foreign licensor and the Chinese licensee, but it is also influenced by Chinese regulatory requirements and intellectual property laws. This article examines the legal framework governing sub-licensing of technology in China and provides practical guidance for foreign companies.
The Basic Principle: Consent of the Licensor
Under Chinese law, the right to sub-license technology is not automatic. The general principle is that a licensee may sub-license the licensed technology to a third party only if the license agreement expressly permits sub-licensing. In the absence of an express provision authorizing sub-licensing, the licensee has no right to grant sub-licenses.
This principle is consistent with intellectual property law in most jurisdictions. The licensor has the right to control who uses the licensed technology and under what conditions. Allowing sub-licensing without the licensor’s consent would effectively deprive the licensor of control over the use and dissemination of the technology.
The Civil Code of the People’s Republic of China, which contains the general contract law provisions applicable to technology license agreements, supports this principle. Under the Civil Code, the licensee’s rights are derived from the license agreement, and the scope of those rights is determined by the terms of that agreement. If the agreement does not grant sub-licensing rights, the licensee cannot sub-license.
For patent licenses specifically, the Patent Law of the People’s Republic of China provides additional clarity. Article 15 of the Patent Law states that a patent licensee may not sub-license the patent to a third party unless otherwise agreed in the license contract. This explicit statutory provision reinforces the contractual principle and makes clear that sub-licensing without authorization constitutes patent infringement.
Types of License Agreements and Sub-Licensing Rights
The right to sub-license varies significantly depending on the type of license agreement. Understanding these distinctions is essential for both licensors and licensees.
Exclusive licenses. In an exclusive license, the licensee is the only party authorized to use the technology, and even the licensor may be restricted from using it. Exclusive licensees often have stronger negotiating positions regarding sub-licensing rights. Some exclusive license agreements expressly grant the licensee the right to sub-license, particularly when the exclusive licensee is expected to develop a market for the technology or to integrate the technology into products that are sold through multiple channels. However, even in exclusive licenses, sub-licensing rights must be explicitly granted.
Sole licenses. A sole license is similar to an exclusive license, except that the licensor retains the right to use the technology alongside the licensee. The sub-licensing analysis for sole licenses is the same as for exclusive licenses — sub-licensing rights must be expressly granted in the agreement. Sole licensees generally have no greater sub-licensing rights than exclusive licensees, despite the nominally more limited scope of their exclusive rights.
Non-exclusive licenses. Non-exclusive licensees rarely have sub-licensing rights. The licensor has already retained the right to license the technology to multiple parties, and allowing a non-exclusive licensee to grant further sub-licenses would create complex overlapping rights that could harm the licensor’s ability to control the market. Non-exclusive licensees who seek sub-licensing rights should negotiate for them explicitly during the contract formation process.
Compulsory licenses. Under Chinese patent law, compulsory licenses may be granted in certain circumstances, such as when the patent holder has abused its patent rights or when required for public health reasons. The sub-licensing of a compulsory license is generally prohibited, as the compulsory license is a limited authorization intended to address a specific situation and should not create additional licensing layers.
Regulatory Implications of Sub-Licensing
When a Chinese licensee sub-licenses technology to a third party, the sub-license constitutes a separate technology transfer that may trigger its own regulatory obligations under China’s technology import and export regulations.
If the foreign licensor is a company outside of China and the Chinese licensee sub-licenses the technology to another Chinese entity, the sub-license is a domestic technology transaction between two Chinese parties. Domestic technology transactions are generally not subject to the technology import and export regulations administered by MOFCOM, which apply only to cross-border technology transfers. However, the sub-license may still be subject to other regulatory requirements under Chinese law.
If the Chinese licensee sub-licenses the technology to a party outside of China, the transaction becomes a technology export from China. The Chinese licensee must then comply with technology export regulations, including the classification of the technology under the Catalogue of Technologies Prohibited and Restricted from Import and Export. If the technology is classified as restricted or prohibited for export, the sub-license may require a technology export license from MOFCOM. The Chinese licensee may be unaware of these regulatory obligations, creating compliance risk for both the licensee and the foreign licensor.
The foreign licensor should also consider the implications of sub-licensing for the original MOFCOM registration. When a technology import contract is registered with MOFCOM, the registration is based on the specific terms of the license agreement between the foreign licensor and the Chinese licensee. If the terms of the arrangement change significantly through sub-licensing, the original registration may no longer accurately reflect the technology transfer arrangements. In some cases, the sub-license may need to be separately registered or may require an amendment to the original registration.
Contractual Provisions for Sub-Licensing
Given that sub-licensing rights are not automatic under Chinese law, foreign companies should ensure that any technology license agreement with a Chinese licensee includes clear provisions addressing sub-licensing. The form that these provisions take depends on the commercial objectives of the parties and the nature of the technology.
If the licensor is willing to permit sub-licensing, the agreement should specify:
- Whether sub-licensing is permitted at all
- Whether the licensor’s prior written consent is required for each sub-license
- The types of third parties to whom sub-licenses may be granted (e.g., affiliates, distributors, end users)
- Whether sub-licensees must agree to the same or substantially similar terms as the original licensee
- The financial arrangements for sub-licensing, including whether the licensor receives a share of sub-licensing revenue
- The duration of sub-licenses relative to the duration of the original license
- The consequences if the original license terminates for any reason (i.e., whether sub-licenses survive or terminate)
If the licensor does not wish to permit sub-licensing, the agreement should include an explicit prohibition and should specify the legal consequences of any unauthorized sub-licensing. The agreement should also address the possibility that the licensee may attempt to sub-license through alternative legal structures, such as a technology services agreement or a subcontracting arrangement, and should make clear that these alternative structures are also subject to the prohibition on sub-licensing.
In both cases, the agreement should include robust audit and inspection rights that allow the licensor to verify that the licensee is not engaging in unauthorized sub-licensing. These audit rights should extend to the licensee’s books, records, and operations, and the licensee should be required to maintain accurate records of how the licensed technology is used.
Consequences of Unauthorized Sub-Licensing
Unauthorized sub-licensing by a Chinese licensee can have serious legal consequences. The licensor may pursue multiple remedies under Chinese law.
Breach of contract. The most immediate legal basis for addressing unauthorized sub-licensing is breach of contract. The licensee’s unauthorized sub-licensing violates the terms of the license agreement, and the licensor may seek contractual remedies, including termination of the license, damages, and injunctive relief. The license agreement should specify the remedies available in the event of unauthorized sub-licensing.
Patent or copyright infringement. Unauthorized sub-licensing of a patent may constitute patent infringement under the Patent Law. The sub-licensee who receives the unauthorized sub-license may also be liable for infringement, even if they acted in good faith. For technology that includes copyrighted elements, unauthorized sub-licensing may also constitute copyright infringement under the Copyright Law.
Unfair competition. In some circumstances, unauthorized sub-licensing may constitute unfair competition under the Anti-Unfair Competition Law of the People’s Republic of China, particularly if the sub-licensee is a competitor of the licensor or if the unauthorized sub-licensing involves trade secrets or confidential technical information.
Regulatory consequences. As discussed above, unauthorized sub-licensing may also trigger regulatory consequences if it results in unreported technology transfers or violations of technology import and export regulations. Both the licensee and the sub-licensee may face administrative penalties for non-compliance.
Practical Guidance for Foreign Licensors
Foreign companies licensing technology to Chinese entities should take a proactive approach to managing sub-licensing risk. The following practical measures can help protect the licensor’s interests.
First, conduct thorough due diligence on prospective Chinese licensees before entering into a technology license agreement. The licensee’s track record, business practices, and reputation in the industry are relevant factors in assessing the risk of unauthorized sub-licensing. Licensees with a history of intellectual property disputes or regulatory compliance issues should be treated with heightened caution.
Second, include clear and comprehensive sub-licensing provisions in the license agreement. The provisions should address all of the elements discussed above and should be drafted in both English and Chinese, with the Chinese version carefully reviewed to ensure accuracy. Ambiguity in sub-licensing provisions is a common source of disputes.
Third, implement monitoring mechanisms to detect unauthorized sub-licensing. These mechanisms may include requiring the licensee to report on the use of the technology, conducting periodic audits, and maintaining relationships with industry participants who can alert the licensor to potential unauthorized use.
Fourth, establish a protocol for responding to discovered unauthorized sub-licensing. The response should be swift and decisive to send a clear message that unauthorized sub-licensing will not be tolerated. However, the response should also be proportionate to the severity of the violation and should take into account the commercial relationship with the licensee and the potential impact on the licensed technology’s market position.
Conclusion
A Chinese licensee may sub-license technology to a third party only if the license agreement expressly permits it. Without explicit authorization, sub-licensing is a breach of contract and may constitute intellectual property infringement. Foreign companies should ensure that their technology license agreements with Chinese entities include clear provisions on sub-licensing, and should implement monitoring mechanisms to detect and address unauthorized sub-licensing promptly. By taking a proactive approach to sub-licensing risk management, foreign licensors can protect their technology assets while building productive licensing relationships in China.
