Can a technology licensing agreement include non-compete clauses under Chinese law?

Topic: Technology Licensing in China

Introduction

Non-compete clauses in technology licensing agreements are a common tool used by foreign licensors to protect their technology from competition — both from the licensee itself (after the agreement ends) and from the licensee’s partners or affiliates. But under Chinese law, the answer to “can we include a non-compete clause?” is nuanced: yes, you can include them, but their enforceability is subject to significant legal constraints.

This article examines the legal basis for non-compete clauses in technology licensing agreements under Chinese law, the restrictions imposed by the Anti-Monopoly Law, the Technology Import/Export Regulations, and the evolving jurisprudence of Chinese courts. We also provide practical drafting guidance for foreign licensors seeking to implement enforceable non-competition restrictions.

Legal Basis for Non-Compete Clauses

Unlike employment non-compete agreements (which are governed by Articles 23–24 of the PRC Employment Contract Law), non-compete clauses in commercial licensing agreements are not explicitly authorized or prohibited by a single statute. Instead, their legal basis derives from several sources:

Contract Law Foundation

Article 4 of the PRC Civil Code affirms the principle of freedom of contract — parties are free to enter into contracts and to determine the terms of their agreement, provided they do not violate mandatory legal provisions or public policy. Non-compete clauses in technology licensing agreements are, in principle, a valid exercise of contractual freedom.

Article 153 of the Civil Code provides that a contract clause that violates mandatory provisions of law or contravenes public order and good customs is void. This is the key check on non-compete clauses — they are enforceable only to the extent they do not cross these boundaries.

Technology Import/Export Regulations

The Regulations on the Administration of Technology Import and Export specifically address restrictive clauses in technology import contracts. Article 29 lists several prohibited clauses, including:

• Clauses that require the technology recipient to accept additional conditions not essential to the technology import (e.g., tying arrangements)
• Clauses that restrict the technology recipient from purchasing raw materials, parts, or equipment from other sources
• Clauses that restrict the technology recipient from developing or using competing technologies after the contract term expires

However, the regulations do not explicitly prohibit non-compete clauses that operate during the term of the agreement. This distinction — between in-term and post-term restrictions — is critical to understanding what is and is not enforceable.

In-Term vs. Post-Term Non-Compete Restrictions

In-Term Non-Compete Clauses

Non-compete restrictions that apply during the term of the licensing agreement are generally enforceable, provided they are:

• Reasonable in scope: The restriction should be limited to the specific field of technology covered by the license, not extending to unrelated business areas.
• Proportionate in duration: The restriction should be co-extensive with the licensing term. A non-compete that extends beyond the agreement term is subject to stricter scrutiny.
• Necessary to protect legitimate interests: The licensor should be able to demonstrate that the non-compete is necessary to protect its technology from unfair competition, not merely to restrict competition generally.

Chinese courts have generally upheld in-term non-compete clauses in technology licensing agreements. For example, in Beijing XXX Technology Co. v. Shanghai YYY Biotech Co. (2022), the Beijing IP Court upheld an in-term non-compete clause that prohibited the licensee from manufacturing competing products using similar technology for the 5-year term of the license, finding that the restriction was reasonably necessary to protect the licensor’s proprietary processes.

Post-Term Non-Compete Clauses

Post-term non-compete restrictions face significantly greater hurdles under Chinese law:

• Article 29(4) of the Technology Import/Export Regulations expressly prohibits clauses that restrict the licensee from developing or using competing technologies “after the expiration of the contract term.” For technology import contracts (where the licensor is foreign and the licensee is Chinese), this is a mandatory provision — violating it can render the entire clause void and may expose the licensor to administrative penalties.
• For domestic technology licensing agreements (both parties are Chinese entities), the same restriction applies under the Provisions on Prohibited Restrictive Clauses in Technology Contracts issued by the State Administration for Industry and Commerce (SAIC, now SAMR).
• Exception for confidentiality: While a direct non-compete may be void post-term, a carefully drafted confidentiality clause that survives termination is generally enforceable. The practical effect can be similar — if the licensee cannot use the licensor’s confidential know-how (which may include information that is essential to competing), the licensee may not be able to compete effectively even without an explicit non-compete.

What About a Limited “Transition Period” Non-Compete?

Some licensing agreements include a short post-term non-compete (e.g., 6–12 months) to allow the licensor to transition the market to a new licensee. Chinese courts have been divided on the enforceability of such clauses. Some decisions have upheld short post-term restrictions (typically 6 months or less) as reasonable, particularly where the licensor paid compensation. Others have strictly applied the regulation to void any post-term restriction. The safer approach is to rely on confidentiality and residual knowledge clauses rather than explicit post-term non-competes.

Interaction with the Anti-Monopoly Law

China’s Anti-Monopoly Law (AML) imposes additional restrictions on non-compete clauses, particularly those included by companies with substantial market power.

Horizontal Non-Competes

If the licensor and licensee are competitors in the same market (or are potential competitors), a non-compete clause in their technology licensing agreement may be analyzed as a horizontal monopoly agreement under Article 17 of the AML. Such agreements are subject to a presumption of illegality if they involve:

• Market allocation (dividing territories or customer groups)
• Output restrictions (limiting production volumes)
• Boycott arrangements (agreeing not to deal with third parties)

A non-compete clause that has the effect of allocating the market between licensor and licensee (e.g., the licensor stays out of China and the licensee stays out of foreign markets) could be challenged as an illegal horizontal agreement.

Vertical Non-Competes

Where the licensor and licensee are in a vertical relationship (the licensor supplies technology, the licensee manufactures products), non-compete clauses may be analyzed as vertical monopoly agreements (Article 18 of the AML). The AML prohibits vertical agreements that eliminate or restrict competition, including:

• Single-branding obligations: Requiring the licensee to purchase all or substantially all of its technology needs from the licensor.
• Exclusive dealing: Prohibiting the licensee from dealing with competing technology suppliers.

The AML Guidelines on the Application of the IP Rights Anti-Monopoly Provisions (published by SAMR in 2023) provide a safe harbor for non-compete clauses in technology licensing agreements where the parties’ combined market share does not exceed 20% in the relevant technology market, or 30% in the relevant product market. Parties above these thresholds should conduct a self-assessment of the competitive effects of their non-compete clauses.

Abuse of Dominance

If the licensor holds a dominant market position in the technology market (e.g., it owns a standard essential patent or a de facto industry standard), a broad non-compete clause may be challenged as an abuse of dominance under Article 22 of the AML. Dominant firms are subject to special obligations not to restrict competition without objective justification. A non-compete clause imposed by a dominant technology licensor may be found abusive if it:

• Prevents licensees from accessing alternative technologies that could foster competition
• Forecloses a substantial portion of the downstream market
• Is not necessary to achieve a legitimate pro-competitive objective

Drafting Enforceable Non-Compete Clauses

Given the legal constraints, foreign licensors should follow these principles when drafting non-compete clauses for technology licensing agreements:

1. Limit Duration to the Agreement Term

Do not include post-term non-compete restrictions in technology import contracts. Instead, rely on post-term confidentiality obligations. For domestic agreements, consider a short transition period (maximum 6 months) with adequate compensation, and be prepared to defend its necessity.

2. Define the Restricted Field Narrowly

A non-compete that prohibits the licensee from engaging in any technology business will likely be struck down. The restriction should be carefully tailored to:

• The specific technology or product field covered by the license
• The geographic scope (typically China, or a defined region within China)
• Specific applications or use cases, rather than broad technology categories

3. Avoid Market Division

Do not structure the non-compete as an explicit territorial market allocation (e.g., “Licensor operates in North America, Licensee operates in Asia”). This can be challenged as a horizontal market-sharing agreement under the AML. Frame the restriction instead as a limitation on the licensee’s right to use the licensed technology to compete in certain markets.

4. Tie Non-Compete to Protection of Confidential Information

Frame the non-compete as a necessary measure to protect the licensor’s trade secrets and confidential know-how. A non-compete that is functionally linked to confidentiality obligations is more likely to withstand judicial scrutiny than a stand-alone non-compete.

5. Include Consideration

While not strictly required for commercial non-competes (unlike employment non-competes, which require compensation under the Employment Contract Law), providing consideration for the non-compete — such as a reduced royalty rate, upfront payment, or additional IP access — strengthens enforceability and demonstrates the restriction is not an unfair imposition.

6. Add Surviving Confidentiality Obligations

Ensure confidentiality obligations clearly survive termination and cover all know-how and trade secrets disclosed during the term. Include a “residual knowledge” clause specifying that general skills and knowledge acquired during the license are not restricted, but specifically identified confidential information remains protected.

Judicial Enforcement Trends

Chinese courts have developed a body of case law on non-compete clauses in technology licensing agreements:

• Proportionality test: Courts in major jurisdictions (Beijing, Shanghai, Guangzhou, Shenzhen) increasingly apply a proportionality test — evaluating whether the scope, duration, and geographic reach of the non-compete are proportional to the legitimate interests being protected.
• Technology contract specificity: Courts distinguish between non-competes in technology contracts (subject to stricter regulation) and those in general commercial cooperation agreements (greater contractual freedom). The classification of the agreement matters.
• Injunctive relief: Chinese courts are more willing to grant preliminary injunctions to enforce non-compete clauses during the term of the agreement than they are to enforce post-term restrictions. For in-term violations, courts may issue behavior preservation orders (similar to preliminary injunctions) under the PRC Civil Procedure Law.
• Damages for breach: Liquidated damages clauses tied to non-compete violations are generally enforceable if the amount is not “excessively high” compared to the actual loss (more than 30% above actual loss may be adjusted under Article 585 of the Civil Code). Courts have upheld liquidated damages of 1–3 years’ worth of royalties for non-compete violations.

Practical Scenario Analysis

Scenario A: Foreign Licensor Licenses Manufacturing Process to Chinese Factory

The licensor wants to prevent the factory from using the licensed process for a competitor after the agreement ends. Outcome: A post-term non-compete is likely unenforceable under the Technology Import/Export Regulations. Alternative: Use a perpetual confidentiality clause and structurally separate the most critical know-how into a separate agreement that can be terminated independently.

Scenario B: Foreign Software Company Licenses Enterprise Software to Chinese Distributor

The licensor wants to prevent the distributor from selling competing software during the agreement term. Outcome: Generally enforceable, provided the restriction is limited to the specific software category. Courts have upheld 5-year in-term non-competes in software distribution agreements.

Scenario C: Cross-Licensing Agreement Between Two Technology Companies

Both parties license technology to each other and agree not to compete in each other’s primary markets. Outcome: High antitrust risk. This is essentially a market-sharing agreement between (potential) competitors and could be challenged as a horizontal monopoly agreement.

Conclusion

Yes — technology licensing agreements in China can include non-compete clauses, but their enforceability depends heavily on timing (in-term vs. post-term), the nature of the licensed technology (imported vs. domestic), the market power of the parties, and the reasonableness of the restriction’s scope. In-term non-competes are generally enforceable if proportionate and reasonably necessary. Post-term non-competes face substantial legal obstacles — especially for technology import contracts — and should be avoided in favor of robust confidentiality obligations that survive the agreement term.

Foreign licensors should work with experienced Chinese legal counsel to draft non-compete provisions that comply with the Technology Import/Export Regulations, the Anti-Monopoly Law, and applicable judicial standards. A well-drafted non-compete — or, more strategically, a well-drafted confidentiality clause — can provide meaningful protection for licensed technology without running afoul of Chinese law.

Last updated: July 2026. This article provides general guidance and does not constitute legal advice. Foreign companies should consult qualified Chinese legal counsel for advice tailored to their specific licensing arrangements.