Protecting your technology in China’s innovation economy ——the role of international arbitration
By James Rogers, Scott Gordon and Matthew(Townsend Fulbright & Jaworski’s Hong Kong and Beijing offices)
Updated: 2013-01-04

China has a long and proud cultural history of innovation–-its people have given us gun powder, the compass, paper and printing, to name but a few Chinese inventions. However, in modern times, PRC companies have developed little of their own independent technology. Rather, they have become masters at manufacturing products that were designed and developed abroad. Now, however, we are seeing an important shift back to China’s tradition as a world leader in innovation. In markets ranging from heavy industry to consumer goods, PRC companies are investing heavily in R&D and increasingly developing world-class, homegrown technology and IP, either independently or in cooperation with foreign partners. This represents a significant break from the recent past.

Protecting your technology in China’s innovation economy ——the role of international arbitration
This new dynamic raises opportunities for Chinese and Western technology owners and developers alike. The higher levels of cooperation between Chinese and foreign firms at the design and development phase not only spurs innovation but can reduce development and manufacturing costs. With Chinese wages historically competitive, and Chinese universities producing a wealth of engineering graduates, international parties have taken advantage of these benefits by relocating product design and R&D to the PRC. At the same time PRC firms are now increasingly able to compete globally, both in measures of cost and quality.

Along with this evolution in China’s R&D capabilities has also come increased contractual and ownership complexity. With more joint ownership and co-mingling of technology and IP, there is an increased possibility of ownership disputes over technology and creative rights, including patents, copyright, trademarks and trade secrets. As Chinese firms have looked increasingly to foreign markets, technology owners and licensors are increasingly seeking to protect and enforce these rights internationally.

I. Reasons for selecting international arbitration to resolve technology disputes

In many jurisdictions, a logical means of protecting and enforcing IP and technology rights is via litigation. Certainly Chinese courts regularly hear technology related matters, including several high profile cases in recent years, including cases brought by Apple, relating to the right to use the iPad trade-name in China, and AMSC, who brought proceedings in the Chinese courts as part of multi-fora claims in excess of US$1 billion relating to wind-farm turbine technology. There are, however, problems in using the court system to protect and enforce technology rights in the Chinese context.

Protecting your technology in China’s innovation economy ——the role of international arbitration
Non-Chinese parties remain cautious about pursuing domestic litigation in China. Foreign parties find the processes, which are inquisitorial, court led, Chinese-language proceedings conducted by local counsel, difficult to understand and manage. The perceived impartiality of certain parts of the Chinese judicial system also remains a concern. While the Chinese court system is constantly improving, litigation in the PRC still lacks transparency and predictability in the eyes of foreign parties, especially when a case is brought in local, provincial courts where the Chinese counterparties are often based and hold influence.

Similarly, Western parties may be reluctant to pursue litigation proceedings against Chinese parties outside of China because foreign court judgments are not readily enforceable in the PRC. Chinese courts are reluctant to enforce foreign court judgments where there is no treaty for the bilateral enforcement of foreign court judgments between the PRC and the country in question. To date there are very few of these treaties, with none between China and any of the UK, USA or, Japan for example. Judgments rendered in China, reciprocally, may face similar enforcement difficulties when it comes to enforcement in those jurisdictions also.

Accordingly, given considerations of enforceability, predictability, neutrality and confidentiality, parties to technology licensing contracts regularly agree to resolve disputes via international arbitration.

Arbitration is a flexible ‘creature of contract’. Its procedural and jurisdictional basis is created by the contractual agreement of the parties. Arbitration allows the parties to adopt a procedure which suits their particular needs and to appoint an independent and impartial tribunal whose members have relevant legal and technical expertise.

Protecting your technology in China’s innovation economy ——the role of international arbitration
Where the dispute involves parties from different nationalities and cultural and legal backgrounds, the ability of each party to appoint an arbitrator ensures that the cultural perspective of each side is represented on the tribunal. This engenders a perception of credibility in the process. While an independent chairperson who does not share a nationality with either of the parties further ensures the perception of impartiality.

Importantly, arbitration proceedings are also confidential. This is a key consideration for parties to technology-related disputes who will want valuable IP kept out of the public domain.

The key advantage of arbitration in respect of “offshore” arbitral proceedings is, however, enforceability. Awards rendered in arbitrations seated outside of the PRC are readily enforceable in mainland China, and vice versa, through the operation of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). The New York Convention, which has been ratified in more than 140 nation states, including the PRC, requires the courts of one signatory state to recognise an award rendered in a foreign signatory state subject to only very narrow exceptions.

The enforcement process in China for foreign awards has been further improved by the implementation in 1995 of a special “Reporting System.” Under this system, the Intermediate People’s Courts can grant enforcement requests but are not empowered to reject them. Should the court be minded to refuse enforcement, it must refer the case up to the relevant District Court and, ultimately, the Supreme People’s Court in Beijing. The Reporting System, which is not applicable to awards rendered in domestic Chinese arbitrations, is not perfect. There are concerns regarding delays and the transparency of the process. However, it has led to a generally pro-enforcement environment for foreign arbitral awards in China.

II. Other considerations for Chinese and Western parties

Having agreed to settle any technology related disputes by arbitration, a number of important considerations bear on the final form of the arbitration agreement in Chinarelated contracts.

(1) Arbitration in China or offshore. In some cases Chinese law will restrict the parties’ choice of venue, requiring them to arbitrate in China, before a domestic arbitral institution. This will be the case where a contract is deemed to be purely “domestic” in nature. The test to determine whether a contract is “foreign related” (and so able to be taken offshore) is whether: (i) one or both parties are foreign; (ii) the performance of the contract takes place outside of the PRC; or (iii) there exist legally relevant facts “as to the occurrence, modification or termination of civil rights and obligations” outside the PRC.

If none of these tests are met and the parties nonetheless arbitrate outside of China, the resulting award will not be enforced in China. Where both parties to a contract are Chinese incorporated entities (even if they are 100% foreign owned but locally incorporated subsidiaries) it is therefore recommended to arbitrate in China if there is any connection between the performance of the contract and China.

(2) Administering institution. There are two peculiarities of Chinese law regarding the administration of arbitrations. First, Chinese law prohibits ad hoc (unadministered) arbitration in the mainland. Second, Chinese law requires arbitrations conducted in mainland China to be administered by a domestic arbitration tribunal, the most well known of these being the China International Economic and Trade Arbitration Commission (CIETAC). The Beijing Arbitration Commission is also well regarded, but the many localized arbitration commissions may still lack credibility among foreign parties.

Parties seeking to agree to arbitration administered by a non-Chinese arbitral institution, such as the International Chamber of Commerce (ICC) or the International Centre for Dispute Resolution (the ICDR, the international arm of the American Arbitration Association), must therefore select an offshore seat for their arbitration.

Conversely, Chinese parties who specifically wish to have an arbitration administered by CIETAC, or another Chinese institution, will typically negotiate for arbitration in mainland China. It should be noted, however, that the 2012 CIETAC Rules expressly contemplate CIETAC administered arbitrations taking place outside of the PRC. Venues such as Hong Kong and Singapore may therefore see increasing numbers of CIETAC administered arbitrations in those jurisdictions, as a compromise between the foreign party’s desire for a neutral, offshore venue and the Chinese party’s desire to adopt institutional arbitral rules with which it is familiar.

(3) Geographical and cultural accessibility. It is also significant that increasing numbers of Chinese parties are choosing arbitration administered by non-Chinese institutions, including the major European institutions, but most significantly the Hong Kong International Arbitration Centre (the HKIAC) and its Singaporean counterpart (the SIAC). All parties should feel comfortable arbitrating in Hong Kong (a special administrative region which is legally distinct from mainland China) and Singapore, each of which have excellent facilities, a well developed common law legal system and an independent, pro-arbitration judiciary. Their geographical and cultural accessibility to China is also a major draw-card for Chinese parties and others based in the region. When such excellent facilities are available in Asia, there is no need to transplant disputes, and witnesses and evidence, at great expense, to the traditional and faraway European and North American arbitration centers.

(4) Arbitral procedure and the selection of arbitrators. Chinese arbitration, including PRC-seated, CIETAC-administered arbitral proceedings, is traditionally relatively shortform and inquisitorial (driven by the curiosity of, and questioning from, the tribunal) rather than the adversarial process (driven by the parties presenting their case as they desire) familiar to international parties. Each has its advantages: the former, often used in combination with mediation-arbitration procedures, is quick, cheap and flexible while the latter is more drawn-out but arguably leads to a result that is more certain and predictable.

In any event, it is the tribunal which will most directly influence the arbitration procedure. Parties should therefore take care to ensure their arbitration agreement is flexible enough to allow for the appointment of suitable arbitrators, thereby ensuring the procedure adopted is one with which they are comfortable and familiar.

For example, under the 2012 CIETAC Rules, the default position, in the absence of party agreement, is that arbitrators must be selected from CIETAC’s panel of arbitrators. In practice, this, together with restrictions on remuneration for arbitrators under the CIETAC schedule of fees, limits the choice of arbitrators with sufficient technical and/ or international experience.

Similarly, the 2012 CIETAC Rules do not compel CIETAC to appoint a presiding or sole arbitrator of independent nationality to the parties. This is an outcome explicitly prohibited by, for example, Article 11 of the HKIAC Rules.

Helpfully, the 2012 CIETAC Rules do provide for greater flexibility in the constitution of the tribunal and allow CIETAC greater discretion in determining certain aspects such as the language and the seat of the arbitration in the absence of the parties’ agreement. This greater flexibility and efforts to internationalize the CIETAC Rules and arbitration procedure are welcomed. However, parties do need to consider such considerations when agreeing to arbitrate in any jurisdiction, under any institutional arbitration rules and the authors recommend that special care is taken in the Chinese context.

(5) Interim measures. Where interim measures are specifically required against a party in mainland China, it may be that the best option is arbitration in the PRC. This is because the Chinese courts will not order interim measures in support of foreign arbitral proceedings. On the other hand, tribunals seated in China are typically not empowered to grant interim measures directly; instead any request will be submitted to the PRC courts. Moreover, the powers of the Chinese courts are limited to the preservation of property and evidence.

(6) Document production and evidence. Chinese arbitration traditionally allows little room for witness cross examination or document production. However, a Claimant looking to demonstrate the misappropriation of technology and IP will often require document production from the other side in order to succeed in its claim. Parties may therefore wish to arbitrate offshore under arbitration rules which expressly contemplate document production, or consider adopting express provision for document production in their agreement. This can be done by incorporation of the International Bar Association Rules on the Taking of Evidence in International Arbitration into the arbitration agreement.

III. Best practice tips for avoiding and mitigating technology-related disputes

Parties should draft their arbitration agreements with care and, ideally, at an early stage in the negotiation process. Poorly drafted and ambiguous arbitration agreements can lead to additional cost and delay as each party tries to take procedural and jurisdictional advantage at the commencement of a dispute.

The same applies to license obligations which, if poorly drafted, can lead to difficulties upon enforcement.

(1) Define your technology. Technology and IP owners should clearly define the extent and relevance of the licensed technology and related documentation and information (the physical IP) transferred under license. Similarly, parties should carefully consider the extent to which technology and IP is confidential or in the public domain, particularly when the technology includes trade secrets or employee know-how.

Greater specificity will avoid the need to comprehensively prove the nature and scope of the license and what constitutes proprietary IP. Likewise, precise confidentiality obligations and contract termination and expiry provisions will ensure that the parties’ ongoing and future obligations are clear and easily enforceable.

(2) Be aware of contractual registration requirements in China. Foreign parties in particular should ensure that all local law requirements and registrations have been complied with at the outset, and make this compliance a condition of the contract. The Chinese regime for registering different types of commercial contracts, including technology and IP related agreements, is complex and ever changing. However, Chinese and Western parties alike should be aware that failure to comply with these requirements may lead to a contract being invalidated and the loss of otherwise available contractual remedies.

(3) Take proactive steps at an early stage. In order to maximize the chances of obtaining injunctive measures against infringers of technology rights, technology and IP rights holders should investigate and document any possible breach of license as early as possible and take prompt, positive action. Injunctive relief is discretionary in nature and judges and arbitrators will weigh all the relevant circumstances, including the urgency of the surrounding circumstances, before deciding to grant it. A party may find it difficult to argue that injunctive relief is necessary and urgent if that party has known about the misappropriation of technology or related IP for some time but taken no steps to prevent it.

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