IP Issues that Require Attention for R&D Outsourcing in China
More and more technology-driven companies now outsource R&D work, especially in the pharmaceutical and biotechnology industries. China, officially the People’s Republic of China, is especially attractive to investments of major R&D activities of this type, due to the ready availability of talent in these areas in China as well as the preferential business environment provided by governmental policies in the country.
R&D outsourcing normally occurs in one of two ways. One involves commissioning by an enterprise and the other joint development. IP issues, however, exist in all phases of either approach. The following is a discussion of important IP issues as they relate to R&D outsourcing in China.
1. Patent application needs to be filed with China first
For an invention creation completed in China, an applicant must file a patent application related to the invention in China first, or obtain approval through confidentiality examination by the State Intellectual Property Office (SIPO), so as to avoid losing patent rights in China.
For an invention creation made in China, if a patent application has been filed in another jurisdiction without requesting a confidentiality examination in advance from SIPO, any subsequent patent right obtained thereafter in China may be held invalid. Therefore, many companies file patent applications in China through the Patent Cooperation Treaty (PCT) route, and then enter the national phase in the preferred jurisdictions.
If an inventor is a Chinese citizen who works in the United States, the applicant for any patent application related to an invention conceived by such an inventor and made in the United States will need to first obtain a foreign filing license from the United States Patent and Trademark Office or wait six months after filing in the US prior to filing the patent application in China.
2. Export control and inspection
R&D normally involves technology transfer between an outsourcing company and a commissioned company. If an invention creation for which a patent is applied involves national security or vital interests that must be kept confidential, relevant regulations must be followed. Failure to do so may result in administrative sanction or even criminal liability being imposed on any individual(s) who files a patent application outside of China and discloses national secrets.
3. Ownership of IP rights
At the beginning of an R&D outsourcing relationship, the ownership of IP rights must be clearly specified in a written agreement to avoid disputes in the future.
In principle, the ownership of technical secrets resulting from R&D outsourcing that are not suitable for patenting is shared between the outsourcing company and the commissioned company under the principle of co-ownership.
Under Chinese patent law, the default rule for the right to apply for a patent belongs to the party (or parties) who accomplishes the invention creation. However, in the case of commissioning by an enterprise, the outsourcing company normally possesses facilities or key technologies and invests more resources in the R&D project, and therefore in practice the outsourcing company will obtain the right to apply for a patent by means of a written agreement. As a result, the outsourcing company usually enjoys all future IP rights.
In the case of joint development, on the other hand, each party is an independent entity that wields control over its own technologies and facilities. Each has a similar amount of investment in the R&D. As such, unless otherwise stipulated in a joint development agreement, the right to apply for a patent is co-owned by parties, and the ownership of future IP rights is uncertain.
4. Ownership of rights "before" and "after" IP rights are obtained
Rights obtained "before" entering an R&D outsourcing relationship and ownership of possible future rights "after" an outsourcing task is accomplished must be clearly specified in the R&D outsourcing contract.
This is because the IP rights obtained by the outsourcing company or the commissioned company prior to the cooperative relationship may play a role in the R&D outsourcing, especially when the commissioned company intends to perform the outsourcing task by using the IP rights of the outsourcing company. Therefore, patent rights that may be utilized by the commissioned company must be specified in the agreement, including the duration of use and relevant restrictions.
The distribution of future IP rights derived from the R&D outsourcing must also be agreed upon in advance.
5. Termination terms
If an outsourcing relationship must be terminated due to unavoidable circumstances, any agreement between a commissioned company and an outsourcing company must cover issues related to the future use of technologies developed through the outsourcing relationship. In particular, the ownership of rights "before" and "after" any IP rights are obtained must be clarified, and issues related to the right to apply for patents after the termination of the outsourcing relationship also requires special attention in order to avoid delays in applying for patent applications.
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