Editor's Note: China was only a manufacturing base for low-tech consumer products 20 years ago. But since the end of the 1990s, a growing number of multinational companies have established research and development (R&D) centers in China. It is a core strategy of their localization in China as they try to better accommodate the demands of the Chinese market by using local technology talents.

But a problem for these companies is how to transfer overseas their technological breakthroughs achieved in China, and face the challenge of how to implement their patent strategies to better protect their R&D achievements in China.

Tian Junfeng, an attorney with Unitalen Attorneys at Law, analyzed China's Patent Law and Foreign Trade Law and offers some suggestions in this article. China Business Weekly has run the article in several editions. In the previous issue the author compared two drafts of the revision to the Patent Law. Below is last part, in which the author will analyze the Regulations of the People's Republic of China on Technology Import and Export Administration. The views expressed here are the author's own.

According to the Regulations of the People's Republic of China on Technology Import and Export Administration, China classifies technologies related to the export of technology into three categories: prohibited technology, restricted technology, and freely exportable technology, among which prohibited technology and restricted technology are published in the Catalogue for Technologies Prohibited and Restricted from Export, which is regularly updated.

As can be noted from Article 31, Article 32, Article 33 and Article 39 of the Regulations, technology prohibited from export shall not be exported. Technology restricted from export shall be subject to license administration, and shall not be exported without a license. Freely exportable technology shall be subject to the contract registration administration.

Article 46 stipulates the legal consequences of violating the regulations on export of technology: where a technology prohibited or restricted from export is exported without approval, the company or individual shall be prosecuted for criminal liability according to the provisions for the crimes of smuggling, illegal business operation, or divulging national secrets or other crimes under the Criminal Law. Where such export is not so serious as to be prosecuted for criminal liability, a penalty shall be imposed according to the circumstances pursuant to the relevant provisions of the Customs Law, or the competent foreign trade department under the State Council issues a warning against it, confiscates illegal income and/or imposes a fine one to five times that of the illegal income. The competent foreign trade department under the State Council may revoke the foreign trade business license.

As can be seen, the legal consequences of the preceding provision involve smuggling, illegal business operation, or divulging national secrets or other crimes under the Criminal Law and the Customs Law. These penalties are much more severe than those stipulated in the relevant regulations of the Chinese Patent Law.

In summary, at present, if a foreign R&D center in China intends to transfer R&D achievements to its foreign parent company by signing an R&D contract with its parent company, indicating the right to apply for a patent for the R&D achievements belongs to its parent company, can stay clear of the regulations of the Chinese Patent Law without violating the current Chinese Patent Law.

However, the above first draft further specifies and restricts the transfer of the right to apply for a patent. If the above-mentioned amendments to the related provisions in the first draft are finally approved by the National People's Congress, then the acts of having an R&D contract signed between the foreign R&D center in China and its parent company for transferring the right to apply for a patent, and thus the patent application right and the patent right to a foreign country shall further be restricted. This will inevitably affect foreign companies and their R&D centers in China greatly, thus invoking a major binding force on their acts.

On the other hand, although the above second draft does not further specify and restrict the transfer of the right to apply for a patent, it restricts the above acts by adding the regulation of "subject to the secrecy examination by the patent administration department under the State Council" in Article 20.

Meanwhile, the above-mentioned practices shall be restricted by the current Foreign Trade Law, the Regulations of the People's Republic of China on Technology Import and Export Administration and the Administrative Rules for Technologies Prohibited and Restricted from Export.

Therefore, in a strict sense, if a foreign company and its R&D center in China intends to transfer to its parent company R&D achievements, which happens to fall into the restricted technologies listed in the Catalogue for Technologies Prohibited and Restricted from Export, then the practice with smallest risk possible, in other words, the most secure and feasible practice is for them to file a patent application while subjecting to a secrecy examination by the patent administration department under the State Council, and at the same time to apply for licensing of technology export with the competent department concerned under the State Council (the Ministry of Commerce of China) according to the relevant laws and administrative regulations.

Should the foreign companies and their R&D centers in China fail to follow the preceding procedures, they will certainly run the risk of paying the penalty for violation of Chinese laws, although up to the present, no such cases have been adjudicated by Chinese courts.

(China Daily 02/16/2009 page9)