By DAN HARRIS
When one of our China lawyers is contacted to “draft a
contract,” we usually must first determine whether it is premature to draft the
contract or not. For example, if a client wants us to draft a manufacturing
agreement to have its widgets manufactured by Chinese Company A, there is no
point in our starting on such an agreement if the two parties are not yet close
to agreeing on the widgets’ price.
We often find ourselves giving clients and even
potential clients a list of the items on which they should reach agreement
before they pay us to draft their China contract. There have been plenty of
times where lawyers have been able to bridge the gap between our client and a
Chinese company to make a deal happen, but there are some gaps we simply cannot
bridge. For example, if a Chinese manufacturer insists on charging $7 per widget
and our client will pay no more than $5 per widget, there is no point in our
drafting an agreement because there will be no deal.
But on something more complicated like a joint venture
deal, where neither side typically is familiar with common terms, we often
start drafting the joint venture agreement before the parties have reached a
clear agreement, in part to help the parties determine what remains for them to
agree upon for an agreement to get signed.
Licensing agreements usually fall between manufacturing
agreements and joint venture agreements in terms of complications. With
licensing agreements, we usually try to “arm” our client with the basic terms
it should be discussing with its Chinese counterparty before our China lawyers
start drafting the licensing agreement. We typically encourage them to get
clear on the following when negotiating a China licensing deal:
1. Make sure any IP (trademarks,
patents, copyrights) your potential China licensee may use is registered in
China. You do not want your potential China licensee to file for “your”
trademarks so as to gain negotiating leverage against you. If you have not
already filed to register such IP in China, do it now.
2. Make sure your potential
licensee is legitimate. Is it financially capable of paying your licensing
fees? Does it have experience with your sort of technology or product? Is it
likely to preserve, enhance, or improve your reputation, rather than destroy
it?
3. Are you going to allow this
potential licensee to sub-license, and if so, to whom?
4. What sort of controls are you
going to want over this licensee’s use of your technology and/or your name?
5.
Who is going to pay what in terms of
marketing your technology and your name in China?
6.
Who is going to be responsible for
paying Chinese taxes on the royalties? For a whole host of reasons, you are
going to want this burden to fall on your China licensee.
7.
For how long will your licensing
agreement last and on what grounds may you unilaterally terminate it early?
8.
Make sure that your potential licensee
agrees to comply with all Chinese laws regarding the need to register your
licensing agreement. This should not be a problem, but occasionally it is.
9.
Do not sign an MOU or an LOI unless you
run it by us first. I urge you to read this post on China MOUs and LOIs.
Once they have reached
tentative oral agreement on the above, we can start drafting the licensing
agreement.
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