The announcement by China to add 23 items of technologies as technologies restricted for export (whilst at the same time removing 4 items from the prohibited technology list) in China's Catalogue of Technologies Prohibited and Restricted from Export has been widely covered in the media, notably in the context of the impact this has on Tik Tok's future. Much of the debate has been around the export of technologies, especially relating to data analysis and AI interactive interface, originating from China. Little attention may have been given to the impact the change could have on in-bound foreign technology transfers. Interestingly, a lot of the technologies which are restricted for export can still be freely imported into China.

China's "forced technology transfer" policy

Those who have been following China's legislative and regulatory process of technology transfers would recall that in March 2019, China removed certain provisions in respect of foreign technology transfer into China that was subject to the US criticism of China's "forced technology transfer" policy; these provisions include the restrictions relating to ownership of improvements and the licensee's use of improvements. The change closely followed the overarching principle set out in the Foreign Investment Law of China encouraging technology cooperation based on voluntary agreed terms and business practices in the process of foreign investment.

Although the restrictions on export do not directly impede upon the parties' freedom to contract, any improvements made based on foreign licensed technology by a Chinese licensee could become subject to the export restriction requirements. For example, although the parties may have agreed that any improvements made based on technology licensed to the Chinese licensee should be assigned or licensed back to the foreign licensor, the licence back or assignment of improvement may become subject to the export restrictions.

The approval process

How are the restrictions regulated? This is a 2 step approval process. The first step is for the Chinese party to obtain a letter of intent for technology export license from the provincial Foreign Trade Department and this must be done before commencing any negotiation with the foreign party. The next step is to obtain a licence to export based on the contract concluded between the parties which only comes into effect on the date of issuance of the licence. The failure to follow these steps carries criminal and administrative penalties ramifications.

Notwithstanding the parties' consensus on ownership and use of improvements, a foreign licensor could be stripped of its rights to use the improvements (at least outside of China) if the license to export is not granted. It is also not clear when the requirement for the letter of intent is triggered in the case where the tech export concerns improvements which are non-existent at the time when the contract is concluded. Would this mean that upon any improvement coming into existence, an application for a letter of intent has to be made or can the parties wait till such improvement is to be disclosed to the foreign licensor under the licence back or assignment?

Impact on the healthcare industry

How can the export restrictions impact the healthcare industry? Analytical algorithms are employed in many areas in healthcare from detecting diseases, diagnostics, disease management and treatment programmes, research and training, patient care, telehealth to simply in apps to help people stay healthy. 

The COVID-19 pandemic has signified the benefits of AI for identifying potential commercially available drugs for treatment and develop and operate contact tracking devices. It is therefore not surprising for some to see the export restrictions as a set-back for foreign companies to tap into China's booming tech and AI health markets. The success of collaboration in AI solutions in China relies heavily on having an acute awareness of the implications of the restrictions on licensed technology and ways to mitigate the risks.

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Please note this blog post was written by a Clifford Chance LLP employee. Clifford Chance LLP is the parent company of Clifford Chance Applied Solutions (CCAS). The content within this post does not constitute legal advice.