China: Developments in Asia

Originally published in The Licensing Journal, May 2006
Copyright © Finnegan, Henderson, Farabow, Garrett & Dunner, LLP

China’s legal framework underwent drastic changes in recent years, resulting in a much friendlier legal environment for foreign companies to enter into technology-transfer contracts with Chinese companies. Before its entry into the World Trade Organization (WTO), China’s burdensome prior-approval and registration requirements, coupled with its inconsistent IP enforcement, discouraged cross-border technology transfers. After joining the WTO, however, China modified its laws and regulations to ease restrictions on foreign technology transfers. As a result, many cross-border technology transfers no longer require prior governmental approval. In addition, China clarified the registration requirements for technology-transfer agreements.

Today, Chinese technology-transfer agreements are mainly governed by the Unified Contract Law and the Regulations on Administration of Technology Import and Export. In many ways, these new laws and regulations led to a technology-licensing regime that should be familiar to those who have engaged in licensing in the United States and Europe.

In 1999, China enacted the Unified Contract Law to replace the former Economic Contract Law, Foreign Economic Contract Law, and Technology Contract Law.¹ Under the Unified Contract Law, specific clauses of a license agreement can be constructed by the parties through negotiation and will be deemed valid unless they violate the laws and administrative regulations of China.²

The Unified Contract Law also adopted many new features. For instance, the fault-liability provision of the new contract law allows a party to a technology-transfer agreement to collect compensation for damages caused by the other party.³ The new contract law also contains a validity-pending contract rule, which allows a principal to ratify a license, if a technology-transfer agreement was made by a person lacking proper legal authority.⁴ Similar to the contract laws of the United States, a technology-transfer agreement can be modified, or even rescinded, if it was made under substantial misunderstanding or under deception or coercion. The new contract law also extended the statute of limitations for a party to bring a contract dispute to two years.

On December 10, 2001, the Chinese government issued the Regulations on Administration of Technology Import and Export (the New Regulations), which became effective on January 1, 2002.⁵ Replacing most of the existing regulations on technology import and export, the New Regulations apply to all cross-border transfers of technology, including the assignment and licensing of patents, technological know-how, and technical services.⁶ Before 2003, the former Ministry of Foreign Trade and Economic Cooperation (MOFTEC) and the State Economic and Trade Commission (SETC) regulated technology transfers and carried out the New Regulations. In 2003, China established the Ministry of Commerce (MOFCOM) to replace the MOFTEC and the SETC, and it is now the sole regulating authority of technology import and export.

Under the old technology-transfer regime, Chinese authorities required that all technology-transfer contracts be approved by the government, subjecting even the most routine technology-transfer agreement to government scrutiny. The New Regulations significantly relaxed its restrictions on import and export of technologies, and depending on the type of technology involved, only certain transactions are subject to governmental approval.

The New Regulations classify technology into three categories: (1) technology prohibited from import and export, (2) technology restricted from import and export, and (3) technology permitted for import and export.⁷ MOFCOM defines the circumstances under which the import or export of technology is prohibited or restricted.⁸ MOFCOM also periodically updates the list of technologies restricted or prohibited from technology transfer.⁹ Therefore, the parties to a technology-transfer agreement should always refer to the latest version of the catalogue issued by MOFCOM.

MOFCOM currently prohibits 25 categories of technology and restricts 16 categories of technology from importing into China.¹⁰ On the other hand, MOFCOM prohibits exporting 33 categories of technology and restricts 170 categories of technology.¹¹ Because most technology-transfer agreements are intended to transfer or license technology to China, the regulation of import-restricted technology is generally more relevant to a foreign company than that of export-restricted technology.

Only the importing or exporting of a restricted technology needs MOFCOM approval. When importing a restricted technology to China, the licensee or the transferee must file an Application for Importing PRC Restricted Technology with MOFCOM. MOFCOM must then determine, within 30 business days, whether to approve or reject the application.¹² When examining an application to import restricted technology MOFCOM considers a number of criteria, such as whether the importation conforms to China’s foreign-trade policy, whether such importation would jeopardize national security or endanger the public health and environment, and whether such importation would promote China’s technological advances.¹³ Upon approval, MOFCOM will issue a Proposal for Technology Import License of the PRC (the Proposal), and only then may the parties sign the technology-import agreement.¹⁴ The parties must submit the signed agreement and other application materials, along with the proposal to MOFCOM for final approval. If MOFCOM approves, it will issue a Technology Import License for the PRC. The technology-transfer agreement takes effect on the date of issuance of the license.¹⁵

Similar to importing restricted technologies, exporting restricted technologies also requires MOFCOM approval. In determining whether to approve the export of a restricted technology, MOFTEC considers whether the export is in line with China’s foreign-trade policy and promotes exports, complies with the PRC’s science-and-technology development policy and benefits the promotion of science and technology.¹⁶

If a technology is not listed as "restricted" or "prohibited," then it is deemed "permitted." However, all cross-border technology transactions, even for the permitted technologies, must be registered with MOFCOM. The registration process is quick, easy, and can be done online. Unlike the approval process for restricted technologies, the registration process does not prompt a substantive review. However, a technology-transfer agreement must not contain unreasonably restrictive, anticompetitive terms.¹⁷ In addition, all technology-transfer agreements involving a Chinese patent must be registered with the State Intellectual Property Office (SIPO) within three months after the effective date of the contract.

Before joining the WTO, China limited all technology-transfer contracts to a maximum term of 10 years. As a result, foreign investors were not permitted to contract for indefinite control over their technology. The New Regulations abolished this restriction and left the choice of term to the parties of an agreement, so long as the term does not exceed the life of the underlying IP right. In addition, the parties may negotiate the royalty-payment structure and amount, so long as the agreement does not require royalty payments after the expiration or invalidation of an IP right.

Under the New Regulations, the parties may negotiate the warranty clauses in a technology-transfer agreement. However, the licensor or transferor of the technology must provide a warranty that it is the lawful owner of the technology, and that the technology is "complete, error free, valid, and capable of accomplishing contracted technical objectives."¹⁸ The New Regulations require the licensor or the transferor to indemnify the licensee if the technology used in accordance with the technology agreement infringes a third party’s IP right.¹⁹

A technology license in China is subject to income tax. Income received by a foreign licensor or transferor is subject to a 10 percent flat tax.²⁰ Chinese law requires the licensee to act as the withholding agent and pay the withheld tax within five days from the date of the transaction.²¹ On the other hand, a foreign technology licensor or transferor is exempted from paying any business tax on income or payments received from transfers of technology, technology developments, and technical-consulting services.²²

On June 13, 2003, SIPO promulgated the Regulations Governing Compulsory Patent Licensing, which became effective on July 15.

Article 4 of the Regulations provides for three types of compulsory licensing:

Compulsory license for cross-licensing

Compulsory license for fair use

Compulsory license for public interest or in the interest of national security

The Regulations also define in detail the application procedure for a compulsory license, the documents to be submitted by the applicant, and the SIPO review procedures.

Consistent with the Patent Law, under Article 2 of the Regulations, SIPO may, upon the request of an applicant, grant a compulsory license to exploit a patent and determine royalties for a compulsory license. Under Articles 24 and 25 of the Regulations, SIPO must notify the patent holder of its decision to grant a compulsory license and must register and announce the decision. The compulsory-licensing decision should specify the scope and duration of the license, and the reasons for granting it. When these reasons no longer exist, the patent holder may petition the patent-administration department of the State Council to terminate the compulsory-license decision.²³

If dissatisfied with either SIPO’s decision to grant a compulsory license or with the adjudication regarding the royalty payable for the exploitation, an applicant, within three months of receiving the notification, may appeal to the People’s Court.²⁴

On August 2, 2002, the State Council published the new Implementing Regulations for the Copyright Law, and on August 3, 2002, the State Council promulgated the new Implementing Regulations for the recently revised Trademark Law. Both new Implementing Regulations went into effect on September 15, 2002.

The new Implementing Regulations increase the maximum fines that may be imposed against trademark or copyright infringers to treble damage, or RMB 100,000 when the damage is difficult to estimate.²⁵ The Implementing Regulations also define the procedures for the application, examination, and maintenance of trademarks and copyrights.

Under Article 25 of the new Implementing Regulations for the Trademark Law, an applicant must file a trademark license recordation with the Trademark office. In contrast to the prior rules, the new Implementing Regulations specify no penalties for failure to record a trademark license. However, under regulations promulgated by the State Administration for Foreign Exchange, recordation is required for a foreign licensor to collect royalties generated from licenses of registered trademarks.

Article 9 of the Implementing Regulations for Copyright Law clarifies the rights of co-authors. Under Article 9, co-authors may not grant any exclusive license to a third party without consent of other co-authors. The Regulations further address issues related to exclusive licensing. Under Article 23, exclusive-license agreements should be in writing. Article 24 provides that if an exclusive-license agreement is silent or unclear, the exclusive licensee will be deemed to have the power to exercise its rights to the exclusion of all other persons, including the copyright owner. Article 24 further requires that, unless contracted otherwise, an exclusive licensee must obtain the copyright owner’s consent in order to issue a sublicense to a third party.

"Interpretations" on Civil Disputes Affect Trademark and Patent Licensing
After the issuance of the Implementing Regulations, in December 2001, the Supreme People’s Court issued a binding judicial Interpretation of the Issues Relating to Jurisdiction over and Scope of Application of Law to the Hearing of Trademark Cases (the Trademark Case Interpretation). The Trademark Case Interpretation entered into force on January 21, 2002.

Under Article 3 of the Trademark Case Interpretation, exclusive licensees are permitted to bring civil cases before the courts without the approval from the trademark owner. Most enforcement of registered trademarks in China is conducted through administrative enforcement authorities—the Administrations for Industry and Commerce—that operate under the guidance of the Trademark Office of the State Administration for Industry and Commerce (AIC). It remains unclear whether the AIC will be willing to enforce rights as defined by the Trademark Law and the Interpretation, or whether the protection will be limited to cases brought before the People’s Courts. This Interpretation further provides definitions for identical and similar marks/goods and services, con-firms the power of the courts to formally recognize the "well-known" status of trademarks under Article 14 of the Trademark Law.

In November 2004, the Supreme People’s Court issued new guidelines known as the interpretation on Several Issues for Handling Criminal Cases of Infringement of Intellectual Property (the IP Infringement Interpretation). Effective December 22, 2004, the IP Infringement Interpretation aims to clarify the exact thresholds for sentencing and conviction under various existing criminal offences by providing clearer definitions of some of the ambiguous terms used in the Criminal Code.

Under Article 4 of the IP Infringement Interpretation, the threshold for criminal liability of an individual involved in the counterfeiting of a patent is set at the following amounts:

Counterfeiting a patent when the illegal revenue is more than RMB 200,000 or the illegal gain is more than RMB 100,000;

Causing direct economic loss of more than RMB 500,000 to the owner of the patent;

Counterfeiting more than two patents when the illegal revenue is more than RMB 100,000, or the illegal gain is more than RMB 50,000; and

Other circumstances of a serious nature.

The Patent Case Interpretation assists patent licensors by giving them indirect access to public prosecution. If a patent owner has difficulty collecting sufficient evidence of patent infringement, an effective way of obtaining a prosecution may be first to file a complaint with the administrative authorities, the Patent Management Bureau (PMB). Under an administrative action, it is easier to determine whether the infringers’ acts exceed the relevant threshold as set out in the Interpretation and to collect relevant evidence. If the infringing acts are proven to reach the relevant threshold, the PMB, in theory will transfer the case to the Public Security Bureau (PSB) in accordance with the Administrative Penalty Law of the PRC, and the PSB will accept the case for further investigation.

On December 30, 2004, MOFCOM promulgated the Measures for the Administration of Commercial Franchise Operations, which became effective on February 1, 2005. The Measures are clearly intended to regulate relations between franchisors and franchisees that are incorporated in China.²⁶ It remains unclear how the measures will apply to cases in which the franchisor is a foreign company that wishes to issue franchises directly to Chinese Companies.

Franchising is defined in the Measures as a contractual relationship whereby a franchisor grants a franchisee the right to use its business resources such as its trademark, trade name, business model, etc., and the franchisee operates under a uniform operational system and pays a franchising fee to the franchisor in accordance with the stipulations of the contract.²⁷

Under Article 4, the Measures distinguish between two franchising models. In the first model, the franchisor directly grants the franchise rights to the franchisee who then invests in the establishment of a franchising network and engages in business operations. In this first model the franchisee does not have the right to sub-franchise. In the second model, the franchisor grants exclusive franchise rights for a specified area to the franchisee who may sub-franchise to others and may establish its own franchising network within the specified area.

Under Article 7, a franchisor must satisfy the following conditions:

It is a lawfully established enterprise or other economic organization;

It has business resources such as a trademark, trade name, or business model that it is entitled to license for use to third parties;

It has the capacity to provide to the franchisee long-term operational guidance and training services;

It has at least two directly operated shops inside China or directly operated shops established by its subsidiaries or holding company that have been in business for a minimum of one year;

If the franchising requires the franchisor to supply goods, the franchisor must have a goods supply system that is stable and capable of guaranteeing quality, and be capable of providing related services; and

It has a good reputation and no record of using franchising to engage in fraudulent activities.

Under Article 8, a franchisee must satisfy the following conditions:

It is a lawfully established enterprise or other economic organization; and

It has financial resources, fixed premises, and personnel, etc.

The Measures set forth the rights and obligations of both the franchisor and franchisee. Article 9 defines a franchisor’s right; Article 10 defines a franchisor’s obligations. Article 11 defines a franchisee’s right; Article 12 defines a franchisee’s obligations.

Under Article 13, the Measures specify the contents of a franchise contract. Under Article 14, franchise fees can take three forms:

Joining fees: a one-time payment made by the franchisee to the franchisor for obtaining the franchise rights;

Royalties: regular payments made by the franchisee to the franchisor in the course of using the franchise rights based on a fixed standard or percentage; and

Otherwise agreed-on fees: payments made by the franchisee to the franchisor in accordance with the contract in order to obtain the relevant goods or services from the franchisor.

The minimum term of a franchise contract is three years.²⁸ After termination of the franchise contract, franchisees may not continue to use the registered trademark, trade name, or other marks of the franchisor.²⁹

Articles 17-26 specify the franchisor’s as well as the franchisee’s duty to disclosure relevant information in a timely manner before the execution of the franchise agreement and during the term of the franchise. Articles 27-40 provide procedures for subsidiaries of foreign companies in China to obtain approval to carry on franchising activities. After approval has been granted, the applicant must also file an application to the local Administration for Industry and Commerce (AIC) to update the business license.³⁰

Under the Japanese Patent Law, the owner of a patent may grant an exclusive or a nonexclusive license. An exclusive license gives a licensee the exclusive right to commercially "work"³¹ the patented invention. Under an exclusive license, not even the patentee may work the patented invention. A nonexclusive license, on the other hand, allows the licensor to work the patented invention and the licensor may grant a nonexclusive license to another person.

In Japan, there are two types of technology licenses: (1) legal licenses and (2) contractual licenses. Contractual licenses result from private negotiations by parties and are treated as ordinary contracts. Just like any contract, therefore, the rights and obligations of the parties to a contractual licensing agreement mainly depend on the terms of the agreement.

Japanese courts generally do not impose implied duties on the parties to a licensing agreement. For instance, unless the licensor fails to disclose material facts about the licensed technology, there is no implied guarantee that the technology actually works.³² Likewise, even when an exclusive license has been granted, the licensee is not obligated to use the licensed technology, i.e., to produce or sell the products, unless the agreement explicitly so states.³³ As a result, parties to a licensing agreement should make all obligations and rights explicit, so long as these clauses do not violate other Japanese laws, such as the Anti-Monopoly Act.³⁴

Unlike contractual licenses, legal licenses are not contracts negotiated by parties, but rather stipulated by the Japanese Patent Law. In Japan, there are three types of legal licenses.

First, if an employee patents an invention that falls within the scope of the business of the employer, the employer automatically receives a nonexclusive license for the patent without any obligation to compensate the employee.³⁵ In April 2004, Japan enacted the National University Corporation Law, which establishes the legal status of Japan’s national universities as independent administrative organizations under the Japanese government. In addition, this law defines the relationship between faculty and their universities as an employee-employer relationship. As a result, the Japanese national universities can now claim ownership over almost all discoveries made by their faculty members. Therefore, under the Japanese patent law, the Japanese universities will have at least a nonexclusive license to work-related inventions by their faculty and graduate students, and they will have the right to require assignment of all work-related inventions.

Second, if a person independently discovers the same invention as that of the patent owner, and has already manufactured, used, or made preparations for making the invention at the time the patent owner files an application, that person may receive a nonexclusive license to the patent.³⁶ However, this nonexclusive license from a prior user’s right is not transferable unless the entity holding the privilege as a whole is sold or transferred; even then, the manufacture and use of the infringing product must remain confined to the original scope of activity.

Third, a party may request a compulsory license if a patented intention has not been "sufficiently and continuously" worked for three years in Japan.³⁷

Under the Japanese Patent Law, an exclusive license must be registered with the Japanese Patent Office (the JPO).³⁸ The registration (and the revocation) of a license requires the consent of both parties. Once an exclusive license has been registered, the licensee may independently bring an action against a third party for infringement and sue for injunctive relief and damages.³⁹

Although only the licensee to a registered, exclusive license can enforce the patent right against third parties, the licensor can always enforce the patent right against third parties. Regardless of the type of license granted, the licensor is entitled to sue for injunctive relief. However, in the case of an exclusive license, because only the licensee may use the patent, the licensor may not sue for lost profits. On the other hand, if the license is nonexclusive, and because non-exclusive licensees may not sue for infringement, the licensor can sue for lost profits suffered by both the licensor and the nonexclusive licensees.

According to the Japanese Income Tax Act, payments for the use of intellectual property rights are considered taxable income.⁴⁰ The Japanese tax authorities require the licensee, instead of the licensor, to pay taxes on the licensor’s behalf. Under the Japanese Income Tax Act, only payments for the use of a Japanese intellectual property right are taxable. Therefore, for example, licensing payments for using a US patent in Japan are nontaxable.

In addition, the obligation to pay taxes refers only to the use of the intellectual property right, not to other payments in the contract, such as supply of equipment, material, etc. Thus, it is important to clearly distinguish the respective payments in a licensing agreement so that only the portion relating to licensing the intellectual property right is taxed. According to Japanese law, licensing royalties are taxed on the basis of a flat rate of 20 percent.⁴¹ This rate can be reduced to 10 percent if the licensor resides in a country with which Japan has concluded a double-taxation treaty.⁴²

In Japan, the Law Concerning Prohibition of Private Monopolization and Maintenance of Fair Trade (the Antimonopoly Law) prohibits license agreements with provisions unreasonably restraining trade or constituting unfair-trade practice. Under this law, the parties to an international-license agreement lasting more than one year must report the agreement to the Japanese Fair Trade Commission (JPFTC) within 30 days of concluding the agreement. Failure to comply with this requirement may result in a fine.

There is no required time period, however, for the JPFTC to review an international-license agreement. Applicants typically receive responses within 90 days.⁴³ The JPFTC has promulgated a set of additional regulations specifically addressing the treatment of patent and know-how licensing agreements under the Antimonopoly Act. These regulations are the Guidelines for the Regulation of Unfair Trade Practices (the JPFTC Guidelines).⁴⁴

The JPFTC Guidelines outline the types of restrictions in a licensing agreement deemed unlawful and unenforceable. Some of the impermissible restrictive clauses are:

Requiring a licensee to pay royalties after expiration of the patent right;

Requiring a licensee to license a patent unnecessary for the technology involved;

Requiring the licensee to assign rights over improvement inventions without compensation; and

Imposing restrictions on the licensee’s research capacity.

In addition, in the most recent revision of the JPFTC Guidelines, the JPFTC prohibits forming patent pools and refusing to grant licenses to exclude new businesses from entering a particular market.

The JPFTC Guidelines established a prior-consultation system for parties seeking to license patents or technical know-how.⁴⁵ As its name suggests, the prior-consultation system allows the contracting parties to voluntarily request the review of a license agreement before contract negotiations are concluded.⁴⁶ If the JPFTC determines that the terms of the contract do not violate the Antimonopoly Act, it issues both parties a clearance notification. This special clearance system assures the parties that the FTC will not find the contract anticompetitive once an agreement is reached. It avoids having such a finding made by the FTC after the deal is completed and announced to the public.⁴⁷ However, the FTC reserves the right to withdraw the clearance notification if the circumstances surrounding the agreement change or the parties add new clauses to the contract that violate the Antimonopoly Act.⁴⁸

The Foreign Exchange and Foreign Trade Act governs all foreign transactions in Japan. It provides a minimum level of regulation while facilitating foreign transactions. It requires parties to a foreign-technology license agreement to give prior notice to the Ministry of Finance for certain sensitive technologies. These technologies include aircraft, weapons, atomic energy, space development, computers, lasers, and optical-fiber communication.⁴⁹

After review, the Ministry can reject a license agreement or request a change, if the ministry finds that the agreement: (1) threatens national security; (2) disturbs public order; or (3) adversely affects domestic business.⁵⁰ The Ministry requires the parties to submit a report three months before the transaction if (1) the amount of payment is more than 100 million yen ($830,000); (2) the transaction involves cross-licensing; or (3) the recipient of the sensitive technology provides it to its subsidiaries. Otherwise, the Ministry only requires the parties to submit a report within 15 days after the transaction.

Contracts become effective after the parties receive notification from the Ministry of Finance. If the license agreement involves sensitive technology the contract comes into effect 30 days after notification.

Historically, South Korea has imported foreign technologies through a tightly regulated technology-licensing system. There are two main reasons for this careful governmental regulation of technology transfer. First, the regulation ensures orderly and controlled technological development. Second, the regulations protect young industries from paying inequitable amounts of money to their more mature and economically powerful counterparts from the United States, Japan, and European countries.⁵¹

As the South Korean industries have matured, however; they have increased their bargaining power against the powerful industries of foreign licensors. Therefore, in recent years, the Korean government has become less protective of its industries and has amended its existing laws to encourage foreign investment.

South Korea underwent a major overhaul in its foreign-investment laws in 1998. All laws previously related to foreign investment, including technology-transfer laws such as the Foreign Capital Inducement Act, were updated and incorporated into a single legal framework. The new law, called the Foreign Investment Promotion Act (FIPA), regulates all foreign investment in South Korea.⁵² The FIPA encourages foreign investment by reducing governmental regulation, simplifying procedures, and increasing financial incentives. Its main goal was to create an investment environment internationally competitive and attractive to foreign investors.⁵³

The Ministry of Finance and Economy and the Ministry of Trade, Industry, and Energy jointly oversee and apply the FIPA. The Act requires that an agreement transferring technologies be reported to the ministries if its duration is one year or more, and if:

The license agreement involves the transfer of advanced technology;

The licensor wishes to take advantage of tax

exemptions under the Restriction of Special Taxation Act;

The licensed technology relates to the aerospace industry listed in the Aerospace Industry Development Promotion Act; or

The licensed technology relates to the defense industry listed in the Special Measures for the Defense Industry.⁵⁴

The Minister of Commerce, Industry, and Energy selects the "advanced technologies" covered by the FIPA. Currently the "advanced technologies" include the following eight categories:⁵⁵

Electronic information and electrical technologies (including computers, semiconductors, video and audio instruments, etc.)

Advanced industrial machineries (including textile machines, printing machines, agricultural machines, robotics, etc.)

Advanced materials and the relating manufacturing technologies (including conductive materials, insulation materials, casting and rolling technologies, recycling technologies, etc.)

Precision chemicals and bioindustries (including medicines, catalysts, industrial chemicals, biomedicine technologies, etc.)

Optical and medical equipment (including laser equipments, optical materials and technologies, etc.)

Aviation and transportation (including aircrafts, automobiles, weapons, etc.)

Environment, energy, and resources (including pollutant treatment systems, power plants, nuclear power technologies, etc.)

Construction, architectural, and facility technologies (including new construction materials, construction machines, etc).

Under the FIPA, the South Korean government provides tax exemptions to parties of license agreements.⁵⁶ If a licensor obtains "advance technology" status, it receives a tax exemption on royalty income for five years from the date of the first royalty payment made under the license agreement. Because a licensor need only give notice to the Ministry when seeking a tax exemption, an application for tax exemption should be made together with a notice of technology inducement.

In South Korea, a nonexclusive license agreement is legally binding on signing. On the other hand, the licensor of an exclusive license must register the license with the Korean Intellectual Property Office (KIPO).⁵⁷ If the licensor fails to register the exclusive license, the licensee may request a court order to compel the licensor to register the license. An unregistered exclusive license would be considered a nonexclusive license. Although only the exclusive licensee is entitled to exercise the intellectual property right, the exclusive licensee may not assign the exclusive license without obtaining the consent of the patent owner.⁵⁸

The Monopoly Regulation and Fair Trade Act (Fair Trade Act) prohibits Korean businesses from entering into international agreements with provisions that constitute anticompetitive practices.⁵⁹ The Fair Trade Act does not require parties to report the agreement to the Fair Trade Commission (FTC). However, a party to a license agreement may request the FTC to review the agreement for an advanced ruling on whether it violates the Fair Trade Act.⁶⁰ This request should be filed within 60 days after the execution of the agreement. The FTC will notify the requesting party about the result of the review within 20 days. If the FTC determines that an agreement violates the Fair Trade Act, the FTC can order the parties to modify or cancel the agreement. In more severe cases, the FTC may impose a fine not exceeding 500 million Won to punish the violators.⁶¹ As a practical matter, however, the FTC rarely fines parties to license agreements even if the agreements contain provisions violating the Monopoly Regulation and Fair Trade Act.⁶²

Under the Korean Patent Act (KPA), there are two ways to obtain a compulsory (nonexclusive) license: (1) file a petition to the Commissioner of the KIPO or (2) request a trial before the Board of Trials established within the KIPO.

Article 107 of the KPA provides that a person may request the Commissioner of the KIPO to adjudicate for the authorization of a nonexclusive license:

When the patented invention has not been used for more than three consecutive years in the Republic of Korea, except for natural disasters, unavoidable circumstances, or other justifiable reasons prescribed by Presidential Decree;

When the patented invention has not continuously been used commercially or industrially in the Republic of Korea on a substantial scale during a period of three years or more without justification, or when the domestic demand for the patented invention has not been satisfied to an appropriate extent and under reasonable conditions;

When using the patented invention noncommercially is necessary for the interests of the public; or

When using the patented invention is necessary to remedy a practice determined to be unfair after the judicial or administrative process.

Articles 108 through 111 further specify the procedure of the adjudication. Article 114 provides the circumstances under which the KIPO may cancel the adjudication ex officio or at the request of any interested party.

If a patent is prevented from being used on by an earlier patent (the blocking patent), and the owner of the blocking patent refuses permission without justifiable reasons, the blocked patent holder may request a trial before the Board of Trials for the grant of a nonexclusive license with the scope necessary to use the (blocked) patented invention. KPA, Article 138.

Even though the KPA provides a compulsory license system, such license has hardly ever been granted or requested. The two most recent cases are both in pharmaceuticals.

In April 2002, a local Korean pharmaceutical company brought a case before the Board of Trials seeking a compulsory license of Pfizer’s blocking patent covering the active ingredient of Norvasc (a drug for treating high blood pressure). However, the petitioner later withdrew the case for failure to meet the requirement to carry out good-faith negotiation with the holder of the blocking patent before initiating the case.⁶³

On March 4, 2003, the Commissioner of the KIPO denied the petition the grant of a compulsory license to import and sell the generic version of Glivek (a drug for treating leukemia), the patent of which was owned by Novartis, stating that "there cannot be recognized the existence of a sufficient public interest which can be a basis for granting a compulsory license."⁶⁴

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.