Technology And IP-Focused Joint Ventures, Collaborations & Alliances - Part II: Focusing On China And India

Monday, July 5, 2010 - 01:00

The following report is based on a seminar with the above title presented April 15, 2010, by Weil, Gotshal & Manges LLP. In the June issue, we featured a summary of Part I of the seminar. In this issue, we present a summary of Part II of the seminar in which issues relating to China and India are discussed. The Panel for Part II (participating by telephone) consisted of Anthony Wang, a partner in the firm's Shanghai office, which he helped to launch in 2004, with a practice that concentrates on complex private equity and venture capital transactions, cross-border mergers & acquisitions and capital markets transactions, and Dev Robinson, a partner in Amarchand Mangaldas's Intellectual Property Department, based in New Delhi. His practice focuses on patent and design laws and in the law of confidential information, with emphasis on licensing, litigation, prosecution and advocacy.

Wang: I'm not sure how much of the audience here has experience in dealing with China, so I'll give a brief history of China's foreign investment landscape. Historically, particularly prior to China's entry into the WTO, joint ventures were the main vehicle used by businesses interested in entering the Chinese market.

After China entered the WTO, many foreign companies chose to establish their own subsidiaries in China. However, given the credit crunch resulting from the global recession and a host of other business reasons, we note that foreign businesses are increasingly looking at joint ventures - whether with state enterprises or private local counterparties - to conduct business in China.

Moreover, in certain restricted industries, often technology focused or in other sensitive industries, which are simply off limits to foreign-controlled companies, JVs with local partners are the only way to go in China.

Earlier today my colleagues spoke about a number of critical IP issues affecting JVs. Now, I would like to cover a few of the special considerations relating to JVs in China based upon its legal framework.

Under applicable Chinese law, a foreign invested enterprise (or an FIE), which includes the commonly used Sino-foreign equity JV, will have a fixed total investment amount, including a government-approved registered capital that is sufficient to fund the JV's business. The registered capital essentially represents the JV partners' equity contribution and the cash portion of the registered capital contribution should be at least 30 percent of the total amount invested. The remaining 70 percent of the registered capital can be funded by in-kind (noncash) contribution such as land, intellectual property rights and other tangible assets.

While the registered capital may be contributed in one lump sum, typically a minimum required portion is contributed up front, with the balance contributed within two years. Nevertheless, all forms of capital contributions, whether in cash or in-kind, will have to be verified by the relevant government authorities.

As I will discuss in more detail below, if the partner to a Sino-foreign JV intends to contribute intellectual property rights as its equity contribution (or a portion thereof) to its registered capital, then such contribution will be subject to even more stringent governmental approvals and oversight. However, if the foreign partner does not intend to contribute such intellectual property rights to the JV's registered capital, there will generally be a bit more flexibility. Nevertheless, any other IP contribution arrangements that do not involve registered capital contribution, including licensing arrangements, are still subject to some forms of regulatory approval.

Earlier today, Michael Epstein mentioned the famous Danone-Wahaha dispute, which demonstrates how important it is for foreign parties to carefully navigate the existing legal and regulatory framework in China. For example, under applicable PRC laws, certain restrictions on a licensee's ability to use improvements or that impose other restrictions may be prohibited by the Chinese regulators. In China, improvements in the licensed IP are generally owned by the licensee. Moreover, licenses of such improvements back to the foreign licensor or to a third party are also subject to PRC regulatory requirements, as well as potential export control requirements.

Returning to the issue of a foreign JV partner's capital contribution, I note that the PRC Company Law expressly contemplates that intellectual property rights may be properly used as noncash consideration to represent a partner's contribution to a JV's registered capital. While the term "intellectual property rights" is not specifically defined under the PRC Company Law, we typically think of such rights to include patents, trademarks, copyrights and know-how. However, for purposes of registered capital contributions, the Chinese government generally does not consider the license of such rights to be intellectual property rights.

As a general matter, a license to IP rights would not constitute valid intellectual property rights for purposes of registered capital contributions, absent special governmental approvals or exemptions. The general principle in China is that intellectual property rights that are contributed to the joint venture's registered capital must be fully and independently owned by the joint venture and a grant of a license is deemed to be inconsistent with such general principle. Specifically, in order for the assignment of any assets to be recognized as a valid registered capital contribution, it is necessary that they be assets that the JV can fully own, exploit and dispose of without undue restrictions. Consequently, given such full ownership requirements, it's even more critical for foreign partners who intend to share intellectual property rights with the JV to determine the costs and benefits of contributing such rights as registered capital.

In light of the foregoing requirements, steps that a foreign party may typically expect to take to protect and preserve critical intellectual property rights may be problematic when contributing such intellectual property rights as registered capital. For example, an express reservation of rights in connection with an assignment could be deemed to be unduly restrictive and therefore not a valid assignment. Also, one cannot assign IP rights to the JV solely to the extent necessary to operate the company's business but otherwise retain ownership rights to use the IP rights in areas outside the PRC company's business.

As my time is winding down here, I will quickly wrap up by saying that even when the issues I have discussed have been addressed, a foreign partner in a JV will need to go through a qualified appraisal process to assure regulators as to the value of the IP. In this regard, it's critical to have discussions on formal and informal levels among the parties, the government regulators and the qualified appraisers, so that any contribution of intellectual property is handled in a way that that reflects the commercial intent of the JV partners. Dev will now discuss the Indian considerations.

Robinson: India is an attractive destination for a potential JV setup. Our system of law is like that in the United States, however, it's practiced differently. We are a common law jurisdiction. We do have a rule of law. We can go ahead and sue the government if that is what it comes down to. We have a large English-speaking population, which is of help when communicating internationally.

The intellectual property law system here is considered fully TRIPS compliant. That means that there are no surprises about how an intellectual property is going to be secured, how it's going to be leveraged and what minimum rights an intellectual property holder can expect.

Before I get onto the JVs I will briefly touch on some IP cases. Two recent cases that limit patent rights deserve mention. The recent case of Chemtura Corp. v. Union of India held that an infringing manufacturer was not liable for infringement simply because the infringer was manufacturing the products for use by the government. In India, government use is an exception to IP rights. Therefore, the use was held to be non-infringing even if the manufacturer didn't have a license.

Hoffmann-La Roche v. Cipla stands for the proposition that public interest in a life-saving drug outweighs the public interest in granting an injunction in interim proceedings to the appellants. This was the first case to deal with infringement of a patent on a molecule. The court reasoned that an interim injunction should not be granted to prevent the production by Cipla of a life-saving last-resort cancer medicine incorporating a molecule patented by Hoffmann-La Roche because that company alone could not supply an adequate amount of the medicine at an affordable price. Besides, the defendant was able to demonstrate a credible challenge to validity.

In Bajaj Auto Ltd. v. TVS Motor Company , it was held that an injunction is not automatically voided by making a counterclaim for revocation. In Bayer Corporation v. Union of India , the court held that Bayer could not link marketing approvals for products as a basis for manufacturing medicines that were under patent. The court held that whether patent linkages should be introduced requires a policy decision by the government.

The law of confidential information is becoming stronger in India. Protection of confidential information is being viewed here as a far more technical subject with the result that our courts have recognized the need to provide greater detail with respect to its definition and the steps that must be taken to protect it.

As far as joint ventures are concerned, the regulatory framework is not as draconian as it used to be in the past. In fact it's now rather friendly and moves along quickly. Very briefly, there are some guidelines that have to be followed when investing in certain business categories. The Reserve Bank of India has guidelines on the repatriation of investments, and there are some caps on the percentage interest of JV partners. Investments are being encouraged in Special Economic Zones and Software Technology Parks that provide tax breaks or easy access to industrial infrastructure in consideration of promoting exports.

Indian companies have in the past looked to JVs as a structure to produce partnerships with Western companies that could help them to cope with the technology deficit. While the total number of patent filings has gone up, a deficit still remains. An Indian partner in a JV frequently looks to its foreign partner for supply and upgrade of technology available to the JV.

What we have noticed in our last few JV transactions is that the Indian partner is less likely simply to agree to the terms proposed by the foreign partner. So, foreign investors can expect a certain amount of horse trading. However, Indian companies are still eager to enter into JVs if the technology carrot can be dangled.

Given the freer market environment that has developed in India in the last four or five years, JVs are still considered a good option for foreign companies that want to test the Indian business climate. Long-term strategies could include buying out the JV partner, e.g. Merrill Lynch (DSP), Morgan Stanley (JM), or selling stake and setting up as a distinct entity, e.g., Goldman Sachs (Kotak Mahindra).

In terms of the regulatory environment, there is an automatic and a government route. The automatic route applies to most sectors now, where there is no cap in terms of repatriation and equity contribution. The government route involves more regulation and applies to certain sectors like atomic energy, lottery, gambling, and multi-brand retail where there is a government interface for approval. In terms of capitalization norms, there are some norms in certain sectors - finance and real estate are two of them.

Sectors that have seen more activity in terms of JVs are fast-moving consumer goods, finance, automobiles, engineering and infrastructure (highways and ports). Notably, some of the larger JVs have been in the infrastructure space. Renault, Walmart, Nissan, Vodaphone and Alstom have all used the JV route to enter India.

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