Can a Licence Agreement Vest Ownership of Licensee-Developed Technology Improvements in the Licensor?

Answer: A technology licensing agreement is typically a contract in which the licensor grants the licensee the right to use patents and trade secrets for a fee. During the performance of the contract, the licensee may make improvements to the technology. Under Chinese law, the ownership of the improvements made by the licensee differs fundamentally from the exclusive adaptation rights of copyright holders, where others are prohibited from adapting the work without the holders’ permission.

First, the licensee has the right to improve the licensed technology. Article 10 of the Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Adjudication of Technology Contract Dispute Cases provides: “Restricting a party from conducting new research and development based on the subject technology in the contract or restricting the party from using of the improved technology” constitutes “illegal monopoly of technology and obstruction of technological progress” under the Civil Code, and such restrictions are therefore invalid. ¹

For example, in the 2023 patent ownership dispute between Henan Shengdu Environmental Protection Technology Group Co., Ltd. and Hebei Zhibo Thermal Insulation Materials Manufacturing Co., Ltd., when reviewing the patent improvement clause in the disputed license agreement, the Supreme Court cited this interpretation and stated: “This clause stipulates that, regardless of whether the improved patent is independently completed by Company B, the new patent with improvements belongs entirely to Company A. Company A did not pay reasonable consideration for acquiring rights to that new patent. This constitutes an abuse of its patent rights, improperly restricting or affecting further innovation based on the licensed patent. Therefore, the relevant clause is invalid.”²

Second, if a license agreement does not specify the ownership of technology improvements, the default rule is that the improvements belong to the licensee who made them. Article 11 of the above judicial interpretation provides: “After a technology contract is declared invalid or revoked, and if the rights to and benefits from new technological achievements completed during the performance of the contract, or subsequent improvements based on others’ technology, cannot be re-agreed upon by the parties, the court may adjudicate that the rights shall belong to the party who completed the technological achievements or improvements.”

Third, a contractual provision that unconditionally assigns all technology improvements to the licensor is also invalid. Article 10 of the judicial interpretation further provides: “Exchange conditions (i.e.considerations) for technology improvements that are unequal between the parties, including requiring one party to provide its self-developed improvements to the other free of charge, to transfer it non-reciprocally, or to grant exclusive or shared rights to the technology improvements, also constitute illegal monopoly of technology and obstruction of technological progress.”

This means that if fair and supported by consideration, clauses stipulating that technology improvements belong to the licensor are valid. For instance, in the 2018 case of Dongguan Jifa Automation Equipment Co., Ltd., Jifa Company accepted patents provided by Sanhe Company and, as requested, carried out improvements and manufactured the products in question while charging processing fees. The contract provided that the improvements would belong to Sanhe Company. The Guangdong High Court held that: “The contract stipulates Jifa as the processor, with consideration for manufacturing the automatic bagging system products. As a rational business operator, Jifa should be able to evaluate the relationship between the contractually agreed processing obligations, the right to receive processing fees, and the technology ownership clause.” Therefore, “the contract clause falls within the scope of the parties’ autonomy of will” and does not constitute illegal monopoly of technology or obstruction of technological progress.

In conclusion, the Supreme Court’s judicial interpretation prohibits technology monopoly and obstruction of technological progress in technology licensing agreements. The licensee has the right to decide whether to improve the licensed technology; if the licensee makes improvements, ownership of the improvements defaults to the licensee. Unless the parties explicitly agree otherwise, the licensor cannot use the improvements. A grant-back provision cannot unconditionally grant the licensor exclusive ownership, usage rights, or licensing rights to the licensee’s improvements; such a provision would be invalid.

The wording of the judicial interpretation shows it applies not only to technology licensing contracts but also to a broader range of situations involving the provision of technical information, such as when a technology-disclosing party (for example, a purchaser of goods) provides technical information to a technology-receiving party (such as a manufacturer) for the purpose of producing products. We believe that Chinese law adopts a state-intervention approach toward rights to technology improvements, encourages innovation, completely prevents the technology owner from monopolizing improvements, and reflects a national policy supporting technological innovation and market competition.

admin

1
Article 10 of the Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Adjudication of Technology Contract Dispute Cases (Fa Shi [2004] No. 20); Article 850 of Civil Code.
2
Henan Shengdu Environmental Protection Technology Group Co., Ltd. v. Hebei Zhibo Thermal Insulation Materials Manufacturing Co., Ltd., Supreme People’s Court Civil Judgment (2023) Zhi Min Zhong No. 416.
3
Dongguan Jifa Automation Equipment Co., Ltd. v. Zhoukou Sanhe Automatic Control Engineering Technology Co., Ltd., Guangdong High Court Civil Judgment (2018) Yue Min Zhong No. 1268.