Bertrand Russell said that “liberty is the right to do what I like; license, the right to do what you like.” That distinction matters just as much in joint ventures as in political philosophy. In U.S.-China joint ventures (JVs), determining who has liberty and who has license is of paramount importance. Most companies approach JVs with IP as an afterthought to be sorted out by lawyers. You shouldn’t.
In this post, we’ll walk through what you can do to protect your IP rights in the context of U.S.-China joint ventures. Specifically, we’ll look at background versus foreground, allocating rights to use, exploit, and enforce, and exit, dissolution and termination provisions.
“Background” vs. “Foreground” IP
Before we approach the joint venture, let’s define a few terms. Background IP is what each party brings to the JV. Background IP includes the U.S. company’s patents, trademarks, or proprietary tech. It also includes the Chinese partner’s distribution network, market know-how, tools, and production processes. Any JV agreement worth the paper it’s printed on should clearly state that each party retains rights to its background IP.
Foreground IP is IP that gets developed by the JV. This is the real battleground—whether it is jointly owned, assigned to the JV entity, or exclusively licensed back to one party. Note that I said, “by the JV.” Foreground IP does not include IP that is developedby one of the parties during the JV period—unless committed to the JV, that’s separate IP. To add a wrinkle, Chinese law recognizes joint ownership differently than U.S. law. In China, joint owners each can exploit IP without consent, but enforcement requires unanimity. This makes joint ownership risky if not carefully structured.
Allocation of Rights to Use, Exploit, and Enforce
When entering a joint venture, the parties should decide who can commercialize JV-developed IP. This was not a major issue in the old days when China was the ‘factory-to-the-world’—but Chinese brands have taken the world by storm. American companies often want worldwide rights. Chinese partners usually want China rights, along with some other important markets. While dividing rights contractually is fairly straightforward, enforcing these rights across jurisdictions is tricky. Borders are porous—particularly given the internet and e-commerce—and enforcement often involves a fair bit of whack-a-mole and mutual finger-pointing.
The JV agreement’s IP enforcement clause is critical. It should specify who has standing and who has the duty to pursue infringement claims. It should also cover how costs and damages are allocated and who pays attorneys’ fees. A common structure is that the JV owns Foreground IP, but one partner gets an exclusive license in its home market, while the other gets rights in its region. The JV in turn has enforcement rights for all foreground IP across regions. While this model is straightforward with respect to third parties, it doesn’t preclude disputes between the parties to the JV.
What Can Be Done to Avoid Disputes?
The best way to avoid disputes is no joint ownership. With no joint ownership, each party has worldwide rights to its contribution to the JV. If one party is contributing a design and the other party is contributing a manufacturing method for that design, each party owns rights in their respective contributions. Most JVs are limited in scope—the parties aren’t merging but coming together for a particular purpose. If they can identify their contributions, the scope of these contributions, and how the other party can use these contributions, each party can control its own destiny. If the license scope is exceeded or an idea is stolen, each party can sue to enforce its rights.
Unfortunately, the no joint-ownership model doesn’t fit most cases. JVs often develop their own tech, using their own staff and without relying solely on Background IP contributed by either party. In such cases, detailed language on commercialization and use of Foreground IP is essential. This should include geographic limitations, non-circumvention language, and industrial use-case limitations. If joint ownership can’t be avoided, consider appointing one party as the enforcement lead, with reimbursement mechanisms.
With joint ownership, the dispute resolution clause also takes on added importance. If there is misuse of the Foreground IP (or either party’s Background IP by the other party) termination may be necessary.
Exit, Dissolution, and Termination Provisions
Inevitably, some joint ventures will fail or outlive their usefulness. This is where strong termination provisions come in. The best approach is to have a termination provision that allows your party to terminate without cause. A breach-only termination provision substantially reduces your leverage—proving breach requires substantial time, cost, and acrimony. If the other party insists on making no-cause termination mutual, you’re usually still better off with optionality than having to prove breach. Because Chinese parties often need MOFCOM/SAMR approval to exit a joint venture, these contingencies should also be explicitly addressed in the JV agreement.
The termination provision should also detail the process of termination. This clause should include clear buyout, license-back, or reversion provisions that allow each side to continue their business without crippling restrictions. As with any good contract, it should also cover return of confidential information and non-use of IP. It is critical that you clearly spell out the provisions surviving termination—including dispute resolution, IP rights, and confidentiality.
What About Governing Law and Dispute Resolution?
Deciding how and where disputes get litigated is essential. Given the chance for things to go wrong—either during or after the life of the JV—parties need to decide in advance how disputes will be resolved. Contrary to popular belief, litigating in one’s home jurisdiction shouldn’t be the default. Chinese courts may be reluctant to enforce foreign arbitral awards. The same can apply in reverse—there can be obstacles to enforcing Chinese judgments in the U.S. The key is to have a straightforward mechanism for getting injunctive relief and damages where a breach is likely to occur. Internationally-recognized arbitral institutions—such as the Singapore International Arbitration Centre (SIAC), International Chamber of Commerce (ICC), and Hong Kong International Arbitration Centre (HKIAC)—can serve as a neutral compromise.
Conclusion
Murphy’s Law very much applies to IP in U.S.-China joint venture agreements. Because anything can go wrong, clear provisions are essential. The key is to iron out who gets liberty, who gets license, and what happens when one party steps over the line or the parties part ways. Coming prepared with a strong contract that covers any contingency will save significant heartache.
Disclaimer: This blog is for informational purposes only and does not constitute legal advice. Reading or interacting with this content does not create an attorney–client relationship. You should consult a qualified attorney for advice regarding your specific situation. Mehaffy, PLLC disclaims all liability for actions taken or not taken based on this blog.