The Art of The Deal -Successful IP Licensing in China

Muhammed I. HussainIIPCS, New York March 23, 2016,

Overview

• Environment, Challenges, Opportunities

• Licensing with Chinese Companies

• Joint Development Agreements

• Sale of Technology Product Assets (M&A)

• Lessons Learned

• Summary

Environment

• Many Chinese Companies are Becoming Global Players

• China Wants Access to Leading Edge Technology

• Global Companies Keen For China Market Access

• Significant Government Support and Incentives Remain

• No Longer a Cheap Manufacturing Base as Cost Goes Up

• Facing Increasing IP Challenges in Global Market Place

• Significant Jump In Patent Filing, But Quality an Issue

• Increasingly Acquiring Patents

• Acquiring Patents As Part Of Product Technology Assets Buy Outs.

What does China NEED?

• Frontier Technologies (selected)

• Biotechnology

• Information Technology

• Advanced Materials Technology

• Advanced Manufacturing Technology

• Advanced Energy Technology

• Main Areas (selected)

• Energy

• Environment

• Agriculture 4

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/26

/20

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See "The National Medium- and Long-Term Program for Science and Technology Development (2006-2020)”,

http://www.most.gov.cn/kjgh/kjghzcq

Deal

M & A

• Acquisition

• Own Part of it

• Contract

Licensing

• Prefer Assignment

• Grant Back

• Dispute Resolution

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Biggest Manufacturing Country

• Knowledge Based Economy?• 大众创业、万众创新

http://baike.baidu.com/item/%E4%B8%87%E4%BC%97%E5%88%9B%E6%96%B0

• Domestic vs Global

• Technology now vs Improvements

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Licensing Areas

. Services Business

- Opening Up to Foreign Participation

- More Government Sensitivity

- Challenging Negotiation

. Industrial Business

- High Interest in Foreign IP & Expertise

- Tough Negotiation on Terms and Scope

- Less Apparent Government Interference

Chinese Negotiation Approach

• Often Have The Foreign Party Travel to China

• Endless Repetitive Raising of Issues That Suits Them, While Discounting The Other Side Issues

• Drag Out Negotiation As Long As Needed Till They Get What They Want

• Ask For More And More Till The Wear You Out

• Giving the Chinese Negotiators Timetable Do Not Always Work In Your Favor.

• Often Adds New Clauses After The Negotiation To Benefit Them, and Not Allow Reciprocity.

Chinese Negotiation Approach

• The Chinese Sets Negotiation Closure and Signing Ceremony with Top Officials From Both Sides Early.

• Once the Deal Framework and Scope is Agreed Close To The Signing Deadline, They Often Introduce New Issues With Excuses Citing Government Demands or Regulation Compliance requirements.

• The Chinese Are Very Good Demanding Patents or Key People to be Added For Free to The Deal Basket Once Asset Valuation Is Complete and Agreed.

• The Chinese Try to Understand the Rationale for the Urgency to Close the Deal on the Part of the Foreign Party, and Use It Very Effectively To Their Advantage.

• The Foreign Party Often Accepts New Chinese Demands For Other Reasons in Case of Asset Sale or JDA (Executive Revenue Commitment, or BOD Priority.)

Lessons

Patent Licensing (Proactive):- Get Hold of Products for Analysis- Present Infringement Proof Packages- US and EU Patents besides CN.- Keep Adding a Few At Every Meeting- Do Not Bring Up Damages, Till The Chinese

Accept Exposure- Never Negotiate Against Yourself- Proper License Scope, Term License- Sometimes Offers Cash and/or Stocks

Lessons

Technology License/Joint Development (JD):- Understand Technology Gaps & Market Position- Scope of Technology Transfer/ Joint Development- Perform Thorough Valuation of Assets- Once an Initial Agreement is reached, Do NOT Allow

The Chinese To Bring up New Issues or Objections.- Do Not Hurry to Close the Deal Based on Artificial

Deadline, and Never Negotiate Against Yourself- The Time is On Their Side –The Chinese Will Drag Out

the Negotiation Till They Get All They Want- The Chinese Do Not Like a Well Written Contract- “Take it or Leave It” Approach Do Not Always Work,

and Avoid “What If’s” Early On.

Lessons

Technology Product Asset Sales (M&A):- Understand Chinese Party’s Technology Product Gaps- Assess Partner’s Market Position in All Geography, and

Benefit They Would Derive With The Technology Product - Perform Thorough Valuation of Assets to be Divested- Agree on a Negotiation Framework Early-on.- Before Sending the Negotiating Team to China, Find Out

Who They Have Attending. Is there a Decision Maker to Join the Meeting? Decision Maker is Often an Executive

- Do Not Be Driven By Deadline to Close the Contract, As You Are Certain To Be Denied The Best Terms

- Once The Chinese Know “Your Timeline” to Close The Deal, They Will Surprise You With New “Wish List or Objections” at the Eleventh Hour, Or Drag Their Feet Till They Get it.

M&A Issues• How to Strike a “Good” Deal?

• Who is a “Good” Partner?

• How to find the Good Partners?

• Yes = Maybe or Yes

• Execution of an agreement with a

“good” partner = the beginning of

the LONG MARCH?

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Summary

- Resist Chinese Demand For Unreasonable Terms Or

Negotiating Ground Rule, Including Signing Date

- No Deal Is Better Than a Bad Deal - Be Prepared To Walk Away

- Show Respect, and Develop Early Relationship With A Decision Maker (From the Business Side and Government)

- Substantive Discussion Often Occurs At Dinner Table

- Play Carefully The “Take It Or Leave It” Card – It Can Go

Either Way – Not The Same China as 10 to 20 Years Ago.

- China Has Come A Long Way, With Economic Boom and

Increased Buying Power, They Have Mastered the Art of

Negotiation With Many Chinese Western Educated And

Trained Subject Matter Experts and Legal Professionals

Thank You

mihussain@iipcs.com; Tel: +1 845 337 9275