www.dlapiper.com0

BEYOND LEGAL:

MAKING SENSE OF CHINA

DLA Piper, Silicon Valley

Thursday, October 19, 2017

Qiang Li – Co-Regional Managing Partner, Asia; Co-Country

Managing Partner, China

*This presentation is offered for informational purposes only, and the content should not be

construed as legal advice on any matter.

www.dlapiper.com1 www.dlapiper.com

1 How different is China and why? 2

2 Why and how to give China special treatment? 11

3 How to monetize foreign technology in China? 16

4 About the firm 21

Contents

1 How different is China and why?

www.dlapiper.com3

Highly regulated – approval based (not disclosure based) capital market

designed to protect retail investors for social stability purposes (“similar to Hong

Kong”)

Regime worked well in the early days to deliver limited liquidity to strategic

industries

Extensive liberalization expected under the Xi administration's 2nd term?

How to explain the prominent absence of public M&A in China

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In the age of high liquidity, regime is causing massive inefficiencies in capital

allocation as evidenced by:

– high price-earning ratios (industry-blind) (sometimes used as benchmark by sellers in

private deals)

– rampant speculation

– enormous backlog of private companies queuing for IPO

– corruption in IPO approval

– rampant insider-trading

– follow-on offerings as challenging as initial IPO offerings

– public M&A close to impossible without government support and intervention

– no penalty on poor management or failed public companies

– limited role of professionals leading to poor quality of disclosures

– prominent Chinese high-growth companies opt for offshore listings (and delistings):

Alibaba, Tencent, etc.

How to explain the prominent absence of public M&A in China (cont’d)

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Much less regulated than public M&A – national approval threshold now as high

as US$300 million

MOFCOM’s role is somewhat on the decline

Role of professionals less subdued

Merger control regime

Add to watch list – Chinese "CFIUS" (national

security review)?

M&A as major form of exit until Chinese stock

markets get their acts together

Why do we have thriving private M&A in China?

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“China is a partnership with a general partner (GP) called the Communist Party

and everyone else is a limited partner (LP)…”

Source: http://www.ft.com/cms/s/0/cbd89828-4c44-11e0-82df-00144feab49a.html#axzz2S1NDLd4Z

How is China so “different?”

GP

LP

LP

LP

LP

www.dlapiper.com7

Diverse country governed

centrally

– how is diversity celebrated?

Case in point: the relative decline

of Shanghai under the prior Hu-

Wen administration

– Shanghai and other more

developed areas largely governed

in the same way as remote areas

controlled by “local tribes”

How is China so “different?” (cont’d)

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It charges a lot of “carried interest…”

Nevertheless, it has been delivering results since 1949

How would you rate the performance of the “GP?”

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Has China developed its own

jurisprudence while “crossing the river by

feeling the stones?”

Domineering role of government directly

results in high compliance costs for

multinationals

China’s existing legal system introduced by the “GP” – the “Great Patchwork” in China’s half-baked market economy

www.dlapiper.com10

Role of lawyers

The highly inefficient financial system

The judicial system and its lack of

independence

Corporate governance, fiduciary duty,

due diligence, supervisors of LLCs,

etc.

Anti-commercial bribery rules

The Great Patchwork - examples

2 Why and how to give China special treatment?

www.dlapiper.com12

Shareholding structure of IMAX China

IMAX China (Hong

Kong), Limited

IMAX Shanghai Mulimedia Co.,

Ltd.

爱麦克斯（上海）多媒体技术有限公司

100%

100%

Offshore

Onshore

Equity

ownership

*

* Reported Chinese Investors of IMAX China:

1.China Media Capital （华人文化产业投资基金）2.Fountainvest Partners （方源资本）

IMAX China Holding,

Inc.

(Cayman Islands)

100%

IMAX Shanghai Service Co., Ltd.

爱麦克斯（上海）影院技术服务有限公司

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Shareholding structure of GLP China

GLP China

(e.g. Lowa China Offshore

Holdings (Hong Kong) Limited)

Subsidiariese.g. 普洛斯投资管理（中国）有限公司

100%

100%

Offshore

Onshore

Equity

ownership

Global Logistic Properties

Limited

(Singapore)

China Consortium

*

Reported Chinese Investors of GLP China:

1.China Life Insurance （中国人寿保险）2.China Development Bank （国家开发银行）3.Bank of China Group Investment （中银集团投资）4.China Post （中国邮政）5.HOPU Funds （厚朴基金）

CLF I 中国物流基金一期CLF II 中国物流基金二期

China JVs其他中国合资企业

56% ~58%

3 How to monetize foreign technology in China?

www.dlapiper.com15

Option 1: HK JV – WFOE subsidiary structure

Tech Inc.

Tech SPV

(Cayman)

JV

(Hong

Kong)

Chinese

investors

WFOE

(China)

100%

50%50%

100%

Offshore

China

VIE

(China)

Contractual

Control

Nominees

game development

(foreign ownership

allowed)

game publishing &

operations (foreign

ownership

prohibited)

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Option 2/3: onshore EJV/CJV (China)

Tech Inc.

Tech SPV

(Cayman)

Chinese

investors

EJV/CJV

(China)

100%

50%50%

Offshore

China

VIE

(China)

Contractual

Control

Nominees

game development

(foreign ownership

allowed)

game publishing &

operations (foreign

ownership prohibited)

www.dlapiper.com17

Option 4: IP license

Tech Inc.

Tech SPV

(Cayman)

100%

Offshore

China

OpCo

(China)

IP license

Chinese

investors

game development /

publishing &

operations

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Flexibility of IPO options

Flexibility of license of IP as capital contribution

Tax benefits

Corporate governance

ESOP

PRC "outbound" approval required?

Re option 1, how to create offshore JV structure with a local partner who is not

able to move funds offshore?

Considerations for the various options

4 About the firm

www.dlapiper.com20

Global Coverage

Australia

Austria

Bahrain

Belgium

Brazil

Canada

China

Czech Republic

Denmark

Finland

France

Germany

Hungary

Italy

Japan

Kuwait

Luxembourg

Mexico

Morocco

Netherlands

New Zealand

Norway

Oman

Poland

Portugal

Qatar

Romania

Russia

Saudi Arabia

Singapore

Slovak Republic

South Africa

South Korea

Spain

Sweden

Thailand

Ukraine

United Arab Emirates

United Kingdom

United States

DLA PIPER OFFICES RELATIONSHIP FIRMS

www.dlapiper.com21

Qiang Li is a Partner in the Corporate team, based in DLA Piper's Shanghai office. Qiang has been practicing law in

Hong Kong and Shanghai since 1997. His practice covers mergers and acquisitions, private equity investment and

corporate finance. He advises multinational and Chinese corporate and fund clients on their cross-border M&A and

direct investments projects.

Qiang frequently counsels international investors on China’s foreign investment laws and has served as Counsel to

the Board of The American Chamber of Commerce in Shanghai. He is a leading authority on China’s myriad legal

reforms in the areas of market access, corporate finance, corporate governance and general corporate matters.

Qiang has significant experience in representing Chinese airline companies in aviation matters. He is also the

founding board member of the Aviation Law Society of Shanghai Law Society.

Qiang LiPartnerco-Regional Managing Partner, AsiaO: +86 21 3852 2168 E: qiang.li@dlapiper.com

www.dlapiper.com22

DLA Piper, Silicon Valley

Thursday, October 19, 2017

*This presentation is offered for informational purposes only, and the content

should not be construed as legal advice on any matter.

PATH TO SUCCESS IN CHINA

DISPUTE RESOLUTION OPTIONS

WHEN CONDUCTING BUSINESS IN CHINA

Cedric Chao

DLA Piper LLP (US)

555 Mission St., Suite 2400

San Francisco, CA 94105

Tel: (415) 615-6008

Email: cedric.chao@dlapiper.com

www.dlapiper.com23

China is the Wild East – no laws and anything goes!

Chinese law is increasingly similar to US law – we can

just use our US law forms and concepts

We should be fine if we just read up on the regulations

Three dangerous misconceptions

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Chinese courts

Courts outside of China

International arbitration

Chinese administrative remedies

Dispute resolution options

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Comparing US and Chinese courts

US China

Legal system Common law Civil law

Legal issues Case precedent Statute-based

Fact finder Jury Judge

Pretrial discovery Yes No

EvidenceMore credence to oral

testimony

More credence to written

evidence

Consequential damages Larger Smaller

Punitive damagesAvailable for business

tortsUnheard of

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Favoritism towards the local Chinese party

Lack of transparency, especially in the remote provinces

Chinese court’s lack of experience with complex international

commercial and IP disputes

Proceedings in Mandarin

Unfamiliar court procedures

Enforcement issues

Concerns about the Chinese courts

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One large US technology company requires its Chinese vendors and

customers to bring disputes to local Chinese courts

Reasoning

Its factory is one of the largest employers in

the province

It enjoys good relations with local officials

Disputes are not company-threatening

Availability of attachment procedures

Requires close supervision of local counsel

Clearly the minority view

Some US companies favor Chinese courts

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Chinese law recognizes foreign court

judgments only from countries with

which China has an international treaty

or a reciprocal relationship

US court judgments are unlikely to

be enforced because no treaty or

reciprocal relationship exists between

the United States and China

US courts?

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Control risk

Minimize favoritism toward local party

Ability to select arbitrator – fairness, expertise

Mechanism for enforcement of final award

International arbitration: advantages

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Arbitration (and mediation) commonly used in China

Foreign arbitral awards recognized and enforceable

Arbitration must be mandatory to avoid judicial resolution in

China

China is a signatory to the UN Convention on Recognition and

Enforcement of Arbitral Awards (New York Convention), which

requires enforcement of foreign arbitration awards

However, the New York Convention has a public policy

exception which is sometimes used to shield China parties

International arbitration

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Once the parties accept arbitration as the dispute resolution

mechanism, the details must be ironed out

Arbitration can vary greatly depending upon what clauses are

included in the contract documents

Negotiating ADR provisions

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Institution: CIETAC or HKIAC, SIAC,

ICC, ICDR

–Emergence of new PRC regional

arbitration charters

Venue: China, United States or third

country

Governing law: Chinese law, US law,

or third country law

Language: English or Mandarin

Arbitrator selection

–Chinese or non-Chinese

–Subject matter expertise

Negotiating ADR provisions

www.dlapiper.com33

Three arbitrator tribunal, not single arbitrator

–Reason: risk mitigation

Provide that each party can nominate one arbitrator, and that the

parties nominate the chair by agreement absent which the

institution appoints

Provide that chair be of a nationality other than that of the parties

–Reason: avoid having two PRC arbitrators

Incorporate “IBA Rules on Taking Evidence in International

Arbitration”

–Reason: IBA rules provide limited discovery and witness

evidence which otherwise may be unavailable in PRC

arbitrations

Negotiating ADR provisions

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Arbitration laws of the seat of the arbitration govern arbitration

procedure

Local courts have supervisory jurisdiction over the arbitration, will

enforce those laws, and will hear actions to vacate the award

Non-Chinese parties with sufficient bargaining leverage typically

seek a venue in a neutral third country

Chinese parties are comfortable with Hong Kong and Singapore

as venues

US parties sometimes question whether Hong Kong is a neutral

seat when it is part of China

Our view: Hong Kong has an autonomous legal system and

sophisticated arbitrators who are familiar with common law

systems

International arbitration: venue in China?

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Chinese law prohibits parties from agreeing to arbitrate outside

China unless the dispute is “foreign related”

If foreign party is a foreign investment vehicle incorporated and

operating in China, it may be considered a “domestic” company

and thus cannot agree to an offshore seat with another Chinese

incorporated company

Chinese law may bar enforcement of the resulting award in

China

Foreign-owned companies incorporated and operating in China

should agree to arbitration in China

International arbitration: venue in China?

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Key concern: will the Chinese courts enforce an arbitral award

against a PRC company?

Anecdotal stories of prevailing foreign parties unable to obtain

enforcement, notwithstanding New York Convention

Improved record: new reporting system requires Supreme

People's Court to review any lower court decision declining to

enforce an award that is foreign related

Special arrangements to facilitate enforcement of awards made

in Hong Kong

Heightened risk: seek commercial protections in contract

International arbitration: Will awards be enforced against Chinese companies?

www.dlapiper.com37

Foreign related IP civil cases, as a share of

total cases dropped from 1.9% (2013), to

1.8% (2014), to 1.2% (2015)

Central government aims to transform

China into one of the world’s most

innovative countries by 2020 → more IP

litigation

Some foreign companies are reluctant to

sue PRC infringers

Risk/reward ratio: perceived difficulty in

proving liability, statutory damages limit,

bad publicity

By contrast, total administrative cases in

2015 were 10,926, of which 4,928 were

foreign (about 45%)

IP litigation in Chinese courts

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China’s dual-track system: parties can enforce IP through judicial

or administrative means

The three main PRC bodies responsible for conducting

administrative enforcement are:

State Administration for Industry and Commerce (AIC) –

trademark, trade secrets and unfair competition matters

State Intellectual Property Office (IPO) – patent issues

State Copyright Office – copyright infringement

Each administrative body has state and local offices

PRC administrative enforcement

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Advantages of administrative enforcement:

Proceedings are usually quick and inexpensive

Proceedings can be useful means of obtaining evidence

for use in subsequent civil litigation

IPO and Copyright Office actions, particularly in more

advanced cities, can be effective means of enforcement

In areas with a high level of foreign investment, Chinese

authorities may be more willing to take action to

encourage further foreign investment

PRC administrative enforcement

www.dlapiper.com40

Cedric Chao is a trial partner and co-head of the global international arbitration practice of DLA Piper, a global firm of

4,200 lawyers. Cedric, a former federal prosecutor, has a unique skill set, having first-chaired numerous high-stakes

U.S. jury and court trials (business and criminal), as well as international arbitration disputes. He has represented

clients, as first chair, in five business disputes where the amount in controversy exceeded $1 billion, and in multiple

others where the amount in controversy was in the hundreds of millions of dollars. His clients have spanned many

industries and countries.

Cedric has appeared in U.S. District Courts in a number of federal judicial districts and in the trial courts throughout

California. He has argued thirteen times before the Ninth Circuit Court of Appeals, including once to an en banc

panel, once before the U.S. Supreme Court, and four times before the California State Court of Appeal. He has

second-chaired four additional arguments before the Ninth Circuit and one additional argument in the U.S. Supreme

Court. Cedric has led teams in international arbitration proceedings under the rules of the ICC, ICDR, LCIA,

UNCITRAL, AAA, and JAMS, and has represented parties in court proceedings to enforce or set aside arbitral

awards. Cedric has sat as an arbitrator under the rules of the ICC and SIAC.

Cedric is a U.S. member of the ICC Arbitration Commission, and serves on the Governing Council of the American

Arbitration Association. He is one of 31 Advisors to the American Law Institute project to draft the Restatement of the

U.S. Law of International Commercial Arbitration. Cedric is a former chair of the U.S. Magistrate Judge Screening

Committee of the Northern District of California and of the California State Bar Litigation Section.

Cedric is listed in Best Lawyers in America (for arbitration, mediation, and business litigation), and has been named

by that publication as “2018 San Francisco Arbitration Lawyer of the Year.” He is named a leading lawyer by

Chambers USA and Chambers Global, among other rating publications.

Cedric C. ChaoPartner

O: +1 415 615 6008E: cedric.chao@dlapiper.com

www.dlapiper.com41

DLA PIPER PRESENTS:

DOING BUSINESS IN CHINA

DLA Piper, Silicon Valley

Thursday, October 19, 2017

*This presentation is offered for informational purposes only, and the content should not be

construed as legal advice on any matter.

www.dlapiper.com42

Onshore JV

JV

(PRC)

HoldCo

(HK)

PRC

customers

Sales

50%50%

RMB fund

(PRC)

PRC IP

IP HoldCo

(Cayman)ROW IP

US parent

(US)US IP

Offshore

Onshore

www.dlapiper.com43

Offshore JV

JV

(Cayman)

IP HoldCo

(Cayman)ROW IP

Sales

50%50%

HoldCo

(HK)

USD Fund

(US)

US parent

(US)US IP

OpCo

(PRC)

PRC

customers

PRC IP

Offshore

Onshore

www.dlapiper.com44

Peng Tao is a Partner with DLA Piper's Hong Kong office. He focuses his practice on China tax, transfer pricing,

mergers and acquisitions, foreign direct investment, and general corporate and commercial issues concerning

operations in China, offshore investment from China and other cross-border transactions.

Peng also has experience in working across DLA Piper's offices in Shanghai, Silicon Valley, and New York, where he

was the Head of the China Desk for Tax.

Prior to joining DLA Piper, he also worked in the Palo Alto and Beijing offices of two other leading international law

firms.

Before entering private practice, Peng worked at the Fiscal and Financial Department with the Bureau of Legislative

Affairs of the State Council of the People’s Republic of China from 1992 to 1997. He had drafted and reviewed

banking and tax laws and regulations that were applicable nationwide in China including the Provisional Regulations

on Value Added Tax, the Law on People's Bank of China and the Law on Commercial Banks.

Peng has published numerous articles and spoken on China tax and transfer pricing issues.

Peng TaoPartner

O: +852 2103 0511 E: peng.tao@dlapiper.com

www.dlapiper.com45

DLA Piper, Silicon Valley

Thursday, October 19, 2017

CHINA / ASIA CYBERSECURITY AND DATA LAW UPDATE

*This presentation is offered for informational purposes only, and the content should not be

construed as legal advice on any matter.

www.dlapiper.com46

ASIA PACIFIC CYBER AND DATA REGIMES AT-A-GLANCE 2011 VS 2017

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China's new CyberSecurity Law

Most comprehensive privacy and cyber law in the world?

Privacy / Internet sovereignty / Data security driven?

Regulates:

Network operators

Key information infrastructure operators ("KIIOs")

Providers of network technology

"Personal data" and "Important data"

Data localization is a key requirement:

Absolute offshore transfer prohibition for certain data sets and for all KIIOs

Security assessments and data subject consents otherwise required

Mandatory breach notifications

Provision of system access for Chinese authorities

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What does this mean for US businesses operating in China?

Data localization is also driven by legal, commercial and

operational needs:

– "Personal data and “important data" may be legally

required to remain in China

– The "Great Firewall" of China

– China customers demanding in country solutions

PRC based infrastructure brings practical challenges:

– Local ICP, ISP and IDC licensing requirements

– China hosting partners

– .CN domain name ownership concerns

– Fragmentation of global data pooling strategies

– Expensive duplicate / segmented systems

www.dlapiper.com49

Recent Data security Enforcement Trends

Fines, Civil claims, PR damage and Prisons

China, 5 years of inaction; and since June 1, 2017:

22 US technology company employees detained

7 US content companies shut down

Baidu, Tencent and Sina allegedly fined RMB 500,000

Hong Kong: First ever privacy related jail sentence

South Korea: Privacy Law used to shut down credit

card issuers following cyber event

Singapore : Dozens fined for inadequate data security

www.dlapiper.com50

DLA Piper CyberCert

www.dlapiper.com51

Scott ThielPartner

Location Head

O: +852 2103 0519

E: scott.thiel@dlapiper.com

Scott Thiel's background in engineering and dual qualifications in both intellectual property law and

computer science provide him with a unique opportunity to understand the technical aspects of client's

ICT and outsourcing projects. An understanding of the issues faced by both sides of a transaction enables

Scott to seek innovative solutions to resolve negotiation deadlocks and deliver completed deals for his

clients.

He advises both users and suppliers of IT outsourcing services on all aspects of the procurement process.

He also advises on complex technology transactions. His work usually involves him on business critical

projects frequently valued in the tens or hundreds of millions of dollars. He advises clients across a range

of sectors including technology, banking, transport, energy and sport.

www.dlapiper.com52

DLA PIPER & KPMG PRESENT:

DOING BUSINESS IN CHINADLA Piper, Palo Alto

*This presentation is offered for informational purposes only, and the content

should not be construed as legal advice on any matter.

www.dlapiper.com53

Panel 1 Topic: China Joint Ventures and Alliances

– Moderator: Paul Chen (Partner, DLA Piper)

– Panellists: Li Qiang (LQ) (Partner and Co-Regional Managing Partner, DLA Piper, Asia), Nathan (Nate) Bush (Partner and

Head of Investigations and Antitrust & Competition, DLA Piper, Asia) Cedric Chao (Partner and Co-Head, International

Arbitration, DLA Piper) and Peng Tao (Partner, DLA Piper)

Panel 2 Topic: Tech Transfer, Antitrust and Regulatory issues in China JVs

– Moderator: Sherman Chu (Partner, DLA Piper)

– Panellists: Scott Thiel (Partner and Head of Technology & Telecoms practice, DLA Piper, Asia) and William (Skip) Fisher

(Partner and Head of Patents, DLA Piper, Asia)

AGENDA

2CROSS-BORDER LICENSING AND TECHNOLOGY TRANSFER WITH CHINESE CHARACTERISTICS

William (Skip) Fisher, Partner, DLA Piper, Shanghai

October 2017

www.dlapiper.com55

Business Is Booming!

PRESSURE – for foreign companies to commercialize IP, for Chinese companies to innovate and globalize

CONFIDENCE – in China's business and legal environment (foreign companies), in themselves (Chinese companies)

NECESSARY – for foreign companies to enter/succeed in China market, for Chinese companies to compete

US-China licensing and tech transfer is big business, but still lopsided in favor of inbound – China is a huge net tech importer!

WHY will upward the trend continue (with increasing levels of tech export)?

– China wishes to increase value of technology contracts from $130 billion in 2013 to $330 billion in 2020

– China wishes to increase licensing export revenue from $1.36 billion in 2013 to $8 billion in 2020

– More foreign R&D in China and more JVs and other technology collaborations

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Licensing/Tech Transfer Cycle

US Co has background IP/tech

US Co licenses/transfers

background IP/tech to PRC Co

PRC Co makes improvement on

background IP/tech or independently

innovates

PRC Co licenses/transfers foreground IP/tech

to US Co

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Structuring considerations

Tax implications

Compliance with US-PRC technology import/export regulations

Ownership of improvements and other technical achievements

Fair and reasonable royalty rates

Effectiveness of IPR enforcement mechanisms

Employee-inventor remuneration requirement

State secrecy examination for foreign patent filings

Trade secret protection

Cross-Border Licensing/Tech Transfer Issues

www.dlapiper.com58

JV /Third-party Licensee Structure

Technology/IP

www.dlapiper.com59

WFOE Structure

Technology/IP

www.dlapiper.com60

Early Tax Advice Is Crucial!

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PRC Technology Import & Export Regulations

Regulations of the PRC on the Administration of Technology Import

and Export (effective 1 January 2002)

– Technology transferred from outside China into China or vice

versa by way of trade, investment, or cooperation

– Assignment and licensing of patent rights

– Assignment and licensing technical know-how

– Provision of technical services

– Catch-all: “transfer of technology by other means”

Classification of technology?

Requirements for technology import contracts?

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Classification of Technology

Prohibited

technologiesNo import/export under any

circumstances

Restricted

technologies Approval by MOFCOM

Permitted

technologies Registration with MOFCOM

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Licensor Liability for Third-Party Infringement

Where the assignee to a technology import contract is accused of

infringement by a third party for using the technology supplied by the

assignor in accordance with the contract, the assignee shall

immediately notify the assignor; the assignor, upon receipt of such

notification, shall assist the assignee in removing the impediment.

Where the assignee to a technology import contract infringes upon

another party's lawful rights and interests by using the technology

supplied by the assignor in accordance with the contract, the assignor

shall bear the liability therefore. (Technology I/E Regulations, Article 24)

Where the assignee infringes the lawful rights and interests of another

party by exploiting a patent or using technological secrets in

accordance with the provisions of the contract, the assignor shall

assume liability, except where the parties have agreed otherwise.

(Contract Law, Article 353)

Conflict between Technology Import Regulations and Contract Law?

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Licensor Warranty of Technology Quality

The assignor to a technology import contract shall ensure the

technology it supplies is complete, accurate, effective and capable of

achieving the agreed technical objective. (Technology I/E Regulations,

Article 25)

The assignor to a contract for the assignment of technology shall

guarantee that it is the lawful owner of the technology which it

provides, and guarantee that such technology is complete, accurate,

effective, and capable of achieving the agreed objectives. (Contract

Law, Article 349)

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Licensor Restrictions on Improvements

Contract invalid if restricting licensee's making or use of

improvements

Terms not equitable if:

– Grant back of improvement without compensation

– Non-reciprocal transfer of improvement

– Sole or joint ownership of improvement without compensation

(Technology I/E Regulations, Articles 27 & 29(3);

Contract Law, Article 354)

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License Royalties – Freedom to Contract?

Earlier MOFCOM policy of unofficial cap of 5% net sales

MOFCOM policy repealed, but often applied in practice

Higher royalty may be challenged by MOFCOM

5% cap vs. freedom to contract vs. "fair and reasonable"?

Different treatment for restricted vs. unrestricted technology?

www.dlapiper.com67

IP Enforcement in China Is Improving!

The American Chamber of Commerce in Shanghai,

2015 China Business Report

Survey: In the last year, China's enforcement of IPR has …

www.dlapiper.com68

IP Enforcement in China Can Be Effective!

The American Chamber of Commerce in the PRC,

2016 China Business Climate Survey Report

Survey: Rate the effectiveness of China's enforcement of IPR laws and regulations

www.dlapiper.com69

Lack of IPR protection & enforcement is a "serious hindrance" (18%) or

"some hindrance" (46%) to business in China

75% of respondents identify "better IPR protection & enforcement" as

the top three drivers for improving innovation in China

54% of respondents identify "improved IPR protection" as the top three

reforms important to business growth in China

Source: 2017 China Business Report, AmCham Shanghai

But Improvement Is Still Needed!

www.dlapiper.com70

Obtaining evidence: Parties generally are not compelled to produce information they don't want to produce, and evidence

preservation by courts can be ineffective. This makes proving infringement and damages difficult for the plaintiff in many cases,

though the situation is improving.

Submitting foreign evidence: Chinese courts require foreign-sourced evidence to comply with certain formalities, including

notarization by notary public, legalization by Chinese embassy/consulate, and translation to Chinese. The process is time

consuming and expensive, and must be considered as part of litigation strategy.

Explaining complex technical issues: Though many courts have IP tribunals for hearing IP cases, most judges have no technical

background. Technical issues are addressed via judicial technical appraisals and/or party technical expert witnesses. It is crucial

for counsel to be able to "teach" the technology.

IP Litigation Challenges

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Receiving reasonable damages: Nearly all patent damage awards are based on statutory damages (upper limit of RMB 1 million,

or EURO 140,000). Actual awards are generally low and insufficient to compensate the plaintiff for actual loss, and don't act to

deter infringement. Plaintiffs in China should base damages on lost profits or illegal profits as much as possible.

Enforcing judgments: Many defendants fail to comply voluntarily with judgments against them, especially paying damages.

Plaintiffs in China must be prepared to apply to court for enforcement of judgment.

Facing local bias: While local bias/protectionism still exists in Chinese courts, the problem likely is overstated. In most cases,

depending on the court and situation, the plaintiff will receive fair hearing under Chinese law. However, foreign plaintiffs must be

aware of the possibility of bias and develop a litigation strategy accordingly.

IP Litigation Challenges

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Employee-Inventor Remuneration

Both the PRC Contract Law and PRC Patent Law stipulate that

employers must reward employees who develop technology on the

employer’s behalf, and upon exploitation of the technology, allocate a

reasonable proportion from the proceeds derived from the use or

transfer of the technology as remuneration.

– Article 76 of the Implementing Rules of the Patent Law expressly allows employers

to reach agreement with employees regarding the form and amount of rewards and

remuneration required under Article 16 of the PRC Patent Law, and Articles 77 and

78 provide default rules when there is no agreement.

– Default minimum rewards – RMB3,000 for invention patents, RMB1,000 for

utility model & design patents

– Default minimum remuneration – 2% operating profit for invention & utility model

patents; 0.2% operating profit for design patents; 10% royalties

– Recommendation: Companies should implement a reward and remuneration

system for inventions in a policy and/or by agreement to avoid the onerous default

rules.

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Secrecy examination requirement for inventions made in China

Secrecy examination is required prior to an entity/individual's application for a patent overseas on any invention or utility model made in China. Failure to do so can result in refusal to grant the patent in China.

– Option 1: File first in China, together with request for secrecy examination – process can take up to 6 months (normally much less)

– Option 2: File international application with SIPO as receiving office – deemed to simultaneously request secrecy examination, notification of secrecy decision within 3 months

– Option 3: File request for secrecy examination in order to file first in foreign country –priority date might be delayed, but is good option if both PRC and US first-filing rules apply

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Trade Secrets under PRC Anti-Unfair Competition Law

Technical information

Not known to the public

Confidentiality measuresEconomic value and

practical utility

Operational

information

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Protection of Trade Secrets

Company trade

secrets

Employees

Customers Suppliers

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Protection of Trade Secrets

HR

Vet employees before/after they

join

Training on what can/cannot be

disclosed

Conduct exit interviews

Facilities

Control access to areas

Sign in, sign out, wear badges

Keep clean desk policies, shred

documents

Documents

Mark confidential and individually

watermark

Prohibit unapproved forwarding of

company documents

Sign NDAs, NCAs

IT

Use stand alone computers for highly

confidential data

Change passwords regularly, secure company emails

Control access to rooms

www.dlapiper.com77

William (Skip) Fisher has practiced IP law in the U.S., China and internationally for 20 years. His practice focuses on

counselling, licensing, and enforcement/litigation in all areas of intellectual property, with a particular emphasis on

patents, trade secrets and international IP and technology-related transactions.

He works with clients to establish and implement strategies for procuring, protecting, commercializing and enforcing their

IP rights and for minimizing risk to their IP assets in China, the U.S. and globally. He also counsels clients on U.S.,

Chinese and international IP law, practice and strategy; represents them in challenging, high-stakes patent, trade secret

and other IP litigation and enforcement actions; and assists them in negotiating and drafting IP licenses, collaboration and

development contracts and other commercial agreements.

Skip advises clients in a wide range of technologies and industries, including computer hardware and software, computer

networks, mobile devices and applications, telecommunications, Internet and e-commerce, pharmaceutical,

biotechnology, chemical, medical devices, mechanical and industrial products, aerospace, automotive, and

manufacturing.

Skip is the China Head of Patents within the Intellectual Property and Technology (IPT) team, based in DLA Piper's

Shanghai office.

William FisherPartnerHead of PatentsO: +862138522198 E: William.Fisher@dlapiper.com

www.dlapiper.com78

CHINA JOINT VENTURES:

ANTITRUST & ANTIBRIBERYDLA Piper, Silicon Valley

Thursday, October 19, 2017

*This presentation is offered for informational purposes only, and the content should not be

construed as legal advice on any matter.

www.dlapiper.com79

Risks: legal, reputational and Commercial Watch the exits!

"Risk based" diligence on (1) partners and (2) contributed entities, businesses,

key personnel

Extraterritoriality: consider compliance risks from third-country activities

– Antitrust/competition

– Antibribery/anticorruption (ABAC)

– Official corruption

– Commercial bribery

– Overseas bribery

– Sanctions and export controls

– Sectoral regulations, environmental, labor, etc.

Document compliance diligence and findings

TRAP: Insufficient control during transitional periods

TRAP: divergent risk appetites and risk assessments

Compliance dimensions of China JV strategy

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"Although the FCPA’s accounting requirements are directed at

‘issuers,’ an issuer’s books and records include those of its

consolidated subsidiaries and affiliates. An issuer’s responsibility thus

extends to ensuring that subsidiaries or affiliates under its control,

including foreign subsidiaries and joint ventures, comply with the

accounting provisions."

"Companies may not be able to exercise the same level of control

over a minority-owned subsidiary or affiliate as they do over a majority

or wholly owned entity. Therefore, if a parent company owns 50% or

less of a subsidiary or affiliate, the parent is only required to use good

faith efforts to cause the minority-owned subsidiary or affiliate to

devise and maintain a system of internal accounting controls

consistent with the issuer’s own obligations under the FCPA."

"In evaluating an issuer’s good faith efforts, all the circumstances—

including “the relative degree of the issuer’s ownership of the

domestic or foreign firm and the laws and practices governing the

business operations of the country in which such firm is located”—are

taken into account."

DOJ and SEC: FCPA guidance

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Policies & procedures addressing

key corruption risks:

– gifts

– hospitality, entertainment and

expenses

– customer travel

– political contributions

– charitable donations and

sponsorships

– facilitation payments

– solicitation and extortion

Third party relationships:

Managing risks from agents and

intermediaries

Elements of effective compliance programs(from US Settlement Agreements)

High level commitment

Internal controls

Proper oversight a independence

Training guidance

Internal reporting and investigation

Enforcement and discipline

Mergers acquisitions

Monitoring and testing

Periodic risk-based review

Industry risk

Country risk

Operational/business model risk

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Reps and warranties

– Covered actors: JV, JV partner, subsidiaries, officers; employees, agents, and

Shareholders

– Covered misconduct: elements vs offenses

– Nexus to JV

Corporate governance

– Compliance programs: specifications and models, adoption and amendment

– Appointment and oversight of compliance, audit, legal functions and high-risk

commercial functions

– Procedures: triggering events, escalation, investigation and remediation

Remedies and compliance impasse?

Negotiating compliance provisions

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Antimonopoly Law (AML) establishes a mandatory, suspensive merger review

regime modelled on EU practice

"Concentrations" must be reported in advance to Antimonopoly Bureau (AMB)

of Ministry of Commerce (MOFCOM) for clearance on competition grounds

under the AML if the transaction parties' global and China revenues satisfy

notification thresholds

Penalties for failure to file and gun jumping

China: mandatory merger notification system

Current

ThresholdsEither And

(1) All parties' combined global turnover > RMB 10

billion (US$1.61 billion, Y121.6 billion)

OR

At least two

parties' China

turnover > RMB

400 million

(US$65 million)

(2) All parties combined China turnover > RMB 2.0

billion (US$323 million, Y24.3 billion)

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Formation of "greenfield" JV or conversion of existing business to JV may

qualify as a reportable "concentration" in many antitrust jurisdictions

– EU Model:

– Joint control where multiple parties hold rights (and vetoes) conferring

"possibility of exercising decisive influence" over JV

– JV must perform "on a lasting basis all the functions of an autonomous

economic entity" to be treated as "concentration"

– MOFCOM largely follows EU on joint control, but has not adopted full

functionality test pending amendments follow EU

In many jurisdictions (including EU and China), revenues of the two parent

groups can trigger notification even if the JV will only operate elsewhere

– Simple case/short form procedures may be available

As Chinese companies "globalize," JVs with Chinese parties increasingly

trigger notifications in China and other jurisdictions

Merger review of China JVs

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Process

Pre-notification consultation

Intake: is filing complete?

– "Preview:" clock does not start until

filing deemed complete

Phase 1 initial review (30 Days)

Phase 2 full review (90 Days)

Phase 3 extension (60 Days)

– Notification may be withdrawn and

refiled to "restart clock" in

controversial case

Approve/block/remedies

Timing effects: PRC merger review process

Of the 917 unconditional clearances

from 2015-2017, 208 involved JVs

"Simplified procedure" alleviated

bottleneck, but low headcount and

turnover makes China a gating item,

even for uncontroversial transactions

In 2016, MOFCOM cleared 82% of all

cases and 98.6% of all fast-track

cases within 30 days of initiation

1 August 2008 –

10 October 2017

Result

Cleared 1881

Conditions 31

Blocked 2

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AML sets low bar for remedies

Low combined market shares can

trigger remedies, especially in

sensitive sectors

Comfortable with behavioural

remedies, "permanent hold separate"

against international practice

Industrial policy may taint decisions

– National champions, controls on

price/supply, famous brands

Pretext, error or innovation? Sparse

decisions & controversial foreign

precedents for remedies or theories

Conditions: not just antitrust

Implicit welfare standards:

– Consumer welfare vs total welfare

– Domestic welfare vs global welfare

– Politically-weighted domestic total

welfare

JVs with China partners

– "Win-win" narratives

– Benefits of domestic allies

– Not all policy objections can be

neutralized

– AML uniquely reaches offshore

transactions

Political risk assessments in multiple

jurisdictions

MOFCOM's substantive decision making

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Nathan (Nate) Bush is a partner in DLA Piper's Litigation and Regulatory

Department. He advises clients in internal investigations, government

enforcement actions, regulatory proceedings, and commercial disputes in

Asia.

He was based in Beijing from 2004 through 2012, and has covered the region

from Singapore since 2013. Nate was a pioneer of antitrust practice in China,

and guides clients through anti-bribery and anticorruption (ABAC) risks in

Asia's dynamic markets.

Nate served as general counsel of the American Chamber of Commerce in

China from 2009 to 2011, and now co-chairs the IP & Legal Committee of the

American Chamber of Commerce in Singapore.

Nate is graduate of Harvard Law School and the University of Virginia. He

clerked for the Hon. Leonie M. Brinkema in the U.S. District Court for the

Eastern District of Virginia.

Nathan BushPartner

O: +65 6512 6065E: nathan.bush@dlapiper.com