Subject to the restrictions on technology monopoly as set forth under Article 329 of the Contract Law of the PRC, a covenant not to sue clause (“CNS”) in a Software Development Agreement is feasible under the current laws and regulations of the People’s Republic of China (“the PRC”).
As more and more software companies enter China’s hot economy, many of them are planning to use China’s rich human talent pool to develop software based upon open source platforms. As a part of the general practice for the open source development community, the owner of the software (“Software Owner”) generally requires participants to sign an agreement containing the so-called standard CNS, which is drafted very broadly. In a CNS, the participants promise not to sue the Software Owner in exchange for access to the software object component, such as services and process.
In order to ascertain the legality of a CNS under the current laws and regulations of the PRC, one needs to first ensure that the particular CNS is feasible under the General Civil Principles of the PRC and the Contract Law of the PRC, and then make sure it will not trigger any technology monopoly restrictions.
In the PRC, when the participant and the Software Owner decide to adopt a CNS, such action will be deemed a contractual action, which is also a type of civil action. Consequently, the legality of a CNS (a civil action) will be judged under the relevant clauses of the General Civil Principles of the PRC and the Contract Law of the PRC.
The General Civil Principles of the PRC and the Contract Law of the PRC enumerated conditions and actions that constitute unlawful civil actions. Based upon our understanding, a CNS does not constitute an unlawful civil action for the following reasons: (i) it meets the elements of a lawful civil action under Article 55 of the General Civil Principles of the PRC; (ii) it does not fall under any of the civil actions as deemed null or void in Article 58 of the General Civil Principle of the PRC; (iii) it does not fall under any of the facts for finding a null or voidable contract as defined in Article 52 of the Contract Law; and (iv) it should be a fair action, and not bound by Article 59 of the General Civil Principles of the PRC and Article 54 of the Contract Law of the PRC. Based upon the aforementioned analysis, a CNS should be feasible under the General Civil Principles of the PRC and the Contract Law of the PRC.
However, the scope of a CNS may be limited by technology monopoly restrictions. Article 329 of the Contract Law of the PRC (“Article 329”) states:
“Technology contract which monopolizes the technology or impedes the technological progress, or which infringes upon the technological achievement of others shall be null and void.”nterpretation Concerning the Several Issues in the Application of Law in Hearing Technology Contract Disputes (“Technology Interpretation”), which identifies actions that are deemed to be illegal technology monopolies. In particular, Article 10(6) of the Technology Interpretation (“Article 10(6)”) identifies the following as an act of technology monopoly:
The element of “technology monopoly” of the Article 329 is further interpreted in Article 10 of the I
“Prohibit the receiver of technology from challenging the validity of the intellectual property of the said technology or from inserting clauses for objection relating to the same.”
Thus, according to Article 10(6) and Article 329, any clause with the effect of restricting the technology receiver from challenging the validity of the intellectual property of the technology would render the technology contract void or null.
Applying the aforementioned rules to the CNS, when it is drafted broadly to include the prevention of the participants from challenging the validity of intellectual property rights of the software, such CNS is deemed to be technology monopoly according to Article 329, and could cause the related agreement to be null or void. However, if there is carve out in the CNS making the aforementioned prevention an exclusion, the CNS would be legally feasible without running afoul of Article 329.
Although the aforementioned carve out is legally feasible, it may not be practicable. In practice, having explicit wording on this exclusion could raise alarm for the participant to question the remaining CNS clause and its validity, which could lead to further negotiation and is time consuming. Based upon our experience in this field, a CNS is best to be drafted broadly while sweeping in the requirements of Article 329 without alarming the participant. A sample language of CNS is as follows:
“The participants shall waive the right to bring any lawsuit, claim or action against the Software Owner subject to any restriction under the relevant laws and regulations of the PRC.”
Our comments and analysis herein were made based on our research and experience in handling similar matters and consultations with the relevant authorities of the PRC. However, it is important to point out that, because China is not a case law system, a case decided by one judge will not have any binding effect on later cases. This is important as at the current time there exists no case law challenging CNS in the PRC courts, due to the sensitive nature of these issues, it is likely that a judge in China could hold opinion different than what is said herein.
Relevant Laws and Regulations
1. General Principles of the Civil Law of the PRC
2. Contract Law of the PRC
3. Interpretation Concerning the Several Issues in the Application of Law in Hearing Technology Contract Disputes
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