V.Trial of Intellectual Property Contract Cases

27.Differentiation and Determination of Technology Transfer Contracts and Cooperative Venture Contracts with Technology Shareholding

In the trial of contract cases，determining the nature of the contract is the fundamental aspect.It is relatively hard to distinguish between technology transfer contracts and cooperative venture contracts with technology shareholding due to the complexity of the actual contracts.Thus，the relevant provisions of the concerned contract and the performance behavior of the parties involved should be taken into account to determine the true meanings of the clauses in dispute.

In the technology transfer contract dispute case of Yan Chunmei（retrial petitioner）v.Zhu Guoqing（respondent）［No.159（2009）of MSZ］，the SPC applied paragraph 1 of Article 125 of the Contract Law of the People's Republic of China（the Contract Law）to determine the true meaning of the clauses in dispute that the contract involved therein was a technology transfer contract with the nature of the advance payment of technology transfer fees plus profit commission，according to the words and sentences used in the contract，the relevant clauses of the contract，the purpose of the contract，the transaction practices and the principle of good faith.

The basic facts of the case are as follows：Yan Chunmei and Zhu Guoqing signed acooperative venture contract on October 29,2003；Ji Xinhua also signed the contract as an intermediary.Pursuant to Articles 1 and 2 of the Contract thereof，Yan Chunmeitransferredherindependently-developedtechniqueofVJgreen concentrates for dairy cows to Zhu Guoqing exclusively，and Zhu Guoqing injected the funds in advance to set up a concentrated cow feed company and handled the relevant approval procedures.Article 4 of the Contract，‘Payment of technology transfer fee’，stipulated that Zhu Guoqing shall pay the technology transfer fee（totaling RMB 1 million）to Yan Chunmei in three installments，with the first installment of RMB 200,000 paid immediately upon the execution of the Contract.The second installment of RMB 200,000 shall be paid after products that meet national and company standards have been produced.The third installment of RMB 600,000 will be paid from the profits after the equipment has been installed and eligible products produced.The technology transfer will be completed within one month of the last installment being paid.Article 5，‘Determination of shareholdings in the company’，stipulates that all of the assets of the company are contributed by Zhu Guoqing，the original assets are irrelevant to Yan Chunmei，Zhu Guoqing enjoys the right of operation，management and decision and owns a 65%stake in the company，Yan Chunmei owns 25%and the intermediary holds the remaining 10%.Furthermore，YanChunmeiinveststhesharesthroughtechnology，andthe shareholders enjoy the right to gain profits and perform the duty of bearing the corresponding risk in proportion to their respective shares in the company.Article 6，‘Agreement on the behavior of both parties’，stipulates that the fund investment in the company and newly-increased assets shall be subscribed by Zhu Guoqing.The assets of the company include fixed assets and the property of newly-increased assets，which are irrelevant to Yan Chunmei.Zhu Guoqing paid RMB 200,000 as part of the technology transfer fee upon the execution of the Contract.On November 27,2003，Zhu Guoqing and six other persons jointly established the Tianxiang（‘天翔’in Chinese character，later renamed‘Tianxiang（天祥）’）Company.Neither Yan Chunmei nor Ji Xinhua was a shareholder in the company.Ji Xinhua raised no objection to this.Yan Chunmei asked her husband to purchase the production equipment for the Tianxiang Company，and Zhu Guoqing installed the equipment，but neither commissioned the equipment nor engaged in any production until the litigation.Both parties recognized that the core of the technical formula consisted of bacterial strains，but Yan Chunmei did not transfer those bacterial strains to Zhu Guoqing.On April 6,2007，Zhu Guoqing sued Yan Chunmei and requested to order the latter to cease the performance of the Contract，refund the technology transfer fee of RMB 200,000 and pay damages for losses amounting to RMB 100,000.Yan Chunmei made the counter-allegation that Zhu Guoqing was in breach of contract，and asked the court to order the latter to pay liquidated damages of RMB 300,000.In the first instance，Huai’an Intermediate People's Court of Jiangsu Province held that the technology transfer contract between both parties was valid，and Yan Chunmei had failed to perform the contractual duty of transferring the technology，thus causing the inability to make capital contribution with the technology evaluation.Zhu Guoqing had not established the company as stated in the Contract，thus constituting no default.Therefore，the court delivered a judgment to rescind the Contract，and ordered Yan Chunmei to refund the technology transfer fee of RMB 200,000 to Zhu Guoqing and compensate for the interest loss therefrom.Yan Chunmei refused to accept this judgment and filed an appeal.In the second instance，the High People's Court of Jiangsu Province held that the involved contract should be a technology transfer and cooperative venture contract，and reaffirmed the judgment of the first instance.Against the second instance judgment，Yan Chunmei appealed to the SPC for a retrial on the grounds of the cooperative venture contract and Zhu Guoqing's failure to establish the concerned company.The SPC determined that the contract involved therein should be a technology transfer contract in the form of the pre-payment of the technology transfer fee plus the profit commission method，and made a retrial judgment on May 25,2009，rejecting her appeal.

Upon review and retrial，the SPC held that the key to determine the nature of the contract involved therein was the understanding of Article 5，‘Determination of shareholdings in the company’，in the light of Article 125.1 of the Contract Law.First，the words and sentences in Article 5 did not clearly state that a company with the shareholders of Zhu Guoqing，Yan Chunmei and Ji Xinhua must be established.Second，Article 5 and the relevant clauses thereof indicated that‘shares’mentioned in Article 5 was not clearly defined as the shares of capital contribution of the shareholders of the LLC，other than the standards for calculating the profits of the company.When specifying the right of owning the company's shares，Article 5 actually stressed the proportion of gaining profits and also the duty of bearing the corresponding risks.However，Article 6 clearly indicated that the assets of the company were irrelevant to Yan Chunmei，so she was actually unable to bear the risks arising therefrom.During the hearing of the SPC，Yan Chunmei recognized that 25%of the shares actually constituted a right to obtain 25%of the company's profits.Ji Xinhua was the intermediary of both parties，the Tianxiang Company did not register him as a shareholder，and Ji Xinhua raised no objection，which proved that the shares of Yan Chunmei and Ji Xinhua mentioned thereof were actually a proportion of the profits.Moreover，according to the purpose of the contract，the establishment of a company with Zhu Guoqing，Yan Chunmei and Ji Xinhua as its shareholders was not a necessity to achieve the contractual purpose.The purpose of a contract means the thing，outcome or status that the parties thereto expect through its execution and performance；the purpose of a contract is always expressed in the form of economic interest.According to the concrete contents of the involved contract，Yan Chunmei and Zhu Guoqing signed the contract for the purpose of obtaining profits through technology transfer.The establishment of a company with Zhu Guoqing，Yan Chunmei and Ji Xinhua as its shareholders was not necessary to achieve this purpose.Furthermore，according to the transaction practices，the fixed technology transfer fee（also called the advance initial payment）plus the profit commission was generally used as the method for calculating the technology transfer fee in technology transfer trading.Finally，according to the principle of good faith，Yan Chunmei asked her husband to purchase the production equipment for the Tianxiang Company after its establishment，and raised no objection to the non-conforming performance of the establishment.Overall，the contract involved therein should have been a technology transfer contract with the nature of the advance payment of the technology transfer fee plus profit commission.Financial supervision，technical supervision and other details stipulated in the contract were apparently part of the cooperative operation，but were actually collateral obligations accompanying the transferor of a technology transfer contract.

28.NatureandEffectofActingContractsandPerformance Arrangement Clauses between Artist Management Co.（Ltd）and Artists

With the vigorous development of the entertainment industry，the number of disputes over acting contracts between artist management Co.（Ltd）and artists has steadily increased in recent years.Different understandings of the nature and effect of acting contracts and the clauses of performance arrangement between the entertainment brokerage companies and artists exist in judicial practice.

In the IP contract dispute case of Xiong Wei and Yang Yang（retrial petitioners）v.Beijing Union Culture&Century Media Co.，Ltd.（Hereinafter refer to as Century Company，respondent）［（2009）MSZ No.1203］，the SPC clarified that an acting contract is not simply a contract of intermediary agency or brokerage，but a contract with comprehensive features.Therefore，the principle of‘unilateral lifting rule’cannot be applied to the clauses concerning performance arrangements based on the regulations relevant to an agency contract or brokerage contract stipulated in the Contract Law.

The basic facts of the case are as follows：In March 2006，Xiong Wei and Yang Yang signed a contract with the Century Company specifying that the latter had recruited Xiong Wei and Yang Yang as signed singers，and would handle the matters of the records，art performances and advertising of Xiong Wei and Yang Yang on an agency basis.If there is a default/breach of contract，Xiong Wei and Yang Yang must pay liquidated damages according to the relevant provisions thereof.The income from commercial performance activities shall be distributed in line with the agreed proportion.Both parties shall jointly raise funds to make，distribute and publicize records，and the royalties shall be divided between both parties in line with the agreed proportion.The copyright of the records shall be owned by the Century Company during the duration of the contract.The contract shall remain in force from March 23,2006 to March 22,2009.After the contract was signed，Xiong Wei and Yang Yang participated in performances arranged by the Century Company，and raised funds for the preparation of a music album.The Century Company received the royalties from the music album and paid a performance fee to Xiong Wei and Yang Yang.On January 12,2007，Xiong Wei and Yang Yang requested that contract be revoked on the grounds that the Century Company had delayed paying them the performance fees，but the Century Company asked them to keep performing according to the contract.Xiong Wei and Yang Yang then lodged litigation and asked for the judgment to annul the clauses of performance arrangement due to the violation of the Administrative Rules for Commercial Performance，and that they may revoke those clauses at any time in spite of their validity.In the first instance，Beijing Second Intermediate People's Court held that the clauses concerning performance arrangement in the contract constituted an agency act of the Century Company for its artists，rather than an agency，intermediate and brokerage act for commercial performances as stipulated in the Administrative Rules for Commercial Performance.The contract was deemed valid because it did not violate the compulsory provisions of the relevant laws and administrative regulations.The noncompliance behavior of the Century Company could not make the contractual purpose unrealizable.Hence，Xiong Wei and Yang Yang could not terminate the contract.The Century Company，Xiong Wei and Yang Yang all refused to accept this judgment and filed appeals.In the second instance，the High People's Court of Beijing Municipality upheld the original judgment.Xiong Wei and Yang Yang filed an appeal to the SPC for a retrial.The SPC delivered a retrial judgment on November 27,2009，dismissing their appeal.

Upon investigation and retrial，the SPC held that the clauses concerning performance arrangements in the involved contract did not violate the compulsory provisions of the Administrative Rules for Commercial Performance，and should therefore be deemed valid.The contract involved therein specified not only the performance arrangements，but also the commercial operation，packaging and promotion of Xiong Wei and Yang Yang，the permission of copyright use and so on.Furthermore，they were interdependent and interrelated，and constituted the complete relationship of the rights and obligations of both parties.The clauses concerning performance arrangements did not simply constitute a contract of intermediary agency or brokerage，but a contract with comprehensive features.The severance of the relationship between these clauses with the remaining contents of the contract，and the application of‘unilateral lifting rule’to those clauses in isolation would have gone against the consistency，equilibrium and equality of the rights and obligations thereof.Therefore，Xiong Wei and Yang Yang's claim that the clauses concerning performance arrangements in the agency contract or brokerage contract could be rescinded at any moment in accordance with the Contract Law was indefensible.