Our partner site China Law Blog gives us insight into the Netflix-iQIYI licensing arrangement and what it really means.
In Netflix finally finds a way into China, CNN’s Sherisse Pham explains how “six months after admitting defeat in its bid to crack China, Netflix has found a way to tap into the vast market.” To summarize, Netflix for years was trying to set itself up in China, so as to be available to viewers in China, just as it is available in “over 190 countries.” To quote from Netflix’s own site, “Netflix is not yet available in China, though the company continues to explore options for providing the service. It also is not available in Crimea, North Korea, or Syria due to U.S. government restrictions on American companies.” Netflix is not available in China because China tightly regulates foreign content and foreign publishing. No surprise there, right?
So how did Netflix manage to all of a sudden make its way into China? By licensing its content to China.
And that makes total sense.
Both here on the blog and in real life with our clients, our China lawyers are always touting the benefits of licensing products, intellectual property, brands, technology and content to China. Licensing deals make sense under many circumstances, but they make particular sense in situations where it is difficult or impossible to get your “widget” into China any other way. In other words, it makes particular sense for content. And because of that, much of my law firm’s China media and entertainment work involves drafting content licensing agreements for written, visual and audio content for magazine and newspaper and book publishers and for television and movie producers and studios. Just by way of an example, virtually all of the China-language editions of foreign magazine titles you see in China are there via licensing. In the typical magazine licensing deals we do, our client, a US or European magazine publisher, will license its magazine’s name and a certain amount of content (to be translated into Chinese) to a Chinese publishing house. Our movie and television and gaming deals are not substantively much different.
In A China IP Reality Check, Part 3, we explained what is typically necessary for a China content licensing agreement to work:
As a preliminary matter — before you license anything to anyone in China — you should register, in China, any of your intellectual property worth litigating over. That means registering not only your English-language trademarks but also the Chinese-language versions of those trademarks. If the Chinese-language versions don’t exist, it’s time to create them. That also means registering copyrights for any meaningful content. For television shows, that means at the very least registering the show bible, scripts, and any produced episodes. It’s true that China is a signatory to the Berne Convention and therefore a valid copyright in the US or Europe is valid in China without registration, but for practical purposes, it’s much easier to enforce a copyright in China if you have registered it in China.
Do not delegate the task of registering your IP in China to your Chinese licensee. The licensee’s interests may not always be aligned with yours.
Once you have registered your IP in China, you should draft an enforceable contract to protect your interests in China as against the Chinese licensee. A contract with the licensee’s Hong Kong affiliate, with disputes resolved by arbitration in Hong Kong (or any other country other than China), achieves none of these goals. Yet this is what we see again and again from companies who either don’t trust or don’t understand the Chinese court system. The problem is usually not that Chinese law won’t protect foreign content owners. The problem is usually that content owners (and their lawyers) often decline to take advantage of the protection Chinese law offers. They write contracts designed to be unenforceable in China, and then complain about China’s legal system when their contracts prove to be worthless.
A properly drafted China content licensing agreement should address the following issues:
1. Make sure the contracting party on the licensee side is the actual Chinese entity that will be licensing the content, and not a Hong Kong affiliate. As a corollary, choose the right law and the right jurisdiction for your dispute. If you want to sue a Chinese company for breaching your contract by using your IP in China, choose Chinese law and dispute resolution via Chinese courts in the hometown of the Chinese licensee. See China Contracts: Make Them Enforceable Or Don’t Bother and China Contracts. Watching The Jurisdictional Sausage Get Made.
The issue with contracting with a Hong Kong company is not so much that the Hong Kong company may be a shell company with no assets (although that is often the case). Rather, the issue is that any legal resolution in Hong Kong is unlikely to be effective in China. And if you’re licensing content to China, China is where the action is going to be. Hong Kong still has the common law system passed down from its days as a British colony; it favors injunctive relief and disfavors liquidated damages (aka contract damages). China is the opposite. What good is injunctive relief in Hong Kong if you’re trying to get the judgment enforced in China, which disfavors injunctions? You might argue: we will arbitrate in Hong Kong but provide that Chinese law governs. For a variety of reasons that almost never works, particularly if the defendant is a Hong Kong company. Meanwhile, the infringement in China continues.
2. Provide for upfront payment of the license fee in an amount that makes the deal worth it to you even if the contract is terminated early. See China Licensing Agreements: The Extreme Basics. Provide for substantial contract damages for late or non-payment of the license fee, and do not provide the Chinese side with any of your content until it has paid the license fee and the funds are in your bank account.
3. Provide for substantial contract damages for (1) early termination and (2) each instance of infringement. Do not mess around with lengthy provisions about injunctive relief. Unlike the common law systems of the United States, Canada, Great Britain and Australia, contract damages are not disfavored under Chinese law. In fact, use of contract damages is well established in China and favored by statute. On the other hand, though Chinese judges may be legally empowered to issue injunctive orders, they have virtually no power to ensure those injunctions are implemented. There is no Chinese equivalent of the U.S. Marshals Service. For this reason, Chinese judges are hesitant to issue an order they know is likely to be ignored. Instead, they will seek to convert every decision to an order to pay a sum certain in damages. Including a contract damages provision gives a China judge the roadmap. Most importantly, since Chinese companies know well the power of contract damages provisions, your merely having one in your contract greatly increases the odds of your Chinese counter-party abiding by that contract.
4. The contract damage amounts must be a good faith estimate of the actual amount of income that would be lost by the licensor in the event of early termination. These amounts are not guaranteed even if the plaintiff prevails: at trial, the defendant can argue that the contract damage amount is too high and the plaintiff can argue that the amount is too low. The utility of contract damages is that when a plaintiff seeks pre-judgment attachment of assets China’s courts will almost always allow attachment in an amount equal to contract damages if such damage amount is specified in the contract. In contrast, if the contract provides for injunctive relief and monetary damages in an amount to be determined at trial, it is virtually impossible to obtain a writ of attachment. To repeat: Chinese companies do not like putting their assets at risk of being seized and so having a contract damages provision is a great deterrent to that company breaching your China content licensing agreement.
Note also that an arbitration body cannot issue an enforceable assets seizure order and it is also virtually impossible to obtain such a order from a court outside the district where the assets are located. That is why we normally want to sue in the “home town” of the defendant, even though that sounds counter-intuitive to a most U.S. and European lawyers, who have been taught to avoid getting “home-towned.” The Chinese understand the “home town” issue, which is why there is an automatic right of appeal to a higher court in a different town, and also why such appeals are de novo. Home town favoritism is often reversed at the higher court level.
5. Do not rely on the default provisions of Chinese intellectual property law to protect you against your licensee. Chinese IP law and your IP registrations protect against random third-party infringement. If you want protection against your licensee stealing your IP, put it into the contract. Your contract with your licensee is your best chance to control your Chinese licensee and to protect yourself. Take advantage of it by using a contract that actually achieves those things.
6. The license term should be relatively long; say, five years. If the term is too short, then the penalty for early termination becomes irrelevant.
If your Chinese counter-party refuses to sign a contract that addresses the above, you know what they have in mind and you should reconsider whether to do the deal.