China: How To Prepare Copyright License Contract Under China Case Law Landscape?

Last Updated: 27 December 2017
Article by Rocky Wu

Both the movie and TV series San Sheng San Shi Shi Li Tao Hua have been very popular in China. They were the derivative audiovisual works based on the literary work with the same title. Thus a number of online game developers are eager to make the online game derivative work San Sheng San Shi Shi Li Tao Hua. However, the claimed sub-licensee to make the online game derivative work recently brought a suit against the owner of the original literary work and the licensee on the ground of breach of contract. The plaintiff claimed liquidated damages and economic loss around US$ 1.65 million.

In recent years, markets for IP have been continuing to expand and to increase in sophistication, providing new ways to utilize, commercialize and monetize IP attribution to the rapid economic development in China. Even industries that are not traditionally considered as being "high-tech" or "knowledge-based" are being transformed by innovations that can become valuable (and licensable) intellectual assets if properly protected and managed. Licensing activity, including copyright licensing, has increased in both volume and complexity to meet the demands of this market place. In particular, the entertainment industry has been booming in China in the past recent years. Thus copyright transaction has been very active in entertainment industry.

Most of the copyright transactions were done by copyright license rather than copyright assignment based on our practice. However, in the Chinese legal practice, most of contracts are drafted very briefly and ambiguous which are not like those in developed western countries. However, with the booming economic development in China in recent years, some exclusive rights statutorily extended to the right holder may have huge amount of economic benefits. Thus the parties to a copyright license contract often have to seek courts' rulings to resolve their disputes due to the poorly drafted contract lack of clarity and foresight or poor risk management in preparation of the copyright license contract.

Copyright licenses may vary tremendously in content and form. However, license agreements are also contracts and, as contracts, are subject to basic contract law. Even though copyright license disputes will be subject to preemption by China copyright law for copyright issues, many disputes will involve issues that are purely contractual, like performance obligations, payment terms, and enforcement or violation of bargained for terms of use and limitations on use. Contract provisions can be used to impose restrictions on the use of copyright protected works that are not provided by copyright law, like restrictions on the users of a purchased work or the fields and methods of use of the work. These types of contractual restrictions are particularly important for licensing of software, when copyright offers only limited protection.

Based on our practice, the right to make derivative work of a literary work has been a hot issue in most copyright contract cases in China. But the China copyright statute and contract statute provide little guidance on how to exercise right to make derivative work of a literary work. The exclusive rights of works of authorship "adaptation right" and "filming right" defined by the copyright statute have close connection with the right to make derivative work of a literary work. But they are very general and ambiguous. Thus they provided little guidance in preparing the copyright license agreements.

Some high profile cases have provided guidance on the modern day scope, and limitations, of copyright protection for copyright owners and users as technologies for copying and distributing content become faster, cheaper and more widely accessible. Thus this article does not intend to provide comprehensive guidance on how to prepare a copyright license contract. This article only provides an overview of the key terms and risk management to consider when preparing a license for a work protected under China copyright laws, while highlighting ways in which the license should reflect, and be informed by, the objectives and constraints of the parties and the changing technological and business landscape impacting copyright-protected works.

Understand Parties to License Contract

When starting the license negotiations it is crucial to know some basic facts about the parties. For the licensee, it is important to know whether the licensor is the original creator and/or owner of the work. If the licensor is not the creator, then the license should provide representations that the licensor has acquired all of the rights to the work (and diligence should be done to confirm this). If the licensor is the co-author of a joint work, then licensor's co-author may have retained right in the work. In some cases, the licensor may be a licensee of the original copyright owner, and in this case the sublicense must conform to any restrictions and limitations included in the original copyright license.

In the above-mentioned San Sheng San Shi Shi Li Tao Hua case, the key issues are that an online game developer entered into a sublicense agreement to make online game based on the literary work of San Sheng San Shi Shi Li Tao Hua with the licensee of the literary work. When the online game developer had invested a lot of money and resources to develop the online game and planned to launch the online game, the owner of the original literary work publicly denied through his blog the authenticity of the signature on all the authorization documents to authorize the licensee to sublicense the exclusive right to make online game based on the literary work. Such statement had seriously impacted the online game developer's business plans and caused huge amount of economic loss to the sub-licensee.

In the case Ultraman, a Chinese company got license to publish the Japanese cartoon books in simplified Chinese character from the assignee, a Thailand company, of exclusive property right of the Japanese cartoon books. But the inheritor of the owner of the original work Ultraman denied that the owner of the original work had really executed the copyright assignment agreement with the Thailand company. Meanwhile, the inheritor of the owner of the original work Ultraman brought a copyright infringement suit against the Chinese licensee.

In the case Disneyland, a Beijing publishing house published Disneyland cartoon books in simplified Chinese character under the sublicense agreement with Maxwell, which was the licensee to publish the Disneyland cartoon books in simplified Chinese character in China. However, the Disneyland company did not authorize Maxwell sub-licensing such right. Thus the Beijing publishing house had to pay damages claimed by Disneyland company which was the owner of the original work of authorship.

In the case Hu Shi and Wei Lian Si, the owner of the original literary work had assigned all the copyright thereof to a Taiwan company before he granted an exclusive license right to publish the work in simplified Chinese character to a Shanghai publishing house. In the case mouse loves rice, exaggeratedly the owner of the popular music work entered into whole copyright assignment agreements with four different parties within four years.

Based on the above cases, we can see that it is important to ensure the licensor has the proper authority to enter into the license agreement. In addition, financial stability of the licensor will be important when the licensor has continuing performance obligations. In software licenses, it may be critical for the licensee to provide for continued access to the source code of a licensed product in the event of bankruptcy (with escrow provisions and frequent updates). For the licensor, it may be important to know whether the licensee is a company or an individual. The licensor will want to know if the licensee has the capacity and ability to market and sell the work, competing or complementary products, and whether the licensee is focused on China or foreign markets. In addition, if the licensor is indemnified for certain risks, it will want to ensure that the licensee has adequate resources (such as insurance or assets sufficient to cover the risk). If the licensee is a foreign company and the licensed exclusive right relates to making audiovisual works, the licensor should keep in mind that whether the licensee has the capacity to realize the licensor's business goals by exercising the licensed right because the foreign company is restricted to make audiovisual works in China.

When the licensee has the right to sublicense, the license should cover terms concerning right to approve sublicenses, payments by sub-licensees, and effect of termination on sub-licensee rights. The licensor can decide whether to retain the right to approve sublicenses and whether to be joined as a third party beneficiary to the sublicenses so as to have a direct way of enforcing its rights. Joint and several liability can be used to ensure that the licensee is responsible for the actions of its sub-licensees. When sublicenses survive termination, the licensor could find itself with unanticipated licensing relationships with new parties.

Clearly Define License Grant

The scope of the license grant will depend on the bargaining power, relative needs, and opportunities of the parties to the license. The parties should take special care to clearly define the rights granted. Is the license to have the right to copy? Display? Perform publicly? Distribute? Create derivative works? What use can be made of derivative works? With respect to the rights granted, the parties should further consider the territory in which the license can be exercised, the markets, the media (e.g., books, online, CD-ROMEs), and technological platforms. Is, for example, the copyrighted content to be used worldwide, or just in China or a particular region of China? Is the relevant market wholesale or retail? Does the market include government, business and/or education? Is the market limited to a particular industry, e.g., sports? Or is it a particular sub-division of that industry, e.g., baseball? Can the content be displayed in print, radio, motion pictures, cable TV, network TV, pay TV, the Internet? If on the Internet, for example, how can the content be displayed—through email blasts, YouTube, blogs, Web sites, interactive games, etc.? If the subject of the license is software to be used in a company, which divisions can use the software, where can the software be loaded, how many users can access the software, etc.?

Lack of clarity and foresight can lead to problems down the road. Using the licensed content outside the scope of the grant will constitute an infringement. In the case Dao Mu Bi Ji, the licensee was licensed to make online game based on the original literary work Dao Mu Bi Ji, which was entered into in 2009. But in the next years, the mobile terminal game had become more and more popular. Thus the licensee also developed the mobile terminal game. The owner of the original literary work brought a suit against the licensee on the ground of copyright infringement and won the case. Actually, in this situation, the owner of the original literary work can pursue the licensee's liability of breach of contract or liability of infringement. But the license agreement failed to define the liquidated damages on this. Thus the owner of the original literary work brought a copyright infringement suit against the licensee and claimed damages around US$ 160,000. However, the court only awarded damages around US$18,000. The Chinese courts have been seemed very conservative on awarded damages based on the economic loss of the right owner in infringement suit or that of the non-breaching party in contract suit.

In this context, the distinction between "covenants" and "conditions" should be noted in connection with drafting a licensing agreement and, specifically, the license grant. Breach of an obligation that is merely a covenant will give rise to a breach of contract claim. Breach of an obligation that is a condition to the license grant may give rise to a claim that the licensee is acting outside the scope of the license and to a copyright infringement claim.

In the case Cong Cong Na Nian, the licensee made online movies according to the copyright license agreement entered into with the owner of the literary work. The online movies were very popular. So the licensee engaged third party and created the continuation work called Cong Cong Na Nian: Hao Jiu Bu Jian. The owner of the original literary work did not think the licensee can create the continuation work under the license agreement and brought a copyright infringement suit against the licensee.

The right to make derivative works based on the original literary work usually means that the licensee needs to make some changes over the original literary work. But the China copyright statute provides that the derivative works shall not infringe the rights of the owner of the original work. However, the copyright statute failed to define the boundary of the extent to alter the original literary work. This ambiguity has caused a number of disputes between the owner of the original literary work and the licensee. In China, this issue is mainly reflected by the conflicts between the licensee's adaptation right and the integrity right of the owner of the original literary work.

In the case Gui Chui Deng, the derivative movie work Jiu Ceng Deng Ta unfortunately had not got the same good comments from the public as those of the original literary work Gui Chui Deng. On the contrast, most of the comments from the public on the movie were negative. Thus the owner of the original literary work felt that the derivative movie work distorted and tampered the original literary work. Then he brought a copyright infringement suit against the licensee. Similarly, in the cases Shanghainese in Tokyo and Liu San Jie, the owners of the original literary works both thought that the licensee had infringed upon their rights of integrity and brought suits against the licensees.

Based on the above cases, we can conclude that it's necessary to explicitly define the derivative work's extent to alter the original literary work although it's not easy in practice.

The objective of any license deal is control: the licensee wants to seek to maximize the rights granted—which may include locking in terms on future rights; the licensor would maximize revenue and be careful not to inadvertently give away rights that might be leveraged into further revenue. Accordingly, the parties should very carefully granulate the rights that are the subject of the grant and avoid ambiguities that might result in failure of the licensee to obtain necessary rights, the inadvertent grant by licensor of certain rights, and litigation that is costly to both sides.

License Term

The term of a copyright is prescribed by statute. The term of a copyright license may not exceed the term of the copyright and royalties cannot be enforced beyond the life of the copyright. In the event that the license is for a term of years, the licensee should be very careful to negotiate renewal rights and lock in rates for renewal. Licensors of exclusive licenses should be especially wary of renewal provisions and should consider allowing renewals only upon licensee achieving some financial milestone that justifies renewal of the exclusive license.

In China, to make a movie or TV program, it's essential to get all the licenses from the government agencies. And it's often time-consuming to get those licenses. Based on our practice, if the license grant involves the right to make audiovisual derivative works we suggest the license term not shorter than five years. Otherwise, the disputes may arise from performance of the contract.

In the case He Yi Sheng Xiao Mo, the owner of the original literary work He Yi Sheng Xiao Mo granted a three-year exclusive license to company A to make TV and movie based on the literary work. Within the license term, the TV was successfully launched and was very popular. In terms of the movie, company A had completed the play writing and got the license to produce movie, but they did not start the filming work. After the license term is expired, the owner of the original literary work exclusively licensed company B to make movie and the license term is also three years. Then company A publicly stated that they would launch their movie shortly. Both the owner of the original literary work and company B did not think company A still had the right to produce the movie based on the literary work. They publicly fought against each other through their official blogs. Under this situation, it is necessary for the licensee to carefully design the performance terms of the contract. The licensee can consider borrowing the clauses of an option agreement into the license agreement. Similarly, in the case The Last Night of Jin Da Ban, the owner of the original literary work The Last Night of Jin Da Ban brought a copyright infringement suit against the prior licensee because they failed to produce the TV based on the literary work within the license term but continued to produce the TV after the license term.

License Fees

Copyright licenses generally adopt a fixed fee model, a royalty based model or a combination of the two.

A fixed fee generally is paid up front or at fixed intervals over time. Licensees should consider negotiating for provisions that condition any fixed payment obligations on licensor's achievement of milestone/performance obligations. The licensee may want to delay any payment until an "acceptance" conditioned. In the event the licensee is incorporating the licensed content for resale, the parties may consider a royalty based compensation model in which the licensee's payment is based on revenues or on the number of units sold containing the licensed content, for example. The parties will want to carefully define when a sale occurs for purposes of triggering a royalty obligation. For example, licensors typically are unwilling to allow the licensee's royalty obligation to depend on the licensee's success in collecting payment from the end user. If royalties are to be based on revenues, as opposed to unit sales, the parties also will want to carefully define the revenue pool against which the royalty will be calculated. Licensors may want to consider pushing for the royalty rate to be applied to "gross sales" so as to minimize the complexity in the calculation. If the parties agree on "net sales," the license agreement needs to carefully define just what that means and account for such items as credits for returns, sales taxes, and discounts.

Particularly in the context of exclusive licenses, the licensor should consider imposing a minimum royalty requirement as a condition of maintaining exclusivity. As noted above, the licensor should consider negotiating other resource allocation requirements (minimum spends, dedicated man hours, etc.) to help increase the likelihood that licensee will meet royalty minimums.

The above discussions are general royalty arrangement rules in business. However, in China, if the licensee is a Chinese company the licensor needs to be more careful for the payment of royalty. Based on our practice, usually we don't think it's practical for the royalty based model because it's really hard to expect a true financial report from the licensees. Due to this business culture difference between China and the western countries, there were often disputes concerning the payment of license fees. In the case The Learning Revolution, the two joint owners of the literary work The Learning Revolution were paid the fixed license fee based on the sales volume of 400,000 books but they found the books were actually sold 10 million. Thus they brought a suit against the sub-licensee in China and claimed damages more than US$ 3 million. But the court rejected their claims because the license fees of the sublicense agreement entered into between the sub-licensee in China and their licensee were actually fixed fees based on the sales volume of 400,000 books.

Risk Management

In view of the above mentioned various risks, the parties should take a variety of steps, non- contractual and contractual, to minimize their risk under the license agreement.

Due Diligence

A contract can be air tight; but given the costs and distractions of litigation, even a winning lawsuit is something to be avoided. Accordingly, the parties will want to do due diligence on each other before making a substantial investment in the business arrangement. The licensee should be certain that the licensor owns the rights it purports to transfer. For example, when it is known that development of the licensed content was subcontracted, the licensee may want to request production of the sub-contractors' assignments of their creative work to the licensor.


In many copyright licenses, the licensee will be concerned principally with two risks: (1) that the content is not owned by the licensor or (2) that the content contains harmful or illegal material. The licensor may be concerned that the licensee fails to exploit the license.

The licensee will want to be assured that he is paying for something that actually has value and that is not sitting in the public domain available for the taking by others. Also, the licensee will want assurances that the rights to the content, if proprietary, are not owned by a third party and that the license will not invite an infringement claim. Accordingly, the licensee should seek a warranty that the copyright to the content is owned by the licensor and that the content does not infringe on the rights of any third party. The licensor may legitimately seek to hedge its bets through a "knowledge" qualification as to the non-infringement warranty (and avoid a breach of contract claim if the representation proves untrue), but offer to satisfy the risk through the indemnification provision. The licensee may seek a more robust warranty and also ask for a representation that all assignments (from subcontractors) have been duly executed and that the licensor has not and will not make any grants that are inconsistent with the license.

Additionally, the licensee should seek a representation that the licensed copyrighted materials contain no other materials that could give rise to a claim. For example, the licensee may seek a representation that the materials contain no material that is libelous or violates another party's rights to privacy or publicity. Again, licensee may seek to qualify these kinds of representations with a "knowledge" qualification.

Particularly in the context of exclusive licenses, the licensor may seek a representation from the licensee that it will use its best efforts to exploit the license. The licensor may demand a representation from the licensee that it will devote some minimum resources to selling product containing the licensed content. These may take the form of a representation that the licensee will devote a specified minimum amount on marketing, achieve certain advertising distribution milestones, dedicate specified human resources, etc. Obviously, the provisions contained in a copyright license, including the warranties, will depend on the nature of the material licensed. For example, software licenses will require additional warranties relating to conformance to technical and functional specifications.


A license agreement typically will contain an indemnification clause. At a minimum, this clause usually will provide indemnification to the licensee for copyright infringement and perhaps for other types of intellectual property infringement. The licensor should consider seeking indemnification for claims associated with licensee's use of the licensed content that are outside of licensor's intellectual property indemnity obligation.

Liability Limitations

Licensors typically will seek to limit their liability to direct damages and exclude consequential, incidental, and punitive damages. A licensor may also seek to cap its direct damage liability. Licensees should seek to carve out any limitation of liability claims for infringement, including claims under the indemnity, and perhaps claims for other specified risks such as breach of confidentiality.

Keep Evolving Strategies

The main objective of this article has been to provide an overview of the key terms to address in the license negotiation and resulting license as well as risk management under China case law landscape. However, the changing technology landscape continues to pose new opportunities and challenges for owners and users of copyright protected works, and copyright licensing requires continued attention to the shifting technological and business landscape impacting copyright-protected works.

The challenges, and responses to these challenges, are increasingly industry specific. In the media world, for example, licenses must anticipate rapidly changing technologies, coordinate multiple rights and rights holders, and address the challenges of enforcement. In the software world, ease of copying and the potential threat of blocking software patents are continuing problems for the copyright licensor. Businesses have also struggled with the hazards and opportunities of open source licensing. There has been a concern among practitioners that industry specific challenges, and legislative responses, will lead to the fragmentation of copyright law. Regardless of whether this trend continues, copyright licensing requires attention to industry-specific trends and industry-specific case law.

The internationalization of markets and the ease of distributing content across geographical boundaries at low cost have expanded opportunities for copyright owners. New models for monetizing IP (including use of IP as collateral and securities based on copyright assets or license revenues) similarly expand opportunities for earning revenue through copyright. As these trends continue, so will the volume and complexity of copyright licensing activity.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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