By Mia Qu   Hannah Sun  King & Wood Mallesons’ Dispute Resolution group

qu_miaoWith the boom of the data industry in China, data has been widely recognized as a form of asset, and data transactions are thriving nowadays. Correspondingly, various data transaction contracts emerge as legal support for such transactions. As the property attribute of data is not clearly defined and rules on data ownership are yet to be enacted, however, problems relating to the validity and legal nature of data transaction contracts and applicable laws are unavoidable. Dealings in data represent a seemingly endless value chain ranging from data input, collection, maintenance, classification, verification, processing, to exchange, reprocessing, analysis and mining. This article focuses on the contracts that set out terms of data transfer and transaction under Chinese law. Contracts that deal primarily with the processing of data will be discussed in subsequent articles. 

Forms of Data Transaction Contracts

Data transaction contracts generally take the following forms:

1.Data Sale Contract 

This type of contract is drafted in the same way as a sales of goods contract, with the seller obligated to deliver the subject matter and the buyer obligated to pay for it. To perform the contract, the seller must deliver the subject matter specified in the contract to a physical medium designated or controlled by the buyer as agreed in the contract.

According to Article 5 of the Supreme People’s Court of China Interpretation on Law Applicability Issues in the Handling of Sale of Goods Contract Disputes, the subject matter of a sale of goods contract includes electronic information products that do not require delivery on a physical medium. It seems that the relevant provisions of the Contract Law would naturally apply to data transactions.

The above provision, however, is merely an expediency because rules on sale of goods are based on exchange of physical objects, and will encounter problems of inapplicability when applied to electronic information products that do not depend on physical mediums.

For example, Article 130 of the Contract Law, which defines a sale of goods contract as “a contract whereby the seller transfers title to the subject matter to the buyer, who makes payment accordingly”, is hardly in accordance with the key features of data (and other electronic information products) transactions. The legal rules on the sale of goods contract, taken as a whole, are centered on title to goods, including rules on the determination, transfer, reservation, and termination of title to goods (or the right of disposal of goods). In the absence of clearly-defined rules on the title to data information products – the subject matter of data transaction contracts, it would be difficult to apply the existing legal rules, and the application of these rules by analogy would be problematic.

In addition, electronic information products are intangible, duplicable and non-unique. The problems arising from those traits should be resolved by IP legal rules instead of the rules on sales of tangible goods. For example, in a software or digital video works transaction, the buyer would be further required to enter into a software copyright licensing agreement.

For data transactions, it is unclear whether data is an object under China’s IP law. Whether China’s IP law would be applicable and how it should be applied is also an issue.

In addition, in some sale of data agreements that contain a “title to data” clause, the validity of such clause remains uncertain.

2.Data Use Contract

Another common type of data transaction contract is the data use contract. This type of contract does not provide that the data provider shall transfer data onto a physical medium designated by the recipient. The general practice is that the provider only provides access or a connector, from which the recipient may obtain or access data.

The question of what is the nature of a data use contract from a legal point of view is still open to debate. To the extent that data is intangible and duplicable, the licensing agreement under IP law is a fair analogy, in that both may grant some rights in the subject matter to the recipient without transferring the intellectual property thereof.

However, licensing under China’s IP law is relatively mature system with specific rules on law applicability, while data use contracts have yet to find their corresponding legal rules. Furthermore, licensing under China’s IP law is based on the fact that the scope of IP rights to be licensed is expressly provided by law, so that the scope of licensing is rather certain. With regard to data, it is unclear whether any right under Chinese law is attached to data, and what is the scope of the right (if any), and where it starts and ends. Therefore, it is difficult to apply the licensing rules under China’s IP Law directly to data.

Therefore, the general principles of the Contract Law should apply to current data use contracts, but application of the provisions on licensing under China’s IP law should not be taken for granted.

3.Data Service Contract

Some data transaction contracts are called data service contracts. Under these contracts, the data provider provides data in a way similar to SAAS (Software As A Service), with the data provider providing access accounts or other login methods, through which the recipient may access data.

Under this mode, the data provider’s obligation may be defined as a form of service, because the provider does not need to transfer or deliver data – the subject matter of the contract – to the recipient in any form, but may grant the recipient access to data by way of providing hardware, data, software, or services.

This type of contract, as it well conforms to the traits of technical service (or general service) agreements under the Contract Law, may be regulated within the existing legal framework.

Major Legal Issues Regarding Data Transaction Contracts

1.Whether a Claim to Data Ownership Is Reasonable and Whether such Claim Is Admissible

There are still disputes on whether data should be owned by someone and who should be the legitimate owerner. The view that data should be treated in the same manner as the air, water and other public resources and that it does not have the attributes of private property has some merit. If the view is adopted by the legislature, the general policy of promoting the sovereignty, free flow and sharing of data would be satisfactorily solved. The author will discuss this issue in a subsequent article.

Currently, most data-related contracts contain a clause claiming title to data. It is unclear whether the validity of such clause would be upheld by the courts if a dispute arising from it. As there is no clear-cut data ownership system, it is understandable that parties to a transaction include such clause in their contracts, but commercial parties should be aware of the uncertainty as to the validity of such clause.

2.Distingishing between Data Itself and IP Rights Derived From Data

Even with the assumption that data itself is part of public resources, the IP rights derived from data may be regarded as separate objects, which may have the attributes of private property. Traditionally, telephone numbers are unlikely to be treated as private property. Through a process of collection, accumulation and assortment, however, such raw data may become a database work in the sense of the Copyright Law. That is to say, collection and processing may turn data into something that can be duplicated, processed and transferred, eligible for protection under IP Law, and contains exclusive rights to some extent. For another example, as long as a piece of information (data) remains confidential, it is capable of being protected as a trade secret if other necessary conditions are met. That requires data collectors to be well versed in China’s IP law and design products with necessary elements qualifying for protection.

3.The Importance of Properly Classifying Data to Ensure its Validity in Transactions

It is generally known that certain types of data (e.g. personal privacy information, trade secrets obtained illegally) shall not be transacted, otherwise such acts may trigger administrative sanctions, civil or even criminal liabilities. Parties to data transactions shall pay particular attention to the validity of data, both its form and content, and make corresponding provisions in the contract.

4.The Means by Which Data Is Collected and Its Validity

How data is collected is also a matter that requires much attention in data transactions. Although China’s Contract Law does not expressly provide that illegally obtained data shall not be traded, illegal means by which data is collected would lead to infringement of the lawful rights of third parties, casting doubts on the validity of the data transaction contract concerned.

5.Data Transactions and Lawful Purposes of Data Use 

Data transactions and the purposes of data use must be lawful. It shall be ensured that data be used for legal purposes, so that the validity of the contract would be upheld. 

6.Derivative Data or IP Rights Subsequent to Use of Data

The parties shall also pay attention to the ownership provisions regarding derivative data and IP rights subsequent to the use or processing of data. It shall be agreed that who shall have title to the fruit of data use and processing, how it should be protected, its related rights and boundaries.

Legal Advice on Data Transactions 

Due to the data industry’s brief history, the drafting and design of a data transaction contract requires creativity and mastery of the civil law and the IP regime. On the design of a contract framework and terms thereof, we offer the following advice:

  • The nature of the transaction and its applicable laws shall be determined in accordance with the characters of the transaction, e.g. whether it is a service, sales, licensing or other transaction.
  • Taking into account the varied nature and details of data products, a multi-layered contract framework should be adopted where appropriate, and different perspectives should be considered as well. For example, to deal with different issues, a series of agreements on licensing, maintenance, and services may be executed separately at the same time.
  • Data sovereignty and compliance is another noteworthy issue, especially when data transactions go across borders, and compulsory elements in the legal rules must be complied with.
  • In drafting detailed provisions, the main legal issues raised in Part Two of this article shall be considered and reflected in the wording of the contract.
  • For data providers, if it is required to track the transfer of data, tagging through specific technical methods may be considered, so that evidence may easily be preserved and collected in case of any disputes.