Yesterday, in China Lawyers: The Fakes and the Quasi-Fakes, I wrote how “with the recent decline in China’s economy the China lawyers at my law firm have in the last few months been seeing a precipitous increase in a new sort of “China lawyer” problem: Chinese law firms that seem to know nothing about international law representing foreign companies shockingly badly at shockingly law prices.
That blog post led to a slew of foreign companies asking us to review their contracts and it also led me to draft a new email based on my review of three different NNN Agreements, all with similar shortfalls that made them 100% worthless for protecting the foreign company’s IP. These NNN Agreements had the following clear flaws:
1. A provision stating that the supplier is allowed to pass on the foreign company’s confidential and trade secret information to any “sister companies” and to any “business partners.“ Think about this for a second. This means your Chinese supplier can form a sister company in a week (it probably already has one) and then freely turn over to that company whatever information you gave it. This is known as an exception big enough to drive a truck through. But it gets worse. It also allows your supplier to turn over to a “business partner” whatever information you provided to it. In other words, it can go to whomever it wants in China or anywhere else in the world and strike a deal with that company (maybe that deal is to sell your confidential information for $1000) and that is okay because that company is a “business partner” of your supplier. These sister companies and business partners are under no obligation whatsoever to keep your information secret; they are legally free to do with your information whatever they wish. This is a common loophole Chinese companies use to disseminate confidential information without violating the agreement. This loophole makes your NNN Agreement 100% worthless.
2. Not satisfied with this first provision, these agreements also include a contract damages provision that provides for a super-low amount of damages for any violation of the NNN Agreement and reads as though the foreign company cannot get damages beyond the super-low amount set forth in the contract. So in other words, even if you could possibly win a lawsuit (and you can’t), you will be limited to such a small amount of damages that there would be no point. For how to properly handle a contract damages provision in your China contract, check out China Contract Damages Provisions.
3. They contain a choice of jurisdiction clause so vague that even if you were to decide to sue it is not clear where you should sue and your supplier will be able to force you to incur substantial attorneys’ fees and tie you up for months trying to get the courts to sort that out. See Common China Contract Mistakes.
For what a proper NNN Agreement (for most countries, not just China) should look like, check out China NNN Agreements .
Be careful out there.