CHINA NNN AGREEMENTS

China NNN Agreements are the key to protecting your IP from China before you provide your IP to anyone in China.

Let’s suppose you are looking for a factory in China to produce your innovative product. How do you prevent the Chinese factories from appropriating you brilliant new idea? As I discussed in yesterday’s post, China NNN Agreements Up Close, a US-style NDA will be worthless; what you need is anNNN agreement drafted for China and drafted for your particular situation. What you do not want is a template China NNN Agreement. See China Contract Drafting Scams: From Bad to Much Worse.

The three Ns in an NNN Agreement stand for non-use, non-disclosure and non-circumvention. Let’s look at each in turn.

Non-Use

Non-use involves requiring your  the factory contractually agree not to make use of your idea/concept/product in a manner competitive with you, the disclosing party. The critical point is that this obligation arises by contract. This protection is not based on abstract property rights arising under intellectual property law. The prohibition protects you not because your concept is classified as some form of intellectual property such as a trademark, copyright, patent, mask work or even a trade secret. The factory is prohibited from using your work because it executed a contract that prohibits it from using your work. Getting a factory to sign a contract with a non-use provision means there is no need to look outside that contract to other areas of law for you (and China’s courts) to be able to control the behavior of the Chinese factory.

Non-Disclosure

The next element is non-disclosure. This is the core of an NDA, or Non Disclosure Agreement. Surprisingly enough, youneed not be terribly concerned with having your Chinese counterparty disclose the information you want kept secret to an unrelated third party. This is because Chinese companies usually have no interest in letting others in on their good thing. If they want to use your concept, they want to use it for their own purposes, not to disclose it to others.

But if you prohibit a Chinese factory from making direct use of your concept, the Chinese factory now has a problem. The clever Chinese entity will not directly breach your non-use prohibition; it will simply disclose your information to someone in their company group and then accurately claim it has not breached the non-use prohibition because it is not the one actually making use of your protected information.

For this reason, it is important you understand the type of group with which you are dealing and you must make clear in your NNN Agreement that disclosure is specifically prohibited within the group and if there is any infringement by any member of the group, the factory that signed your NNN Agreement and made the disclosure is fully liable. Often, some education of your Chinese counterparty on this issue is required because Chinese companies often do not consider disclosure to a member of their own group as violating a non-disclosure prohibition.

The situations you will normally confront are as follows:

  • In many regions of China, family members own a large group of small to medium sized companies. The family sees all these companies as the same entity for disclosure purposes.
  • Many Chinese factories use a team of constantly changing subcontractors. Some of these subcontractors are part of the family group, some are related by co-ownership, some are related only by physical proximity. The factory will often claim they must disclosed your information to their subcontractors to be able to properly evaluate or cost your product.
  • Many Chinese factories are part of large and extensive “group company” 集团公司 arrangement where numerous subsidiaries are owned by a single parent. Members of the group do not see other members as outsiders for purposes of prohibition of disclosure.
  • Many state owned enterprises do not see other SOEs or even the Chinese government itself as separate competitors. In their view, they are all owned by “the government” and the information held by one company should be freely shared with other SOEs in the same business. This is particularly true in sectors with a public service background such as medicine, healthcare and aeronautics. Since all the companies are pursuing the public good, they see no reason not to share the wonderful information you provide to them.
Non-Circumvention

Finally you need to deal with non-circumvention. The Chinese factory knows you are purchasing the product at the China price and you are then adding a margin and selling it at a profit in the foreign market. In this situation, it is only natural for the Chinese factory to work to obtain a list of your customers they can contact to sell your product at the original China price. After going through your customer list, they start marketing “your” product to the rest of the world. Trust me when I tell you that at least a half dozen times a year the international dispute resolution attorneys at my law firm get contacted by a company on the verge of going under after having been taken out by a Chinese factory using this tactic. What would your customers do if offered your product for 50% less? In many industries (especially those where quality and servicing is critical), most customers would say no. But in many other industries — including consumer products — they quickly and almost uniformly say yes.

Note also that if you have not registered your brand name and/or logo as your own trademark in China, there is nothing to stop your Chinese manufacturer from putting “your” brand name and/or logo on these very same products and selling them into any country where you do not have a corresponding trademark. See Don’t Sleep on Your China Trademark.

This is circumvention, and you must prohibit circumvention by contract. There is no other way to do it. A good NNN agreement is your only protection.

These are the three elements of China NNN agreements (and for NNN Agreements around the world). As you can see, the situation is complex and the contract must be carefully drafted to deal with your specific situation. Now that you have torn up your worthless NDA and you have mastered the three Ns, one more step remains. You must ensure your NNN agreement contract has some teeth that provides you with the tools required to keep the Chinese factory under control. I will discuss how to accomplish that in my next post.

 

 

Every so often one of our China lawyers gets an email from someone who essentially challenges us to tell them why they should hire us. Our response is to patiently explain why they are wrong to think that they do not need a lawyer.

One of our lawyers got such an email the other day from an American company that seemed irritated that one of our clients “had insisted” they contact us:

________ at ________ [our client company] insisted that I contact you about our China manufacturing plans even though I have been doing business with China for more than twenty years.  ______ tells me that you believe that contracts with China manufacturers can be worthwhile but I know that it is the government there that determines everything. I want to stop my Chinese manufacturers from copying my products and selling them to my competitors. I doubt any contract can do this for me but can you lay out for me exactly how your company can help me, how long it will take and what you will charge. They just signed the attached NDA but ________ keeps telling me that I should have you modify it. If you are going to do that, I will need it back by the end of the week.  I also am enclosing a manufacturing agreement my lawyer drafted for me and I would appreciate your point of view as to how realistic it is.  We made it very favorable for my company.  It is approximately 10,000 words and so I also need to know what you will charge to revise it. I need this back by the end of the week as well.

Here was our response:

I hesitate to spend time on this because you seem convinced that you do not need help and because it is too late for us to fix your NDA, which does not do what you want it to do. I instead urge you to read  How To Stop Your Chinese Supplier From Becoming Your Competitor and China Contracts. Why Even Bother? and whatever links are contained in those two.

The NDA you sent will not help you in dealing with your Chinese manufacturers. An American NDA with jurisdiction in Chicago will not impact Chinese companies. What you need is not really a China NDA at all, but a China NNN Agreement (Non-Disclosure, Non-Use, Non-Circumvention) Agreement. This sort of agreement can go a long way towards preventing potential or future manufacturers from stealing your design.

The requirement that you sue in Chicago strips you of any power or leverage over your Chinese manufacturers. Chinese manufacturers do not fear U.S. litigation as much as they fear being hauled into a Chinese court and hit with liquidated damages (or even worse, a pre-judgment seizure of their assets based on the liquidated damages provision). The goal with our NNN agreements (and of all our China contracts) is to prevent the Chinese company from doing what you don’t want them to do, not so much to beat them if you end up having to sue.

There is no point in our using your existing NDA as a template because it would take us more time to do that than for us to start from scratch. More importantly, non-disclosure is not really the risk you face. Your biggest risk isn’t your Chinese manufacturer disclosing your product to someone else; your biggest risk is your Chinese manufacturer making your product and your NDA is completely silent on that.

I spent five minutes reviewing your manufacturing agreement and that was enough  for me to determine that it too isn’t close to what you need for China. Honestly, it isn’t close for what you would need in the United States either. It does not mention any penalties for bad quality nor does it set forth any sort of timeline. These two things are the most basic provisions one expects to see in such an agreement. It reads as though a non-lawyer cobbled it together from various contracts on the internet. You should consider using no contract at all because if you did that you would at least be able to sue your Chinese manufacturers in China, instead of in the United States. I suggest you read Suing Chinese Companies in US Courts.

And there is no way we can promise you anything by the end of the week because we do not even have a good idea yet of exactly what it is you really need and for that it would make sense for us to talk by phone.

Not surprisingly, we never heard from him again.

 

HOW TO GET AN NNN AGREEMENT PROPERLY SIGNED AND EXECUTED

This post is on what you typically should do by way of contract signing formalities for your China NNN Agreement. It answers the following question we frequently get from our blog readers and from our own clients: What exact steps should I take to get a China NNN Agreement signed?

The below is the typical response my law firm’s China lawyers give about the signing of most Chinese contracts:

The next step is to send this bilingual agreement to the Chinese side for review. If the Chinese side accepts all terms you should sign, date and then submit the contract to the Chinese side. Then don’t do anything — and especially do not send any confidential information regarding your product or your molds — until the Chinese side returns with a fully executed version, that it has signed, dated and chopped. You will want to make sure the exhibit listing your confidential information is properly filled out and dated, signed and chopped by the Chinese side. And you want to make sure of this not only at the time of first execution, but also every single time a new product item or a new mold item is entered onto the record. For your own protection, you will want to make sure you in the end hold on to at least one original, fully executed agreement.

Please note that though the above says “bilingual agreement,” the official portion of the agreement is strictly in Chinese. The English language portion is strictly a translation for the benefit/convenience of our clients. I am careful to make this distinction because nearly all the contracts we draft call for Chinese as the official language and we never draft contracts where more than one language is the official language. For why this distinction is so crucial, I urge you to read Silly Rabbit, The Chinese Language Contract Is What Matter and Dual Language China Contracts Double Your Disaster Chances.

 

 

HOW TO DRAFT AN NNN AGREEMENT THAT BITES

China NNN Agreements are by far the most common China contract we draft. China NNN Agreements are used to protect your confidential information and to prevent your Chinese counter-party from competing with you or going around you to your customers or vendors. In other words, they make sense for almost every company doing business with China or looking to do business with China. And because they make sense before contract or deal negotiations begin, it is not uncommon for us to draft one only to have our client immediately determine there is no chance of a deal. And when our client is trying to determine the Chinese company with which it wishes to conduct business from among four or five such companies, we draft four or five NNN Agreements.

Because we do so many China NNN Agreements, we have various systems set up to speed them along, both for our law firm’s benefit and for our client’s benefit. We charge a flat fee for our China NNN Agreements and so the more efficient we are with them, the less time they take us. On the flip side, our clients benefit from getting their completed China NNN Agreement quickly and with clear instructions of what they need to do with it.

When our China lawyers send out final drafts of pretty much any China contract we do so via an email explaining what our client should do next and what to expect. We do this because China contracts tend to be very different from American and European contracts and even what it takes to get a China contract properly signed tends to be very different as well. See China Contracts: Make Them Enforceable Or Don’t Bother. Because our China contract lawyers have so much experience with how China companies respond to NNN Agreements, we explain to our NNN clients what they can expect by way of negotiations from the Chinese side.

By way of a quick aside, for more on negotiating with Chinese companies, check out the following:

Anyway, some variation of the below is what we usually send out after we have completed a China NNN Agreement. But to avoid anyone thinking there is one standard NNN Agreement that can work for every situation, I have added “Editor’s Notes” to highlight how what is described below is for one particular situation and your mileage may (and almost certainly will) vary.

With respect to this NNN Agreement, please note the following:

1. Here is your NNN agreement. This is not a traditional NDA agreement. A traditional NDA agreement relies on the concept of trade secrecy. As a practical matter, the information you disclose will almost never meet the technical legal standard for trade secrecy. This agreement takes a different and more practical approach: if you disclose, the Chinese side cannot use the information in competition with you. This is a very simple approach that is most effective in your situation. EDITOR’S NOTE: For more on why Western-style NDAs do not work for China, check out Why Your NDA is WORSE Than Nothing for China.

2. This NNN agreement does not describe your confidential information in detail. We usually do this because it is usually better not to describe your confidential information with specificity. If you expect the information you transfer to the Chinese side to be treated as confidential, you need to identify it as such at the time you disclose it to the Chinese side.

3. We have highlighted the places where the Chinese party’s information should be inserted. Note that it is important you use the correct Chinese name. EDITOR’S NOTE: We include this sentence when our lawyers have been tasked with drafting a China NNN Agreement that our client can use again and again with multiple Chinese parties. It is absolutely crucial you use the correct Chinese name of your Chinese counter-party and that involves — at minimum — checking the name of the Chinese company provided to you against official Chinese corporate records.

4. This is a one-way agreement.We drafted this to protect information you give to the Chinese company, not the reverse. Sometimes the Chinese side will claim it too has information it wants to protect. In that situation, it is not a good idea to convert the NNN Agreement we have provided into a mutual NNN agreement. Instead, the Chinese side should provide its own agreement. In many cases, the agreement the Chinese side provides you will be an unenforceable NDA you can sign.

5. We drafted this with no set term. In other words, The Chinese side can NEVER use your confidential information; it is a permanent obligation. EDITOR’S NOTE: Sometimes it makes sense to put a time limit on the this obligation.

6. Related parties/subcontractors. One of the most common ways confidential information is lost in China is when the Chinese recipient discloses that information to a related entity (owned by a relative) or to a subcontractor (owned by a relative or a business associate). There is seldom any reason for a Chinese company to disclose your confidential information to subcontractors at the NNN stage. However, if this happens, our approach makes the Chinese company that signs the NNN Agreement liable for any violations by a related party or by a subcontractor. EDITOR’S NOTE: There are times when we must. draft the NNN Agreement to allow for certain confidential information to be revealed to certain other parties. In these circumstances, a determination has to be made as to whether to secure NNN Agreements with those other parties as well or to just rely on the blanket liability provision included in the original NNN Agreement.

7. Dispute resolution is in the Chinese courts. This is the best method for your situation. EDITOR’S NOTE: There is no one best method of dispute resolution across the board and choosing the best method for your particular contract will always vary depending on a whole host of factors. For more on crafting dispute resolution provisions for your China contracts, check out the following:

8. The agreement provides for contract damages in a specific monetary amount for every breach. We do this to make clear to the Chinese party that it will face real and quantifiable consequences if it breaches the NNN agreement and because setting out a specific monetary amount provides for a minimum level of damages. This sum certain amount also provides a Chinese court with the basis for a pre-judgment seizure of the Chinese company’s assets. A credible threat of your seizing your China counter-party’s assets greatly increases the likelihood of the Chinese company abiding by your NNN agreement. Please let me know if you wish to adjust this amount but note that this amount needs to be a reasonable estimate of your damages likely to arise from the Chinese side’s violations of the NNN Agreement. For more on the importance of a well-crafted damages provision for your China contracts, check out China Contracts that Work: Liquidated Damages and China Contract Damages: What To Do, What To Do.

9. If the Chinese side accepts the terms of this agreement, you should first sign and date the agreement but then not do anything more (such as sending your confidential information) until you get back a fully executed agreement. At minimum, the final executed agreement should bear what appears to be the Chinese side’s company seal.

Please review and get back to me with any questions.

 

Last week, in China NNN Agreements and How to Give Them Real Teeth, I wrote how important it is to put teeth into your China NNN agreements. But what happens when you do? Our China lawyers have found that properly drafted NNN agreements dramatically reduces infringement by Chinese factories and any litigation relating to these issues.

This is because Chinese companies are genuinely afraid of the Chinese court system. Chinese companies do not fear an order from a Chinese court telling them to behave properly. What they fear is a judgment for a sum certain that a Chinese court will enforce by seizing and auctioning their factory assets. They fear a prejudgment seizure of assets that ties up their factory property until the lawsuit is settled. These Chinese companies know that their breaching a well drafted China-centered NNN Agreement will likely get a Chinese court to freeze their assets and that is the last thing they want.

This fear of China’s court system usually generates one of the following three responses to our NNN agreements by Chinese factories:

1. Some Chinese companies simply refuse to sign.
These are the companies that planned to steal the foreign technology from the very beginning. We recently represented an American company in a very difficult negotiation with a Chinese company on a technology licensing project that involved transferring trade secrets for an industrial process. After unfruitful talks that went on all morning, we reconvened after lunch, at which point the Chinese side announced:  “Look, it is very clear to everyone that the only reason we are interested in this venture is so we can appropriate the technology of the U.S. company. We have reviewed the documents and it is very clear he (pointing to me) will not let us do that. So let’s just stop the discussion right here and admit we have nothing more to discuss.” That was the end of it.

Some U.S. companies would have seen this as a failure of negotiation, but the owner of the U.S. company thanked me. He said his Chinese staff were pushing him into a venture with which he was not comfortable. The confession of actual intent in front of his staff solved his internal problem and stopped his company from making a serious mistake. From this we can see that forcing the hand of the companies that have bad intentions from the start is probably the greatest benefit of a well drafted NNN agreement. I will note though that this sort of situation is pretty rare.

2. Some Chinese companies enter into serious discussion about specific matters they believe should be excluded from the scope of the NNN Agreement.
This means they have read the NNN Agreement and they take it seriously, and because they take it seriously they insist it be modified to reflect their own realities. In some cases, the Chinese company’s concerns are unfounded. But, in other cases, the Chinese company will reveal they already have technology of their own in the same area that they need to protect.

This is a positive result, for several reasons. First, if the concerns of the Chinese company are unfounded, this provides advance notice that the factory will be unreasonable and difficult to deal with. Second, if the concerns are reasonable, this provides the grounds for more fruitful discussions on each party’s technical concerns and these discussions often lead to more fruitful joint development of existing technology. In the past, U.S. and European companies simply assumed the Chinese factory was without any technical base of their own. This is no longer true and so it is often now necessary to consider the technical base of both sides in any project involving new technology in China.

3. Most Chinese companies execute the NNN agreement and then treat the three obligations as a serious matter that must be approached with care.
This is by far the most common situation and I estimate this counts for at least 95% of the situations our China lawyers face.

How does this work out in practice? It does not mean every Chinese company will suddenly abandon years of bad practice and begin behaving well. What it does mean is that when the Chinese factory violates the rules, litigation is usually not required. In most cases, a reference to the NNN agreement and the credible threat of litigation is enough to induce the factory to reform its behavior and step back into line. This is particularly true in cases of disclosure to undisclosed third parties and to attempts at circumvention.

This then illustrates the general approach my firm’s China lawyers take with agreements in China. We do not want to litigate nor do we intend to litigate. Rather, we use the general fear of litigation and involvement with the courts to achieve a result that greatly reduces the likelihood of ever having to go to court. But to be able to reduce the likelihood of having to go to court it is essential the Chinese side believe it would be relatively easy for you to sue it and prevail. Most importantly, the Chinese side must believe you can quickly and easily get a Chinese court to freeze its assets. If the threat of an enforceable money judgment in a Chinese court is not credible, this strategy does not work. Chinese companies are experts at seeing through threats that are mere bluffs. So the foreign company needs to do its NNN Agreement correctly. Teeth are not enough. You have to make the agreement bite.

For more on China NNN Agreements, I suggest you read the following, in order:

 

 

CHINA DESIGN PATENTS v. CHINA NNN AGREEMENTS

One of the most common things our China lawyers do is help protect our clients’ IP when they first go into China. One of the most common subsets of that work is protecting our clients before they start to manufacture their products in China.

On that front, one of the things we virtually always discuss is what the client can do to protect itself from its own manufacturer by contract and overall in China from everyone (including the client’s own manufacturer) by registering their intellectual property in China.

The intellectual property we help our clients register can be an invention patent, a utility patent, a design patent, or a trademark or a copyright, all depending largely on the particular sort of intellectual property needing protection and the client’s particular situation and stage.

On the contract front, early on we typically recommend an NNN Agreement, a Product Ownership Agreement, a Product Development Agreement, and/or a China Manufacturing Agreement (also known as a China Supply Agreement or a China Manufacturing Agreement) largely depending on the particular IP needing protection and the client’s particular situation and stage.

In an ideal world, our China lawyers work with our clients to pick and choose from the above with cost as now object. But rarely do our clients have unlimited budgets and so most of the time we have to work with them to determine which of the above are absolutely necessary, which of the above will have the most “bang for the buck,” and which of the above are not all that necessary or can wait.

One of the most common questions with which we have to grapple is whether our client should focus on its China IP registrations or its China manufacturing contracts. If the client has only enough funds for one thing, should it use those funds to register its trademark in China, its design patent in China, or to have an China-focused NNN Agreement it can use with all China companies to which it will be revealing its secret sauce?

Unfortunately, there is nothing even close to a one size fits all China IP protection strategy because there is nothing even close to a one size fits all China IP situation. So there is little I can tell you here about how to prioritize the above.

We would though love to hear from you-all on how you have prioritized your China IP protective measures and why you did what you did and, most importantly, how it has worked out for you.

 

BEWARE THE WORTHLESS NNN AGREEMENT
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.

 

China NNN Agreements are by far the most common China contract we draft. China NNN Agreements are used to protect your confidential information and to prevent your Chinese counter-party from competing with you or going around you to your customers or vendors. In other words, they make sense for almost every company doing business with China or looking to do business with China. And because they make sense before contract or deal negotiations begin, it is not uncommon for us to draft one only to have our client immediately determine there is no chance of a deal. And when our client is trying to determine the Chinese company with which it wishes to conduct business from among four or five such companies, we draft four or five NNN Agreements.

Because we do so many China NNN Agreements, we have various systems set up to speed them along, both for our law firm’s benefit and for our client’s benefit. We charge a flat fee for our China NNN Agreements and so the more efficient we are with them, the less time they take us. On the flip side, our clients benefit from getting their completed China NNN Agreement quickly and with clear instructions of what they need to do with it.

When our China lawyers send out final drafts of pretty much any China contract we do so via an email explaining what our client should do next and what to expect. We do this because China contracts tend to be very different from American and European contracts and even what it takes to get a China contract properly signed tends to be very different as well. See China Contracts: Make Them Enforceable Or Don’t Bother. Because our China contract lawyers have so much experience with how China companies respond to NNN Agreements, we explain to our NNN clients what they can expect by way of negotiations from the Chinese side.

By way of a quick aside, for more on negotiating with Chinese companies, check out the following:

Anyway, some variation of the below is what we usually send out after we have completed a China NNN Agreement. But to avoid anyone thinking there is one standard NNN Agreement that can work for every situation, I have added “Editor’s Notes” to highlight how what is described below is for one particular situation and your mileage may (and almost certainly will) vary.

With respect to this NNN Agreement, please note the following:

1. Here is your NNN agreement. This is not a traditional NDA agreement. A traditional NDA agreement relies on the concept of trade secrecy. As a practical matter, the information you disclose will almost never meet the technical legal standard for trade secrecy. This agreement takes a different and more practical approach: if you disclose, the Chinese side cannot use the information in competition with you. This is a very simple approach that is most effective in your situation. EDITOR’S NOTE: For more on why Western-style NDAs do not work for China, check out Why Your NDA is WORSE Than Nothing for China.

2. This NNN agreement does not describe your confidential information in detail. We usually do this because it is usually better not to describe your confidential information with specificity. If you expect the information you transfer to the Chinese side to be treated as confidential, you need to identify it as such at the time you disclose it to the Chinese side.

3. We have highlighted the places where the Chinese party’s information should be inserted. Note that it is important you use the correct Chinese name. EDITOR’S NOTE: We include this sentence when our lawyers have been tasked with drafting a China NNN Agreement that our client can use again and again with multiple Chinese parties. It is absolutely crucial you use the correct Chinese name of your Chinese counter-party and that involves — at minimum — checking the name of the Chinese company provided to you against official Chinese corporate records.

4. This is a one-way agreement.We drafted this to protect information you give to the Chinese company, not the reverse. Sometimes the Chinese side will claim it too has information it wants to protect. In that situation, it is not a good idea to convert the NNN Agreement we have provided into a mutual NNN agreement. Instead, the Chinese side should provide its own agreement. In many cases, the agreement the Chinese side provides you will be an unenforceable NDA you can sign.

5. We drafted this with no set term. In other words, The Chinese side can NEVER use your confidential information; it is a permanent obligation. EDITOR’S NOTE: Sometimes it makes sense to put a time limit on the this obligation.

6. Related parties/subcontractors. One of the most common ways confidential information is lost in China is when the Chinese recipient discloses that information to a related entity (owned by a relative) or to a subcontractor (owned by a relative or a business associate). There is seldom any reason for a Chinese company to disclose your confidential information to subcontractors at the NNN stage. However, if this happens, our approach makes the Chinese company that signs the NNN Agreement liable for any violations by a related party or by a subcontractor. EDITOR’S NOTE: There are times when we must. draft the NNN Agreement to allow for certain confidential information to be revealed to certain other parties. In these circumstances, a determination has to be made as to whether to secure NNN Agreements with those other parties as well or to just rely on the blanket liability provision included in the original NNN Agreement.

7. Dispute resolution is in the Chinese courts. This is the best method for your situation. EDITOR’S NOTE: There is no one best method of dispute resolution across the board and choosing the best method for your particular contract will always vary depending on a whole host of factors. For more on crafting dispute resolution provisions for your China contracts, check out the following:

8. The agreement provides for contract damages in a specific monetary amount for every breach. We do this to make clear to the Chinese party that it will face real and quantifiable consequences if it breaches the NNN agreement and because setting out a specific monetary amount provides for a minimum level of damages. This sum certain amount also provides a Chinese court with the basis for a pre-judgment seizure of the Chinese company’s assets. A credible threat of your seizing your China counter-party’s assets greatly increases the likelihood of the Chinese company abiding by your NNN agreement. Please let me know if you wish to adjust this amount but note that this amount needs to be a reasonable estimate of your damages likely to arise from the Chinese side’s violations of the NNN Agreement. For more on the importance of a well-crafted damages provision for your China contracts, check out China Contracts that Work: Liquidated Damages and China Contract Damages: What To Do, What To Do.

9. If the Chinese side accepts the terms of this agreement, you should first sign and date the agreement but then not do anything more (such as sending your confidential information) until you get back a fully executed agreement. At minimum, the final executed agreement should bear what appears to be the Chinese side’s company seal.

Please review and get back to me with any questions.

 

WHAT TO DO WHEN NEGOTIATONS BOG DOWN

The below is an email from one of our China lawyers to a client explaining why our client needs to stay firm in its position regarding its proposed NNN Agreement. This email involves an initial NNN regarding a product the Chinese company wanted to review to help it determine whether it wanted to buy stock from our client to make a large stake investment in our client. This email is from quite some time ago on a deal that has already concluded. It has been modified slightly so as to camouflage any possible identifiers.

I reviewed the NNN agreement we provided you and I reiterate that there is no basis to make changes to what we drafted for this deal.

There are three provisions of the NNN Agreement that restrict the Chinese company’s right to make your product for themselves or for other entities.These provisions provide that the recipient (Chinese Company) shall not:

— Make any commercial use of Confidential Information in competition with you.

— Sell any Product or goods similar to the Product which make use of your Confidential Information to anyone other than you.

— Use any Confidential Information provided by you in any manner to create any goods for any entity other than for you.

These provisions only apply to the improper use of your confidential information and there is no way any party acting in good faith could interpret these provisions to provide for any restriction on their right to manufacture and sell their own products or to manufacture and sell products designed by some other entity. Since the Chinese manufacturer’s concern is without basis and makes no logical or legal sense, there is no revision that should be made.

Note also that we have used these “offending provisions” hundreds of times in China (and their predecessor provisions hundreds of times as well). In the early days, some Chinese factories expressed concerns with these provisions and so we carefully revised them to deal with those concerns.

If ___________ [China manufacturer] continues objecting to this clear and restricted language you should assume you have a problem. The only way ____________ [China manufacturer] could have a problem with this language is if it believes the Confidential Information is not unique and has already been provided to them by one of your competitors and is not owned by you. This is one reason Chinese entities object to an NNN agreement: they do not believe what you will provide them is unique or owned by your company.

When this specific objection is raised and we think the objection has merit, we add a provision stating that if the Receiving Party proves the Confidential Information was previously disclosed to them by a third party and if the Receiving Party proves it is currently making use of the Confidential Information in current production for itself or for a third party, the provisions of the NNN will not apply. However, it would be a mistake to add this language to the current NNN agreement because this type of objection is never made regarding companies in your situation and because __________ [China manufacturer] is not making this specific objection and there is no reason to suggest such an objection is conceivable with respect to your Confidential Information. This kind of “you don’t really own the information” objection is raised only in the case of new designs from bare startups where the design is not patented or trademarked and where the product has no history of having been manufactured or sold. No one would consider raising this objection to mature products from a mature company such as yours. But that is not what _____________ [China manufacturer] indicates as their current concern. They say their concern is that the quoted language will prevent them from manufacturing and selling to __________ [a competitor]. The simple answer is that this language does not mean that and no one reading the actual written terms in good faith would read them that way, and prior to this, nobody ever has.

As we have discussed, given that you are dealing here with a direct competitor, you do not want to allow for any ambiguity at all. You have a 100% right in all Confidential Information and _____________ [China manufacturer] is not permitted to make any use of the Confidential Information in any way that competes with you. It’s pretty simple. They either agree or they don’t. When a Chinese company raises these kinds of meritless objections, all you should say is: “Sign it or we will not go any further with our discussions.” And that is exactly what you should  do here. Any company raises this kind of objection regarding clear and unambiguous language will be hard to deal with in working on a full scale sale stock agreement.

Note that when we draft a final Stock Sale Agreement, we will include transaction specific confidentiality provisions that will involve additional customized language not included in the current NNN. For now, however, the most important issue is to test out ______ [China manufacturer]. Will it act reasonably or will it continue to make arguments that make no legal or business sense? It will be good for you to know this right away.

As always, please feel free to contact me if you have any additional questions.