China NNN Agreements: Don’t Leave Home Without One (Or Many)

China NNN Agreements are crucial.

Years ago, our Chinese lawyers used to get a fairly steady stream of panicked callers who would call us a month or so after returning from China where they had showed their product, prototype or product drawings to Chinese OEM companies. These people were calling us in a panic because they had shown their product, prototype, or product design drawings around China (in some instances they had even left it there) and now everyone there had gone silent.

They would typically ask if we thought a Chinese company might be using their information to copy their product. I would then ask them if they had required the Chinese companies to sign any sort of secrecy agreement before turning over the information. After a long pause, they would invariably answer, “no,” and then usually ask about suing. I would then explain how the copying of a product in this sort of situation was probably a violation of Chinese law, but . . . .

I realized the other day that these calls have decreased greatly in volume and I think the increasing use of nondisclosure agreements is why. Our more typical call now is from a consultant or manufacturer seeking our help in drafting a China-specific NNN agreement before heading off to China with a prototype/product/drawing for OEM quotes.

Smart.

Simple, because they tend not to vary all that much from company to company or from product to product.  We like putting in an attorneys’ fee provision and a provision regarding injunctive relief. We always do them in both English and Chinese, nearly always for a flat fee. We virtually always make Chinese the official language. Most importantly, they nearly always contain a contract damages provision.

Effective,
because the Chinese courts are getting familiar with them and will generally enforce them.

Telling,
because we have found that if a Chinese manufacturer refuses to sign one, this is probably not the Chinese manufacturer with which you want to do business.

China NNN Agreements:  Do not leave home without one.

When our international attorneys work with sourcing companies and related OEM manufacturing arrangements, we almost never just draft a “straight NDA.” We instead prefer to draft a “non-disclosure/non-use/non-circumvention agreement” that we refer to as an NNN Agreement. When a foreign company contracts with a Chinese company to manufacture a product, the NNN focuses on the three primary “bad acts” the foreign company needs to prevent:

  • The foreign company does not want its design revealed to a third party. To prevent this, a non-disclosure provision is required. Though this is an important issue in China, disclosure to an entirely unrelated third party is actually fairly uncommon. The bigger risk is disclosure to a related party. Many Chinese businesses have multiple subsidiaries and manufacturing is often done through a large network of subcontractors. Chinese companies are quite relaxed about passing around information within this network. A good non-disclosure agreement must focus on control of information within a network that the Chinese manufacturer itself may not consider as falling within the scope of a non-disclosure requirement. Note that the typical NDA rarely even addresses this issue.
  • Usually, the biggest concern for the foreign company is to prevent the Chinese manufacturer from making use of the product design to compete with the foreign company. For this purpose a non-use agreement is required. A good non-use agreement focuses on two issues. First, the agreement identifies the applicable intellectual property or confidential information of the foreign company and then authorizes the Chinese manufacturer to use that property/information solely to manufacture the product for the foreign company. Second, the agreement requires the manufacturer agree not to manufacture the product or any similar product under any circumstances, other than for the foreign company. This second provision is the most important as it prevents the Chinese manufacturer from manufacturing a similar product under its own trademark. Since many products are not covered by patent or other IP protections, the only way to prevent such “copy-cat” manufacturing is with such a non-use provision. Normal IP protections will not work, so a contractual agreement is essential. Since nearly all “off the shelf” American-style NDAs completely fail to account for this they are virtually worthless for China.
  • The foreign company also does not usually want the Chinese manufacturer to go around the foreign company by selling the product directly to the foreign company’s existing or future customers. After the Chinese manufacturer has manufactured the product for some time, it will likely have learned about the market and the customers for the product. It is only natural for the Chinese manufacturer at some point to go to the ultimate customer and say: “Look, WE are the company ACTUALLY making this product and since there is no patent or other IP protection applicable to the product, why don’t you just buy the product from us, for less?” This is called circumvention and it is extremely common in China. If you want to avoid getting “cut out” in this way, a non-circumvention provision agreement is required. Again, an “off the shelf” American-style NDA is not going to cover this.

Most non disclosure agreements we see are just modifications of the standard NDA used in the United States or in England and those agreements simply do not deal with the special problems of related parties in China and they treat non-use/non-circumvention either inadequately or not at all. Only a carefully thought out NNN Agreement that thoroughly resolves all of these issues is of any real value in China.

We love NNN Agreements for foreign companies doing business in China. They are simple, effective, and telling. They are also far better than any NDA Agreement, especially any Western-style NDA.

NNN Agreements work well for China so don’t leave home without one.

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