China NNN Agreements: The Initial Questions We Ask

China NNN Agreements

If it seems we have been writing often about China NNN Agreements, you would be right. We are doing so because we have had a  troubling increase in companies coming to us after having lost their IP to their Chinese counter-party (usually their Chinese manufacturer) because the NNN Agreements they used were worthless or even worse. See China Contract Drafting Scams: From Bad to Much Worse and China NNN Agreements: Do Them Correctly or Walk Away.

In a further effort to save IP from being usurped by China, I am providing the following email, sent from one of our international manufacturing lawyers to a repeat client, setting out some of the initial questions we ask of our clients who have retained us to craft them an NNN Agreement that is actually enforceable and protective of their IP:

It is good to work with you again. For the NNN, here are the basic questions:

1. We normally draft a unilateral NNN because it is not our business to protect the Chinese receiving party’s intellectual property from you. However, if you believe the process will include the exchange of information back and forth between you and [Chinese Company] we can certainly  cover this with a mutual NNN. A mutual NNN is more complex to manage than a unilateral NNN, which weakens enforcement. However, you have stated in your draft outline: “The agreement should also be crafted so it is a benefit to [Chinese Company].” This sounds like you want to do a mutual NNN.

Please advise: a) unilateral or b) mutual?

2. In normal commercial NNN matters, we provide for the IP protection to apply until you release the receiving party in writing. Since our NNN is not based on trade secrecy concepts, it is reasonable to provide that the receiving party can never make use of your confidential information. Chinese companies that are used to using NDA agreements will, however, sometimes complain and seek a very short term limit; one year has become common. To avoid often extended negotiations on this issue, we can provide for your NNN to be effective for 5 years after the final disclosure. Note also that if the NNN is mutual, the term runs both ways.

Please advise: a) effective until released in writing or b) term is five (or more) years from the date of the final disclosure. Note that b) is probably best for a mutual NNN Agreement with a Chinese company.

3. If it is likely [Chinese company] will do development work that will result in a new product or innovation, we cover that issue with a New Work provision. The problem with a New Work provision is that it suggests [the Chinese Company] is authorized to use the information you provide it to develop a new product without approval or consultation with you first. Often, that is exactly what you as the disclosing party want to prevent. In that case we provide in effect that new work is a violation of the agreement. This all comes down to how friendly and collaborative you want the NNN to appear to [Chinese company] at this stage.

Please advise: a) New Work prohibited as a breach of the NNN, with a provision providing that you will own the work resulting from that breach or b) a standard New Work provision providing that you own all new work or c) a custom drafted new work provision that provides that the parties will agree on an allocation of ownership and exploitation of new work.

4. Do you want to refer to the basic program contemplated by the NNN in the NNN itself? It is normal best practice for the NNN Agreement not to mention the base project, on the assumption that even that information is confidential and should not be disclosed in a “public” document. However, you have already shared the Draft Outline with [Chinese Company] so all parties would be fully aware of the specific project.

In this case the options are: a) provide for a general statement of the program in the body of the NNN, with something like “Development of the _____ device” b) provide for a non-confidential statement of the project/program in an exhibit to the NNN. Please advise on which option you want to use.<

5. We will need the Chinese name, address, etc. for [Chinese Company]. I see their English name in the draft Distributor Agreement they provided to you, but it is crucial that we get their Chinese name completely accurate because only the Chinese portion of the NNN Agreement will be recognized by the Chinese courts.

6. Any confidential information that goes to [Chinese Company] will also go to [Chinese Company B].  As a practical matter, this means this information will also be available to [Chinese Company C as well]. Please consider the risk this creates.

Considering this risk, do you want us to do separate NNN agreements for [Chinese Company B and Chinese Company C] also? Or is it sufficient to a) provide that [Chinese Companies B and C] are parties to whom disclosure is permitted? Do you want [Key Chinese Employees A and B C] to individually sign this NNN Agreement also? These issues show one reason why a mutual NNN is difficult: if you ask for these additional protections, [Chinese Company] can then ask for the same from your company, pulling in your company’s various subsidiaries and even individual researchers and engineers. This actually is all quite reasonable in a mutual NNN, but it can get complex quickly. Moreover, individuals from both sides may resist executing NNN agreements that make them personally liable. Please advise on this issue.

For more China NNN questions — this time from our clients to our lawyers — check out China NNN Agreements: The Questions We Get.

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