China NNN Agreements Up Close

It is not uncommon for one of our law firm’s China lawyers to receive an email along the following lines:

I am leaving for China tomorrow to meet with potential Chinese manufacturers and I just learned that US-style NDAs are of little to no value in protecting my trade secrets from Chinese companies. Can you get me an NNN Agreement by tomorrow and how much will it cost?

Our response to these emails is usually something like the following:

I am sorry but there is no way we can complete such an agreement in one day. The way we do these is to send you a fairly substantial questionnaire and we usually have follow-up questions after that. We then draft the NNN Agreement in English and then secure your approval to that. We then have one of our lawyers fluent in Chinese translate it into Chinese for use in China. This typically takes us 3-5 business days.

We then talk about their other options, which vary depending on the nature of the business.

Over Thanksgiving we took on a quasi-rush job for a China NNN Agreement and we just completed that NNN Agreement.  Because the time frame was so short, we had to condense much of our instructions into fewer emails. The following comes from the email from us to the client, enclosing the completed NNN Agreement. We are posting the bulk of this email below as it is helpful in explaining a bit more about what it takes to secure an enforceable NNN Agreement with a Chinese company.

  • Our China Manufacturing Agreement contains similar non-disclosure, non-compete, and non-circumvent provisions to those in this NNN agreement, and if you were certain that you were going to be using a certain Chinese factory to manufacture your product and that their price/quality/speed was acceptable, you could just skip the NNN agreement and go straight to an OEM agreement.
  • It is of course difficult to know whether a given manufacturer can meet your specifications before it has manufactured a single item. The ideal way to handle manufacturing in China of unique products such as yours is to have three agreements. First, an NNN Agreement, for the situation where you reveal confidential information to determine, conceptually, if the Chinese party can make the product. Second, a development agreement, to cover the cost/procedure/ownership of rights/etc. of product development, and to figure out if the Chinese party can in fact make the product you want at a sufficiently high level of quality, in a suitable timeframe and at an acceptable cost. Third, a China Manufacturing Agreement, to cover the manufacturing and purchase of the product(s). Many vendors want to cram everything into one agreement, promising they can of course manufacture what you want, and any product development will be folded into the manufacturing contract. It’s an awkward fit. A manufacturing agreement is not a development agreement.
  • I note that you are dealing with a Hong Kong company related somehow to a Chinese company. Your replies suggest the counter-party should be the Chinese company and we have drafted the agreement accordingly. As a general rule, the counter-party in an NNN agreement should be the entity to which you are directly sending confidential information and that is usually the China factory company.
  • Assuming the Chinese company is the proper counter-party, you should be sure to follow the terms of the NNN Agreement. Only send information to the Chinese company. Do not send information directly to the Hong Kong company unless the Hong Kong company also signs an NNN agreement (which would have to be revised to be enforceable in Hong Kong). Be careful not to treat the Hong Kong entity and the Chinese entity as the same company — regardless of what the Chinese side might say. They are not the same company, and a court would not treat them the same.
  • You had asked about whether both ______ and ______ should be signatories. It does not matter much who signs the agreement on behalf of the Chinese company, so long as the company chop is affixed. That said, ideally you would find out the name of the Chinese company’s legal representative (listed on the company’s business license) and have that person sign the NNN agreement. It is also possible to have both _____ and ______ sign in their personal capacities — that is, to be personally liable — but I doubt they would agree to that.

There you have it.