China NNN Agreements: Watching the Sausage Get Made.

Of all the mistakes we see foreign companies make with China, the most common (and often the most damaging) has to be using an off the shelf NDA Agreement when dealing with China.

Perhaps more than any other agreement, it is critical you use a China-specific NNN Agreement to protect your confidential information from China.  We call our China NDA Agreements China NNN Agreements because they include non-use and non-compete provisions, in addition to non-disclosure provisions.

I thought of that this morning as I watched a number of emails fly back and forth between a couple of my law firm’s China IP lawyers regarding a couple of NNN Agreements we are in the process of drafting. Together, these emails do a great job showing why you need more than just an “off the shelf NDA” and what goes into drafting an NNN Agreement that will be effective for each individual company.
The first email was sent to client A at the commencement of work on its NNN Agreement:

I will be drafting your NNN agreement for China. For the start, please provide me with a one or two paragraph description of what you will be doing in China for which you are seeking protection by this NNN agreement. Note that what what we mean by an NNN agreement is: 1) Non-disclosure, 2) non-use and 3) non-circumvention. For China, 2) and 3) are more important than 1). The danger with Chinese manufacturers is that they will use the idea you provide for their own production and they will then attempt to sell that product to your own customers. These actions are what we seek to prevent via the NNN agreement.

In addition to the descriptive paragraph, please answer the following:

    1. Provide the full legal name of your company, including state/province of formation.
    2. Provide the address and related contact information that you will want for the contract.
    3. Provide the name and title of the person from your side who will execute the agreement.
    4. Does your company have a Chinese name? If so, what is it?
    5. Am I correct in thinking that you intend to use our NNN Agreement for discussions in China regarding manufacturing _________”

Please consider the following for tomorrow’s telephone conversation:

1. Will you use this NNN Agreement for a single product or for multiple products?

2. What is the best way to identify the products for which the NNN Agreement will be used? Ideally, we seek a clear, descriptive name that does not require attaching specifications or other proprietary information. Sometimes, even the name is proprietary. So we want to develop a designation that is clear, but that does not reveal more than you want to reveal.

3. Do you plan to use this agreement with a single potential manufacturer or with multiple manufacturers?

4. What types of information will you be providing to the Chinese side that you want to see protected by the NNN Agreement? This can range from providing a general concept all the way to providing the full production specifications as the preliminary to a hard price quote.

5. Will you expect the Chinese side to do any design work during the initial discussion period? If so, please explain.

6. Is your product protected by trademark, copyright or patent anywhere in the world? If it is, please explain

7. After you disclose this product in China, are you interested in preventing the Chinese side from contacting any of your existing customers concerning your product or related products?

8. We normally require the Chinese manufacturer NOT contact any potential sub-contractors who would work in the production process. Please advise if you believe that this would be a concern in your situation. Note that some Chinese “manufacturers” are not actually manufacturers. They serve only as a middle man for the actual manufacturers. If you will use that kind of company, then they will need to be able to discuss your product with their subcontractors and we will need to allow for this.

9. Do you have any specific technology items you desire to have protected in a heightened manner.

The second email was to another client for whom one of our lawyers had just completed an NNN Agreement:

Please find attached an NNN agreement for this project. Please note the following:

  1. We could not find any Chinese language information about the manufacturer. Please therefore have the manufacturer write in the Chinese company name, address and related information by hand in the appropriate places on the agreement.
  2. When executed by the Chinese side, please be sure that they stamp the agreement with their company seal in red. The stamp is important, so do not neglect this step.
  3. This agreement includes two exhibits. One is for listing the relevant products and the second is called a No Contact list. The purpose of the no contact list is to formally list out those customers of your company that you want to prohibit the manufacturer from contacting. If there are no such companies at this time or if you do not want to disclose names, just leave this exhibit blank at this time. You may want to use it later.
  4. It appears that this manufacturer will be working with numerous subcontractors. This is always a difficult issue. The approach here is the standard approach: subcontractors must be approved by you in advance. It is also best for you to require that subcontractor to execute a separate NNN agreement. However, this is often not practical. Our approach is to make the manufacturer liable for bad acts by the subcontractors. Note, however, that a very common way for copying to occur in China is to allow your designs to get into the hands of subcontractors and related parties.
  5. Be sure to make every document you provide to the Chinese side as confidential. In the case of subcontractors, ensure that the specific items that are provided to any individual contractor are carefully identified. The NNN agreement is of little use if you do not take care at the stage where specifications are distributed to the Chinese side.
  6. Note that this NNN agreement is intended to protect you only during the process of obtaining a quote from the manufacturer. For full production, you will need a China Manufacturing Agreement that deals with all the manufacturing issues in a comprehensive fashion.

What do you think?

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