China-Specific NNN Agreements Versus Template Non Disclosure Agreements (NDA)

China Joint Venture

NNN v. NDA
American and European companies are always asking us to revise their template NDA “to make it work” for China. Our response is always to say it would be faster, cheaper, easier and much better for us to just start all over with a China-specific NNN.
 

1. NDAs Do Not Work for China; China-Specific NNN Agreements Do

I then tell them that NDAs do not work for China and that the way to protect their IP is with a China-specific NNN Agreement. Fairly often they then reveal they have already done “some things” in China using an NDA” and then they almost invariably say something like, “at least better that is better than nothing.” I usually respond with something positive (but ultimately noncommittal) like, “well, fortunately, we can now start taking substantive action to protect your IP from China.”
But the problem is that virtually all NDAs are in fact worse than nothing and here are just some of the reasons why.

1. Your China counterpart knows the NDA it signed is worthless and you having given them an NDA to sign tells them you do not know what it takes to protect IP in China. In other words, you have just told them that stealing your IP will be relatively easy.

2. Your NDA probably says all disputes will be resolved in an American court under United States law or an EU country court under that country’s laws. What this means is that if your China counter-party does steal your IP, you must sue them in the United States or in the EU country listed in the contract, which is exactly where you do not want to sue them. The reason for this is because China does not enforce United States judgments ever and EU judgments rarely and so you being required to sue outside China cuts off any possibility of you recovering anything as against your China counterpart on the IP theft. See Enforcing US Judgments in China. Not Yet. If your Chinese counter-party knows you cannot ever recover against it in a lawsuit, you have just told them they can steal your IP with impunity.

3. The NDA will usually be in just English and that has its own inherent problems. See Drafting China Contracts That Work.

4. The NDA virtually never has a contract damages provision or if it does, the amount is so high as to nullify it. See China Contract Damages Done Right.

There are countless other reasons why it is critical you have an appropriate China NNN Agreement if you are serious about protecting your IP from China and one of our China IP lawyers explained one more to a client the other day when she explained the inherent difference between an NDA and an NNN Agreement:

This [Chinese] company wants to convert the NNN agreement we wrote into an NDA based on abstract principles of trade secrecy law. Our NNN agreement is not a trade secrecy agreement. It is a contract that essentially says if XY or Z information leak out or are copied or are used to compete against you, the Chinese company will be responsible and it will owe you x dollars in damages.

You should reject virtually all of the changes requested by your Chinese counter-party.  They just don’t get it or (far more likely) they are trying to lure you into signing an agreement that will not protect your IP in China. The changes they are requesting are the opposite of what you want and need and it does not make sense to go through them item by item to explain. Your answer to them should be a simple no.

We have drafted close to one thousand NNN Agreements for our clients doing business in China and probably close to an additional thousand for our clients doing business in various other countries in Asia and elsewhere around the world and they virtually always get signed. China. We sometimes make adjustments to our NNN Agreements based on legitimate concerns that it will restrict the use of technology already owned by the receiving party. However, this agreement has already been revised to deal with those legitimate issues. Given this history, you should be wondering on what possible basis does this company have to demand a complete revision of the agreement. We think it is because they want you to sign a bad agreement (an NDA and not an NNN Agreement) so they can easily walk away with your IP.

If you want to protect your IP from China you need an appropriate China NNN Agreement or the appropriate NNN provisions in some other agreement, such as a manufacturing agreement, licensing agreement, or distribution agreement. Please do not just use an NDA believing it is better than nothing because it isn’t. Oh, and by the way, pretty much everything stated above applies with at least equal force to just about every country in Asia as well.