NDA — No Way for China

The first step in doing OEM manufacturing in China is to find a good factory to make your product. For entrepreneurs that want to protect their newly designed product from infringement, this is a dangerous stage and too many make the mistake of trying to protect themselves with an NDA (a nondisclosure agreement) rather than with an NNN Agreement (non-use, non-disclosure, non-circumvention) enforceable in China. In this post I will show you why NDA agreements are not what you want.

I have reviewed hundreds of NDA agreements used in China and incredibly few of them have been of any use to the foreign party. The reason is technical, so stick with me because understanding the technical legal issue will provide the key to figuring out what you need to do. An NDA agreement is focused on protecting trade secrets. Trade secrets are a form of intellectual property, just like trademarks, patents and copyrights. The essence of a trade secret is simple: to be protectable property, the information must remain a secret. If the “secret” is revealed to the public, there is no more protectable property.

NDA agreements are focused on preventing disclosure of the trade secret to the public. That is their sole purpose, and once public disclosure occurs, there is no more property right in the information and any associated NDA agreement is no longer valid. Good NDA agreements are therefore narrowly focused on preventing the secret information from being revealed to the public.

Most lawyers in the United States and Europe seek to maintain their domestic intellectual property portfolio. Trade secrets are created by law and these lawyers are therefore concerned with ensuring protection of the trade secrets in their portfolio. For this reason, it is natural for an American or European lawyer to draft a single NDA agreement subject to U.S. or maybe British law, written in the English language and exclusively enforceable in some U.S. state or in the UK.

But this kind of NDA is of absolutely no value in China. There are two reasons for this:

The fundamental issue in China is not protection from disclosure to the general public. The Chinese factory that steals your idea is not planning to disclose that concept to the general public. The factory that steals your idea is planning to use it for its own benefit. You therefore need a contract that prevents the factory from doing this. The prohibition must be based on the contract, not on the the concept of something being a secret. The contract must be clear that it does not matter whether the information provide to the Chinese factory is a secret or not. By contract, the Chinese factory is agreeing not to use the information in competition with you. If you consider what is really required, you will immediately see the typical NDA does not work because its language does not fit the actual situation. What is needed is an NNN Agreement, as I will explain in my next post.

The other fundamental problem with the typical European or U.S. style NDA is that the agreement is not enforceable in China. Chinese law allows for protection of trade secrets. Chinese law also allows for contracts that provide for complete NNN protections. But for such a contract to be enforceable in China it must be governed by Chinese law, be governed by the Chinese language, and be exclusively enforceable in a Chinese court. We have explained in detail why this is true in earlier posts and I will not repeat myself here.

I meet often with American and European entrepreneurs working to manufacture new and innovative products in China. I ask them whether they have already given away your idea to the Chinese side? The common response is, “no, I have not, because I used an NDA drafted by my U.S. (or European) intellectual property lawyer.” In 100% of those cases, I review the NDA and then have to explain that their NDA is useless.

In virtually all these situations, the entrepreneur has already given away their critical ideas and fixing this will be difficult, perhaps impossible. This is distressing for young inventors dreaming of becoming the next Apple or Cisco. Imagine the meeting with the investment bank doing their IPO when the letter arrives stating the Chinese factory claims ownership of the product.

The solution is simple: do it right from the start, by using an NNN agreement enforceable in China.

If you really have a trade secret to protect, use a separate NDA agreement focusing solely on the trade secrecy issue that complies with the requirements of Chinese trade secrecy law (yes, there is a formal statute) and is enforceable in a Chinese court. My law firm’s international IP lawyers have drafted 500+ NNN Agreements for China, Vietnam, Thailand, Mexico, Taiwan, etc., and maybe five NDAs for these same countries.

Take the NDA you have been using and throw it away. Then remember the basic rule: in China (and most of the rest of the world as well), you need to start out right with an NNN Agreement. Correcting your mistakes later does not usually work.