Virtually every Non Disclosure Agreement (NDA) our China lawyers see is defective. One of the things that most frequently makes them defective is that they call for disputes to be resolved in a U.S. court. The problem is that Chinese courts do not enforce US court judgments and so even if the American company prevails in its U.S. litigation against the Chinese company, it usually will have no recourse against the Chinese company unless the Chinese company has assets in the United States. Knowing this, the Chinese company feels free to violate the NDA with impunity. See Chinese Companies Can Say “So Sue Me”.
A China NDA should not be simply pulled “off the shelf” because an “off the shelf” U.S. style NDA does not work for China. NDAs with China need not be but they must be done correctly and that means they need to be customized based on — among other things — the product involved, the parties involved, the countries involved, the courts involved, the potential damages involved, and the IP involved.
When our lawyers do these agreements with Chinese companies, we almost always do them as an NNN (Non Disclosure, Non Use/Non Compete, Non Circumvention) Agreement, not just as an NDA.We also ask many questions of our NNN clients so we can tailor their NNN to their specific situation to maximize the likelihood it will not be breached by their Chinese counter-party and to provide them with the best chance for recourse if it is. To a certain extent, these two goals are the same in that providing the best chance of recourse against a Chinese company is what will have the most impact on preventing that company from violating the agreement.
We almost always (but not always) draft our China NNN Agreements in Chinese and in English, with Chinese as the official language. This makes it faster, cheaper and easier to go to court should the Chinese counter-party breach the agreement.
We ask the following of our clients before we start drafting their NNN Agreements, (along with anywhere from one to three rounds of follow-up questions based on the answers we receive):
1. Please provide us with a one or two paragraph description of what you will be doing in China that you want covered by the NNN agreement. Note that what what we mean by an NNN agreement is: 1) Non-disclosure, 2) non-use/non-compete and 3) non-circumvention. For China, 2) and 3) are more important than 1). The danger with Chinese manufacturers is that they will use your idea for their own production and then sell that product to your customers. These actions are what we seek to prevent through the NNN agreement.
2. Provide the full legal name of your company, including state/province/country of formation.
3. Provide the address and related contact information you will want for the agreement.
4. Provide the name and title of the person from your side who will execute the agreement.
5. Does your company have a Chinese name? If so, what is it?
6. Will you use this agreement for a single product or for multiple products?
7. Is this particular Chinese factory the only factory from which you will be getting these products?
8. What is the best way to identify the products for which the agreement will be used? Please provide us with 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.
9. Will you want to use this agreement with a single potential manufacturer or with multiple manufacturers?
10. What types of information will you be providing to the Chinese side that you believe should be protected by the NNN agreement. Our clients range from providing a general concept all the way to providing the full production specifications as the preliminary to a hard price quote.
11. Do you expect the Chinese side to do any design work during the initial discussion period?
12. Is your product protected by trademark, copyright or patent anywhere in the world? Where? What about China?
13. After you disclose this product in China, are you interested in preventing the Chinese side from contacting your existing customers concerning your product or related products? If so, do you want a general prohibition or do you wish to attach a specific list of persons/companies the Chinese side should not contact (a “No Contact List”). Each method has its pros and cons and we would be happy to discuss those with you.
14. We normally require the Chinese manufacturer NOT contact any potential sub-contractors who would work in the production process. Please advise if you believe this would be a concern in your situation. Note that some Chinese “manufacturers” are not actually manufacturers. They serve only as brokers or middle-people for the actual manufacturers. If you use that kind of company, it will need to be able to discuss your product with its subcontractors and we will need to allow for this.
15. Please advise of any specific technology items you wish to have protected in a heightened manner.
16. The NNN Agreement will apply only to PRC China manufacturers. It will not cover Taiwan or Hong Kong or Macau companies that may handle manufacturing for you as intermediaries. If you will be dealing with companies from Taiwan or Hong Kong or Macau (or from any country other than the PRC), please let us know so we can make allowances for that.
17. The NNN agreement applies only to the preliminary negotiation stage for your product. If you move on to production, you will need a formal China Manufacturing Agreement. If you will engage the Chinese side to do design, you will need a formal design agreement. The NNN agreement is NOT a replacement for these other agreements.
One more thing. About half the time when someone asks us about our drafting an NNN Agreement to protect them against their China manufacturer, they either do not need an NNN Agreement at all or some other sort of protection would be far more valuable to them. This is why we also discuss our clients’ specific situation and possible needs before we start drafting anything.