Archives: China NDA

Just responded to an email from a client that went something like this:

A couple of the potential manufacturers to whom we are showing the NDA you did for us are saying that “we don’t respect” them and that these sorts of agreements are “not done in China” in the _____ industry.  Is this true?

My response was as follows:

China Non Disclosure Agreements are quite common and they tend to work very at protecting confidential information.

Chinese companies often say that something isn’t Chinese as a way to avoid it.  What I always say about NNN Agreements (what we call our NDAs) is that we have done about 300 of them.  Maybe 148 times, the Chinese company just signs it.  Around 147 times, the Chinese company suggests reasonable changes and then signs it.  About five times, they say “this is never done in China.”  I then tell our client that can’t be true and we have our own proof of it — the 295 out of 300 times that we got one signed — and that the Chinese manufacturer saying that is a very bad sign.

 Nothing unusual about the ____ industry either.

Probably more than any other agreement, there is a conception out there that it is just fine to use an off the shelf NDA Agreement when dealing with China.

Wrong….

At least as much as with any other sort of agreement, it is critical to tailor your NNN Agreement (we call our NDA Agreements NNN Agreements because they include non-use and non-compete provisions, in addition to non-disclosure provisions) to your specific situation. I thought of that this morning as I watched a number of emails fly back and forth between a couple of my firm’s China lawyers regarding a couple of NNN Agreements we are in the process of drafting.

Together, these two emails do a great job of showing how you need more than just an “off the shelf NDA” and of exactly what typically 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 provide 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:

  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 that 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. Please advise whether 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 an OEM manufacturing agreement that deals with all the manufacturing issues in a comprehensive fashion.

What do you think?

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One of the things that drives me nuts is how some businesspeople act as though the laws in China are so unclear that either nobody knows how to do things right or that there is no point in even trying.

But in so many areas of China business, there is a real uniformity of views among lawyers experienced in representing clients in or doing business with China. That is certainly the case when it comes to the legal safeguards one must undertake when outsourcing from China. These legal safeguards will save you money by both reducing the chance of problems and by greatly increasing your chances for a good resolution should problems occur.

I thought of this uniformity of views when I read a post on the Korean Law Blog, entitled, “Korean Outsourcing: The Legal Basics.” It is a very good post on what it takes to do outsourcing to Korea correctly, but it really is a post on how to do outsourcing to anywhere correctly. In fact, all you need do is change the word “Korea” from that post to “China” and you have a great post on China outsourcing.

That post starts out by noting that if you are “just dealing through a purchase order (PO) in Korea you are heading down a path that will invariably lead to a kick in the tail.” The same is true with China. It then talks of how “foreign companies often make the poorest of choices when doing business with Korean companies” and of how “Korea is still far behind the United States and the West in terms of business ethics, protection of intellectual property and legal transparency.” In these sentences, take the word “Korea” and multiply by four and you have China. It then notes how “many risks, not even considered potential risks in the West, are regularly realized in Korea.” Absolutely ditto for China.

The post then gives the following advice (with my comments in italics:

1. Request and obtain the company’s business registration number and perform a credit check on the company. Ditto for China. For more on this, check out “Giving China Due Diligence Its Due, Part II. Don’t Be A Sucker.”

2. Register all your intellectual property rights (copyright, patents, trademarks etc.) in Korea. Registration will help to prevent your competitor, a disgruntled distributor, or your manufacturer from counterfeiting your goods and exporting your product from Korea to your customers and potential customers. Registration in the United States and Europe does not guarantee that your intellectual property rights are protected in Korea. IP treaties only provide you a window of time to register in a member state.  Ditto for China. For more on this, check out “Register Your IP In China. This Is What I’m Talkin ‘Bout.

3. Your Korean license, distribution, OEM agreements and other agreements used in other nations are not adequate for Korea. All “standard” distribution, license, OEM agreements and other agreements should only be used as guides in Korea. Korea has a unique legal system with unique business risks. If you are planning to deal only through a purchase order (PO), you are a goat waiting to be milked. Ditto for China. For more on this, check out China Supply Agreements. “Why The “Perfect” OEM Agreement Should Cost Less.

4. All agreements, to avoid any initial misunderstandings, should be drafted in English and Korean. A well drafted Korean OEM agreement is not complete until it is translated. Even the best English speaking Koreans, are ill prepared to understand agreements of this nature. Clear misunderstandings upfront and avoid legal fees down the road. Ditto for China. Ditto for China. For more on this, check out “China OEM Agreements. Why Ours Are In Chinese. Flat Out.

5. Know-how, trade secrets and the like should be protected through a written agreement. A standard non-disclosure agreement (NDA) is not enough. This agreement should be signed prior to any course of dealing and normally should include confidentiality, non-use, non-circumvention, non-competition clauses with a liquidated damage clause. Ditto for China. For more on this, check out “Why Non Disclosures (NDAs) Alone Are Not Enough For China” and “Why Non Disclosures (NDAs) Alone Are Not Enough For China, Part II.

6. For at least the first few shipments, don’t pay until the goods are inspected. For the first shipment, check the goods at the port yourself. Afterwards, procedures can be put in place that guarantees the quality, quantity and delivery time through local channels. Not quite ditto for China. This is great advice, when it works. Unfortunately, most Chinese suppliers operate on such slim margins that they cannot or will not start production on a contract without at least half of the money upfront.

What do you think?

Just received a very typical email from someone looking to manufacture product in China:

A bit of background on our company; we are a supplier and installer of _______ and following months of design and development have finally completed a prototype model of ___________ which we now want to manufacture in China. Following two months of research and talks with various Chinese manufacturers we found a company which manufactures ____________ based out of __________.

Before beginning talks with them, we asked for them to sign a confidentiality agreement which we are in receipt of. We are now looking to arrange sending over a prototype for them to reproduce and send back. Before doing so, however, I wanted to make sure we are not leaving ourselves in a vulnerable position.

On your blog you discuss an OEM contract. Could you provide some information on what this is and whether we need to look into this at this early stage?

I responded as follows:

You do not need an OEM Agreement until you are actually ready to start manufacturing. OEM agreements cover the manufacturing relationship and you are not yet at that stage.

At this point, what you probably need is an NNN Agreement as I am virtually certain the Confidentiality Agreement you had the Chinese factory sign provides you with little to no protection. Here is some information on NNN Agreements:

If you are going to be spending a lot of money to have the prototype made and want to be sure that when it is done you will own the prototype and/or the molds used to make the prototype, then you should have us draft what we call a mold agreement. These agreements are usually not necessary unless you are spending so much on the molds or on the prototype that you want to be certain that if something goes wrong between you and the Chinese factory, you will end up with the molds or the prototype.  

The other thing you will need to think about at some point is securing a Chinese trademark for your name. China is a “first to file” country and so if you are not the first to file for your trademark and someone beats you to it they will own “your” name in China. This means they will then be able to stop you from using their name in China and you will not be able to put your name on your products in China. Without being able to put your name on your product in China, you have to export them without your name on there and then add your name only once your product arrives in the United States. 

If you have any patents on your product, we should discuss that too. My firm does not do any patent work, but I would be happy to refer you to qualified attorneys who do.

If you have any additional questions, please let me know.

 

 

This post is part 2 of a three part series by Robert Walsh, the founder of Samsara Biopharma Consulting, and his colleagues, Jennie Shi, Wendy Zheng, and Zhou Tong.  Part 1, “The Basics on China Pharma,” can be found here.

This post is aimed at small-to-medium sized foreign pharma companies that want to enter the Chinese market.

We assume:

• Your company has something unique, not a generic, and it provides a new and innovative therapeutic approach for its target indication. It can, however, be a new formulation including an off-patent molecule, or perhaps a new delivery system, say, oral or transdermal patch, vice injection.

• Your IP is very solid, and it and your trademarks are protected by well thought-out registrations.

• The product is already approved in your home country, and your registration files all meet international requirements. Of course you will have the ability to obtain Free Sales and GMP Certificates, and have them legalized at the Chinese consulate having jurisdiction over your area.

Unless your company has a massive war chest for establishing its China market and is therefore unconcerned about making expensive mistakes while getting into the market, you will want to partner with an appropriate Chinese company. Ideally, this Chinese company will be large, will have its own manufacturing, sales, and distribution networks, and, more importantly will have a product line already selling into the sorts of clinics your product should enter.

The first step is to do a market survey, mostly to determine demand, and to identify which treatment regimens are currently in practice in China and the key players in the therapeutic area in question. This does not have to be a long and expensive undertaking. For one, until you actually meet with a company at their operating location in China, you’ll be unable to discern whether you are working with a legitimately successful company or an internet-based Potemkin company.

The second step is to short-list 5-10 good candidates according to the criteria cited above. At this point you will want to fax and Fedex letters of introduction to each of these companies, including all pertinent contact info, as well as standard marketing brochures and prescribing information used in your own market. This can be in English. You should explain that your company is considering entry for the product into the Chinese market and is considering working with a Chinese partner. Depending on response(s), and the intelligence level of questions asked, you will probably narrow your selection of candidates down to about 3-5 companies.

The third step is for your company to go on a road show to China with a team that should include your CEO, your business development head, your medical director, and the head of regulatory affairs.

It is often advisable to secure signed Non Disclosure Agreements (NDA) from the Chinese companies before meeting with them. We do not recommend massive 20-page English language tomes threatening all manner of actions if the slightest thing goes wrong. A 5-6 page Chinese language one that conforms to what is typical in China is definitely preferred, especially since you are the one who proposed the introductory meeting.

Unless your company already has staff who speak Chinese and are familiar with China, it is advisable to identify, assess, and hire a local person to act as coordinator for the trip and to interpret, and help run the meetings. This person should have a pharma background and be versed in the material to be covered.

We suggest you budget at least a day and a half for each company, and allow a day for travel from city to city. During each meeting, strive for the highest level of formality in your presentations. The Chinese company typically presents its corporate introduction first with yours following.

Your CEO probably should present the corporate brief, your medical director the clinical aspects of the product, and your regulatory affairs person the pathway followed for registration in your home country. The business development person should cap off the presentation by describing your company’s overall marketing strategy and giving a thumbnail view of your company’s China market entry strategy.

The Chinese companies will want to know:

  • Your company’s financial health and whether your business model is working.
  • The level of acceptance of the product by Key Opinion Leader (KOL) doctors. In China, drug companies do not make drugs for patients; they make them for the doctors who write the prescriptions.
  • Whether your company would consider manufacturing in China for the local market, in order to address local price sensitivity. This is quite a separate discussion, but be prepared for the question.
  • How your company would structure an out-licensing and sales & distribution agreement, dossier consideration fees, royalties, transfer prices, etc. You should have already had discussions on how to answer this before leaving home.

After this sort of session, the Chinese side may express unequivocal interest in carrying your company’s product, and suggest that both companies enter into business negotiations after a suitable period for further exchange of information. Especially if the Chinese company is a State Owned Entity (SOE), they likely will ask for some sort of Letter of Understanding (LOI). The LOI is meant merely to record the substance of the meeting and lay out timelines exchanging information and engaging in further visits.

The meeting is usually followed by a plant tour, which we highly recommend you use to gauge the Chinese company’s manufacturing expertise and quality standards. Effusive praise and glowing satisfaction are the default modes for this portion of the visit.

Your fourth step is for your team to settle on the candidate company and begin courting them. Once this company is onboard, both sides should work on crafting an agreement for out-licensing, marketing, sales, and distribution that works to get product registration and marketing approval in China.

The following are typical sticking points in reaching agreement:

  • Who pays the costs to conduct any clinical trials SFDA (China’s Food and Drug Agency) may require, over and above those already completed in your home country? Who will own the data, which may be useful in a Korean or Japanese registration attempt?
  • Will you use your own or the Chinese company’s branding scheme?
  • Who will be responsible for minimizing fakes/counterfeits/copies?

The above represents our thinking on best practices for getting into the Chinese formulary. In our third and final part of this series, we will talk about Chinese pharma successes disasters.

The other day, I and another China lawyer from my law firm were talking with a very sophisticated client about protecting his company’s intellectual property in China. We went through the usual litany of options, starting with trademarks, copyrights, and patents, and then we started discussing the importance of not neglecting “less sexy” protections, such as non disclosure agreements (NDAs) and trade secret contracts.

We then talked about how we typically recommend that NDAs (we call them NNN Agreements because in addition to non-disclosure provisions we view it as critical to include non-compete and non-circumvent provisions as well) and trade secret agreements be in Chinese, call for application of Chinese law, and provide for jurisdiction in China courts, particularly for actions requiring injunctive relief. We also noted how we usually want to add a provision stating how protection of the confidential information requires more than just damages, so as to make it easier to seek injunctive relief. By way of a very brief explanation, injunctive relief is when a court orders a party to do something other than pay damages. For example, if you have an ex-employee who has taken your customer list upon termination from your company, you might seek injunctive relief to require this employee to return the list to you and destroy any copies. Our view is that if someone is stealing your IP in China, you do not have time to sue in the United States or in Europe and then take that judgment/award back to China for enforcement (assuming that would even be possible).

The client then commented how this was all well and good, but “everyone knows” the Chinese courts never grant injunctive relief. I told him I knew that not to be true because I personally was aware of cases where such relief had been granted and it was “my sense” that Chinese courts were becoming more comfortable with this sort of remedy. I then talked about how even if the chances of injunctive relief were low, the cost-benefit analysis of putting in such provisions mandated we do so. He agreed with this.

Rouse’s most recent China Intellectual Property Express newsletter (h/t to Duncan Bucknell’s absolutely excellent IP Think Tank Blog which I pretty much read cover to cover this morning because I just could not stop) has a short piece entitled, “Use of injunctions on the increase in Chinese Courts” [link no longer exists] noting the following:

According to statistics from the Supreme People’s Court, 430 applications for preliminarily injunctions were accepted by Chinese Courts between 2002 and 2006. Of these, 83% resulted in the grant of a preliminarily injunction or similar remedy. During the same period, 642 applications for evidence preservation were accepted, with 607 of those being approved. Most cases were determined within 48 hours, thereby ensuring the effectiveness of provisional measures. These statistics show that Chinese Courts are now willing to make use of provisional measures in the protection of intellectual property.

Not huge numbers, but getting there.

This same issue of the Newsletter also has a short article on a recent trade secret case where the Xi’an Intermediate People’s Court awarded General Electric approximately $120,000 in damages in a trade secret/unfair competition lawsuit against an ex-employee.

I rest my case.

Excellent post on negotiating in China at the new China business Blog, Chinese Negotiation/Negotiating in China [link no longer exists]. The is entitled, “Negotiating in China — Trust is just the beginning [link no longer exists] and it is geared to the foreign company  doing its first deal in China.

The post rightly posits that in any negotiation with a Chinese business, “TRUST is going to come up early and often.” But the “trust” that must be discerned actually involves the following:

  • Can you trust their intentions?
  • Can you trust their ability?
  • Can you trust their judgment?

The post then goes on to explain each of these three questions.

Intentions. Do they plan to fulfill the terms of the contract or not? Are they honest and reliable? This is the most basic type of due diligence in China, and it’s relatively easy to spot those with bad intentions: they are the ones who can’t give you references from past satisfied customers or partners. Make sure you get current referrals, and check them carefully.  Be sure that you are discussing the same individuals, not just companies or associations.  You also have to make a value judgment about the people giving you the reference, so don’t cut any corners here.

Ability. This is equally important. There are plenty of China businesses and China consultants who are completely honest and completely incompetent. Good intentions are great, but don’t mean a thing if the person you are negotiating with doesn’t have the ability to do the job you need done. Chinese counter-parties often underestimate the complexity of the task they are agreeing to or misunderstand your standards. Get very specific very fast about jobs they have done in the past. Make sure you are clear about their experience. Did they actually do the work you are discussing, or were they part of the team that did it? Beware of generalists when you need a specialist. Talk about deadlines and schedules, and be wary of unrealistic estimates. Find out what they WON’T or CAN’T do. A competent supplier or consultant will know their limits, and won’t take an assignment that they can’t handle.

Judgment.  Standards are different in China, and your idea of an adequate solution may be very different than your potential partner. Expats in China often complain about jobs that they consider to be 75% finished. You need to establish a “meeting of the minds” with your counter-party. Don’t be satisfied with vague statements or simple agreement. Drill down to details, and pose scenario-type questions. It is notoriously difficult to draw out the true opinions and feelings of Chinese business people, but that doesn’t mean they are being dishonest or evasive.

The post goes on to discuss how Chinese companies spend way more time than Westerners in getting to know those with whom they are doing business and though you “may walk away from your initial meeting with lots of simple answers and agreements” those “don’t really mean as much as you think they do.”  The post’s wise advice on this is not to be “afraid to ask naive questions or rephrase the same idea several times”:

If anything doesn’t sound 100% right, then take the time to explore it thoroughly. Experienced China negotiators know that what seems simple and clear at the beginning can quickly turn complex and confusing after money changes hands ‘ even if it is only a relatively small deposit or up-front payment.

All good advice, to which we add the following:

  • Go into your negotiations prepared. Far too often our China lawyers have had Western clients who insist on a particular term from their Chinese counterparts that no Chinese company can give or ever gives. If every manufacturer of widgets in China requires at least a 60 days turnaround time, you are wasting your own time and money by insisting on 10 days for you.
  • As a corollary to the above recommendation, we are big fans of using an already tested contract to gauge the bona fides or good faith of a Chinese company. For instance, my law firm has been using the same China NDA (non-disclosure agreement) for so long that we can in large measure assess the legitimacy of Chinese manufacturers just by how they react to it. Legitimate Chinese companies always eventually agree to it (usually rather quickly, but sometimes with reasonable modifications). The illegitimate Chinese company refuses to sign, usually claiming such agreements are “never” signed in China or are “illegal.”

For more on negotiating in China, check out the following: