Archives: NDA

Every so often one of our China lawyers will get an email from someone who essentially challenges us to tell them why they should hire us. Our response is to patiently explain why they are wrong to think that they do not need a lawyer and to not so patiently tell them that it would probably not be a good idea for us to represent them. We do this because we long ago learned that taking on a bad client is never a good idea and that trying to convince someone to hire you who believes that do not need to do so never works out.

I got such an email the other day from an American company that seemed downright angry that one of our clients “had insisted” that they contact us:

________ at ________ [our client company] insisted that I contact you about our China manufacturing plans even though I have been doing business with China for more than twenty years.  ______ tells me that you believe that contracts with China manufacturers can be worthwhile but I know that it is the government there that determines everything. I want to stop my Chinese manufacturers from copying my products and selling them to my competitors. I doubt any contract can do this for me but can you lay out for me exactly how your company can help me, how long it will take and what you will charge. They just signed the attached NDA but ________ keeps telling me that I should have you modify it. If you are going to do that, I will need it back by the end of the week.  I also am enclosing a manufacturing agreement my lawyer drafted for me and I would appreciate your point of view as to how realistic it is.  We made it very favorable for my company.  It is approximately 10,000 words and so I also need to know what you will charge to revise it. I need this back by the end of the week as well.

Here was my response:

I hesitate to spend time on this because I do not think that you will retain us both because you have come to us too late for us to fix your NDA (which, quite frankly, does not achieve what you want it to achieve) and because you are neither going to believe nor like what I have to say. So I instead urge you to read  How To Stop Your Chinese Supplier From Becoming Your Competitor and China Contracts. Why Even Bother? and all of the links contained in these.

What you have done so far is unlikely to help you in dealing with Chinese manufacturers. It just does not sound like you have received good advice so far and I have to wonder whether that is because you have been hiring the wrong China attorneys (or no attorneys at all) or if it is because you are not interested in changing how you do business with China.

An American NDA with jurisdiction in Chicago is not likely to have any impact on a Chinese company. What you need is not really a China NDA at all, but an NNN (Non-Disclosure, Non-Use, Non-Circumvention) Agreement that protects you before you have actually chosen a particular manufacturer for your product.  This sort of agreement can go a long way towards preventing potential or future manufacturers from stealing your design.

The ability to sue in Chicago is not likely to give you any power over a Chinese manufacturer. The bottom line is that Chinese manufacturers do not fear foreign litigation as much as they fear being hauled into a Chinese court and hit with liquidated damages (or even worse, a pre-judgment seizure of their assets). The goal with our NNN agreements (and of all our China contracts) is to prevent the Chinese company from doing what you don’t want them to do, not so much to beat them if you end up having to sue.

There is no point in our using your existing NDA as a template because it would take us more time to do that than for us to use our own template and then modify that to suit your current needs. More importantly, non-disclosure isn’t really the risk you face; it’s non compete that really matters and your NDA is completely silent on that. Your biggest risk isn’t your Chinese manufacturer disclosing your product to someone else; your biggest risk is your Chinese manufacturer making your product.

I spent five minutes reviewing your manufacturing agreement and that was enough time for me to determine that too also isn’t close to what you need for China. Honestly, it isn’t close for what you would need in the United States either. It does not mention any penalties for bad quality nor does it set forth any sort of timeline. These two things are the most basic provisions one expects to see in such an agreement. It reads as though a non-lawyer cobbled it together from various contracts on the internet. You probably would be better off with no contract at all.

And there is no way that we can promise you anything by the end of the week because we do not even have a good idea yet of exactly what it is you really need. You are going to need to determine whether you are prepared to spend money to do things right in China contractually or just continue muddling through. You know what I would recommend, but of course it is entirely up to you.

I never heard from him again.

A couple of weeks back, we did a post entitled, Protecting Your IP From China. The Value And The Peril Of Trade Fairs.  In that post, we talked about the benefits of securing a Non Disclosure (NDA) or an NNN (Non Disclosure, Non Compete, Non Circumvent) Agreement from potential Chinese manufacturers, before revealing your trade secrets to them.

Renaud Anjoran, of the Quality Inspection Tips blog did a follow-up post to ours, entitled, China Trade Shows: Don’t Get Your New Product Designs Stolen.  In his post, Renaud points out that using an NDA or an NNN Agreement “is good advice, but not always sufficient. I think this is a case where non-legal strategies are far, far more effective.”

I whole-heartedly half agree.  I agree that a signed agreement is not always going to be sufficient and I also agree that non-legal strategies for protecting your IP from China are absolutely critical.  I just am not sure which is more important between the legal and the non-legal strategies, because I view both to be essential and I think that their importance can vary with the product and other factors.

Be that as it may, Renaud (as usual) raises some valid points, especially his pointing out how many walk around trade shows with fake name cards and how securing a fake signature on a document is not worth much:

Many people walk trade shows with fake name cards. And, even if they identify themselves correctly, they can easily use another company (their supplier, their brother…) to circumvent the agreement. So having them sign any kind of confidentiality agreement on the spot, without checking them up, is a weak strategy.

Renaud then provides a couple of interesting real-world examples of trade show strategies by companies with “sensitive IP”:

One exhibits on a small booth at the Canton fair, and shows only his latest developments in silicon kitchenware. When people stop and show interest, my friend takes their name card, asks a few questions, and says “we’ll be in touch” (he takes the time to check them up before sending them photos, prices, and so on). And he makes sure no photo is taken on the spot. Two people can easily monitor a 9 sq.m. booth.

The other one exhibits on the toy fair in HK. They have a big booth, with a third of the space open to the public and the rest as a private showroom. Only companies they trust are allowed in the showroom where the really unique designs are displayed.

The bottom line for protecting your IP from China: do what you can on both the legal side and the non-legal side to protect your IP from China.  It’s tough out there and the more “weapons” you employ, the better your chances.

What do you think?

 

Spoke the other day with a consumer goods client who goes to a couple of trade fairs every year in the PRC.  He told me of some funny (and not so funny) trade fair stories, some of which revolved around intellectual property, intellectual property protection, and intellectual property theft.

Well it all got me to thinking….

Trade fairs can be both bad and good for your intellectual property.  Trade fairs (as my client noted) are a great place to steal someone’s IP.  It therefore is not a place to let your guard down with respect to protecting your intellectual property.  I have gotten far too many calls from people who provided product information to potential manufacturers they met at trade fairs, only to realize too late that they had revealed too much, too soon.

It should go without saying that you should not reveal anything more at a trade fair than you would otherwise, and you should have an agreement in place (an NDA or an NNN) before revealing any trade secret.  For more information on NDA Agreements and NNN Agreements for China, check out the following:

If you think you may be revealing confidential information at a trade fair, get your NNN Agreement drafted before you go.

Trade fairs are also great places to monitor your own IP to see whether it is being copied in China.  There are far too many stories of US companies going to a trade fair, to see their own product (oftentimes with their own brochures, only slightly revised if at all) sitting on a Chinese manufacturer’s table.  If this should happen to you, do not get mad and do not make a scene.  Rather, use this as an opportunity to try to end the infringement both on the spot and in the future; use it as an opportunity for protecting your IP from China.

The best way to do that is to gather up as much information as you can about the infringer.  If at all possible, try to secure the following:

  • The name and address of the company making the product.  Get a business card.  And if you can, get a copy of their business license.  If possible, get the names of those working at the stand.  Get as much of this information in Chinese as you can.
  • Take down the stand number.
  • Take photographs.  Liberally.  Make sure some of the photographs make clear where they were taken and, if at all possible, when.

Then consider going to the company that is putting on the trade fair and requesting that they immediately shut down the offending stand.  If you are going to succeed at this, it would be best if you bring along someone whom you trust who speaks Chinese.  It is also critical that you have proof that infringing/counterfeiting is taking place.  This means that ideally you should provide proof of your own IP filings in China.  Then consider whether you should report the offending party to the Chinese authorities or pursue litigation.

Renaud Anjoran over at the Quality Inspection Tips blog recently wrote on “How your Chinese suppliers might become your competitors.”  Anjoran provides some excellent suggestions for preventing your China supplier from competing with you, based on his notes from a talk by Paul Melkebeke, Vice President Supply Asia for Samsonite.

Melkebeke talked of how building a brand and a distribution network is a long-term investment.  No doubt about that.

He then noted how Samsonite protects its IP by all available means — patents, design registrations, copyrights, Non Disclosure Agreements (NDA), etc, but these things are “not enough.”  I completely agree.  Companies must do everything they can to protect their IP from China and from elsewhere and doing this requires more than just registrations and contracts, as we noted in our post, How To Protect Your IP From China. Part 2:

Though there are, of course, particular protections you can and should employ depending on what you are doing in China, it will almost always make sense for you do to do the following four things.

  • Do business with the right people in China. Companies with nothing to lose are far more likely to take your IP than those with established businesses and reputations and incentives for not getting sued.
  • Think about what you have that needs protecting. What do you have that others want? What do you have that your competitors would love to get their hands on? Is it your technology?  Your customers?  Your brand?
  • Figure out how you (not your lawyer) can protect what needs protecting. Can you break into subparts whatever it is that you want to protect so that nobody in China gets access to the full thing? Can you get away with sending an older version to China? Can you lock it down in your building in China or on one computer such that your employees cannot leave with it? Can you keep the key portions on a server in the US?  These sorts of protections are usually called structural protections and they can be absolutely critical.

Melkebeke noted how Samsonite helps its suppliers improve on efficiency and quality, knowing that the supplier’s other customers (Samsonite’s competitors) will also benefit from these efforts. This is a really important issue and one that is difficult to address. One way to handle this is to become the exclusive buyer from your supplier. But if you are not Wal-Mart, the odds of your being able to achieve that are incredibly slim.  We have had clients that have purchased equipment for their Chinese suppliers with the proviso that equipment can be used only to make our client’s product. This too is pretty rare though.

Melkebeke noted how “many suppliers compare their FOB price to Samsonite’s retail price, and think it is all profit. Many of them start their own brand and push for distribution. But retail space is not cheap in China, and these companies are not expert at this game, so they end up losing money. So far, none has been successful.”  This is something we often discuss with our manufacturing clients that outsource product to China, especially when they claim that “there is no chance our Chinese manufacturer will ever be able to compete with us.” I often give the following example:

We had an outdoor equipment manufacturer (“USA Company”) come to us after its Chinese manufacturer (“China Manufacturer”) had stopped making outdoor equipment for USA Company. China Manufacturer had not only stopped making outdoor equipment for USA Company, but it had also registered USA Company’s brand name as a China trademark in over a dozen different categories/classes (this was before China prohibited this sort of thing by agents).  China Manufacturer’s plans were to sell the outdoor equipment to the two large hardware store chains to whom USA Company had been making the overwhelming bulk of its sales.

China Manufacturer completely struck out in its efforts to sell its own products to the two large hardware store chains. China Manufacturer went to those chains and offered to sell its product for about half the price of what USA Company had been selling them, but both hardware chains basically threw it out because China Manufacturer had no plans and no ability to maintain constant stocking of the products and no plans and no ability to repair the products and no plan and no ability to handle returns and other customer service needs. China Manufacturer’s plans to sell directly into the US market were essentially a joke.

Nonetheless, China Manufacturer had done huge harm to USA Company’s business.  USA Company had to scramble to find a new supplier (it succeeded) and it also had to figure out how to get its products manufactured and shipped out of China without violating China Manufacturer’s trademarks (it did, by securing a trademark for small engines and then prominently plastering its name on the small engines of all of its outdoor products).

The moral of the above story is that you cannot count on your Chinese manufacturer not trying to compete with you even if doing so makes no sense at all.

Melkebeke went on to note how the internet has broken down selling barriers and OEM manufacturers can sell their products online, but only at “a very low price” and “this is not the way to build a brand.”  China is Samsonite’s second largest market after the US. According to Melkebeke, Chinese consumers are willing to pay a premium price for Samsonite product and are “as picky as Japanese consumers.”  Because of this, despite helping its manufacturers improve, Samsonite is not really hurt by suppliers that try to compete with Samsonite because Samsonite prevails because of its quality and brand recognition.  But, Melkebeke rightly notes that companies with a weak brand, and in certain categories (e.g., electronics, where components and specifications are easily compared) are at much higher risk of losing business to a China supplier that seeks to compete with them.  I completely agree.

Anjoran then wrote about how Melkebeke advocated for employing legal methods to keep suppliers in their place, “even if they are not 100% effective.”

The first comment to Anjoran’s post stated that “legal contracts are next to useless in most cases unless you are a Samsonite or an Apple. For SMEs, the only sustainable strategy is relentless innovation.”  I completely disagree.  

From the legal side, there is a lot that can be done to protect yourself from your China supplier, even though, like anything else, these things will not work 100% of the time.  But really, legal protections are probably more important for small and mid-sized companies than for a massive company like Apple!

Let me explain.

First, I would urge everyone to read a post we did last week, entitled, The New Role Of Written Contracts For Product Purchases In China, in which we talked about how the importance of having real contracts with Chinese suppliers has increased and of how American companies are reacting to that:

This approach is changing and more and more foreign buyers are entering into long-term purchase contracts with their suppliers (typically called OEM Agreements, Manufacturing Agreements, Product Supply Agreements, or Product Sourcing Agreements). There are several reasons for this trend.  Probably the most important reason is the drive for standardization on the part of buyers. Chinese product is just one part of a worldwide supply chain. Major retailers have diverse sources of product. All product has to meet a basic standard to fit smoothly into the chain.  Product that is delivered late or that does not meet specifications fouls up the chain. Product that is subject to an intellectual property infringement challenge or that contains pirated, non-standard parts or that contains a non-standard component that raises safety issues disrupts the supply chain.

In the early days of buying product from China, the price was so cheap that these non-compliance issues and their resulting costs were simply absorbed by the foreign buyers at each stage of the purchase chain. However, in the current environment of tight supply chain management, the disruption is normally quite costly and cannot be tolerated by retailers already financially stressed by the current economic environment. As a result, retailers are imposing strict standards on their direct suppliers. The strictness of the controls and the magnitude of potential losses mean that foreign buyers can no longer simply absorb the costs of non-conformance by the Chinese manufacturers.

Foreign buyers now have no choice but to impose the same standards on their Chinese suppliers. Thus foreign buyers must enter into written contracts for product purchases from their Chinese suppliers that mirror their own obligations to their major retailer customers. These contracts must be supplemented with detailed supplier manuals and codes of conduct that seek to regulate the day-to-day business operations of the Chinese manufacturers.

None of this is unusual in North America and Europe, but the approach is very new to most Chinese export oriented manufacturers. The purpose of these agreements is quite simple. The purpose is not to make the situation better but rather to impose liability for non-performance directly on the Chinese manufacturer. That is, the foreign buyer is saying: “I no longer will simply absorb the costs caused by your lack of compliance with the conditions of sale. If you (Chinese manufacturer) do not perform, I will suffer a loss and I am going to pass that loss on to you.”

Second, check out our post from 2011, entitled, Getting Started On Manufacturing In China. The Legal Basics.  In that post we set out the legal basics for manufacturing product in China, in the form of a response to a typical email from a US company seeking to have its products manufactured in China:
The first two things you will likely need are a Non Disclosure Agreement (NDA) and a registered trademark in China. We prefer to do what we call an NNN Agreement — non-disclosure, non-use and non-circumvention. This is an agreement that you use when you are trying to find manufacturers for a product. You have the manufacturer sign the agreement before you show them the product. It prevents manufacturers from stealing your design for themselves and from going around you to sell the product to your US customers.

Here is some more information on NDAs/NNNs:

If you are not concerned about manufacturers in China copying your designs, you do not need an NDA/NNN Agreement.

The one thing you will almost certainly need to do (but maybe not right away) is to register your trademark in China. Before you use any of your trade names (think brands or product names) or trademarks in China (think logos), you absolutely must register them in China or someone else almost certainly will and then you will not be able to use your name in China, even if all you are doing is exporting your product from China. Here’s some info on that: China: Do Just One Thing. Trademarks.

Depending on your situation, you may also want/need a Product Development Agreement. If you are going to work extensively with a Chinese manufacturer to develop a new product, you need a specific product development agreement. These agreements cover the cost and procedure for development and ownership of the developed product. Many companies fail to enter into this kind of agreement and then discover the Chinese side owns “their” product and/or molds at the end of the process.

Once you have chosen the manufacturer for your widget, the next thing you will need is a Manufacturing Agreement (these are also called supplier agreements and OEM Agreements). Many US companies do all their manufacturing in China based on purchase orders. This is very bad for the US side. A good manufacturing agreement covers IP, quality control, NNN issues, warranty, ownership of molds, tooling, supplies, diversion, dispute resolution, and all the other various issues that arise in a manufacturing relationship.

Here is some more information on Manufacturing Agreements:

But what is a small company to do?  The above.  But what about the idea that contracts are “useless” for small companies?  I am not sure why this commenter said this, but I do know that small companies often ask me whether it is worth having a contract if they cannot afford to sue to enforce it.  I often respond by saying that if they cannot afford to sue on a breached contract, they also cannot afford bad product and that is all the more reason they need a contract.  There are many reasons to have a good contract with your Chinese supplier and suing on a breach is but one of them.

As anyone who has been involved in litigation anywhere in the world will tell you, it is a horrible thing. It is expensive, time consuming, and imperfect. Litigation signifies the end of discussion between parties and, as such, it should only be undertaken after all other avenues have been exhausted. As I am constantly telling clients, “if you have to sue, you have already lost. You can win the litigation, but even so, you will have lost.”

Litigation virtually never brings anyone a complete remedy.  If you are owed $250,000 and you sue and the court awards you $250,000 and the other side pays you in fairly prompt order, you still have not achieved a complete remedy.  What about the time you spent trying to settle the case before suing? What about what you might have done with the $250,000 had you received it sooner? What about your attorneys’ fees in dealing with the problem? What about all the time you and your employees had to spend on the case?  Litigation is not a complete remedy, which just underscores point number 1 on how it should always be a last resort.

There is huge value in having a contract with your Chinese counterpart that has little to nothing to do with winning a lawsuit. Even if you never intend to sue anyone in China, it makes sense to have a good contract, preferably in Chinese.  There are three main reasons to have a good contract, and suing and winning on it is only one of them.

One of the main reasons for having a good contract with your Chinese product supplier is to make sure that the two of you are on the same page. We wrote about this reason in Chinese Manufacturing. Delivery Date? What Delivery Date?:

One of the most common problems we see between American companies and their Chinese manufacturers is “late” delivery.  I put late in quotes because many times I think the problem is not so much that the Chinese manufacturer was late, but rather that the contract and the American buyer were unclear on the actual delivery date requirements.

Let me explain.

When we draft an OEM Agreement (a/k/a Manufacturing Agreement or Supplier Agreement), we are always very careful regarding delivery times.  Most of the time, our clients come to us with a term sheet or an oral agreement with their Chinese manufacturer dictating something like 30 days for delivery.  We like strictly tying the Chinese manufacturer to the “agreed-upon” delivery time and we usually do that with a liquidated damages provision tied to late delivery.  Just by way of example, we might put into the OEM Agreement a provision saying something along the lines of delivery shall be within 30 days and for every day beyond thirty the Chinese manufacturer shall be required to pay US Company 1% of the purchase order price within ten days.

Perhaps more than any other contract provision, we tend to get blow-back on the delivery time provision from the Chinese manufacturer. Oftentimes when faced with the reality of having to pay a set amount for late delivery, the Chinese manufacturer gets really serious about delivery times and tells us that they simply cannot promise delivery within the previously “agreed” time frame.  Our client usually realizes it is better to get real agreement (even if longer than originally anticipated) before ordering, rather than getting late delivery after ordering.

The other, somewhat related issue we face on delivery times is that when our client comes to us and says it has agreed with its Chinese manufacturer to a 30 day delivery schedule, we then have to figure out 30 days from what.  We typically go with 30 days from the issuance of the purchase order, but oftentimes the Chinese company pushes for it to be 30 days from its receipt of payment or 30 days from its receiving proof of payment.

Bottom Line:  Certainty is important with respect to delivery dates and, without a doubt, the best way to achieve that certainty is a written contract, in Chinese (so that there is no doubt the manufacturer understands what is on the paper) clearing setting forth the delivery date.

In my view though, the main reason to have a good contract is to prevent problems on which you might need to sue:  We wrote about this way back in 2006, in China OEM the Smart Way:

The best solution for this is to prevent it from happening in the first place and the best way to do that is to choose the right supplier and use a good OEM contract.  When we draft OEM contracts for our clients, we always put in a provision precluding the Chinese manufacturer from subcontracting out production. Without exception, the Chinese manufacturers have agreed to this provision and, again without exception (at least as far as we know), they have always abided by it.  The reason for this is simple.  The manufacturer may have twenty some companies for whom it produces goods, but probably less than half of them forbid subcontracting.  When the Chinese manufacturer is so busy as to require subcontracting, it makes sense for it to first subcontract out work for those foreign companies for whom it is NOT prohibited by contract from doing so.  I am always analogizing this to bike locks.  Even the best bike lock cannot prevent all thefts, but its efficacy comes from the fact that bike thieves generally find it easier to steal a bike with a poor quality lock or none at all than one that is difficult to break.

Any contract that makes your Chinese counter-party think twice about messing with you has at least some value.  My law firm has settled a number of matters with Chinese companies based on well-written contracts, but we decline to take on cases without contracts.  Having a well written contract does not mean you will always win your lawsuit if you are forced to sue on it. But it does mean you will have some leverage if things go wrong and it does mean you will at least have a chance. Having no contract means no chance.

How do you stop your Chinese supplier from becoming your competitor?

  1. Choose the right Chinese supplier.  A company that is thriving has a lot more to lose than one that is tanking.
  2. Register your intellectual property (trademarks, copyrights and patents).
  3. Make sure your supplier signs well-written (preferably in Chinese) contracts that forbid it from competing with you or improperly using your IP.

It is that simple.

What do you think?

Fascinating and important post over at the Chinese Law Prof blog today, entitled, “When does law matter in China?”  The post and my own experiences lead me to answer by saying “all the time.”  But remember mattering is not the same thing as being determinative.

Professor Clarke starts his blog post by noting how he is “often asked (skeptically)” whether the law matters in China.  He then answers it with the following:

I was struck by this article on the Caixin web site today. Apparently the Ministry of the Environment possesses detailed data on soil pollution in China. Lawyer Dong Zhengwei made a request under the “Regulations on Open Government Information” for that data to be made public. In response, the MOE stated that the information could not be released as it was a state secret.

Surprise, surprise, right? Of course the government does not want to release this information. But think about how this scenario could have played out in an era not so different from today: (1) Lawyer requests information. (2) No response. And this could have happened whether or not there were regulations on open government information.

Instead, the existence of these regulations combined with a shift in what for want of a better term we might call legal culture has meant that the MOE apparently feels the need to respond in some way. It has to come up with a justification for not revealing the data. And that means it has to put itself in the embarrassing position of lamely claiming that this information is a state secret, implying that releasing it would somehow harm national interests.

Let’s make two assumptions: (1) an action based on an explicit rationale is easier to criticize than one for which no rationale is supplied; and (2) government officials and agencies would, all other things being equal, prefer not to put themselves in the position of exposing themselves to criticism. If you buy those two assumptions, then at the margin we should expect to see more information being made available as a result of the regulations.

In other words, this law matters not because there is some institution out there (for example, courts) that can force the government to reveal information, but because the very procedure, even if it results in an effectively unreviewable decision not to disclose, puts some pressure on government to operate differently from the way in which it has operated in the past.

He is absolutely right.  The law had at least some influence here.

The reason I found Professor Clarke’s post so interesting to me is because I had a similar discussion on a much more micro level just an hour or so before I saw his post.  A company called me about the pros and cons of having an NNN Agreement with its potential Chinese manufacturers.  It had previously had a Chinese company sign an NDA (Non Disclosure Agreement) and had just discovered that company was now selling its product online.  My response was something like the following:

An off the shelf U.S. style NDA is virtually never going to work.  First off, they focus on disclosure, when the focus really should be on stopping the Chinese manufacturer from competing with you. Second, they usually call for litigation in the United States, which pretty much every Chinese company knows will have no impact on them because Chinese courts do not enforce U.S. judgments.  We write our agreements very differently.  We write ours so as to convince the Chinese manufacturer that it would be better off not violating our agreement than violating it.  We do this by making sure that our dispute resolution clause has teeth, by making sure that the Chinese manufacturer will be held liable if it manufactures our client’s product, and by making clear what the damages/penalty will be for any violation.

We have done probably 500 of these agreements by now and about 245 times they come back signed without changes.  Another 245 or so times they come back with reasonable changes and then there is a bit more negotiating and then the agreement gets signed.  Maybe ten times or so, the Chinese company refuses to sign and then we tell our clients to find someone else because that company is refusing to sign because they want to be free to compete without a good NNN Agreement making their life difficult.

The potential client then asked if any of our clients had ever sued on such an agreement and I told him that as far as I was aware, none had ever needed to do so, and that showed the strength of the agreement.  I then talked of how the main reason for having such an agreement is to prevent problems, not to be able to win in court if there are problems.  I then made clear that having such an agreement is no guarantee against IP theft, but that if you have a good agreement and you are dealing with a legitimate Chinese company, the odds will be very much in your favor.  And if you do not have such an agreement, I can guarantee that your chances of having problems will go way up.

A legal system need not be perfect to be relevant and important.  The U.S. legal system is neither perfect nor certain, and yet nobody ever questions the value of a contract.  Just for the sake of example/argument, let’s say the U.S. system works 95% of the time in a commercial context and the Chinese system works 60% of the time in that same context.  My contention is that in both countries it still makes sense to have a good contract because having a good contract sufficiently increases your odds.

What do you think?

Just fired off the same email I’ve probably sent at least two dozen times. It was in response to someone who just realized that their Chinese manufacturer or potential manufacturer had used confidential or trade secret information.

Here’s the email to me (changed to get rid of any identifiers):

I had my Chinese factory sign a non disclosure agreement and I just learned that they copied my product and are selling it to two of my competitors.  I am still buying product from them. What should I do? I want to sue them.

Here’s my pretty much standard response:

I suggest you send me a copy of the NDA that your factory signed.  If it is in Chinese and provides for litigation in China and was sealed/chopped than you are likely in quite good shape.  If it contains a provision making crystal clear what the exact dollar/RMB penalty is for a violation, all the better. But if you just used an off the shelf American version of an NDA, than doing anything on this would almost certainly be a waste of time. If your NDA provides for suing in the United States, that will be even more true. I should also note that if it just provides for the manufacturer not revealing trade secrets (as opposed to selling your product to others) your likelihood of winning a case will be reduced. In the meantime, I suggest you read the following about China NDA/NNN Agreements:

Almost without exception, we hear nothing further, which is fine since it is always easier to deliver bad news by email as opposed to by phone.

 

Just received the following comment to our post, How To Find And Deal With Chinese Manufacturers:

I have a question,
I sent a picture of a unique [product] and they sent back an email saying that they would like to manufacture it and when I said mine they corrected me by stateing ours.
is this normal?
How should I deal with them.
how does something like this work?
Thanks

We get this type of question shockingly often.  Usually, it comes from someone who just returned from China calling to say that they just spent the last week in China, meeting with a whole slew of potential Chinese manufacturers, and they just realized (oftentimes by having read one of our blog posts on the need for a Non Disclosure Agreement) that they should have required the potential manufacturers to sign a Non Disclosure Agreement BEFORE showing them their product or prototype.

So what can be done?  How should this company deal with their manufacturer? How can this company protect its trade secrets now?  With this particular company, all may not be lost. and that is why I struck its specific definition of their product and replaced it with the generic word, “product.”

If this company provided its product to just one manufacturer and is now planning to buy from just this one manufacturer, this company may end up doing just fine.

What this company should have done BEFORE it showed its unique product to anyone in China (or anywhere else in the world for that matter) is to have required that Chinese manufacturer to sign a comprehensive NNN Agreement written in Chinese and tailored for enforceability in China.  But that was not done, and the question is what can this company do now that it has returned without a China NDA of any kind.

This company can and should go to this particular Chinese manufacturer and say something along the following:

We want you to manufacture our product, but for that to happen, we need you to sign this OEM Agreement.

The OEM Agreement this company provides to its chosen Chinese manufacturer should contain each and every trade secret provision that should have gone into the NNN Agreement this company should have required the Chinese manufacturer to have signed before showing the Chinese manufacturer anything.  If the Chinese manufacturer signs the OEM Agreement, the company will have its trade secret protections. If the Chinese manufacturer refuses to sign the OEM Agreement, the company will have a big problem.

In our experience, Chinese manufacturers will virtually always sign a legitimate OEM Agreement containing trade secret protections becuase the Chinese manufacturer wants the manufacturing business.  I would estimate that Chinese manufacturers sign our OEM Agreements around 98% of the time and those few times that they do not it is because they are not a legitimate company and they do not want to be bound by legitimate requirements.  In other words, the Chinese manufacturer that refuses to sign an OEM Agreement does so because they intend to steal trade secrets or fail to deliver on their quality promises and they do not want to sign a contract that could effectively penalize them for doing so.

The much tougher problem is the company that comes back to the United States having shown its unique product to ten Chinese manufacturers.  That company can get a protective OEM Agreement from just one or two of them (i.e. the ones whom it is going to use for manufacutering) and it will then always have a problem with eight or nine of them.

The real solution, however, is not to go to China without an NNN Agreement at the ready.

If you are seeking to have your product manufactured in China, I suggest you scour  the following regarding NNN/NDA Agreements:

And the following regarding China OEM Agreements:

And the following regarding other key issues arising from China product outsourcing:

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.

A potential client recently sent me a contract written in both Chinese and in English. The English portions were silent about the controlling language but the Chinese portion made crystal clear that the Chinese language portion would control.  And guess what? The Chinese language portion was very different from the English language portion. So different, in fact, that the American company that sent me the contract had no claim under the Chinese language portion, yet it would have had a claim under the English language portion.  My firm always rejects this sort of case because we just assume that the Chinese court will look only to the Chinese language portion of the contract.

This taking advantage of what looks like a dual language contract is a very old trick, and one I have seen at least a dozen times, and not just with China/Chinese.  But for the trick to work, the non-English speaking party has to assume that the foreign language in its contract (in this particular case, Chinese) is the same as the English and never even bother to get it translated.  The foreign party is betting on ignorance/laziness/cheapness/naiveté.  Unfortunately, that is too often a good bet.

I also have on two recent occasions received poorly drafted “Non Disclosure Agreements” (NDAs) from potential clients who want to use those agreements to sue their manufacturer for copying their product and stealing their customers. In both cases, I have had to write the following email:

Near as I can tell, your “NDA” does not help you one bit. It says that your Chinese manufacturer cannot disclose confidential information to any third party, but it does not say a thing about it stealing your designs or competing with you.  In fact, it makes clear that it is free to do whatever it wants with whatever is in the public domain and it will no doubt argue that your __________[product] is in the public domain. I also note that the manufacturer did not chop/seal this document so there is also a good chance that it may not even be binding on it and an even better chance that it will at least make that claim.

It is possible that you can bring a trade secret/unfair competition (or some other non-contractual) claim against your manufacturer, but in many ways, your existing contract may hurt you in pursuing even those claims. If you want to sue this company I suggest you seek to retain Chinese counsel to do so, but I suspect that you will have difficulty finding a good firm that will take this case on a contingency basis.
Whatever you do in terms of your present problem, you should get a new contract in place for any new China orders. That new contract should, among other things, state clearly that your manufacturer cannot use your designs or copy your products or solicit your customers.
Sorry I cannot be more encouraging on this.
Before anyone accuses me of writing this post to try to convince those who are doing business with China to retain a qualified and Mandarin-fluent lawyer to assist them with their China contracts, let me say that I plead guilty. I have said it before and I will say it again. Nearly all of the contracts we see that were drafted without such assistance are of little to no value to the foreign party.  I know that is strong language, but it is also the truth.
What are you seeing out there?

Probably 99% of the Non Disclosure Agreements we see that have been used “quickly” by American companies with their potential Chinese counter-parties are defective, usually terminally so.  One of the things that most frequently makes them defective is that they call for disputes to be resolved in the United States. The problem with that is that Chinese courts do not enforce US court judgments and so even if the American company were to prevail in the United States, they typically 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.

A China NDA should not be simply pulled “off the shelf” because an “off the shelf” U.S. style NDA is just not going to work.  I am not going to tell you that NDAs with China need be super complicated, because they don’t.  But I am going to tell you that they need to be done right and that means not just pulling something off the shelf. In fact, when we do these sorts of agreements with Chinese companies, we nearly always do them as an NNN (Non Disclosure, Non Use/Non Compete, Non Circumvention) Agreement, not just an NDA.  We also ask a fairly long list of questions to our NNN client so as to tailor the NNN to its specific situation and to thereby maximize the likelihood that it will not be breached by the Chinese counter-party and to provide the best chance of 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 is going to have the most impact on preventing that company from violating the agreement.

We ask the following questions before we begin work on NNN Agreements for our clients (along with follow-up questions based on the answers):

  1. Please provide us with a one or two paragraph description of what you will be doing in China that you want to be 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 far more important than 1). The danger with Chinese manufacturers is that they will use the idea you provide them for their own production and that they will then attempt to sell that product to your own 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 that 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. 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.
  8. Will you use this agreement with a single potential manufacturer or with multiple manufacturers?
  9. What types of information will you be providing to the Chinese side that would 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.
  10. Will you expect the Chinese side to do any design work during the initial discussion period?
  11. Is your product protected by trademark, copyright or patent anywhere in the world? Where? What about China?
  12. 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? If so, do you want a general prohibition or do you wish to attach a specific list of persons/companies that the Chinese side should not contact (a “No Contact List”).
  13. 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 use that kind of company, they will need to be able to discuss your product with their subcontractors and we will need to allow for this.
  14. Please advise on any specific technology items that you wish to have protected in a heightened manner.
  15. Note that this Agreement will apply only to PRC China manufacturers. It does 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.
  16. Note that the NNN agreement applies only to the preliminary negotiation stage for your product. If you move on to production, you will need a formal OEM 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.

For more on China NNN Agreements, check out the following:

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