Non Disclosure Agreement

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.

With so much foreign attention focused on the possibilities for drama in China it is easy at times to overlook the nation’s thirst for foreign-produced or foreign-formatted factual content. The recent announcement of BBC Worldwide’s deal with CCTV is a timely reminder that factual content can succeed in an environment where reality and elimination formats are considered undesirable television viewing by the authorities. When I ran all this past Kristian Kender, a Beijing-based media consultant with whom we regularly work, he agreed that there were many openings for factual content in China. According to Kristian, “with the success of CCTV-9 there do exist quite a lot of opportunities for international factual producers in China. What they need to bring to the table is experience, some funding and an international broadcaster.”

So, it is great to see that a bunch of factual producers will be touring Beijing and Chengdu November 12 through 18 this year as part of the “Enterprise Asia Screen Industry Delegation.”  The event is already attracting media analysis; for example Screen Hub’s recent article “Chinese Factual: initial fears before a long haul” [link no longer exists].

We have devoted more than a few posts to legal issues around feature films produced with Chinese partners or imported into China from abroad , with the following being just some of them:

Though many of these issues we discussed in the posts above apply to all types of content, television tends to present its own challenges for foreigner producers and distributors. In the face of these challenges, preventative or protective measures include
  • Obtaining some level of protection for a series format by employing a non-disclosure agreement that is appropriate for the Chinese context
  • Filing for registration of program titles as trademarks in China
  • Taking practical steps to increase the likelihood of receiving payment from Chinese agents
  • Doing some due diligence on buying agents to ensure that they have the necessary capacity and authority

I will be writing more about these issues in the context of China factual content when this group hits town.

 

A reader directed me to an excellent article in Material Handling & Logistics Magazine, setting out the basics for succeeding at outsourcing product manufacturing to China.  The article is by Michael Zakkour of Technomic and it is called The Ten Rules for Contract Manufacturing in China.

The article starts out by noting that “there are three overarching ‘must haves’ for producing/buying in China: a good supplier, a good contract and good IP protection.”  It goes on to say that if “you pay attention to the tiniest of details on all three you will likely have a profitable experience,” but “small lapses in any of the three could spell disaster.”  I completely agree.

It then maps out ten “simple rules to follow,” of which I will be discussing only the following, which are all legally related.

  • “Register all of your trademarks, copyrights and patents in China. China is first to file, not first to use. If you are not diligent with this, you will at some point lose your IP.”  I 100% agree.  See File Your Trademark In China. Now.

For more on best methods for China product manufacturing, check out the full article here.

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 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 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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My law firm is always getting emails like the following (I got one this morning which spurred me to write this post):

I’m a __________ based business owner and widget designer. I’m developing my own line of widgets and I am now preparing to move forward by sending out my samples to factories in China. I am interested in knowing what my next steps should be from a legal perspective and how you can help me with those.

My response was and is usually along the following lines:

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 U.S. customers.

Here is some more information on NDAs/NNNs:

If you are not concerned about manufacturers in China copying your widget 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 U.S. companies do all their manufacturing in China based on purchase orders. This is very bad for the U.S. 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:

If you have any additional questions, please don’t hesitate to ask.

I was telling a client today how my law firm has done more than 200 Non Disclosure Agreements (NDA) with Chinese companies and our results very roughly approximate the following:

  •  100 Chinese companies signed what we drafted
  •   95 Chinese companies made one or more reasonable modifications and then signed
  •     5 Chinese companies angrily told our clients “this is not how business is done in China.”

I went on to say that we liked the second category the best because those were the companies that took the agreement seriously enough that they did not want to sign anything with which they were not fully comfortable. 

I then had a reveletion. Legitimate companies do not get angry when put to the test.

Let me explain.  

We are always preaching to our clients the importance of due diligence. We tell them to be sure to conduct business with only registered Chinese companies and that the best starting point for confirming whether a company is registered is to review a copy of their certificate of registration. Our clients often express concerns to us that this sort of request will offend their Chinese counterparty. Our response is that those who have the registration virtually always promptly provide it and those who do not have the registration get angry and talk of how the request is an insult. Tellingly, I cannot think of an instance where a company complained about having to provide its registration and then come up with it. In other words, their anger has always stemmed from their having gotten caught, not from the request itself.  

Am I on to something here? Is anger a good measure of a party’s intentions? How can it not be? What do you think?

This is part II of our series on what are commonly referred to as non disclosure agreements or NDAs. In Part I, “Why Non Disclosures (NDAs) Alone Are Not Enough For China,” we talked about how many companies are using inadequate, off the shelf American NDAs in China. Those agreements are inadequate for three primary reasons. First, they typically fail to cover internal disclosure within a network. Second, they oftentimes fail to prevent the Chinese signing party from manufacturing or using the product or information sought to be protected. To remedy this, non-use provisions are required. Third, they usually fail to prevent the Chinese signing party from circumventing the foreign company by going directly to the foreign party’s customers or clients. To remedy this, non-circumvention provisions are required.

But even if these NDA agreements were to account for the three issues discussed in Part I and more briefly above, most of the ones we see would still not be worth the paper on which they are printed because they are pretty much unenforceable in China. Let’s let co-blogger, Steve Dickinson, explain:

Most NDA agreements I see are just modifications of the standard NDA used in the U.S. The non-disclosure provisions do not deal with the special problems of related parties in China and the non-use/non-circumvention is treated inadequately or not at all. Only a carefully thought out NNN Agreement (non-disclosure, non-use, non-circumvention) that treats all the issues is of any real use in China.

Even the best agreement is of no use if it cannot be enforced. This is the other major defect of the typical NDA agreements I review: the agreement is usually not enforceable. It is absolutely required that an NNN Agreement be enforceable in China. And yet, most of the NDA agreements I read are governed by U.S. or English law with enforcement by litigation in the U.S. or England or by arbitration outside of China. This approach is almost always useless. U.S. courts almost never have jurisdiction over Chinese companies, so a judgment from a U.S. court is of no value. Arbitration outside of China is expensive and slow and proof is difficult or impossible and denies access to injunctive type remedies that would be available for arbitration in China.

To greatly increase your chances of having an NNN Agreement that will actually be enforced, the following nearly always makes sense:

  1.  The Agreement must include an accurate translation into the Chinese language.
  2. The agreement must provide for enforcement through litigation in a Chinese court or through CIETAC arbitration. To further ensure that the NNN Agreement will be enforced, the NNN Agreement should provide for specific monetary damages that will be awarded in the case of a breach. Though U.S. and other common law systems sometimes discourage using this sort of liquidated damage provision, the Chinese system is the opposite. Specific contract damage provisions are encouraged since they ease the court’s work.
  3. Most NDA type agreements rely almost exclusively on injunctive relief as the primary enforcement mechanism. This is a a major mistake in China. The preference for injunctive relief in common law systems (such as the United States or England) is because it is often difficult or impossible to prove the amount of economic damages that result from a breach. This is not really an issue under Chinese law, where parties to a contract are encouraged to set a fixed amount for damages that will result from a breach. If written correctly, the liquidated damage amount sets a floor on damages, but if actual damages exceed that amount, it is permissible to seek damages for the excess. In addition, money damages and injunctive relief are not exclusive. A court or arbitrator is free to order that damages be paid and that the infringing/breaching party terminate the infringing action.

NNN Agreements that set forth a specific damage amount that will result from a breach make the cost of a breach clear to the Chinese manufacturer and if set high enough, will go a long way towards discouraging a breach. Having a properly written liquidated damages provision in your NNN Agreement also makes for quick and effective litigation/arbitration, which is much to the advantage for the damaged party.

Many Chinese manufacturers quickly sign the traditional poorly drafted and unenforceable non disclosure agreement without even thinking about it. Why is that? Because they know that their signing it comes with little to no risk.

When a Chinese manufacturer sees a well drafted NNN Agreement, they will sometimes resist signing. For some manufacturers, the reason is simple. Their whole reason for doing your outsourcing work is to acquire your technology and designs for their own products. So long as your technology is not protected by patent or trade secrecy law, and you have failed to require the Chinese manufacturer sign a strong NNN Agreement, the Chinese manufacturer is free to use your technology for its own purposes. Absent an agreement that prevents them from doing otherwise, it is perfectly legal for a Chinese manufacturer to use your unprotected information for their own products manufactured under their own trademarks. However, if an NNN Agreement makes clear that the Chinese manufacturer cannot appropriate your technology and contacts, then the manufacturer that wanted your OEM manufacturing solely for these reasons is no longer motivated to enter into the arrangement with you.

Sometimes the manufacturer has more complex reasons for refusing to sign a well drafted and enforceable NNN Agreement. A well drafted and enforceable NNN agreement shows the Chinese manufacturer that the foreign party knows its way around China and that it plans to hold the Chinese manufacturer to the terms of their contractual commitments. For this reason, the Chinese manufacturer may reasonably decide it would be better off just manufacturing for those foreign companies that do not manifest an intent to hold the Chinese side to their commitments.

Therefore, using a well drafted and enforceable NNN Agreement does actually increase the risk that the Chinese side will refuse to sign. However, we see this as a good thing. If the Chinese side has a good reason for not signing, they will say so and the agreement can be modified to account for that. If the reason for the Chinese side refusing to sign is not a good one, the Chinese side will be forced to make this clear also. In either case, the foreign company benefits from finding out in advance what is really going on. This “advance notice” function is one of the main advantages of a good NNN Agreement; it forces both sides to face up to the real situation and to engage in a frank discussion of what is really required for a successful and long term relationship. This is a much better situation than ritually executing a meaningless agreement.