The other day, I did a post, China NNN and NDA Agreements, on why China NNN Agreements are so important for those doing business with China. Within a few hours of that post, my co-blogger, Steve Dickinson, pointed out that if we are going to encourage China NNN Agreements over non disclosure agreements (commonly referred to as an NDA), and the below is that post.
Most lawyers tell their clients who are doing outsourcing work in China that they need an NDA. Many businesses see the typical NDA as an unnecessary and unenforceable “piece of paper” they use only if their legal department forces them to do so. The normal questions I get about NDAs are the following:
- How can I prove the information mentioned in my NDA was revealed?
- How can I prove what was revealed was actually confidential per my NDA?
- How can I enforce the NDA agreement even if I could prove the facts?”
Their concerns are well founded, particularly when dealing with China. In fact, most of the NDAs our China lawyers are completely useless because for China because they are directed at the wrong issues and they are unenforceable. Pulling your English language NDA and having it translated into Chinese is a complete waste of time as your resulting document will be either worthless or worse than having nothing at all. I feel compelled to repeat this. A Western-style NDA is worthless or worse for China. For China, you need a China NNN Agreement.
When my law firm’s international manufacturing lawyers work on international manufacturing arrangements, we never just draft a “straight NDA.” Instead, we draft a “non-disclosure/non-use/non-circumvention agreement” that we refer to as an NNN Agreement.
When a foreign company client contracts with a foreign/Chinese company to manufacture a product, the NNN focuses on the three primary “bad acts” the foreign company client needs to prevent:
1. The foreign company does not want its design revealed to a third party. To prevent this, a non-disclosure agreement is required. Though this is an important issue, disclosure to an entirely unrelated third party is actually fairly uncommon with China manufacturers. The bigger risk is disclosure to a related party. Many Chinese businesses have multiple subsidiaries and manufacturing is often done through a large network of subcontractors. Chinese companies are quite relaxed about passing around information within this network. A good non-disclosure agreement must focus on controlling information within a network that the Chinese manufacturer itself does not consider as falling within the scope of a non-disclosure requirement.
2. The biggest concern of the foreign company is usually not disclosure to a third party. They are usually are most concerned about preventing their Chinese manufacturer from making use of the foreign company’s own product design to compete with the foreign company. For this purpose a non-use agreement is required. A good non-use agreement focuses on two issues. First, the agreement identifies the applicable intellectual property or confidential information of the foreign company and then authorizes the Chinese manufacturer to use that intellectual property or confidential information solely to manufacture product for the foreign company. Second, the agreement requires the Chinese manufacturer agree not to manufacture the product or any similar product other than for the foreign company. This second provision prevents the Chinese manufacturer from manufacturing a similar product under its own trademark. Since many products are not covered by patent or trademark or other IP protections, the only way to prevent such “copy-cat” manufacturing (for which China is deservedly famous) is with such a non-use provision. Normal IP protections will not work, so a contractual agreement is essential. NDAs utterly fail to account for this.
3. The foreign company also does not want its Chinese manufacturer to go around (circumvent) them by selling their product directly to the foreign company’s existing or future customers. After the Chinese manufacturer has manufactured the product for some time, it will likely have learned about the market and the customers for the product and you do not want that manufacturer to then go to your customer and say: “Look, we are the company actually making this product and since this product has no patent or other IP protection, why don’t you just buy the product directly from us, for a lot less?” This is called circumvention and it is extremely common in China. If you want to avoid getting “cut out” in this way, a non-circumvention agreement is required. Again, NDAs just ignore this.
Most non disclosure agreements our lawyers see are just modifications of the standard NDA used in the United States or in Europe and those agreements simply do not address the special problems of related parties in China or the need to protect against circumvention either inadequately or not at all. Only a carefully thought out NNN Agreement that thoroughly resolves all these issues is of value for China.
Stay tuned, as the day after tomorrow we will talk about yet another fatal flaw of “Western-style” NDAs and why they are almost never enforceable in China.