Here is why you can’t use a NDA in China and what you need instead to protect your business from being copied.

Intellectual Property (IP) theft in China has increased tremendously in the past years. This may be attributed to trade wars among countries. Trade wars have made Chinese factories aim for an increase in their profit margins. As a result, they turned to wrongdoing by copying American products and marketing them as their own. It makes Chinese companies the toughest competitors of American (or other western) companies.

But if you have an American business that sells physical products, you may have been outsourcing with Chinese manufacturers to produce your products to save on costs. And this strategy does not come without disadvantages --- one being exposure to IP theft.

What businesses need to be wary about is that the Chinese have a different legal justice system, separate from those of American and other western countries. Any contract signed and executed under the laws of western countries will not be enforceable in China, including Non-Disclosure Agreements (NDAs).

NDAs won’t offer protection

The execution of an NDA normally protects a company’s confidential information. Although there’s little danger for the general public to know about the trade secrets, it is common for companies to use the intellectual property of others to their own advantage, to make a profit. A traditional western-style NDA will not stop any Chinese manufacturer from stealing ideas, information, trade secrets, and technology originally developed in a western country.

Effect of IP theft on your company

Chinese manufacturers who steal intellectual property (IP) can pose a great threat to many American/Western companies. These manufacturers may compete with your company by making the same product as yours and selling to your target audience at a lower price. Assuming that these manufacturers won’t sell to your clients, they can still offer their version of the product to your local competitors. In effect, it could become difficult for your own company to penetrate the market deeper, which can deter your growth.

NNN Agreement is the solution

The protection you need is not only about stopping Chinese manufacturers from divulging your company’s confidential information to the public and preventing them from copying your product using your trade secrets. It also includes stopping them from distributing to the market.

Fortunately, a specific document addresses all these aggressive malpractices in China --- the NNN Agreement. NNN stands for Non-disclosure, Non-use and Non-Circumvention Agreement. What this document does is threefold: it stops a Chinese company from disclosing your confidential information to the public, it bars them from misusing the said information, and, most importantly, it blocks them from competing against you. It includes selling to your direct customers their version of the same product at a lower price.
  • Non-use: This means your Chinese counterpart cannot use any of your work for whatever purpose because this will lead to a contract breach.
  • Non-disclosure: This provision in the agreement will prohibit a Chinese manufacturer from publicly disclosing any of your confidential information. If privacy is breached, the company will be fully liable for damages. The provision also prohibits employees, sister companies, subcontractors, other members, and third-party groups within their circle from doing the same. 
  • Non-circumvention: This provision will protect your company against Chinese factories that would sell your products to the rest of the world, regardless of the price and quality.
Important points when drafting your NNN Agreement 
  • NNN agreements should have China as the main consideration. This means that the agreement must be written to be enforceable in a Chinese court. Specifically, it must be written in the Chinese language, and Chinese law should be the governing law. Doing so will enable you to go against a Chinese company quickly in case of any breach.
  • Be elaborate and detailed in terms of the charges that you would file if the agreement was breached. It must include the monetary consequences of violating the contract. It should make the company you are working with aware that any wrong move on their part has a corresponding negative sanction.
  • Contract damages have to be considered realistically; a Chinese court should be able enforce the contract by the seizure of assets of the party committing the violation.
  • ​Include a clause that prohibits the Chinese company from colluding with any of your staff to conduct an illegal activity against your company. 

Here are some major takeaways for you if you’re planning on (or are already) outsourcing from any Chinese manufacturers:
  • Never expect that a regular NDA will protect you from IP theft in China. It will not suffice.
  • The agreement needs to be a China-focused NNN agreement when dealing with Chinese manufacturing companies.
  • The agreement must cover the protection of not only intellectual property, but also concepts, ideas, lists of clients, product designs and procedures. It has to protect your molds and tools as well.
  • Having an appropriate NNN agreement will always be essential. After years of unethical practice, Chinese companies are now fully aware of the threat of litigation that comes with breaking in an NNN. With a properly drawn-up contract, you’ll soon be able to successfully find a Chinese manufacturer that’s willing and able to establish a healthy business relationship.
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