As we navigate the intricate landscape of doing business in China, the importance of safeguarding your Intellectual Property (IP) has never been more prominent. Since our inception in 2012, this concern has continued to be a significant focal point, touching upon all facets of Chinese manufacturing. In this article, we delve into the imperative matter of safeguarding your intellectual property rights, primarily through the implementation of an NNN agreement, which is a pivotal tool in addressing IP concerns in China.
When dealing with any product manufactured in China, the initial step is to secure a reliable factory to produce your goods. However, it’s paramount to protect your product from its very inception and execute an agreement before revealing any confidential information to the factory. The preferred agreement in this regard is known as an NNN (non-disclosure, non-use, non-circumvention) contract, specifically tailored to address the intricacies of your manufacturing. This agreement must be meticulously drafted to ensure its enforceability in Chinese courts.
It’s essential to acknowledge that a standard non-disclosure agreement (NDA) is often ill-suited for China. The conventional NDA primarily aims to prevent public disclosure, whereas the key issue in China is guarding against a Chinese factory potentially appropriating your idea for its own benefit. Therefore, your contract with Chinese factories should explicitly stipulate that, whether the information is classified as a trade secret or not, the factory is unequivocally prohibited from using this information in a competitive manner against you.
Another limitation of standard NDA agreements is their lack of enforceability in China. Chinese law does indeed provide for the protection of trade secrets and recognizes contracts that offer NNN protection. However, for such an agreement to be effective in China, it typically must be drafted in Chinese, governed by Chinese law, and exclusively enforceable in Chinese courts.
In essence, to protect your IP in China, you require a Chinese NNN agreement. Let’s delve into the essence of the three Ns:
Non-Use: This entails the Chinese factory committing, through a written contract, not to use your idea, concept, or product in a manner that competes with your interests as the disclosing party. This is a contractual provision that holds the Chinese factory accountable, irrespective of the information’s classification under intellectual property law. It prevents the Chinese factory from exploiting your IP, such as copyrights, patents, or trade secrets, as it would be a clear breach of the contract.
Non-Disclosure: It’s critical that you distinctly define the group within the agreement to whom disclosure is prohibited. This group could encompass friends, family, or business associates in other companies. This specification is essential to address potential contract violations, even when the Chinese company might not view providing information to someone within that group as disclosure. In such cases, the company becomes fully liable.
Non-Circumvention: This provision within your agreement is vital for preventing the Chinese factory from selling your product to your customers. It aims to deter the factory from undercutting your prices and selling your product to your customers. Moreover, it guards against the factory producing your product and exporting it internationally, potentially luring your quality-conscious customers with lower prices. To mitigate circumvention by the Chinese supplier, your NNN agreement must incorporate China-appropriate non-circumvention provisions.
The unique Chinese approach necessitates your NNN agreement to be written for enforceability in Chinese courts, governing a Chinese defendant with Chinese as the stipulated language. The rationale for this approach is straightforward: in cases of infringement or circumvention, swift action against the Chinese defendant is crucial. Any deviation from this approach could render the agreement unenforceable or result in delays that nullify its effectiveness.
According to Dan Harris of HarrisBricken, an NNN agreement should be meticulously structured to ensure that the consequences of a factory breach are immediate and impactful. The contract should include predefined monetary damages for each act of breach.
The information provided underscores the general approach to drafting agreements with Chinese factories. The primary objective is to reduce the likelihood of resorting to legal action while instilling the belief in the factory that legal recourse is readily available and can be pursued effectively. NNN agreements accomplish precisely that.
If you require legal support to draft an NNN contract in China, please reach out to INVENI Business & Technology. Legal
Submitted by Michelle Low Chew Tung, Managing Director of Inveni Business & Technology Ltd.