A while back, I manufactured a single product for a huge, big box store. This product cost 10 cents to make and that Company was selling it for $9.99 in their 1000s of home-garden retail stores all across America.
You would think I would be making big money doing this but honestly, I did not even make good money, maybe sometimes, I would make good enough money. But that is it!
Then that evil big box store went ahead and canceled their order with me out of the blue and defaulted on their remaining payments, leaving me hanging with 50,000 units of product gathering dust. To make matters worse, due to new EPA restrictions, I had to dispose of that “stock” properly.
I spoke to my lawyer over a few drinks and found out that this huge American Company made several fatal errors in their NDAs, which I could make use of to teach them a lesson!
I put all my remaining stock I had on Amazon at the evil price of $6.66! pun intended. This was a pretty low-ticket, and they really dropped the ball on this. I was able to brand and trademark everything in China before they even sent their first hitman to knock on my door.
And to this day, I am still referred to as “that Chinaman” in some circles.
Do Not Use a U.S. Style NDA
NDA Agreements are for trade secrets. That is not what you need.
NDA agreements focus on protecting trade secrets. For a trade secret to be protectable property, the information must remain a secret. For this reason, NDA agreements are geared to preventing disclosure of a trade secret to the public. NDA agreements therefore focus on preventing secret information from being revealed to the public. Since U.S. companies generally focus on intellectual property, they believe they can rely on a single NDA agreement, written in English, subject to U.S. law, and exclusively enforceable in a U.S. city and state. But for the following two reasons, this kind of NDA is of no value in China.
First, the issue in China is not protection from disclosure to the general public. The Chinese company that steals your idea does not do so to reveal it to the general public. It steals your idea to use for its benefit. This means that your contract with Chinese companies must make clear that whether the information you provide is a secret or not, the Chinese company agrees not to use the information in competition with you. Now that you know what is really required for China, you can see why US-style NDA agreements are useless in China.
NDA Agreements are Not Enforceable in China
The second problem with typical NDA agreements is that they are not enforceable in China. Chinese law allows for protecting trade secrets and for contracts that provide NNN protections. But if such a contract is going to be effective in China, it usually should be written in Chinese, governed by Chinese law, and exclusively enforceable in a Chinese court. I will discuss this issue in more detail in below.
Use an NNN Agreement Written Specifically for China
You need a China NNN agreement to protect your IP in China. The three “Ns” that make up a China NNN agreement are: non-use, non-disclosure, and non-circumvention.
Non-Use
Non-use means the Chinese factory agrees by written contract not to use your idea or concept or product in a way that competes with you. The key here is that this obligation arises from a Chinese contract, not from some abstract property rights under intellectual property law. A contract prohibiting use will protect you not because your concept is some form of intellectual property, such as trademark, copyright, patent, or trade secret. Rather, it will protect you because the Chinese factory cannot use your work. After all, if it does so, it will be in breach of its contract with you. Getting a Chinese factory to sign a contract with a non-use provision means you will not need to look outside that contract for you or for China’s courts to be able to control the Chinese factory.
Non-Disclosure
The next “N” in a China NNN agreement is non-disclosure. In most instances, you need not be concerned with your Chinese party making your secrets public. The Chinese factory usually has no interest in letting the general public in on its good thing, as it typically wants to use your idea or concept for its purposes. But as we mentioned above, this is usually all that a standard NDA can accomplish, and it cannot usually even accomplish that in China.
Non-Circumvention Non-circumvention is the third and last “N,” and its importance varies with the situation. Your Chinese factory knows you are purchasing products from it at the Chinese price and then adding a big margin before you sell the product in a foreign market. How would you be impacted if your Chinese factory sought to sell your product to your customers at 50% less than you charge? The best way to prevent circumvention by your Chinese supplier is by having a China-appropriate non-circumvention provision in your China NNN Agreement
Draft your NNN in Chinese.
The reason for this approach is that in cases of infringement or circumvention, you must be able to move quickly against the Chinese factory. Most of the time, any other approach will make the agreement unenforceable or delay it for so long as to make the agreement useless.
Draft your NNN Agreement to Convince your Chinese Counterpart not to Breach it.
NNN Agreement must be written so that the Chinese company genuinely fears that breaching the agreement will have an immediate and negative impact on them. You need to make sure the NNN agreement provides for damages in a specific monetary amount.
Draft your NNN Agreement with an Appropriate Damages Provision
An NNN agreement needs to include a reasonable sum for damage that a Chinese court can and will enforce by ordering seizure of the defendant’s assets. However, the Chinese legal system does not allow for punitive damages, so It is important to set the damages at an amount that is reasonable.
Draft Your NNN Agreement to Avoid Litigation
My approach is not to settle it in court, but to be able to avoid having to go to court, so stack it so the Chinese side believes it would be relatively easy for you to sue and prevail. China’s appropriate NNN agreements do exactly that.
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