In the intricate dance of international business, protecting intellectual property (IP) is a delicate step that requires precision and foresight. When doing business in China, this becomes even more critical, and the China NNN Agreement emerges as a cornerstone of safeguarding your innovations. This agreement, crafted with an understanding of Chinese legal nuances and business practices, serves as a formidable shield against IP infringements. In this piece, we’ll delve into the essentials of creating a China NNN Agreement that stands as a bulwark for your IP.
* The Preliminary Phase: Choosing the Right Partner
The journey of manufacturing in China often begins with identifying a reliable factory. This choice is pivotal, as it sets the stage for the protection of your product. Before disclosing any detailed information, it’s imperative to ensure that your potential Chinese manufacturer enters into a suitable agreement.
* Secondly, this agreement should be based on three fundamental principles
1. Avoid Traditional NDAs
Non-Disclosure Agreements (NDAs) are typically designed to protect trade secrets and prevent information from being disclosed to the public. However, in China, the real threat to your IP often comes not from disclosure but from misuse by your supplier/factory itself.
They may steal information not to disclose it to others but to use it for their own gain. Therefore, your contract must explicitly state that your supplier/factory agrees not to use the information you provide, regardless of its classification as a secret. This is where the NDA falls short, as it does not address the misuse of information.
2. Opt for a China-specific NNN Agreement
This agreement should encompass non-disclosure, non-use, and non-circumvention, tailored to address the specific challenges of OEM manufacturing in China.
3. Enforceability in China
The agreement must be drafted in a way that it can be enforced within the Chinese legal system, which often requires it to be written in Chinese, governed by Chinese law, and exclusively enforceable in a Chinese court.
* The China NNN Agreement is composed of three key elements
1. Non-Use
This clause prohibits the Chinese factory from using your ideas, concepts, or products to compete with you. The protection arises from the contract itself, not from abstract property rights under intellectual property law.
2. Non-Disclosure
This clause goes beyond preventing the factory from sharing your information with the public. In addition, internal disclosures within the factory’s group or to subcontractors, should be limited to those which is necessary for the purpose of complete the manufacture and the supplier/factory should be responsible for any inappropriate disclosure resulted in.
3. Non-Circumvention
This clause is crucial in industries where your Chinese factory might sell your product directly to your customers at a lower price, undermining your market position.
* Enforceability and Damages
When drafting your China NNN Agreement, it’s essential to consider the following:
– The agreement should be written to be enforceable in a Chinese court with jurisdiction over your Chinese counterparty.
– The agreement should provide for specific contract damages for each act of breach, giving the Chinese party a clear understanding of the consequences of violating the agreement.
– The damages provision should be set at an amount that reasonably substitutes for the damages resulting from a breach of the agreement, taking into account that Chinese law does not allow for punitive or extensive consequential damages.
* Choosing the Right Legal Counsel
Finally, it’s crucial to engage the right legal counsel for drafting your China NNN Agreement. Choose a lawyer who actually works for You, not just a so-called “big” law firm, whether local or international. One issue with collaborating with these large firms is the multitude of communication channels. The lawyer who initially greets you may not be the one actually working on your case (for example,you converse with a partner, but the actual work might be done by an intern you never get to interact with or understand). Opting for an experienced local lawyer who personally oversees your business from beginning to end may be a wiser choice for small and medium-sized enterprises.
By adhering to these principles, you ensure that your China NNN Agreement is not just a piece of paper but a robust shield against IP infringements in China. For more information regarding agreement on sourcing in China, you may check our previously post: Tips on Preparing OEM Contract with China Factory
