31 May 2022

Protecting your confidential information in China: a different ballgame

Known as the “world factory”, China still has a strong attraction to foreign investors. In daily life, you can easily find goods attached with tags, labels, and stickers on a variety of goods showing they are “Made in China”. With the benefits including low taxes and duties and low labor costs, China manufacturers still offer a very competitive value in the global manufacturing landscape. There’s a big chance that you are currently in cooperation with a Chinese manufacturer or seeking for a new one, in this case it’s important for you to conduct your business with an “NNN agreement” that protects your ideas and products in China.

You may already be familiar with a European style Non Disclosure Agreement which focuses on protecting trade secrets. However, unfortunately, this is not working if you want to protect your IP in China. An NDA agreement focuses narrowly on preventing confidential information from being revealed to the public, but it doesn’t diminish the risk that the information might be  used to compete with you. What’s worse, only an NNN agreement is enforceable under Chinese law. So, in order to have a comprehensive protection for your relationship with Chinese counterparts, an NNN Agreement plays a key role.

An NNN agreement is designed for individual property and confidentiality protection when cooperating with manufacturers in China. It consists of three “N”s and each of them represents a different type of contractual obligation:

1. Non-Use

This section in the agreement gives a Chinese factory that you’re working with the obligation to not use your ideas, concepts or products in ways that will lead to competition with you. It is of great significance because the obligations are ensured by a written contract rather than Intellectual Property law, and your ideas or products would be considered as the subjects to contractual provisions, rather than IP concepts such as copyrights or trade secrets. Therefore, any violation of them would be directly seen as a breach of the contract and there’s no need to claim infringements of your Intellectual Property rights. This will bring much convenience for you because the contract would be the basis for your control over the Chinese factory and disputes resolution, so it saves your strengths from looking for safeguards of your confidential information from other legislations or waiting for the courts to decide.

2. Non-Disclosure

As introduced above, the Non-use provisions prohibit a Chinese factory from using your confidential information, but that’s not enough for complete protection. There’s still a risk that the Chinese factories will disclose your information to the public, or in some cases, to someone of their group. The latter situation is more likely to take place in reality because the Chinese factory is able to claim that they did not violate the non-use provisions for not using the protected information directly. But eventually they will use the information somehow for their own benefits and cause harm to your profits. Those behaviors smartly avoid the non-use section and pose a substantive threat to your interest. Therefore, a non-disclosure section is also necessary to keep your information secret, and it is especially important to clearly state in the agreement that not only disclosure within the group is prohibited, but also any infringement caused by group members and third parties would lead to liabilities of the factory.

2. Non-Circumvention

The non-circumvention section of the agreement obliges the Chinese manufacturer to not make products of your ideas and sell them to your potential customers at a lower price. It is always the case that you buy the products from China at a relatively low price and sell them to consumers of other countries after adding a margin to the prices to make profits. Aware of the price gap between the Chinese market and foreign markets, the Chinese manufacturer may be tempted to sell your products in other markets by themselves with a price lower than yours. Such behaviors can have a profound impact on you because, except for some certain service-oriented industries, consumers tend to choose the same products with less costs. In this case, you may have difficulty selling your own products and suffer a big loss caused. Therefore, non-circumventions provisions are of extreme value in prohibiting chinses factories from conducting circumvention behaviors.

In conclusion, a Chinese NNN agreement is crucial for your cooperation with Chinese manufacturers. It includes non-use, non-disclosure and non-circumvention parts to provide an overall protection to your confidential information and products. An effective agreement is an essential part for your business to succeed. In our next article on this subject, we’ll elaborate on how to draft an effective NNN agreement.

Do you need advice on this topic? Please contact Joost Vrancken Peeters on +31 620210657 or jvp@lgga.nl or Shangjing Zhao on s.zhao@lgga.nl

Author
J. (Joost) Vrancken Peeters

Lawyer & Partner