Guest Post: NDAs & NNNs in China.

Fiona approaches with caution.

Wondering what's the difference between an NDA and an NNN? And which one might be more effective in China? Hejab Azam, from PatSnap has some thoughts.

Hejab is a copywriter at Patsnap, creating educational content about IP, particularly in relation to business strategies - often interviewing R&D and IP leaders, and industry influencers to investigate burning IP questions. 

Here's what she has to say about protecting your IP in China with an NDA or an NNN: 

"Want to protect your IP in China? You might need more than an NDA. Many Western businesses are concerned that their non-disclosure agreements (NDAs) are ineffective in China. This isn’t surprising, since several companies have had bad experiences when dealing with Chinese companies. I recently spoke to an IP consultant, Matthew Wahlrab, who’s helped a number of businesses successfully license their IP in China. According to him, “Many companies in China will sign NDAs with Western companies that they know have IP. They will ask for standstills, which preclude you from asserting a patent against an infringing product in their country, even if they steal your idea. After you sign these papers, the Chinese companies say, ‘We have a standstill in place, you gave us these patents for 3 years.’”

I’m sure you’re thinking, “But aren’t NDAs supposed to protect IP?” Perhaps if you’re dealing with trade secrets. Not so much if you’re trying to prevent your products from being misappropriated.

Why are NDAs less effective in China?

NDAs are designed to protect secrets from being disclosed to the public, however, the disclosure of secret information isn’t the only issue in China. The main concerns are misappropriation of technology and counterfeit goods—against which NDAs are ineffective.

Secondly, according to Dan Harrris, co-editor of China Law Blog, most Western companies will ask Chinese companies to sign an American or British-style NDA, drafted with US or UK laws in mind. This makes it difficult for Chinese courts to enforce your NDA, since it’s not been drafted based on Chinese laws. Some companies might get their NDAs translated into Chinese or the court might use a translator. Although Chinese courts are happy to translate an English agreement into Chinese, translations are not always 100 percent accurate because many words don’t have a Chinese or English counterpart—which can lead to miscommunication and long delays. For example, in some languages, the same word might be translated as either “shall” or “should”—two completely different meanings.

Why are NNNs more effective than NDAs?

A better approach might be to use an NNN agreement—which stands for non-use, non-disclosure and non-circumvention—rather than just an NDA.

Non-circumvention

To ensure your suppliers don’t turn into competitors, it’s essential to have a Chinese non-circumvention provision in your agreement. “China price” is what attracts some foreign companies to China—especially in the automotive and smartphone market. This helps them increase their margins when they sell exported products in their home countries. And Chinese companies know this. For example, according to a World Economic Forum report, Chinese carmakers sell their SUV lines at 30% lower prices than multinational corporations. The same can be said about China’s smartphone market, allowing Chinese players to increase scale and challenge Western competitors. What if your Chinese supplier starts selling your products, for cheaper, to your customers? Signing an NDA is not going to prevent Chinese companies from doing that.

Non-disclosure

Some Chinese companies may not view their subsidiaries or group companies as outsiders, and therefore won’t view disclosing information to them as violating a non-disclosure clause. You should make it clear in your agreement that you don’t want them to disclose secret information to those other parties.

Non-use

A non-use clause means that a Chinese company or manufacturer cannot use your product to compete with you. Signing an NNN creates an obligation through a Chinese contract. If a Chinese company is in breach of a contract with you, it’s much easier for the Chinese courts to enforce your rights because of the written provision preventing the Chinese company from using your products.

For an NNN to be enforceable in Chinese courts, it must be written in Chinese and governed by Chinese law. Having a contract in Chinese also makes the terms clear to the other party and prevents them from using the excuse that they misinterpreted the contract. NNN agreements can deter Chinese companies from stealing your IP because these could make them liable to paying heavy fines. Sometimes, Chinese courts may seize companies’ assets if they fail to pay a fine or assets could be seized before the trial. What makes NNNs even more intimidating than NDAs is that Chinese courts don’t disfavour liquidated damages. So, specifying the amount of damages in your agreement forces the Chinese company to realise, in advance, the consequences of any breach. Chinese courts will also use this amount to determine how much to seize pre-trial. Basically, most Chinese companies will not want to mess with you if you have a Chinese NNN agreement."