China NNN Agreements and How to Give Them Real Teeth

As I noted in my previous post on China NNN agreements, for enforcement purposes you must make sure that the agreement has some teeth. To understand how enforcement works under Chinese law, we need to do a little work.

The first point to realize is that the standard approach for enforcing an IP contract under the common law has no application under Chinese law. In the common law system, the lawyer is concerned with two major issues. First, the rule that disfavors liquidated damage provisions. Second, the law/equity distinction that allows only for injunctive relief when a law (damages) remedy is not available.

Experienced common law IP lawyers take the position that infringement of IP rights is inherently impossible to value monetarily. For that reason, the typical common law IP agreement will be carefully crafted to provide for injunctive relief as the sole remedy. Given the coercive power of common law judges, once the need for injunctive relief is established, this is a very effective system. Since it is effective in common law jurisdictions, common law lawyers instinctively work to use the same method for China. This is a mistake.

The fundamental reason is that the Chinese civil law system does not follow common law rules. Liquidated damages are not disfavored under Chinese law. In fact, use of contract damages is well established in China and favored by statute. Second, there is no law equity distinction under Chinese law. The powers of Chinese judges are not limited by antiquated common law legal distinctions. Thus, the fear of liquidated damages and the need to justify injunctive relief have no basis under Chinese law. Concern about these issues by common law lawyers is therefore a waste of time.

However, the power of Chinese judges is circumscribed in another way critical for understanding how the Chinese system works. Chinese judges have almost unlimited coercive power to seize assets to enforce payment of a monetary damage award. On the other hand, Chinese judges have almost no power whatsoever to enforce an order that requires a party to take some action. So though Chinese judges are fully empowered to issue injunctive orders, they have virtually no power to ensure those injunctions are implemented. For this reason, Chinese judges will seek never to issue an order they know will be ignored. Instead, they will seek to convert every decision to an order to pay a sum certain in damages.

For this reason, a common law lawyer has to work hard to think about enforcement in a manner that is virtually opposite to what is normal to them. Instead of working hard to justify the almost exclusive use of injunctive remedies, the goal is the opposite. For China, the goal must be to provide by contract a specific monetary remedy for virtually every act of infringement or other violation of the terms of the contract and to never be in a position where injunctive relief is required.

That is what I call putting teeth into the contract. You need to include a sum certain monetary penalty that a Chinese court can and will enforce by ordering the seizure of the defendant’s assets. The Chinese system does not allow for punitive damages and it also does not allow for extensive consequential damages. It is therefore important to set the amount of the penalty equal to a reasonable calculation of lost profits that results from an infringement.

By use of this approach, there is no need to request an order from the Chinese court instructing the manufacturer to terminate its infringing conduct. Instead, it is possible to set a specific contract damage amount that makes it easy for the court to make a decision and then makes it easy for the court enforce its decision. This is a very effective solution that takes into account the reality (rather than the theory) of Chinese law and the Chinese court system.

The post China NNN Agreements and How to Give Them Real Teeth appeared first on China Law Blog.

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.