China-Specific NNN Agreements Versus a Template Non Disclosure Agreement (NDA)

American and European companies are always asking us to revise their template NDA “to make it work” for China. Our response is always to say that it will be much faster, cheaper, easier and better for us to just start all over with a China-specific NNN. I then tell them that NDAs do not work for China and that the way to protect their IP is with an NNN Agreement. Fairly often they then reveal that they have already done “some things” in China using an NDA” and then they almost invariably say something like, “at least better that is better than nothing. I usually respond with something positive (but ultimately noncommittal) like, “well, fortunately, we can now start taking substantive action to protect your IP from China.”

But the problem is that virtually all NDAs are in fact worse than nothing and here are just some of the reasons why.

1. Your China counterpart knows the NDA it signed is worthless and your having given them that NDA to sign tells them that neither you nor those working for you (within or outside your company) know what it takes to protect IP in China. In other words, you have just told them that stealing your IP will be relatively easy.
2. Your NDA probably says all disputes will be resolved in an American court under United States law. What this means is that if your China counter-party does steal your IP, you must sue them in the United States, which is exactly where you do not want to sue them. The reason for this is because China does not enforce United States judgments and so your being required to sue in China cuts off any possibility of your recovering anything as against your China counterpart on the IP theft. See Enforcing US Judgments in China. Not Yet. If your Chinese counter-party knows you cannot ever recover against it in a lawsuit, you have just told them that they can steal your IP with impunity.
3. The NDA will usually be in just English and that has its own inherent problems. See The Five Keys to A China Contract That Works.
4. The NDA virtually never will have a contract damages provision or if it does, the amount will be so high as to nullify it. See China Contract Damages: More Art Than Science.

There are countless other reasons why it is critical you have an appropriate China NNN Agreement in place if you are serious about protecting your IP from China and one of our China IP lawyers explained one more of these by email to a client the other day when she explained the inherent difference between an NDA and an NNN Agreement:

This company wants to convert the NNN agreement we wrote for into a NDA based on abstract principles of trade secrecy law. Our NNN agreement is not a trade secrecy agreement. It is a contract that essentially says if XY or Z leak out, they will be responsible and they will owe you x dollars in damages. See On the Importance of Contract Damages in China Contracts.

Accordingly, you should reject virtually all of the changes requested by your Chinese counter-party.  They just don’t get it or they are trying to lure you into signing an agreement that will not protect your IP in China. The changes they are requesting are the opposite of what you want and need and it does not make sense to go through them item by item to explain. Your answer should be a simple no.

We have drafted close to one thousand NNN Agreements for our clients doing business in China and probably close to an additional thousand for our clients doing business in various other countries in Asia and elsewhere around the world and they virtually always get signed. China. We sometimes make adjustment based on legitimate concerns that the agreement will restrict the use of technology already owned by the receiving party. However, this agreement has already been revised to deal with those legitimate issues. Given this history, you should be wondering on what possible basis would this single entity have to demand a complete revision of the agreement. We think it is because they want you to sign a bad agreement (an NDA and not an NNN Agreement) so they can easily walk away with your IP.

If you want to protect your IP from China you need an appropriate China NNN Agreement or the appropriate NNN provisions in some other agreement (your manufacturing agreement, your licensing agreement, your distribution agreement, your JV agreement, your whatever agreement. Please don’t just use an NDA believing it is better than nothing because it isn’t. Oh, and by the way, pretty much everything stated above applies with at least equal force to just about every country in Asia as well.

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.