Protecting intellectual property (IP) and sensitive information should be a priority for foreign companies manufacturing products in China. Unlike other countries in the world, signing a non-disclosure agreement (NDAs) as a legal instrument to secure valuable IP and maintain confidentiality in business relationships, is not enough in China.
Navigating the intricacies of NDAs can be particularly challenging. Mutual NDAs with Chinese companies rarely protect a foreign company’s intellectual property or confidential information.
China's rapid economic growth and technological advancements have made it a hotbed for innovation and investment, attracting foreign companies seeking opportunities in the market.
However, news stories of IP disputes and trade secret theft have underscored the need for a China-specific non-disclosure/non-use/non-circumvention (NNN) Agreement, instead of just an NDA.
Chinese companies will insist on a Mutual NDA because a China-specific NNN Agreement would expose them to a lawsuit. China's legal framework has raised questions about the enforceability of NDAs within the country.
China leads the world for counterfeit and pirated products, according to a 2023 report from The Office of the United States Trade Representative. WeChat, Aliexpress, Baidu Wangpan, DHGate, Pinduoduo, and Taobao are the biggest web-based platforms for counterfeit goods.
In recent years, there has been an increase in Chinese factories seeking Mutual NDAs. A possible strategy in this situation is to agree to an innocuous (and separate) NDA that protects the Chinese factory, but only if the Chinese company will sign a separate, China-specific NNN Agreement that protects the foreign enterprise.
Enforcing an NDA in China can present complications for foreign entities. China's legal system, cultural differences, and specific interpretation of laws can influence the outcome of NDA enforcement cases. Non-disclosure can be too loosely interpreted and does not protect all interests in China.
However, NNN agreements can be used in China as a more all-encompassing document to protect trade secrets, proprietary information, and confidential information. NNNs enforce that information cannot be shared with anyone or used in any way.
NNN Agreements protect a company’s IP in China. These are intentionally not mutual agreements that protect the Chinese company’s IP as well.
NNN Agreements protect the unauthorized disclosure of any type of information that the foreign company does not wish to reveal or be used by its Chinese factory. They also make the Chinese factory liable for any unauthorized disclosure of information by any company related to the Chinese factory, such as a subsidiary or affiliate.
NNN Agreements should be based on Chinese law, written in Chinese, and should be enforceable in a court that has jurisdiction over the Chinese factory.
An NDA focuses primarily on the protection of confidential information. It establishes a legally binding agreement between two or more parties to keep certain information confidential and restricts its disclosure to third parties.
China Mutual NDAs are nearly always enforceable only in the courts of the foreign buyer’s home country. And Chinese courts rarely enforce court judgments from other countries.
On the other hand, the Chinese company can both secure and enforce a judgment against a foreign company in its home court. This is why Mutual NDAs are so popular among Chinese companies and foreign enterprises should think twice before entering one of them.
Enforcing an NNN
There are essential components to make NNNs enforceable. These things must be included to make the NNN comprehensive and enforceable:
Clearly indicate the parties involved. This should include their names and roles, including who will be sharing and receiving confidential information (i.e. the disclosing party and the receiving party) and who they will be sharing such information with.
Define the nature of the confidential information. This should include the general topic of information covered by the NNN, as well as the scope of information that's covered. It should also define how confidential information is shared.
Security measures must be taken to protect technical or trade secrets. If a dispute arises, the courts will determine whether the information qualifies as confidential—and your confidentiality measures are a huge factor in that decision. Use multiple security measures, such as strong passwords, two-factor authentication, and marking sensitive data and communications as “confidential information.”
Exclusions from confidentiality. If there are any cases when parties in the NNN are allowed to disclose confidential information (for example, after it's been made public), those should be included in the contract.
Terms of the agreement. How long does the NNN last? For employment-related NNNs, they typically last for the duration of the working relationship, but they can last for years after termination as long as both parties agree to those terms.
What will happen if the NNN is breached. It's a good idea to include provisions that outline any injunctions, damages, or other consequences for breaching the NNN.
Legal requirements for enforceable NNNs
For NNNs to be enforceable in China, they need to meet the following requirements:
The documents should be written in Chinese so that disputes do not later arise due to mistranslations. If there are bilingual versions (both English and Chinese copies), the meaning and obligations should be consistent across them. In this case, using a bilingual lawyer and/or a law firm with expertise in Chinese law can be helpful.
Chinese laws should govern the agreement to avoid complications and misinterpretations of the document’s terms. The NNN should be exclusively enforceable in Chinese courts, as obtaining foreign judgments may actually lead to an inability to enforce the NNN in China.
The NNN must be signed and executed by all parties.
The NNN should be reasonable, meaning that the monetary damages named in the NNN should not be too high or punitive.
To protect yourself further, make sure that your ability to enforce your NNN extends beyond the signing party to any other companies, contractors, sub-contractors, and representatives they may work with so that you can seek damages if they breach the agreement.
Information covered by an NNN
In China, information considered confidential or proprietary can be covered by an NNN. This includes:
Trade secrets and proprietary information: manufacturing processes, formulas, designs, and technology that are unique to a company and provide a competitive advantage.
Financial information, including confidential financial statements, budgets, sales figures, and projections.
Customer information, like customer contact information, purchasing history, and preferences.
Employee information, such as salaries, job duties, and performance evaluations.
Intellectual property, which can include patents, trademarks, copyrights, and other types of intellectual property that are owned by a company.
Situations to use an NNN in China
When an invention or business idea is being presented to a potential partner, investor, or employee
When financial information is being shared with a potential partner or investor
When a new product or technology is being shown to a prospective buyer
When sensitive company information is shared with an employee or contractor
When access to proprietary or confidential information is given to employees or contractors
When customer information is shared with employees or contractors
When engaging with a new Chinese manufacturer/factory, supplier, or producer
Breach of NNN
If an NNN is breached in China, the consequences and available remedies will depend on the specific circumstances of the breach, the terms, and provisions of the NNN, and the applicable laws and jurisdiction. There may be legal proceedings against the breaching party, injunctive relief to prevent further disclosure or use of the information, and compensation for losses or damages.
Under China’s Anti-Unfair Competition law, you may be able to seek additional damages. This can include the breaching individual or company giving up profits they made, punitive damages (additional monetary awards as punishment for misconduct), and public apologies.
Woodburn Accountants & Advisors is one of China’s most trusted business setup advisory firms. Woodburn Accountants & Advisors is specialized in inbound investment to China and Hong Kong. We focus on eliminating the complexities of corporate services and compliance administration. We help clients with services ranging from trademark registration and company incorporation to the full outsourcing solution for accounting, tax, and human resource services. Our advisory services can be tailor-made based on the companies’ objectives, goals and needs which vary depending on the stage they are at on their journey.
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DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.