IP Protection: NDA or NNN?

Most importers have many of the same concerns when sourcing in China, one being the ability to protect their IP (Intellectual Property). It’s important for businesses to protect their homegrown ideas because it sets them apart from competitors, and can be used as a vital source of revenue. So how does one go about protecting what they create? This blog will look at the pros and cons of issuing an NDA agreement (Non-Disclosure Agreement) or NNN agreement (Non-use, Non-disclosure, Non-circumvention), and which one can better serve you and your China sourcing team.

NDA agreements focus on preventing trade secrets from being revealed to the public. This works well in the USA. However, importers are concerned about protecting their IP in China, and these agreements—often written in English and subject to US law—do not work well in China. The issue here is that in China, the risk doesn’t come from disclosure to the public. The risk is Chinese factories could use one’s IP information for their own benefit.

So, as per this great article from the China Law Blog, China NNN agreements, NNN agreements would be the better way to protect IP in China, and here’s why.

This is what the 3Ns stand for:

• Non-use: This states that the factory cannot use your information or ideas to compete with you. This does not necessarily protect your product as intellectual property, copyright or patent, etc., but it protects you in that if the factory should use your information, they in breach of contract with you—and this is not recognized as an IP issue.
• Non-disclosure:This protects you from having your ideas made public, which isn’t a huge concern because factories usually don’t want others, but themselves, to benefit from your information.For example, it’s common for an extended family to own a group of businesses, but consider them all the same entity for disclosure purposes. With that said, factories will disclose your information to someone in its “group”. This way they are not in breach of contract for “non-disclosure”, and they aren’t in breach of contract for “non-use” as they didn’t use your information themselves.Another issue is that some factories use subcontractors, and assert they need to disclose to them to provide pricing for your product.Then there are SOEs—are they all in competition with one another? Maybe not. Therefore, it’s common that information held by one SOE should be shared with another SOE. This non-disclosure would help bar against that.
• Non-circumvention: Your suppliers and factories are pretty well aware that you’re buying product at the China cost, and selling them to the end consumer with an added margin. This would prevent them from selling YOUR products to YOUR customers for less than you.

On top of that, you would want your NNN agreement to be enforceable in China. So, it should be written in Chinese—Chinese law should be the governing law—and Chinese courts should have jurisdiction over the defendant.

The main objective of these agreements is to prevent problems. If a manufacturer signs a document that is clearly not enforceable, it’s useless. But if they sign an agreement that promises all sorts of problems, then they will think twice. So, it helps to have the NNN agreement written in such a way that Chinese factories fear the consequences of breaching this contract, like enforcing damages for each act.

Following these guidelines will help to reduce the likelihood of having to go to court. For these reasons, the NNN is the way to go.  It is a bit more involved and cumbersome, but it affords much better protection.

How do you protect your IP in China? Share your methods with us in the comments below.

By Jocelyn Trigueros

Editor’s note: This blog was originally published on December 3, 2018.