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Beyond the NDA: Using NNN Agreements in China

What’s an NNN?
Better than an NDA,
For deals in China

What is an “NNN” agreement and why might you want to use one? “NNN” stands for “Non-Disclosure/Non-Use/Non-Circumvention.”
An NDA is just a non-disclosure agreement (which often also includes a non-use clause) that’s designed to protect the discloser’s trade secrets and other confidential and proprietary information when this is shared with another party.

An NNN agreement, on the other hand, imposes additional obligations.

“Non-use” means that the party receiving information and materials (confidential or otherwise) – including concepts and ideas that don’t qualify as intellectual property (IP) — won’t use it to compete with the disclosing party.

“Non-circumvention” means that the receiving party won’t “go behind your back,” as discussed further below.

Although an NNN agreement could be used in any manufacturing context, they’re especially common when foreign companies are doing business with China and are often used with original equipment manufacturers (OEMs).

An NNN can be signed at an early stage of the business relationship when the companies are just discussing doing business together but haven’t agreed on prices and other terms.

An NNN is not a substitute for a product development agreement or a product supply or manufacturing agreement. It provides a level of protection, but it doesn’t spell out all the terms of the business relationship.

It’s important to use an NNN and not just an NDA because a US-style NDA may not be enforceable in China.

For an NNN to protect a foreign company doing business with a manufacturer in China, it should be written in (or properly translated into) Chinese, governed by Chinese law, and enforceable in a Chinese court.

Here’s an example of the risks that an NNN is designed to mitigate:
Acme Corp., a US company, wants to have its widgets manufactured by a Chinese company called Shēngchǎn Inc. Acme will need to provide product designs, trade secrets, documentation, and other materials and information to Shēngchǎn.

Acme wants to make sure that Shēngchǎn won’t use these materials and information to:

  • Make similar products to sell directly under the Shēngchǎn brand
  • Make the same or similar products for Acme competitors
  • Make extra units of the Acme products to sell directly

Hence, the parties will enter into an NNN agreement to prohibit (and hopefully prevent) these things from happening.

Under Chinese law, an NNN must specify the amount of liquidated damages that can be awarded if a party violates an agreement. (Liquidated damages are much less common in NDAs.) But a court can adjust the amount of damages if the judge considers them too high because Chinese courts don’t allow for punitive damages in these situations.

Also, liquidated damages can be set as a floor, and actual damages can go higher if the disclosing party can show additional losses because of the breach.

If the Chinese partner breaches the NNN Agreement, a Chinese court can order even a pre-judgment seizure or freeze of its assets in the amount of the liquidated damages. The threat of that can be enough to make a company think twice about the costs of breaching an NNN.

Incidentally, the most effective way to protect confidential information is not to disclose it in the first place. When working with any outside service provider it’s important to think carefully about what the provider actually needs to do the work and to limit disclosures to the minimum possible amount.

Another way to protect your business is to be careful about which company you pick to make your products. The cheapest option may not be the best one if it’s at the cost of your company’s proprietary information.

Just like the haiku above, we like to keep our posts short and sweet. Hopefully, you found this bite-sized information helpful. If you would like more information, please do not hesitate to contact us here.

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