Not every strong NNN agreement is perfect. For instance, your NNN agreement may seem to be ‘watertight,’ providing excellent protection of your IP, but it may lead to difficulties in working with Chinese suppliers if it’s too strict.

How far does an NNN agreement need to go to protect your IP in China?Here at Sofeast, we take IP protection of our customers’ products, designs, supply chains, and information very seriously, so we’d never suggest creating an NNN agreement which is toothless.

But some NNN agreements, perhaps drafted by lawyers in the West who have a limited understanding of what it takes to get products manufactured abroad in China or Vietnam, for example, are so draconian that most suppliers will not sign them and work with you.

If your goal is to manufacture your new product, or even simply to check the quality of workmanship from a supplier, then your legal agreements need to be strong enough to have ‘teeth’ if needed, but not so strict that suppliers will refuse to sign. If the latter occurs, you’re still at square one as you’re unable to fulfil your needs and get started.

👉 Related: How To Create A Valid Manufacturing Contract In China To Protect Your IP

 

Clauses in an NNN agreement that suppliers will find hard to stomach

Over the years we’ve signed hundreds of NDA and NNN agreements with customers from around the world for many different reasons so we have a good understanding of what is effective and what is overkill. We are not lawyers, so consider this article as merely for your information – always check with legal counsel if you are unsure.

Here are several clauses that could work against you in China if you include them in an NNN or NDA:

 

Burden of proof

This kind of clause will state something like: 

“If it is found that any 3rd party gains access to any of the owner’s IP it is seen as due to the actions of the supplier unless they prove otherwise.”

This is a clause that we rarely see and we don’t believe that it is reasonable. The NNN will, by definition, prohibit the sharing of IP unless required, so adding a burden of proof to a supplier which seems quite arbitrary puts them in a bind.

 

Damages

NNN agreements often mention that the owner may sue for damages if there is a breach. An example of this would be something like:

“The supplier agrees to pay damages of at least USD 100,000 to the customer if there is any breach of their obligations laid out in this agreement.”

The threat of suing for damages is often enough for an NNN agreement. It’s unlikely that suppliers would sign an agreement that specifies a large damage payment in US dollars. At the very least, it has to be proportional to the amount of business. (And note that, in countries like China, a judge will usually not enforce damages that are seen as disproportionately high.)

 

Holding a company owner personally liable

Another that may sound like it adds to your safety but is, in fact, unrealistic, is holding the owners of the company you wish to work with personally liable.

The threat of suing the company who would then have to pay some form of damages is enough to deter Chinese suppliers from bad behavior. What owner would sign this agreement knowing that they might lose everything even if an employee made a mistake or behaved irresponsibly?

 

Termination period

Most legal agreements have a set time period by which they terminate, so including a clause which doesn’t end is likely to be a sticking point. An example:

“The supplier is bound by the agreement in perpetuity.”

It’s quite reasonable for the NNN agreement to be terminated 5 years after the business relationship ends.

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These clauses make the agreement quite unbalanced and can scare off suppliers completely, even if they’re a perfect fit for you and have no intention of harming your business.

 

How to make your NNN agreement more effective?

When dealing with suppliers in, say, China, the key is to make the NNN enforceable in their country, NOT your own. If you provide a ‘local’ NNN, a Chinese court is unlikely to enforce it and courts in your country are unlikely to be able to act against the supplier.

So what makes an NNN agreement effective?

  • The NNN should be based on Chinese law only.
  • It should be written in Chinese as the official language of the agreement (an English translation is appropriate to keep on file, but this will not be seen as official).
  • Chinese courts in the supplier’s locality should be chosen to enforce the agreement.
  • The agreement should specifically mention how to correctly handle the relationship with subcontractors and their use of your IP and whether this is acceptable at all.
  • It will include the standard language:
    Non-use – the supplier cannot use your IP in any way.
    Non-disclosure – the supplier cannot make public your IP or share with others (such as a friend’s factory, or via unauthorised subcontracting).
    Non-circumvention – the supplier cannot start making your products themselves and selling at a lower price to steal your customer base.

👉 Related: Sofeast provides a proven and effective NNN agreement template for just US$52 which you can adjust to fit your exact needs.

 

When working with Sofeast specifically, is signing an NNN agreement necessary?

This depends largely on the type of work we’re undertaking for you. Based on the amount of proprietary information we require from you, it may not be necessary, so, using the following examples, you can make that determination.

QC product inspections

Let’s consider a popular service that we provide.
If we only perform QC product inspections for you, all we need is the BOM (without the suppliers’ names, prices, etc. – just the list of components with their markings and their ratings), the 2D mechanical drawings in pdf (no need for the 3D CAD files), the user manual, etc. We will not need the Gerber or STEP files.

You may decide that an NNN is actually not really necessary in this case, although we will be happy to sign one if you require it and we agree on the terms.

More advanced problem-solving

Now let’s consider more complex services where, for example, our engineers will need to look in detail at your product and its IP.
If you want us to look into a problem that has to do with the PCBA of an electrical product, for example, we’ll need access to your source code. 

In this case, signing an NNN agreement is advisable.

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We will advise you if an NNN is appropriate for the work we’re doing, or if there are ways around it by providing us with tailored information that we need to do the job, but protects your IP.

👉 Related: Read some more examples and get an insight into what is typical in NDAs (very similar to NNNs) here: How to Use and Review Non-Disclosure Agreements (NDAs)

👂 Listen: We also think you’ll enjoy this episode of our podcast which does mention IP protection in the contract with your supplier:

 

Have your say…

What experiences of contract law and using NNN agreements with Chinese suppliers do you have? Please let us know by leaving a comment.


 

Are you designing, or developing a new product that will be manufactured in China?

If you want to learn even more about reducing risks, then you’ll also like this free eBook. Sofeast has created An Importer’s Guide to New Product Manufacturing in China for entrepreneurs, hardware startups, and SMEs which gives you advance warning about the 3 most common pitfalls that can catch you out, and the best practices that the ‘large companies’ follow that YOU can adopt for a successful project.

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  • The 3 deadly mistakes that will hurt your ability to manufacture a new product in China effectively
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