You want to launch a new product and want to get it made at a Chinese factory. Accordingly, you find out that factory and now you are on your way to do business with them. However, doing business with a Chinese factory is not easy and we are revealing the reasons behind it in our posts. The most important aspect to worry about is protecting your idea from being stolen. An American style NDA contract will not suffice; instead you will require a China binding NNN contract.
The 3 Ns stand for:
Non-use stands for not using the idea, concept or product by the Chinese factory which might hamper your business and also your reputation. They cannot compete with you by using your product or concept. This point in entirety needs to be written down in the contract so that it is binding on the Chinese company. The most critical point here is that nothing is based on abstract property rights; instead everything is based on a binding contract from where the obligation arises. Copyright, trademark, patent and intellectual property rights are not valid in Chinese context and hence it has to be a more tangible aspect. To make it more prominent, get an NNN agreement prepared for your Chinese manufacturer which will prohibit it to use your idea or product. If the Chinese company signs the contract, you are no longer required to look for other legal help.
This is not a very important aspect in a Chinese agreement because they are not keen on exposing factory’s knowledge to the general public. Instead they are keen on using it for their own purpose and hence including this provision is not mandatory in the contract. However, if you have included the above mentioned provision in the contract, the Chinese factory will encounter a problem. To beat this problem, they will not breach the contract directly, but will disclose the idea to someone in the group which will make them safer.
Now, it is important to understand the different kinds of groups that can exist in the Chinese market. Two things must be made clear in order to do business with them. They are:
- Disclosure is particularly prohibited inside the group
- In case there is any disclosure, the company dealing with the group is fully liable for that
Majority of Chinese companies do not consider sharing information within the group as breach of contract. Under such a circumstance, you must understand the different types of groups.
- Families run business in China and they can share information within the family members running the company.
- Subcontractors form an important part of the company. However, they are constantly changing and hence disclosing the idea to them is basically a breach which is not considered the same by the Chinese organization.
- Huge Chinese companies often have numerous subsidiaries owned by a parent company and members of all these companies will know the idea or know about the product.
- In China many state owned enterprises are running business who do not consider other SOEs as separate competitors. The main problem with such organizations is that they are government aided and hence do not see any problem in sharing the useful information provided to them by foreign companies.
Finally, non-circumvention deals with profit making. The Chinese company knows that you will sell the product by hiking the price and retaining your profit margin. It is only natural and feasible for the Chinese factory to track and obtain your customer list and contact with them directly trying to sell the products made for their clients. This is a malpractice which has several side effects and China lawyers often get a call from potential clients talking about this problem. Lot of foreign companies are already on the verge of shutting down due to these malpractices.
Circumvention is dangerous and it must be prevented by hook or by crook. Only an NNN contract can prevent it and hence you must draw it to protect your company. These elements constitute the most important part of NNN agreements in China which must be drawn carefully to simplify and to protect the business from being shut. Your NNN agreement must be incorporated with some tools that will help in controlling the Chinese manufacturing companies.