Before starting OEM manufacturing in China, foreign companies need to locate a reliable Chinese factory to make your product. It is vital before revealing any information about your product to sign out an appropriate agreement with the Chinese party. While drafting the agreement, you must keep the following things in your mind:
Stay away from using a U.S. style NDA (non-disclosure) agreement- NDA agreements are signed to secure and protect the trade secret. It prevents the disclosure of the trade secret to the public. Most of the U.S. companies think that a single NDA agreement that is written in English, subject to U.S. law, and exclusively enforceable in a U.S. city and state is enough. But the truth is entirely different. The U.S. model non-disclosure agreement will not work in China mainly for two reasons. First, the Chinese company that steals your idea will not reveal it in public, rather they will make use of this secret for their benefit. American companies need to make sure that the information they are providing to the Chinese companies irrespective whether it is secret or not, the Chinese company will not make use of it in competition with you. Second, NDA agreements are not enforceable in China. Chinese law allows for protecting trade secrets and for contracts that provide NNN protections.
Go for an NNN (non-disclosure, non-use, non-circumvention) agreement written to deal with the specifics of OEM manufacturing in China- You need a China-centric NNN agreement to protect your IP in China. Three most important parts of China NNN agreement are
(1) Non-Use: It signifies that the Chinese factory agrees by written contract not to use your idea or concept or product in a way that competes with you, the disclosing party.
(2) Non-Disclosure: Most American companies working with Chinese manufacturers discover that an unethical manufacturer is not actually interested in exposing any confidential information or trade secrets to the public. Instead, such a manufacturer wants to use and exploit the information for its own gain and profits. Non-disclosure agreement has to be coupled with other legal protections in order to prohibit a Chinese factory from using your protected information.
(3) Non-Circumvention: The non-circumvention provisions from the agreement prohibit the Chinese manufacturer from copying your product, circumventing your business and selling the product directly to your own customers.
Draft the NNN agreement so it is enforceable in China- NNN agreement should be written to be enforceable in a Chinese court with jurisdiction over the Chinese defendant. This means that Chinese law is the governing law, Chinese is the governing language, and exclusive jurisdiction is in a Chinese court with jurisdiction over the defendant. The NNN Agreement must be written so that the Chinese company genuinely fears that its breaching the agreement will have immediate and negative impact. The first step is to make the NNN agreement enforceable.
It is a challenging task to find a reliable manufacturer in China. Revealing trade secrets and information from the very beginning will give your manufacturer to copy your product. To prevent this issue, U.S. companies need to have an accurate NNN agreement.