Why the standard NDA fails
Companies that have a Chinese factory make their product usually sign the same non-disclosure agreement they use with everyone else: governed by the law of their home state, enforceable in their home courts, in English. Against a supplier in Guangdong it protects almost nothing. A U.S. judgment for breach is difficult to enforce in China; a U.S. court cannot stop a factory from shipping; and the agreement covers only disclosure, when the real risks are that the factory uses the design to make its own version, sells the product to the customer's own buyers, or quietly subcontracts to a cousin's workshop. The NNN agreement developed by practitioners in China addresses each of those risks and is drafted to be enforced where the supplier is.
The three N's
Non-disclosure prohibits the supplier from revealing the customer's confidential information, broadly defined to include designs, specifications, tooling, pricing, customer identities and the existence of the relationship itself. Non-use prohibits the supplier from using that information for any purpose other than manufacturing for the customer—including making a competing product, filing patents or design registrations on the customer's work, or using the molds for anyone else. Non-circumvention prohibits the supplier from going around the customer to sell to its customers or distributors, directly or through affiliates. The obligations should extend to the supplier's affiliates, subcontractors and employees, and should survive the end of the relationship.
Drafting it to be enforced in China
The agreement should be governed by Chinese law, give jurisdiction to the Chinese court of the supplier's domicile or to a Chinese arbitration institution, and be written in Chinese with the Chinese version controlling. It should be signed by the supplier's legal representative and stamped with the company chop, and it should name the supplier by its exact registered Chinese name. Most importantly, it should fix a liquidated-damages amount for breach. Chinese courts can reduce liquidated damages that greatly exceed actual loss, so the figure should be defensible, but a stated amount is what makes the agreement work: it allows the customer to apply for asset preservation against the supplier's bank account at the start of a case, which is the step that changes a supplier's behavior. An agreement with no damages clause, no chop and a California forum clause is, in practice, a request.
The manufacturing agreement around it
The NNN agreement protects information; the manufacturing or OEM agreement allocates everything else, and it is where the recurring disputes live. Ownership of molds and tooling paid for by the customer should be stated expressly, with the right to take them away—tooling disputes are among the most common reasons a product line is held hostage. Subcontracting should require consent. Quality standards, inspection rights, defect remedies, delivery terms and payment milestones should be specific. The customer should also register its trademarks and, where relevant, design patents in China before production begins, because China is a first-to-file jurisdiction and a supplier or an agent can otherwise register the customer's own brand and block its exports at customs.
Operational safeguards
Documents do not replace practice. Check the supplier in China's enterprise registry and visit the factory before sharing anything. Disclose in stages, and give each supplier only what it needs for its part; some customers split production so that no single factory has the complete design. Mark drawings, control who receives files, and keep records of what was shared and when. Watch the marketplaces for look-alike products, because the first sign of a problem is usually a listing. And maintain a working relationship with the factory's owner—many disputes that end in court began as a payment or quality disagreement that no one addressed.
If the worst happens
Evidence first: in China, infringing products are typically purchased and the purchase notarized so that the evidence is admissible, and the NNN agreement, the drawings and the communications are assembled. A demand letter in Chinese, citing the agreement and the liquidated-damages clause, is often enough. If not, proceedings in China with Chinese counsel—an application for asset preservation, then suit on the agreement or an infringement action—are usually the fastest route. In the United States, marketplace takedowns, customs recordation and, for patented or trademarked products, an exclusion order from the International Trade Commission under Section 337 can keep the infringing goods out of the market. Which combination fits depends on the rights, the evidence and where the copies are being sold.
References
How Lumen Law & Co. can help
A company working with a Chinese factory needs protection that can be enforced in China, not a translated U.S. non-disclosure agreement.
- Draft NNN agreements governed by Chinese law, with the Chinese text controlling and a liquidated-damages clause, after verifying the supplier's registration and chop requirements.
- Review or draft OEM and manufacturing agreements covering tooling ownership, subcontracting limits, quality and payment terms.
- Arrange trademark and design registrations in China and customs recordation in China and the United States.
- When infringement occurs, coordinate notarized evidence, Chinese-language demand letters, proceedings in China, and marketplace and Section 337 remedies in the United States.