In this episode…
NNN agreements are important legal tools importers should use to protect their IP. Renaud chats with Adrian about what they are and some of the common errors made with them that could leave you with an unenforceable agreement and no protection at all!
First off, though, they kick off by examining the increasing Covid cases and their effect on supply chains in China as of mid-January 2022…
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00:00 – Greetings & introduction
01:10 – Exploring the worsening Covid situation across China.
The impact of Omicron on China. Stricter restrictions on internal travel. Many Eastern seaboard cities in key manufacturing areas are affected and have some lockdown measures in place. With the Olympics and Chinese New Year coming up soon, Beijing is acting strongly to attempt to squash any outbreaks. China is unlikely to open its borders in 2022 if cases remain high abroad. If lockdowns keep happening, more disruption to Chinese supply chains is possible as factories won’t be able to run effectively.
11:45 – What is an NNN agreement?
NNN stands for non-disclosure, non-use, and non-circumvention. Basically, this agreement helps protect any information of yours (IP), such as product details, drawings, marketing strategy, etc, from being used incorrectly or against you. It builds on a traditional NDA and is more secure for you when working with Chinese, Indian, Vietnamese, or other suppliers abroad as it prohibits unauthorised disclosure (like an NDA), but also prevents the use of your IP to produce a similar product using it as a basis, and circumventing you by going directly to your customers with your products to try to cut you out. It usually also restricts usage of the IP for a specific purpose, i.e. manufacturing the product only, and has a standard term of applicability, such as two years, for example.
18:40 – What do importers often get wrong when drafting and using NNN agreements?
There are some common errors that importers make when drafting and using their NNN agreement:
- The most common issue. Reusing the same NDA template that you use in the West for manufacturers in Asia. In most cases, this will be unenforceable for different reasons, such as being in the wrong language, calling for litigation in your home country, or having terms that are inappropriate for use with suppliers in Asia.
- Selecting the wrong jurisdiction for the agreement. China, for example, may not be the best choice, as fees may be higher, everything needs to be translated. It may be that Hong Kong, Singapore, etc, may be better options. Research your supplier. If they are in China but have a Hong Kong parent company, for example, the parent company would probably be a better option to be bound by the agreement (and HK courts are probably easier to work with than those on the Mainland).
- Including ‘unreasonable’ terms, such as the supplier being held liable for any unauthorised disclosure, period, unless they can prove it was not from them (too high a burden on the supplier). Adding a clause for disproportionally high damages for breaches of IP (with scaring the supplier in mind) that are simply too high for a judge to reasonably enforce. Trying to hold company owners personally liable if IP is misused (understandably, many company owners will object to this type of clause). Specifying that the obligations of the agreement remain in place in perpetuity (not realistic to expect companies to administer this data forever).
Adding unreasonable clauses can be viewed as an unreasonable restraint on trade that makes the NNN agreement totally void in certain jurisdictions, so your goal to add enhanced protection could actually backfire.
With an NNN agreement, if you intend to deviate from fairly standard clauses that most templates have, it’s best to check with a business lawyer* who’s experienced with the law of your supplier’s country to assure that your proposed clauses are reasonable and enforceable.
*Note: We provide any advice purely for your educational interest and we aren’t lawyers. Always consider speaking to your lawyer before entering into an agreement with suppliers.
34:46 – Wrapping up.
- China’s hard-line COVID-zero response to Omicron could trigger supply-chain chaos [Fortune]
- Will A China NNN Agreement Protect Us If We Start Assembling Products There?
- How Far Does An NNN Agreement Need To Go To Protect Your IP In China?
- Misguided Legal Advice Given to Startups in China: 8 Examples
- IP Protection For Importers Developing & Manufacturing Products In China [Sofeast Free Guide]
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