▍ Legal practice - Q&As for NNN Agreement in China

Lucy | Aug 5 2022

NNN agreement is short for Non-Disclosure/Non-Use/Non-Circumvention agreement, which means not to tell anyone, not to use the information, and not to go around your back. In recent years, signing NNN agreement has been widely adopted, and became the initial step in dealings with Chinese companies, particularly the original equipment manufacturers (OEMs).

An NNN Agreement is much more than just a Non-Disclosure Agreement (NDA). NDA focuses narrowly on preventing secret information from being revealed to a third party or to the public, which is not sufficient for OEMs in China. In contrast, NNN agreement not only contains confidentiality provisions but also prevents misusing confidential information.

Please find below some frequently asked questions regarding the NNN agreement and our answers for your reference.

Q1: What will be required for drafting an NNN agreement? 

A1: The minimum information required is the basic information of both parties, e.g. their names and addresses. You can also include other specific requirements that have been mutually agreed upon. Overall, NNN agreement is a framework agreement aiming to safeguard proprietary technology/information from leaks and misuses. Further information, such as details of the technology, will not be required.

Q2: What is the term/duration of NNN agreement? Should it be indefinite?

A2: We usually stipulate that the validity will expire 2 or 3 years after the end of a business relationship. Certainly, it can be longer than 3 years and even be indefinite, as long as both parties agree and the entrusted party is willing to bear the associated costs.

Q3: Could liquidated damages be stipulated to a specific amount?

A3: Yes. Both parties may agree, in accordance with Chinese law, on the amount of liquidated damage or the method to calculate it. Specifying the amount is usually preferred as it can help to avoid subsequent challenges of calculating damages. For instance, the liquidated damages could be 30% of the contract value, 1 million USD/CNY, etc. The amount can be adjusted upwards from the estimated damages caused by the breach, in order to properly bind the manufacturer. In legal practices, the court may reduce the amount depending on the actual loss caused by the breach, in case the amount is considered too high.

Q4: What if the liquidated damages set beforehand are too low?

A4: The entrusted party can set a relatively high amount in the first place, based on the value of subsequent contracts and its bargaining positions. At the same time, the agreement can include a clause that the party in breach shall bear all the compensation liabilities if the amount of liquidated damages is insufficient to cover the actual loss.

Q5: Is it common for the manufacturer to breach an NNN agreement?

A5: Manufacturers may breach an NNN agreement by providing processing services for competing companies, reserving products for self-sales, or using confidential information/technology to design around, make, and sell similar products. These common breaches are subtle and tricky. Therefore, we would suggest our clients also obtain IP protection in China for their brands, designs, and inventions. For trade secrets, security measures must be taken and strict liability for breaches shall be agreed upon. The same is true for non-patentable technical data.

Q6: Could an NNN agreement be applied in all scenarios? Are there any other contracts similar to NDA/NNN agreement?

A6: The main purpose of NNN agreement is to restrict the manufacturer from using or disposing of proprietary technology/information without approval. Sometimes, it could be a general product idea rather than a fully functional design, so the manufacturer will be tasked with turning “napkin scribbles” into a viable commercial product. Such a business relationship is more in line with the characteristics of Product Design and Development Agreement or Commissioned Processing Contract in which the ownership of related IP and the mold can be defined.

Q7: Are there any other tips for trade secret protection in China?

A7: There are some tips below.

· First, security measures must be strictly taken to protect technical or trade secrets. In case of dispute, it has to be determined by the judicial expertise institution whether the information belongs to a trade secret before the lawsuit can be established in the court, where confidentiality measure is one of the most significant factors.

· Before cooperating with Chinese enterprises or individuals, it is necessary to sign an NDA/NNN agreement and stipulate the ownership of intellectual property rights. It shall also stipulate that if the other party files patent, trademark, and/or copyright applications without written approval, the squatting IP rights can be requested to transfer back to the real owner.

· The time limit and scope of using intellectual properties and the liability of contract breach shall all be stipulated in both the NDA/NNN agreement and other contracts.

· Think twice before sending information about your intellectual properties to others.

· After signing NDA/NNN agreement, the correspondences including technical or trade secrets should all be marked as “confidential information” and should all be properly preserved.

· Preserve original evidence that is related to your technical or trade secrets, including the draft of the design, edit records with dates, etc.

If the foregoing has not addressed your queries on NNN agreement, please feel free to contact us and we are pleased to discuss further.