China NNN Agreements: Litigation Fear Is Your Weapon

A well-crafted, China-focused NNN Agreement will almost always allow you to generate sufficient fear of litigation to greatly reduce the likelihood of your ever having to go to court.

This is the last in my four-part series on using NNN Agreements to protect IP from Chinese companies. In part 1, Want To Protect Your IP From China? Throw Your NDA In The Waste Basket, I explained why US-style NDA Agreements do not work for China. In part 2, Want To Protect Your IP From China? Use An NNN Agreement, I explained China-centric NNN Agreements are what works for China instead of NDA Agreements. In part 3, IP Agreements that Work for China, I explained how to draft an NNN Agreement China courts will actually enforce. In this final post, I wrap it all up by discussing how properly drafted NNN Agreements reduce both infringement and the litigation that can stem from that.

Chinese companies are afraid of the Chinese court system, particularly when they know they will lose. More than anything, Chinese companies fear a prejudgment seizure of their assets. Chinese companies know that if they breach a well drafted China-centered NNN Agreement, the odds are good that a Chinese court will order a freeze on their assets and that is the last thing they want.

Due to this fear of the court system, my firm’s China lawyers typically encounter one of the following three responses from Chinese factories to our NNN Agreements:

1. Some Chinese companies refuse to sign. This is becoming increasingly rare. These are the companies that planned to steal our client’s technology all along. One of our China lawyers loves to tell of how he was representing an American company in a very difficult negotiation with a Chinese company on a technology licensing project that involved our client transferring trade secrets for an industrial process. After unfruitful talks that went on all morning, the Chinese side announced: “It is clear to everyone we are interested in this venture so that we can appropriate your client’s (the American company’s) technology. We have reviewed the documents and it is clear that he (pointing to our lawyer who loves to tell this story) will not allow us to do that. So let’s just end the discussion right here.” And that was the end of it.

Forcing the hand of the Chinese companies that have bad intentions from the start is one of the greatest benefits of a well drafted NNN Agreement. The Chinese company that will not sign an NNN Agreement is a Chinese company with whom you do not want to be doing business.

2.  Some Chinese companies engage in serious discussions about what they believe should be excluded from the scope of our NNN Agreement. These companies have read the NNN Agreement and they take it seriously. And because they take it seriously, they want us to modify it to reflect their own goals and realities. In some cases, the Chinese company’s concerns are unfounded. But, in other cases, the Chinese company will reveal that they already have technology of their own in the same area that they need to protect.

This is a positive result, for several reasons. If the concerns of the Chinese company are unfounded, this provides advance notice that the factory will be unreasonable and difficult to deal with. If the concerns of the Chinese company are reasonable, this lays the groundwork for discussions regarding each party’s technical concerns and these discussions often generate more fruitful joint development of existing technology.

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3. Most commonly, the Chinese side will execute the NNN Agreement and then treat the three obligations (non-disclosure, non-compete, and non-circumvent) seriously. This does not mean every Chinese company will suddenly abandon years of bad practice and begin behaving well. But this does nearly always mean that even if the Chinese company violates the NNN Agreement, litigation will almost certainly not be required. In most cases, the American company referring to the NNN Agreement coupled with a credible threat of litigation will be enough to induce the Chinese company to step back into line.

A well-crafted, China-focused NNN Agreement will almost always allow you to generate sufficient fear of litigation to greatly reduce the likelihood of your ever having to go to court.


Dan Harris is a founding member of Harris Moure, an international law firm with lawyers in Seattle, Chicago, Beijing, and Qingdao. He is also a co-editor of the China Law Blog. You can reach him by email at firm@harrismoure.com.

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