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How To Deal With Intellectual Property With Chinese Manufacturers?

  • 5 min read

chinese sourcing agents

NDA agreements have no value in China!

When working with Chinese suppliers, one needs an OEM agreement and an NNN agreement to protect your intellectual property.

NNN (non-use, non-disclosure, non-circumvention) agreement.

OEM  (Original equipment manufacturer) agreement.

OEM agreement

The Chinese manufacturers you deal with are called Original Equipment Manufacturers (OEM).

This is because they are the ones who manufacture the product, and you put your label on it. They do all the hard work and you just have to slap your label on the product to call it your intellectual property.

To ensure that the relationship between you and your supplier goes on smoothly, you need to make sure you have an OEM agreement that protects your interest.

The following are the clauses every OEM agreement must have.

Product and Specifications

You need to specifically define the product you want the supplier to manufacture on your behalf. If the product is one that has varying dimensions, the agreement should state the range of specifications you want to manufacture.

Forecasts and binding purchase/supply commitments

The OEM agreement should also make provision for minimum purchase and supply commitments.

Price

The OEM agreement should also have provisions relating to the price that obtains for the agreement. There can also be provisions for periodic increases in the price of products supplied. You should also make provisions for a discounted price if there is supply above a certain threshold.

Quality control

In addition to having your product manufactured, you need to make sure it is of superior quality. So you should include clauses that allow you access to the production site. You can choose to visit the production site with or without notice. Quality control also means you can inspect random batches of the goods for any defects.

Termination

Your OEM agreement should state conditions that will result in a breach of the contract. An example is a breach of your intellectual property by the manufacturer. You should also include terms relating to breaches that can be remedied by the OEM. An example is when the OEM supplies goods and they are not up to the required specification. The remedy can be that the OEM will either pay damages or remanufacture the goods.

Consequences of termination

You should have a clause that handles what happens in the event of a termination of contract. This can include things like the sale of completed products to you, the completion of partially completed products and their sale, the destruction of confidential information, and so on.

NNN agreement

Why you should use an NNN agreement ?

A lot of Western companies dealing with Chinese manufacturers usually resort to Non-Disclosure Agreements. However, this is a big mistake. A lot of unscrupulous Chinese manufacturers do not intend to disclose your proprietary information to third parties or the public. Rather, they intend to compete directly with you.

A lot of Americans discover too late that the Chinese manufacturers they chose to work with have started selling their products under a new brand, at a cheaper price. Technically, this is not a breach of the non-disclosure agreement, so you don’t really have any legal recourse.

If you want to prevent all this from happening, you can use a Non-Disclosure, Non-Use, and Non-Circumvention Agreement (NNN).

This agreement protects your intellectual property and also prevents the Chinese manufacturer from trying to circumvent you by invading your target market, poaching your staff, or approaching your clients.

What should be in your NNN agreement

An NNN agreement is only as good as its terms. So, if you have an NNN agreement with the wrong terms, you might as well be hanging yourself out to dry.

To make sure that you are well protected, the following are the terms you should include in an NNN agreement.

Duration

The first thing you should take care of in your NNN agreement is the timeframe for its application. You need to make sure that the agreement extends even after the contract has been terminated. Without adequate provision for time extension, the Chinese manufacturer could easily wait till your contract is over before trying to circumvent you.

Definition of Confidential Information

You should also include a list of confidential information you want to protect during the existence of your contract. The protected information can include things like; intellectual property, client list, technical procedures and designs, business plans, marketing plans, and so on.

Exclusive Contacts

If you intend to share a list of important contact with the Chinese manufacturer, you should include a clause that prevents them from contacting anyone on the list without your permission. This exclusive contact list can include clients, investors, agents, marketers, and so on. However, you don’t need to include this clause if you don’t intend to share contact information with the Chinese manufacturer.

Non-Disclosure Part of the NNN agreement should be allocated to making sure the Chinese manufacturer doesn’t disclose your proprietary information to third parties. This is because unscrupulous Chinese manufacturers can decide to leak your information to their agents. They could also “accidentally” leak your proprietary information to third parties. To prevent this, you should include a clause that the Chinese manufacturers will be held liable for any leaks by agents, or unauthorized third parties.

Non-Competition

This is also another major portion of the NNN agreement. This provision will ensure that the Chinese manufacturer doesn’t compete with you in any way in future, even after the agreement has lapsed.

Non-Circumvention

This provision of the NNN agreement will be to make sure that the Chinese manufacturer doesn’t try to contact any of your clients or contacts without your prior permission.

Non-Solicitation

Some members of your staff will be very essential to the creation of your products. This makes them the target of Chinese manufacturers who will want to poach them. By including this clause, you prevent the Chinese manufacturer from poaching any members of your staff.

Jurisdiction and/or governing law

A lot of Western/American companies do not have a good idea of the intricacies of the Chinese legal system. As a result of this, many of them decide to make the contract’s jurisdiction the familiar territory of the US legal system.

If you do this, you are literally shooting yourself in the foot. This is because judgments gotten in the US can’t be enforced in the China as there is no enforcement treaty between both countries. Even if a Chinese judge decides to look at the merit of your case, it will still be from the standpoint of Chinese law. The only time it would be reasonable to make the jurisdiction of the agreement the US is when the Chinese manufacturer has assets in the US that you can seize.

Liquidated damages clause

A lot of Western-style NDAs make use of injunctive relief if there is misconduct on the part of the Chinese manufacturer. An injunctive relief is one where the court instructs the offending party to stop carrying out its breaching acts. This becomes a big problem if you make the jurisdiction for the offence the US. While you are struggling to enforce your US injunction in a Chinese court, the manufacturer is busy invading your market. By the time all the dust settles, it might already be too late.

What you can do instead is to include a clause for liquidated damages. With liquidated damages, the Chinese manufacturer will pay a penalty for any breach of agreement. The mere presence of this penalty clause will make most Chinese manufacturers stay in the line.

However, you should make sure the penalty isn’t too high. It is meant to compensate you for your loss and not to punish the manufacturer. If your penalty is too high, the Chinese manufacturer will think you are a newbie. When this happens, it might refuse to continue dealing with you based on the fear that you might be difficult to work with.

This might sound very complicated, and if you’d like some help protecting your intellectual property, we’re happy to assist you.