China NNN Agreements: Do Them Correctly or Walk Away

By Dan Harris


By a wide margin, the most popular China contract my law firm writes is the China NNN Agreement. These are basic and important agreements no matter what your industry. We write these to protect against disclosure, competition, and circumvention. For more on what goes into our China NNN Agreements, check out our most read post, imaginatively entitled China NNN Agreements.


Unfortunately, not everyone uses my law firm’s China lawyers for their NNN Agreements and I say this for reasons beyond our not capturing the fees for those. I say this because our China attorneys receive a steady stream of emails from Western companies that want to retain us to sue on their existing NDA or NNN Agreement and after we review those agreements, we decline to take their case because their agreements are just not good enough. In fact, our firm has never taken on a breach of an NDA or breach of an NNN because we have yet to see such an agreement written by someone else that was strong enough to warrant litigation and because nobody has ever sought to sue on any of those we wrote.


Note. I am not saying that no other law firm can write a proper NNN Agreement for China. I am not saying that at all. I am merely saying — not surprisingly — that in situations where a Chinese company has signed an NDA or an NNN Agreement and then someone wants to sue on it, we have not liked the agreement on which they want to sue. Get it?

What then is so wrong with the NDAs and the NNNs my law firm sees and does not like? All sorts of things. The most common problem is that the agreement was not written for China at all. It is just a Western-style NDA used either as-is or cobbled together to try to look like it is for China. For why this does not work, check out Why Your NDA is WORSE Than Nothing for China. Probably the second most common problem we see is the situation where the Western company has an NNN that is 98 percent good, but then has a bad provision through which its Chinese counter-party can drive a truck. In these situations, I ask the Western company how the horrible provision came about and invariably their response is that the Chinese company would not sign the NNN Agreement without it and nobody told them how bad it would be for them to put that provision into the NNN Agreement.


WARNING. There are all sorts of ways a Chinese company can quickly and efficiently eviscerate a perfectly fine NNN Agreement with what can appear to be a minor change. For this reason alone, it is always a bad idea to get an NNN Agreement from your lawyer and then not go back to him or her with any proposed changes. When any of my firm’s lawyers draft NNN Agreements we make very clear that we see our role as handling the NNN transaction from beginning to end. See e.g., China NNN Agreements: How to Get Them Properly Signed and Executed.


I thought of all of the above recently when communicating with one of the best and most experienced attorneys I know. We were discussing “the old days” in China legal and how different they were and then we started talking about how in so many ways little as changed. On that front, this lawyer wrote me the following regarding NNN Agreements and IP theft [stripped of any identifiers and cleaned up substantially]:

Back in the 90’s I worked on a deal with a Chinese company that was entering the cellular phone business. The other side was ___________[Company X] from the United States. Company X insisted on a well-crafted, highly effective NNN Agreement. The Chinese side refused to sign this though, so Company X went home and said it would not come back until the agreement was executed. I asked the Chinese side why it would not sign the agreement. They said: “We won’t sign because we are doing this project to acquire the technology for ourselves. We are not going to disclose to someone else.” That is when I learned that non-use is more important than non-disclosure in these agreements. I told the Chinese side that if they didn’t sign Company X will not be back. The Chinese company eventually signed, but I also was sure to tell Company X that from the moment the paper document was signed, it would need to monitor what its Chinese counter-party was doing with its IP. Nothing really much has changed since those days except Chinese companies have become far more clever and they no longer  make it clear from the start what they are planning to do. But as you and I both know, that does not mean anything else about these deals and what is needed in these agreements has changed.

Yup. What are you seeing out there?