China NNN Agreements: Do Them Correctly or Walk Away.

My law firm writes more China NNN Agreements than any other contract. We have been drafting 5-15 of these a month for more than 15 years. These are basic and important agreements no matter what your industry. We write China NNN Agreements to protect against disclosure, competition, and circumvention. For more on what goes into our China NNN Agreements, check out our most read post on China NNN Agreements: imaginatively titled 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 this work. 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.

What is wrong with the NDAs and NNNs my law firm sees that have been written by other lawyers? All sorts of things.

The most common problem is that it 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 foreign 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. When I ask the foreign company how the horrible provision came about, their response is invariably that the Chinese company would not sign the NNN Agreement without this particular provision and nobody told the foreign company how bad it would be for them to put that provision into their NNN Agreement.

There are all sorts of ways Chinese companies can quickly and efficiently destroy 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 them with any proposed changes. This is also why working with a template China NNN Agreement is so often a disastor. When we draft NNN Agreements the China lawyers at my law firm see our role as handling the NNN transaction from beginning to end. We charge a flat fee for our NNN Agreements and that flat fee includes revisions.

The third most common mistake we see with NNN Agreements is getting the Chinese company name wrong in Mandarin. If you do not get the name of your Chinese counterparty written correctly in Chinese, there is a very good chance your NNN Agreement will be viewed as being completely worthless. The Chinese courts generally will view your contract as worthless. More importantly, if your Chinese counterparty will view your NNN Agreement as worthless and will have no compunction about breaching it.

We have also been seeing a huge increase in foreign companies paying Chinese lawyers (and fake lawyers) to draft an NNN Agreement that the Chinese lawyer drafts to greatly favor the Chinese company. The fees the foreign companies are paying for these horrific NNN Agreements are so low that we are convinced the Chinese lawyers are getting paid a lot more by the Chinese company to “throw the game” in favor of the Chinese company. See China Contract Drafting Scams: From Bad to Much Worse

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 little has changed. This lawyer wrote me the following regarding NNN Agreements and IP theft:

In the 90’s I worked on a deal with a Chinese company entering the cellular phone business. The other side was from the United States. The U.S. company insisted on a well-crafted, highly effective NNN Agreement. The Chinese side refused to sign this so the U.S. company 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 the NNN Agreement, the U.S. company would not be back. The Chinese company eventually signed, but I also was sure to tell the U.S. company that from the moment the paper document was signed, it would need to monitor what its Chinese counterparty was doing with its IP. Nothing really much has changed since those days except Chinese companies have become 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 about these deals and what is needed in these agreements has changed.