A typical NDA does not protect from the real risk when sourcing and manufacturing in China.  It is not the exposure of confidential information, but the appropriation and misuse of confidential information to create similar products to compete against you.  From a legal and practical perspective, NDAs are not recommended when dealing with Chinese companies as it provides no real protection.

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Maxguard’s comprehensive NNN Agreements include these essential clauses to provide maximum protection.

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The Non-Disclosure Clause

The non-disclosure clause is similar to that of a Non-Disclosure Agreement (“NDA”) you may see in western countries. Its purpose is to stop trade secrets and proprietary information from being disclosed to unauthorized third parties or made public. The non-disclosure clause states what information is protected and who is allowed to receive and view this information within a group. If there is an infringement made by any member of the group, then the receiving party that made the disclosure should be made fully liable.

A well-defined non-disclosure clause should also include a disclosure-by-approval process to prevent additional risks. It is common suppliers use outside technical consultants and sub-contractors in the same industry to fulfil their duties. A disclosure-by-approval provision can allow the disclosing party to better manage who receives the proprietary information and deter third parties associated with the supplier from taking unfaithful advantage of the information.

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The Non-Competition Clause

The non-competition clause states the receiving party who signs the agreement can’t use the protected information to engage in or be involved in any business that might compete with the disclosing party.  In an event the receiving party is doing the same business as the disclosing party, a conflict of interest can easily arise. The receiving party may have the motivation to gain more market share through use of the proprietary information. The non-competition term ensures the receiving party, by themselves or in conjunction with any parties, are not allowed to use the products or ideas to compete with the disclosing party and can’t sell its products or services to its competitors.

It’s important to note, in some NNN agreements, a non-competition clause exists as only an implied provision within a non-use clause defined through what constitutes proper use of the information.  This weakens the protection of the disclosing party by not directly addressing the methods of competition.  Therefore, it is critical to know not all NNN agreements are created equal.

 

The Non-Circumvention

The non-circumvention clause states the receiving party is not allowed to bypass the disclosing party and reach out to their customers directly. In practice, a supplier can easily figure out how the products or services are distributed and know which markets their buyers are selling to.  The supplier can be motivated to go directly to their buy’s customers and sell at a lower price while the buyer’s customers also get a lower price.  Win-Win right?  Not for you.