Imagine sending your drawings, blueprints and samples to a Chinese factory, only to discover later that your competitor is selling a suspiciously similar product. It’s a nightmare scenario for anyone manufacturing in China.
According to the OECD and the EU Intellectual Property Office, China was the source of 45% of all counterfeit goods seized worldwide in 2021. And one of the main ways to make sure you don’t become part of that statistic is to sign an NNN agreement with your factory.
What Exactly is an NNN Agreement?
In plain English, an NNN agreement legally stops a factory from copying your product, sharing your designs with third parties, or going behind your back to sell directly to your customers. Each “N” in the acronym covers a different way an untrustworthy factory could exploit you:
- Non-disclosure: They can’t share your secrets with anyone else. (This is similar to a standard NDA).
- Non-use: They can’t use your designs for anything other than making your product.
- Non-circumvention: They can’t bypass you to sell directly to your customers or partners.
Why a Standard NDA will NOT protect you
Many people ask us if a standard non-disclosure agreement (NDA) can perform the same function as an NNN agreement. In short, it cannot.
While it is true that an NDA stops a factory from sharing your information, that’s not really the main risk in China. Once a factory has your tooling and moulds, the bigger danger is that they’ll use your designs for other buyers or bypass you to steal your customers. Only an NNN offers protection against those two risks in particular.
That’s not to say an NDA can’t still be useful for early discussions, but the moment you share detailed technical information, you need an NNN.
What Makes an NNN Agreement Enforceable in China
There’s a big difference between having an agreement with a factory and having one that’s actually enforceable in China. There are a few things you’ll need to do to make sure your agreement will be upheld in a Chinese court if there’s a dispute.
The first is to be ruthlessly specific. You’re going to want to define exactly what the agreement protects. What products are covered? What confidential information is involved? Are there any restrictions on the factory making similar products for other customers? And as with any contract, vague wording is going to leave room for disputes over what the factory was allowed to do.
The agreement should also ban subcontracting without your written consent. Many factories in China will subcontract parts of their manufacturing process to other factories, often without you knowing. If that happens, your agreement won’t cover those subcontractors.
You also need to confirm which moulds or tooling you own or are paying for, and that they can’t be used for anyone else. Finally, state how long the obligations last, and require the factory to return or destroy your materials when the relationship ends.
Governing Language and Law
In the agreement, you’re going to want to clarify that it’s governed by Chinese law. If there’s a problem, you want to go after the factory in the jurisdiction where its assets and company are actually located. If you go to a U.K. court, for instance, it’s very unlikely that you’ll be able to enforce any action against a Chinese factory.
And because it’s governed by Chinese law, you’ll also need to make sure the agreement is written in both Chinese and English, with the Chinese version controlling in court. A Chinese court would prefer to deal with the case in its own language, and this reduces the chance of an English translation being misrepresented in court and you losing your case because of it.
The final point on governing law and language is that you’ll want the agreement to state that arbitration is preferred in case of a dispute. You can do this through the China International Economic and Trade Arbitration Commission (CIETAC). The reason you should do this is that the proceedings can run in English, and the awards are enforceable across borders.
Reasonable & Enforceable Damages
Actual losses from IP misuse are difficult to prove, so the agreement should set a fixed damages figure in advance. That figure needs to be appropriate. You can’t just put a gazillion dollars on there, because if there’s a dispute and the court thinks the amount is punitive, it will reduce it, possibly to a figure you’d be really unhappy with. You’ll need a lawyer to help you sort that out.
Check Exactly Who You’re Signing With
A common mistake is signing the NNN agreement with a trading company or affiliate rather than the factory itself. If there’s a dispute, the factory can then say it never signed an NNN agreement. So when you’re preparing an NNN agreement, check your contact’s business licence to make sure they are the factory. The agreement needs to use their exact registered Chinese name, and you need to make sure they stamp it with their official registered company chop, not just a signature.
Common Mistakes When Making an NNN Agreement
By far the biggest mistake is sharing detailed product information before an agreement is signed. This often happens at the quoting stage, when buyers send designs to get a price. But once those materials are out, it’s legally harder to bring them under an agreement signed later. So the No. 1 rule is to get the NNN signed BEFORE you send the factory anything.
The second mistake is an agreement that binds only the primary supplier and not its subcontractors. You either need to ban subcontracting in the NNN agreement, make sure the agreement covers subcontractors, or sign NNN agreements with the subcontractors themselves. The best option depends on how many subcontractors are involved, how critical they are to the process, and so on. This is an area your lawyer needs to look at carefully for your specific product.
Finally, some factories will refuse to sign a reasonable agreement or will want to make edits to it. If they do, make sure your Chinese lawyer checks the implications of those edits. And it goes without saying that any factory that refuses to sign your NNN agreement before the partnership goes ahead should be considered a supply chain risk.
What an NNN Agreement Can’t Do
An NNN agreement is a powerful tool for protecting you against the supplier that signs it, and a well-drafted agreement can also cover the supplier’s affiliates. But an NNN won’t stop unrelated businesses from copying your product.
For this reason, we’d also recommend registering your intellectual property in China. Think of it this way: the NNN agreement protects you against misuse by your supplier, while registered trademarks, patents and design rights give you legal options against other businesses that might infringe on your rights.
It’s worth pointing out that China uses a first-to-file system, so whoever registers a trademark first usually owns it, regardless of who used it first. There have been many cases of factories, agents and distributors registering foreign brands themselves, then blocking the real owner’s goods or demanding payment to hand the mark back. Registering IP in China can take up to a year or more, so this is something you want to do before you approach any factories, not after.
Enter the Chinese Market Safely with Kinyu
An NNN agreement and registered IP are powerful tools for protecting your product and your brand. But without oversight on the ground, people could be violating those agreements without you knowing. We always suggest complementing both with either a sourcing office or an experienced team on the ground in China. That way you can verify suppliers, manage factory relationships and monitor production, and catch problems much sooner than you could remotely.
We can help set up this kind of on-the-ground infrastructure for you and make sure you’re hiring the right people to oversee your supply chain. If you’re preparing to share designs with a Chinese supplier, get in touch with Kinyu to discuss how to protect your product before production begins.
