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China IP: Is your barn door open?

by Dan Harris 

 

Shut the barn door before the horses or IP have left.

Shut the barn door before the horses or IP have left.

I was quoted as follows in today’s Financial Times in a Lucy Hornby (a truly terrific China journalist, BTW) article entitled, US warns China over IP risks:

Dan Harris, a lawyer specializing in Chinese business at Seattle-based HarrisMoure, says that in most cases, the foreign company’s IP is stolen by an insider.

*    *    *    *

“Hack attacks are usually not even necessary,” says Mr Harris. “Why go to all the trouble of trying to bust in a barn door when so many American companies still just leave it open.”

How do American companies leave their “barn doors” open and how can they shut them?

This post cannot explain all of the ways each company can and should be shutting its own barn doors both because that would take a book and also because each company is different. So I will instead focus on what I see as the biggest area of slippage: the initial meetings when the US company is euphoric about its China opportunities. I am focusing on this because that is where my firm’s China lawyers most often see IP go out the window.

In How To Protect Trade Secrets when Meeting Potential Partners, the China IPR SME Helpdesk does a nice job providing a short explanation on the basics of what foreign companies need to be doing when discussing deals with Chinese companies that involve trade secrets. The SME Helpdesk starts out by recommending that the foreign company be careful regarding the information it provides to the Chinese company before there are any written legal protections in place:

  • Give only a general overview during your meeting and take care not to give away any proprietary information during the initial meetings
  • Share only rough sketches of designs, plans or strategies so that the business partner will not be able to recreate your business/project
  • Invite potential partners to your business premises to see any of your work instead of sending them something
  • Know when to walk away and do not be afraid to do so

The article then recommends securing “non-disclosure agreements (NDA) so that the duty to maintain confidentiality is made clear.” It notes that NDA Agreements “are widely used in China and well-accepted by Chinese courts, so a Chinese third party that is unwilling to sign an NDA is not likely to be a trustworthy potential business partner and should be treated with caution.” This is completely true. It then states that ‘sometimes an NDA on its own is insufficient to protect your IPR, especially for companies in the manufacturing industry or companies sourcing their products from China. Under these circumstances, a non-disclosure/non-use/non-circumvention agreement (NNN) may be used.” This is true more than sometimes; this is true nearly all the time.

A couple years ago, in Your China NDA is DOA. Again, I explained how American companies consistently and continually get themselves in trouble in China by using off the shelf American-style Non Disclosure Agreements (NDAs):

Just fired off the same email I’ve probably sent at least two dozen times. It was in response to someone who just realized that their Chinese manufacturer or potential manufacturer had used confidential or trade secret information.

Here’s the email to me (changed to get rid of any identifiers):

I had my Chinese factory sign a non disclosure agreement and I just learned that they copied my product and are selling it to two of my competitors. I am still buying product from them. What should I do? I want to sue them.

Here’s my pretty much standard response:

I suggest you send me a copy of the NDA that your factory signed. If it is in Chinese and provides for litigation in China and was sealed/chopped than you are likely in quite good shape. If it contains a provision making crystal clear what the exact dollar/RMB penalty is for a violation, all the better. But if you just used an off the shelf American version of an NDA, than doing anything on this would almost certainly be a waste of time. If your NDA provides for suing in the United States, that will be even more true. I should also note that if it just provides for the manufacturer not revealing trade secrets (as opposed to selling your product to others) your likelihood of winning a case will be reduced. In the meantime, I suggest you read the following about China NDA/NNN Agreements:

Almost without exception, we hear nothing further, which is fine since it is always easier to deliver bad news by email as opposed to by phone.

I sent out two of these emails in just this last week, including one to a company that called me before it went to China and to whom I was very clear that it needed an appropriate Chinese language NNN Agreement before it went. After their return from China, they sent me an American style NDA that their very local lawyer wrote for them before they left, along with an explanation along the lines that “we know this is not exactly what you would have wanted for China but we figured it would be better than nothing.” I wrote back and explained that it was, if anything, worse than nothing because it requires any lawsuit to take place in the United States — which is a clear tip-off to most Chinese companies that they can do whatever they want with impunity. For why this is the case, check out If You Could Have Only Two Clauses in Your China Contract, What Would They Be? Part II. This company is from deep in farm country and it was this company that I had in mind when I used the barn door analogy.


Dan Harris is founder of the Harris & Moure law firm, a boutique international law firm focusing on small and medium sized businesses that operate internationally. China is the fastest growing area for the firm. Dan writes ChinaLawBlog.com as a source of China legal and business information.

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