Learn all about China NNN agreements… Should you protect your product? [Podcast ep.038]
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Simple. Free. Advice. No Obligations.
Welcome to the Global tqm.com podcast where we teach ecommerce business owners how to source the best products from China, negotiate with Chinese manufacturers, navigate Chinese business culture and grow your business to seven figures and beyond. David Hoffman is the founder and CEO of global tqm.com, your team on the ground in China.
Hi, everybody. Good day. And welcome to this week's podcast, where you get to meet your team, your office on the ground in China. And today, I'm very happy with Joyce here joining us. Hey, Joyce.
Thank you. How are you?
Very good. Thank you. So Joyce, I know you do a lot of our discovery calls and you speak a lot of our clients and you get like this recurring question on nnn agreements, and India Neiman's. And you asked me, could we do a podcast dedicated to that? I think it's a great idea.
Yeah, we always get some questions about it. Because obviously, there's always concerns about like getting their product copy and stuff like that. So I thought it would be a good podcast.
Excellent. I think you're absolutely right. So I prepare the deck, we'll jump straight into it. And yeah, I think for the benefit of the audience, keep it interactive. If you've got questions, just interrupt me. And yeah, hopefully, we'll get everything covered.
So the first thing, guys, what we're going to cover today in in, in, in agreements, his use cases for NNN agreements, when do we want to use them?
And in an agreement versus NDA agreement? And what is the difference? Why do we actually sign them? And the most important question is, are they effective, right? We don't want to just be signing something that's not effective.
And we want to be realistic about the effectiveness. The other thing is, are they enforceable, right? I think people don't think about this a lot. But you really have to think when you're signing something, are you going to enforce it?
And if you do need to enforce it? How will you do that? How much time to spend on them? That's an interesting question. I'm going to save therefore, when we get to that point, should they be in English? Or should they be in Chinese? You may think you know the answer already? And are there better ways to protect your IP?
And are you most important deed being 100% responsible, you're probably wondering what that means. But I'm going to tell you right at the end, you have to stick around to understand what that means. But don't miss out on that.
Because I do think of any type of agreement and especially in in in agreements is you've got to be 100% responsible for the whole process of communicating and sharing information. So let's start with use cases, for in in in agreements.
Typically, you want to sign it in, in an agreement to protect your design, to protect your moulds, or to protect your packaging. That's kind of what I call the first step or reason to have an engineer in agreement. And then you also want to have an end in an agreement to protect original ideas.
Maybe you've got a great idea for something, and you need to talk to manufacturers about it, you need to protect them, you want to protect your brand and most important you want to protect Payton's. Now, you might think patents are already protected if they're patented. And yes, they are.
But you know, when you are discussing the details behind patents, there's a lot of disclosures you have to make around the technical parts behind that patent. So it's really important to have an in in agreement for these cases, then, most importantly, you know, is just to generally keep information confidential and safe, right. So maybe you don't have a design mould an idea or something that particularly requires in an agreement, but you still want to just generally have an understanding of keeping information confidential and safe.
And there could even be simple things like your order details, the price you're paying who your customers are, if your manufacturer finds that out, and so on and so forth. And then of course, you want to just make sure that your factory is clear and aware not to disclose your information, not to deal with competing products or items and maybe a conflict of interest. We'll talk about that little bit more detail. And most we're not to copy your product right.
Now, obviously, you've got a lot of questions around this. But just fundamentally these are the use cases for ending in agreements. You don't need an agreement. If all these cases don't apply to you. You may very well find one for one case just to keep information confidential and safe. So it is generally considered a good practice. Click For those of you don't understand an NNN first NDA, you'll mostly be familiar with an NDA, which stands for a nondisclosure agreement. And that's where third party agrees not to share your information or disclosure information to anybody else.
We generally in China, not only China, but everything we talking about here today, please keep in mind is in the context of developing products in China, and sourcing products from China, from Chinese manufacturers. So if you keep that context clear, a lot of what I'm saying, we'll make sense. There are other contexts outside of manufacturing from China, that you might disagree with some of the advice, I'm going to give you some of the practical thoughts I'm going to share with you. So please keep that in mind. Then.
So what is an NNN agreement and nnn is nondisclosure, non compete and non use? Alright, so you can see that it covers three parts, as opposed to only one part that NDA covers. Now, as we talk in progress more in this discussion, I do want you to understand that there are many cases where NDA is satisfactory. And it's not reasonable to expect somebody to sign it NNN agreement.
And we'll cover some of those topics in here. So why do we sign them? I think we've covered that a little bit. But more importantly, is the use cases are different to the reason right? There are reasons to sign this.
And the one is very important to set expectations. Expectations are basically simply agreements between you and third party or a manufacturer of exactly what the rules of engagement are around confidentiality, non compete, non disclosures, non use, things like that.
One of the other reasons we sign them is to judge third party responses. Now, keeping in mind this is in context of manufacturers that you don't know, and you're trying to develop and build relationship with. One of the things I look for, and it's a little practical tip, you could call it is how all third parties responding to you wanting them to sign in an L or an NDA.
And when I say that, it might be good, it might be bad, and it's very often the opposite of what you expect. So one of the things I look for is somebody's happy sure send me or NNN agreement, and it's super willing to sign it. It's too easy.
That was too easy. It means I might not be clear on the expectations, or there might not be taking it seriously enough. I prefer it when somebody comes back and says, I'm sorry, we can't sign in for the following reasons. Now, a lot of people said, but that's crazy. Why wouldn't they sign it in an air and I can't deal with them if they don't. And what I want you to think about for a minute is if they're not willing to sign it, because they scared it might be a problem.
The first thing that sticks out for me is that they respect it. And that's really important because you want to judge their responses, because there's a lot of other factors we'll talk about in terms of relationships so that this is going to be enforceable or whether they'll honour it or not, and, and we'll discuss it and enforceability. But the way they respond to signing in in agreement for me, is a tell sign on how seriously like take it in an agreement, how likely they are to honour in an agreement.
And you know, that's the opposite of what you expect. If it's too easy, I would be a bit more hesitant and precautious thinking, have they read this all they're clear in what it means are the expectations set correctly.
Whereas when they have problems around it, rather than jumping ship, I tend to say to myself, Okay, I'm dealing with somebody who is serious about what they're doing, who's willing to honour their commitments. So let me rather work through it with them.
Right, because often you'll find in understanding where they see a potential conflict is probably the areas you want to focus on. And nine times out of 10. Just talking that through and identifying where there seems conflict areas. You could clarify the expectations, you can include those points in the document, at least you know, where they stand, they know where you stand, and probably you've got a relationship where there's integrity behind this document.
So that's, that's one way I want you to think about judging the third party and just generally it is a show of good faith, right? If it's something very simple you're doing it's just about keeping information private, and it's not particularly complex or on patents or or designs, then it is just generally still shows a sign of good faith, rather than rather do it then not do it, if that makes sense. So, Joyce, I'm talking a lot, if you got any questions they have a lot to cover.
Well, one thing I do want to ask is that like, when do you actually bring them up? Because like, I know, you show like, show your expectations is it before? Like you showed them products and designs and stuff like that? Is that like, yeah, so is it? The beginning? I guess?
So. It but I think it's based on the circumstances, Joyce, so I wouldn't rush into every relationship saying, hey, please sign on this, you know, piece of paper before we talk to you. It's kind of a think about like, any relationship, right?
Sometimes you got to get to know each other first. Yeah, learn about each other, get some exchange information and details, and then you move into more of a contractual relationship.
Now, why I said circumstantial, is if you have something very highly patented, or very special design, and they really have a lot of IP to protect there. Yes, I don't, I'm not suggesting you go disclose that first.
But, you know, I would do a lot of pre checking and pre discussions with the manufacturer first, explaining that we have something to develop that will require an NDA. But let's first discuss what you do what you're capable of what your willingness is, is get some general quotes of production.
And just feel that okay, these are people I can work with, and then move.
Yeah. Does that make sense?
Right. So, of course, the next question is, are they effective?
Yeah, definitely. Yeah.
And and in short, the answer is, yes, they are effective. And that requires a little bit more explanation. That 10% effective.
Alright. Now, I'm not saying oh, they 10% effective, you shouldn't do them run away, and everyone's gonna cheat you and don't bother No.
Remember what we said before, it is good faith, it is important to set expectations clearly. But we have to be realistic, right. They are effective, they can be enforced. But there's a lot of factors to understand around the effectiveness, the enforceability, which we're going to get into.
So when I say it's 10% effective, what I'm really saying is, of all the things you can do to protect your IP, and there's a lot, this falls in like that 10% Or even lower than 10% bracket of the overall way you're going to protect IP.
Does that kind of make sense?
Yeah. So don't take 10% as don't do it. Take for the reasons we discussed, do it. But we're going to discuss about being realistic and the responsibilities that come with this. So what I'm going to move on, are they enforceable.
So that leads us to the next question, and I get asked this a lot. So, in short, yes, they are enforceable, if they're well drafted, if the clauses are clear, if the breach is clear, and there's lots to discuss around that. But remember, the enforceability comes at a time and comes in it comes at the cost of time, okay.
And so I want you to think about is to enforce it, you're going to spend weeks months with information with lawyers, with courts with arbitration. So you've always got to think practically, what the distraction takes out of you, from your business from your other things that you're doing is, is that worth the time, there's a cost of time,then, of course, there's a cost of money, right?
There's always a monetary cost to enforce anything like an NDA or in an end is going to require legal fees, locally, internationally, maybe translation fees, there's a lot that goes around. So what I'm not telling this to scare you away from it, I like to be practical about things.
So don't sign it because you think, Oh, well, if I do wrong, I'm going to enforce it. Nine times out of 10, I can tell you from experience of 20 years in China now, that nine times out of 10 most people when they're confronted with the issues will walk away from trying to enforce an nnn because of time and cost, not everybody and we'll talk about that a little bit.
But it does depend on the size and scale of your business. But most people nine times out of 10 I can tell you hands down when they start getting involved in the time and cost eventually decided to just not worth it and then move on. So keep that in mind. And that's why I bring it down to the 10% category of protecting IP and getting things done. Right.
Yeah, makes sense.
Yeah. And then what really matters is what is the remedy brought is a quantifiable. So if you want to enforce something, and you've got general terms that says, Oh, we can see for legal fees for damages for this for that, who's going to quantify that and agree on that, it's too hard, it's going to be a debate is going to take forever, you will get nowhere.
So remedy should be simple and clear, right? If there's a breach, you pay me $1,000. For example, if there's a breach, you pay me $100,000, for example, if there's a breach, you refund me XYZ, right? Remember, everything's really quantifiable, because for anybody getting into an agreement like this, it's got to be realistic, right?
Nobody's going to do something where they earn $5,000. And the risk is $500,000. For confidentiality, right. It is a risk reward balance. And we'll talk about that. And that also leads to be strikes. The next point here in understanding enforceability is your significance. Right?
What I mean, when I say that is, if you're going to enforce it, you have to be meaningful to the supplier as well, for them to honour it, you know, we get a lot of clients that come to us, they're going to buy 200 pieces of a product, maybe it's a unique design, and they're putting so much weight on to this NDA agreement or in an agreement.
And you have to think to yourself, are you significant enough to the manufacturer, now, if you're a big brand, like Nike, of course, you're going to sign it in, in an agreement, of course, they're going to enforce it, of course, you're going to be your significant to the factory, they're not going to want to breach it, they're not going to waste their time trying to do it.
And your Nikes obviously, an extreme example, but there's a lot of brands that are doing a million dollars out of China, and they probably significant enough to the manufacturer. So I do kind of always say with enforceability is really boil it down to your significance with the factory, because the time cost and the monetary cost is normally very easy to figure out when you look at your significance, right. If you buy X Y Zed, there's not going to be worth your time either to find something like that.
So when it comes to enforceability, I like to be practical and realistic. Which leads me ready to the next point how much time to spend on these nnn agreements. And I raise this because I've seen some people spend 234 weeks trying to negotiate the terms of the in in in agreement.
And I've seen some people spend half a day, which is fine. Now, generally speaking, I say if you know what your intentions are that we spoke at the beginning, you don't want to spend that much time on it.
Because if you're haggling over little points on it NNN agreement, that means there's an inherent distrust, number one. Number two, is I've tried to do as little as possible, which kind of answers that and amending the agreement.
So it is a distrust, which is fine. Be it's very rare that those little details in in in in agreement, ever become that material or that significant. Because most of the time, if you look at the enforceability points I made earlier, you're never going to get there. Right.
So I say be practical, understand your significance, understand where you're at, in terms of volume in terms of sourcing, in terms of affordability of time and cost fodder in an agreement. And keep it in perspective, that well, if this is going to also be 10% effective in my overall plan and strategy. It's probably not worth spending three weeks on a gym losing valuable time and getting to market.
Now, that does not apply to big brands, people are doing large volume out of China. But those negotiations normally go quicker anyway, because the manufacturers are, you know that they're putting the correct resource on it. And then, of course, a very real issue often faces What if a factory won't sign an NDA until there's a PO? And that's always a conflict, right?
Because they, you can't disclose information until the beforehand so they can't You can't agree on a purchase order and a process of disclosing that information. So you know, that's where and we'll talk about later, you want to work with the factory to a point where at least you've both got some kind of idea of what certain things are going to cost.
There's a relationship here that's worth moving forward on. And then you may very well have to raise a purchase order. It says subject to final pricing subject to a few things. But
you need clauses on your purchase order you need, right,
exactly, yeah, Joyce. That's right. So you would have clauses so and you give that purchase order subject to signing NNN agreement subject to final processing.
Because presumably, at this point, you haven't disclosed that information yet, and subject to a few points, and that's okay. But it's very rare, you have to get to that point. Or kind of feel like, you should get far enough where you know, this is a manufacturer you can work with, sign an NDA lead into a final quote and move to a PO.
But when you get stuck like that, you know, you deal with a case to case on its merits. And there isn't a clear answer, it really depends on who you're dealing with, and what else you know about them. And that really comes down to just making a realistic judgement of the relationship.
And then you decide how you want to move forward. What do you really know about the relationship? Right, you know, we spoke about effect is $1 Sign in, in agreement? A lot of people run away from that, and they go, Well, why, you know, probably they manufacturing something similar.
Maybe they've got their own IP, that might be a conflict. Maybe they've had problems before. Maybe they just really respect it. Oops, sorry. So he's talking, maybe they respect in and and so that's where I go really dig into the relationship and figure out who these people are, why they're feeling this way. Because it may actually very well turn into a positive.
And, of course, is a question to ask yourself, do you even need one? Now, we did say this is a show of good faith. So it's nice to have one, you might want to consider, look, if I'm buying 200 pieces, it's really just a simple design, that is probably a lot of other things on the market, similar, but you just love it so much that you want to have it in in agreement, you know, maybe take an introspection and decide, based on what I know, now, do I even need one.
And we're going to talk about that a little bit more about the other ways to protect IP and what's also more, what makes up the 90% of if, if the NDA is a 10%, and maybe even look here at downgrading rights, the factory won't sign one, maybe the internet is too onerous for them, maybe I'll sign an NDA.
And you know, you have to make that judgement call and just how important your intellectual property really is. And then, of course, finally, you make a call to move if they won't sign anything, finally, or won't sign a provisional purchase order subject to XYZ. But it really is circumstantial on a case by case. But these are generally the way I look at these things in the way I try to come to rational decision on that. And again, as we said, treated as a show of good faith.
Even if it's not that important or significant in your ticket product category, and maybe downgrade entered into NDA if it's just a show of good faith. I think that's perfectly reasonable. Whoops, let me go back are sorry. So should you do it in English or Chinese? And this I get asked a lot. And there's not one answer to this.
So firstly, for you, obviously, English is better, because you don't read Chinese, you don't speak Chinese. So signing, sending in Chinese is not actually going to help you at all, because you could be signing anything. Right? So you need to know what you're signing. So unfortunately for you signing English is the best. If you plan to enforce it, Chinese is probably the best. Because when you do take someone to court in China or arbitration in China, they generally use Chinese as the language, the legal language. And what that really means is if you started an English, and you do need to enforce it, you'll have to get it translated and notarized to deal with it in the court in China.
So again, that becomes a cost you'll spend a couple of $1,000 having doing that. So you could do an English version. You could do an English and Chinese version and hope that the Chinese matches in English and have a clause in their sign. In the case of litigation, the English version prevails.
But I can tell you if you go to court anyway, the judge will tell you to get the English version then Translated again and notarized into Chinese in order to enforce it. And translations cost money. So understanding this will help you kind of realise it's maybe not as big a deal as you think, on the principle that you're most likely not going to enforce it. Go with English, if you're comfortable.
If it's a different scale of project, that you really think there's a possibility to enforce it, then you know, I would actually go for English and Chinese, that's generally the way I look at it. And again, it comes back to your significance matters, right?
Be realistic with yourself, look at the volume you buy, look at the designs you're making, and just, you know, take a deep reflection on how easy is it to modify that design slightly? How easy is it? How many similar products are there in the market that a quick Google search might show or disclose?
There's just so much out there anyway, that there's not a lot of confidentiality in your product anyway. So keep those things in mind. So obviously, that brings us to the most important part is, are there better ways to protect your IP?
Now, I want you to think about this a little bit holistically, right? There isn't one miracle answer that says, Oh, this will protect your IP, it's the sum of everything is what protects your IP. And that's the sum of things like, I've ended up going to the slides, the sum of all your activities, that's really what ends up protecting your IP and giving you the competitive edge.
So for example, yes, you can have an NDA agreement. But have you thought about document control, right? If you want to enforce a high level, in an agreement with lots of controls, lots of restrictions, you know, it then also becomes your responsibility to control the way you distribute documents, right, that means a coding system on documents version control on documents, that means marking documents as private and confidential. So they fit into the scope of the nnn agreement.
You know, you can't just generally, you know, if you try out every single thing I send you private and confidential. And then it's actually not, but in this one is, you can see how the lines can quickly become blurred.
It's very, you can very easily mess things up, and then confuse yourself too
exactly and then you set some precedents. And then it wasn't clear that this was a confidential document. And that one isn't a confidential documents. So you can see how it starts getting messy just relying heavily on just the nnn agreement.
Because the first offence Well, do you have document control, you have version control? How do you distribute them? How do you know this particular document falls under NNN and so on, and so forth? So I'm just giving you the whole picture.
Not to frighten anybody, but just to think about all the things that are effective, right? So for example, with document control, you might want to say, well, actually, I'm gonna have two folders, one called confidential documents, we are only share, read only versions and only share with somebody off top but a NDA in place. And then you got another folder, we've got non confidential documents, so
And mark those documents. So that's a step you can definitely take to reduce risk. This document redaction, right, so I often get asked, you know, sometimes you have to share some information with the supplier. But you still even if you've got an engineer, and maybe you don't have it in, but you do have to disclose some information in order for them to give you a quote or give you an idea.
And you know, another common way to protect it is document redaction. So you actually black out certain key parts or key bits of information that you don't want them to see. And that's a really good practice. But you'll find most people don't go to that level of document control and document redaction.
But it's a very, very useful and helpful way to share information and get some feedback from factories without disclosing everything. sharing tools, you know, there's a lot of tools Google Docs, there's ways to share tools that people that people can't download documents of course, I can screenshot them but normally when there's a lot it's a bigger job. Make them view only you can track who's viewing them. You know, the there's a lot of tools out there that really help you control your RP in a better way.
Trademarks, this is my absolute favourite. Ah, for me, the single best way to protect yourself is registering your trademark. I think choice you know that I've talked about it for years and every call that comes up, we'll talk about trademarks. particular trademark in China is just for me, it's, it's like your name and reputation. If something Oh, David XYZ, it would be hurt me, right?
Because I care about my personal reputation. And it's the same with a brand, right? If your brand is Apple, they care about everything they do because their name matters to them. And even if people go rip off Apple phones and Apple laptops and every other Apple product, people still know it's not Apple, because it trademark represents the integrity of the business, they have to sell service, their quality as a product, the reliability and so many other things, not just oh, it's the coolest design or oh, you know, all all those other things.
So trademarks are probably for me, one of the best ways to protect your IP, then keep in mind, you know, outside of nnn is your know how right? I can go copy an Apple phone, it doesn't mean I can market it distributed setup cloud servers and infrastructure. Most people don't know how to do that. So even if they copy your product, remember, there's a lot of know how in your business, how do you acquire customers? How do you get your traffic's? How do you do your product listings? You know, how do you do digital marketing? How do you distribute it to the retail market, there's a lot to know how that trumps the factors of nnn because that people can't just copy a product and overnight, they've got a business, right?
There's operational know how there's accounting, know how financial know how so don't underestimate the importance and the fact that not everybody can just copy something and executed and generate sales and create a business out of it. You know, most importantly, is managing the customer base.
And that is really never sharing your customer details with anyone. Even if a copy of product, they can't go to your customers, you own your customers, you own the relationship with your customers. And as you acquire more customers, you bought that reputation through your trademark and the name they get to know you and it becomes a very robust infrastructure, you build it.
And when you look at it from all these perspectives, and of course patents, patents in place, which become legal protections should be on my list, what's not, you realise there's so many more factors that affect your success, that the nnn agreement almost becomes one of the smallest parts of that.
Because even with that nnn agreement in place, there's a whole bunch of other things here that you may not be able to execute on. And the biggest one for me as well as time to market. And we spoke about you know, how long have you taken in in in in agreement, you know, time to market is everything.
When you get to the market first, you set the precedent, you don't miss the major promotions or sales. That's the most important aspect I have seen people spend months on end in in agreement. And by the time they finished that they haven't even started developing the product, getting samples, checking the factory out placing purchase orders, there's a lot to do to get to market.
Put the nnn agreement into context, find quick solutions around it and move on. Because there's a lot that has to be done before you selling a product successfully. So look at it very holistically fraud and shrink the nnn agreement down into its place. It has a place it has an importance, but it's not the overarching importance. What really is the overarching importance is are you being 100% responsible.
And what I mean when I say that is having an agreement is in no way going to help you and protect you. It's going to do a 10% job, maybe it's 5% job, you being 100% responsible is taking all those list of items that I gave you in the previous slide and saying, I've got that I've got that I've got that I've got that I've got that. Right. And I've done all those things, right.
Because that's going to basically give you that holistic approach to protect your IP. Are you setting expectations clearly, you know, what is the reason for the in in in agreement brought what are the costs involved? Right? practicality, airing of this discussed about comes down to practicality.
And do you have document control and the way to you carry? Right and that's what I call being 100% responsible? If you understand all these aspects of RP, understand enforceability, understand the costs of enforceability, understanding the role you have In the ecosystem of other supplier relationship is, be realistic, be 100% responsible for the fact that what you can do, what you can't do, how much you can buy, and just how valuable your product is right?
For example, a quick Google search often shows 100 similar products to designs people make with some variations. So in a case like that, I go well, more so than a design patent or more so than any and then copy your design for you come with some clever, or slightly different get to market quickly.
Get to market quickly, the winning formula is sales, right? Get to market quickly bet the customers and consumers decide it's a great idea. Not a great idea, because most likely, no one's gonna copy it anyway until it's a success. So keep that in mind. And that's what I really call being 100% responsible. Don't just say I've got it in agreement f1, safe, right? Because you're not being responsible to yourself into your business.
Say, am I clear about all of these points? Have I done the right thing in all of these areas? And if I haven't, just be okay with that. Because maybe there's a cost implication, maybe there's an uncertainty employee implication, you know, you don't want to over invest in a product until it's got some sales traction. So that's really what I call being 100% responsible for your IP.
So the two key takeaways, for me on this in an in an NDA discussion is be 100%, responsible and clear about all the ways of protecting your IP.
Be realistic about your recourse and who you are dealing with, it does come down to your relationship. And it does come down to what are you going to do if you suspect there's a breach if you take those two takeaways with you, you'll look at it from a very different context in a very different perspective.
That's very good. I completely agree. And I mean, like, make sense of it. There's a lot of responsibility as a customer as everybody to make sure that we have all the understanding and also like, know how to do it too and how much money in time it's going to cost about like building your own business and stuff like that to
100%. Exactly. And for anybody listening if you want to, if you have an issue you want to talk through, if you need more advice, you know, feel free to hop onto our website global t kim.com.
We do free discovery calls are that are do them or Joyce does them. For 15 minutes, we can talk through any particular issues you have around in in in agreements, or any particular issue around manufacturing or sourcing. You know, we'd love to help you wherever we can. Our goal is to give you a team on the ground in China and make life easy for you.
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