| Story Views | |
| Now: | |
| Last Hour: | |
| Last 24 Hours: | |
| Total: | |
Stop Your Proprietary Information from “Leaking” All Over China, Part 3
This is part three in a three-part series of posts on why foreign companies doing business in China so often lose their proprietary information (intellectual property) to their competitors in China. The first post focused on how so many of these losses arise from what we call leakage — the situation where the foreign company has a contract preventing its Chinese counter-party (usually the manufacturer) from using the foreign company’s proprietary information, but fails to prevent that information from leaking to third parties that are not bound by such a contract.
The second post focused on the most common forms of leakage our China lawyers see from companies doing business in China, particularly those that enter into manufacturing contracts with Chinese companies.
And this third and final post focuses on what you can and should do to prevent such leakage.
The first step to preventing your information from leaking in China is to have contract provisions written to prevent this. If your contract with your manufacturer does not cover the issue, you have little hope. This is why a contract is required and why a simple purchase order is virtually never adequate. But what sort of contract provisions are appropriate? The key is to deal with related parties (See Part 2 for a list of the riskiest related parties) by stating that all disclosures to related parties are prohibited and that your Chinese counter-party will be liable for all improper use of the information by a related party. That is, for related parties the approach is a simple matter of absolute prohibition.
In dealing with third parties other than related parties, the situation is more difficult. An absolute prohibition will not work. It is obvious that the manufacturer must disclose the key information to its employees. And in the modern manufacturing world, few factories are wholly self contained, so sharing of information is virtually always required as part of the manufacturing process.
There are two ways of dealing with the situation. The approach we previously took was to require the Chinese factory identify each individual and entity that would be a recipient of our foreign client’s confidential information. Our foreign client would then, in turn, enter into a separate NNN Agreement with each of these individuals or entities. Under this approach, the Chinese factory would be liable only for damages caused to our foreign client that arose from disclosures to persons or entities the Chinese factory never identified to us. But as China’s manufacturing practices evolved, and especially as Chinese factories began to manufacture increasingly complex products (such as Internet of Things devices) that required a whole slew of different companies this careful system has become less and less workable. The Chinese factory will seldom identify every involved party and those who have been identified are becoming increasingly unwilling to execute their own NNN agreements, and the fact that the factory ends up “off the hook” means that the factory becomes careless with information.
So our most common approach today is to provide that the factory can disclose information as necessary, but the factory is liable for all damage caused our client from misuse of the confidential information. If a key employee steals the information, the factory is liable. If a subcontractor steals the information, the factory is liable. If a mold manufacturer steals the information, the factory is liable. You get the idea. This approach allows the Chinese factory the flexibility to get its job done but it also provides it with a strong incentive for it to impose its own mechanisms for maintaining the confidentiality of the information provided to it by the foreign buyer. Chinese factories will often complain that loading the liability on them is unfair. The response to this should be that “if you cannot trust the persons to whom you disclose our information, you should not make the disclosure. Our record in getting these sorts of agreements signed is shockingly good.
When you manufacture in China, your goal must be to stop leaks of your information. This is not an easy job, but it is doable.
We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.
Source: http://www.chinalawblog.com/2016/08/stop-your-proprietary-information-from-leaking-all-over-china-part-3.html
