A non-disclosure agreement with a Chinese counterparty — a supplier, a distributor, a potential joint venture partner, an employee — is the first line of defense for a foreign company’s confidential information. But an NDA that’s signed and filed in a drawer and never enforced is a document that’s not worth the paper it’s printed on, or in China, not worth the WeChat message it was sent as.
The question is not whether Chinese law recognizes NDAs — it does — but whether the NDA can be enforced in practice when the counterparty breaches it. The answer depends on how the NDA is drafted, what the counterparty did, and what evidence the foreign company has. Here’s how to make an NDA that actually works in China.
The Chinese Legal Basis
A non-disclosure agreement is a contract like any other contract under Chinese law, governed by the Civil Code. An NDA that’s properly formed — the parties agreed, the subject matter is lawful, and the obligations are clear — is binding on the parties. A breach of the NDA by the recipient of the confidential information is a breach of contract, and the disclosing party is entitled to the remedies for breach of contract — damages, specific performance, and in some cases termination of the underlying commercial relationship.
The NDA is distinct from the trade secret protection under the Anti-Unfair Competition Law. The trade secret protection is a statutory right that exists regardless of whether the parties signed an NDA. The NDA is a contractual right that supplements the statutory right. A trade secret that’s protected by the Anti-Unfair Competition Law and also by an NDA gives the foreign company two independent legal bases for taking action against the counterparty — the statutory claim for trade secret misappropriation and the contractual claim for breach of the NDA.
The two claims have different elements and different remedies. The statutory trade secret claim requires the foreign company to prove that the information is a trade secret — not generally known, commercially valuable, and reasonably protected. The contractual NDA claim requires proof that the NDA exists and that the counterparty breached it by using or disclosing the confidential information. The NDA claim is generally easier to prove because the definition of confidential information in the NDA can be broader than the definition of a trade secret, and the proof of breach is the unauthorized use or disclosure, not the misappropriation by improper means.
What a Chinese Court Looks At
A Chinese court that’s asked to enforce an NDA looks at the agreement itself — is it clear, is it specific, are the obligations defined — and at the evidence of breach — what did the counterparty do, and how does the foreign company prove it.
The agreement must define the confidential information with enough specificity that the counterparty knows what it can’t disclose or use. A definition that says “all information disclosed by the foreign company to the counterparty” is too vague — the counterparty can argue that it didn’t know what was confidential and what was not. A definition that says “all information relating to the foreign company’s product specifications, manufacturing processes, customer lists, supplier lists, pricing, and business plans that is disclosed by the foreign company to the counterparty and that is marked as confidential” is specific enough.
The marking requirement — the foreign company must mark the confidential information as confidential — is important for enforcement. A document that’s marked “Confidential — Do Not Disclose” is clearly confidential. A document that’s not marked is harder to prove was confidential, particularly if the counterparty received many documents and the foreign company can’t show which documents were confidential and which were ordinary business documents.
The court also looks at whether the foreign company took reasonable measures to protect the confidentiality before the disclosure. Did the foreign company limit access to the information within its own organization? Did the foreign company present the NDA to the counterparty before disclosing the information? Did the foreign company record what information was disclosed and when? A foreign company that emails the confidential information to the counterparty before the NDA is signed has a weaker case than a company that signs the NDA first and then discloses the information in a controlled manner.
The Evidence Problem
The biggest challenge in enforcing an NDA in China is evidence. The foreign company must prove that the counterparty used or disclosed the confidential information, and that’s hard to do unless the counterparty was careless.
The easiest case is when the counterparty’s product — a competing product that the counterparty started manufacturing after the NDA was signed — contains features that are identical to the foreign company’s confidential specifications. The identical features are circumstantial evidence that the counterparty used the confidential information, particularly if the features are unusual or distinctive and the counterparty didn’t have the capability to develop them independently.
The harder case is when the counterparty’s breach is disclosure, not use — the counterparty told a third party about the confidential information. The foreign company may not know that the disclosure occurred, and if it does know — for example, a customer told the foreign company that the counterparty offered a competing product based on the foreign company’s technology — the evidence is hearsay unless the customer is willing to testify or to provide a written statement that’s admissible in a Chinese court.
The hardest case is when the counterparty’s breach is through an employee who moved from the counterparty to a competitor. The employee took the confidential information to the new employer, and the new employer is using it. The foreign company must prove that the employee had access to the confidential information through the counterparty, that the employee took the information to the new employer, and that the new employer’s product incorporates the confidential information. The chain of evidence — the access, the taking, the use — is three links, and each link must be proved.
The Practical Enforcement Steps
The first step when a breach is suspected is preservation — preserve the evidence of the breach before the counterparty knows the foreign company is onto it. Download the counterparty’s website pages that describe the competing product. Buy the competing product and keep it as evidence. Take screenshots of the counterparty’s WeChat posts and social media that mention the competing product. Record the dates of every communication with the counterparty.
The second step is a cease-and-desist letter from the foreign company’s Chinese lawyer. The letter states that the counterparty is in breach of the NDA, describes the confidential information that the foreign company disclosed, describes the counterparty’s use or disclosure of the information, and demands that the counterparty cease the use or disclosure and destroy all copies of the confidential information. The letter should be specific, not general — it should describe the specific information, the specific breach, and the specific remedy.
The cease-and-desist letter serves several purposes. It puts the counterparty on notice that the foreign company knows about the breach and intends to enforce the NDA. It creates a written record that the counterparty received notice of the breach — and if the counterparty continues the breach after receiving the notice, the continuation is evidence of willfulness. It may resolve the dispute — the counterparty may not have realized it was breaching the NDA, or may decide that the risk and the cost of continuing the breach are not worth the benefit.
The third step, if the cease-and-desist letter doesn’t work, is litigation or arbitration. The choice between litigation and arbitration depends on the dispute resolution clause in the NDA. An NDA that’s governed by Chinese law and that provides for litigation in a Chinese court is enforced through the court. An NDA that provides for arbitration is enforced through the arbitration institution.
The fourth step, if the court or the arbitration tribunal finds for the foreign company, is enforcement of the judgment or the award. A Chinese court judgment is enforced through the Chinese court’s enforcement procedures — the court can seize the counterparty’s assets, freeze the counterparty’s bank accounts, and restrict the counterparty’s legal representative from leaving China. An arbitration award is enforced through the court in the same way as a court judgment. The enforcement procedures are the teeth of the NDA — without enforcement, the judgment or the award is a piece of paper.
What the NDA Should Include
The NDA should include the following provisions that are specific to the Chinese enforcement environment. First, a governing law clause that specifies Chinese law as the governing law. An NDA that’s governed by a foreign law — English law, New York law — is harder to enforce in a Chinese court because the court must apply the foreign law and must receive expert evidence on what the foreign law requires.
Second, a dispute resolution clause that specifies the Chinese court or the Chinese arbitration institution that will resolve disputes. A Chinese court or a Chinese arbitration institution is the most practical forum for enforcing an NDA against a Chinese counterparty because the judgment or the award is directly enforceable in China without the need for a foreign judgment enforcement proceeding.
Third, a liquidated damages clause that specifies the amount of damages for a breach. A liquidated damages clause avoids the most difficult part of the breach of contract case — proving the amount of the loss. A clause that says “the recipient shall pay X RMB for each breach” is enforceable if the amount is a reasonable estimate of the loss at the time the NDA was signed. A clause that imposes an astronomical amount that’s clearly punitive is not enforceable — Chinese law prohibits punitive damages in most contract cases.
Fourth, an injunction clause that specifies that the foreign company is entitled to an injunction — a court order that the counterparty stop the breach — without proving irreparable harm. The injunction is the most important remedy for a confidentiality breach because the damage from a continuing breach — the continuing disclosure of the confidential information — is cumulative and may be impossible to quantify.
