Structuring your contracts with third parties and employees in a careful manner should be an important component of your intellectual property (IP) and wider business strategy in China. Often, important information which helps maintain your business’s competitive edge is divulged (whether intentionally or not) to third parties by your employees past or present. Similarly, confidential information is sometimes surrendered during negotiations with potential business partners in China. Ensuring awareness of confidentiality obligations through contracts can help avoid both these situations. In last month’s EUROBiz Part 1 of this article, written by the China IPR SME Helpdesk, described the important contractual provisions to include and avoid when conducting business in China. Part 2 outlines the benefits of Non-disclosure Agreements for your business and highlights idiosyncrasies in Chinese law which affect ownership of IP created by your employees.

Non-disclosure agreements (NDAs)

It is advisable that you sign a NDA with any third party to whom you plan to reveal confidential information, such as sensitive product information, designs and sketches, business strategy, or client information before doing so. Non-disclosure agreements are quick and inexpensive, and a basic template will require little modification for use with different products and clients. They are also widely used in China and well-accepted by Chinese courts, so a Chinese third party that is unwilling to sign a NDA is not likely to be a trustworthy potential business partner and should be treated with caution.

Sometimes a NDA on its own is insufficient to protect your intellectual property rights (IPR), particularly for companies in the manufacturing industry or those sourcing their products from China. This is because not every single product will be covered by patents or other forms of registered IPR. Under these circumstances, a non-disclosure/non-use/non-circumvention (NNN) agreement may be used.

• The non-disclosure provisions will cover the unauthorised disclosure of confidential information.
• The non-use provisions will state that the Chinese manufacturer cannot produce your product or any similar products for anyone other than you. These provisions will prevent the Chinese manufacturer from making or selling similar ‘copycat’ products without your authorisation.
• The non-circumvention provisions will prevent the Chinese manufacturer from by-passing the protection or circumvention means or technologies that you put into your product, for example, anti-counterfeit micro-chips.

Confidentiality, remuneration and other IP provisions in contracts

Companies should think carefully about protection against IP risks when hiring employees in China. It is good practice to include express provisions in employment contracts regarding confidentiality, IPR ownership, non-compete and non-solicitation in order to avoid future disputes and material damages to your business’s operations.

Confidentiality information/trade secrets

The best way to keep trade secrets and confidential information from being divulged by employees is to impose confidentiality obligations in employment contracts. For example, employers may require employees to keep confidential information and trade secrets confidential (unless the employer has given prior written consent) and limit employees’ use of confidential information and trade secrets to work-related purposes. Such confidentiality obligations should continue to bind employees even after the termination or expiry of their employment contracts.

Conversely, to avoid infringing others’ IPR, you should make clear to your employees orally, and in writing, that they should not disclose or apply confidential information and/or trade secrets obtained from previous employers during their employment terms with your company.

Patents/copyrights

Under China’s Patent Law, any rights to patents arising from creations or improvements made by an employee in the course of his or her employment, or by primarily using the resources of an employer (known as ‘employee creation’), automatically belong to the employer unless otherwise stated in the contract.

The employment contract should also limit the use of employer’s patents to the sole benefit of the employer and require employees to disclose all inventions they have created. The employer should enter into agreements with its employees explicitly stating the employer’s ownership of patents and patent improvements, in order to avoid any misunderstanding or dispute. In addition, the employer should be made the applicant of any patents arising from employee creation, as patent rights are granted only to patent applicants.

Meanwhile, under China’s Copyright Law, the copyright of a work created by an employee when fulfilling an assignment from an employer (known as ‘service work’) only belongs to the employer if it is created primarily with the materials and technical resources of the employer and the employer is responsible for the work. Nevertheless, the employee is still required to be named as the author of such service work.

Since ownership of copyright does not automatically belong to the employer, it is extremely important for the employer to enter into agreements with its employees stating that all service work for which the employer is responsible, or that is created using the employer’s resources, belong to the employer.

Creator-employee remuneration

Under China’s Patent Law, when an employee has created something that subsequently results in the granting of a patent to his or her employer (known as ‘creator-employees’), the employer is required to award remuneration to the creator-employee for the patented creation. Unless otherwise stated in the contract, the remuneration to be awarded to the creator-employee must be in accordance with the minimum requirements provided in the Implementing Regulations of China’s Patent Law. For this reason, employers should insert in employment contracts a provision that quantifies the amount of remuneration to be awarded to creator-employees for their patented creation.  Such remuneration must be “reasonable” and, in the absence of such an agreement, default rules stipulate that the ‘creator-employee’ may claim for two per cent of the business profits annually derived from the invention or utility model patents he or she invented.

Non-compete/non-solicitation

More often than not, employers incorporate non-compete and non-solicitation provisions in the employment contract to prevent leaving employees from stealing, or using without authorisation, the employer’s customers, employees and suppliers, and competing with their businesses.

According to China’s Labour Law, non-compete obligations must not exceed two years and must apply only to senior management personnel, senior technical personnel and others with non-disclosure obligations. Moreover, employers are required to pay compensation to former employees fulfilling their non-compete obligations. In general, the compensation can be anywhere from 20 to 60 per cent of the employee’s annual salary over the last 12 months, as provided in the meeting minutes of the Supreme People’s Court and Labour Dispute Arbitration Committee of Beijing Regarding Labour Disputes.

Top Tips

• Use a China IP specialist to help draft your contracts to ensure the protection of your business’s IPR.
• Have your contracts translated into Chinese by a trusted source to avoid any misinterpretations due to poor translation, or have the official versions of your contracts drafted in Chinese and English with both languages having equal effects (meaning both languages are official and shall be respected when interpreting the contract terms).
• You may choose foreign or Chinese law as the law governing the disputes of the performance of the contract, but Chinese IPR under the contract will always be governed and protected in accordance with Chinese IPR laws.

Take-Away Messages

• Sign a NDA or ensure that there is adequate protection in your contract addressing confidentiality issues.
• For manufacturing or sourcing in China, consider signing a NNN agreement to prevent your Chinese business partner from disclosing your confidential information or competing with you later.
• Ensure that employment contracts include provisions relating to ownership rights, remuneration, non-compete, non-solicitation, and confidentiality if no separate NDA is in place.
• Include confidentiality provisions in all employee contracts. Even if that employee is currently unlikely to have access to confidential information, he or she may do so in future roles within the company.

The China IPR SME Helpdesk is a European Commission funded project that provides free, practical, business advice relating to China IPR to European SMEs. To learn about any aspect of IPR in China, visit our online portal at www.china-iprhelpdesk.eu. For free expert advice on China IPR for your business, e-mail your questions to:  question@china-iprhelpdesk.eu. You will receive a reply from one of the Helpdesk experts within seven working days. The China IPR SME Helpdesk is jointly implemented by DEVELOPMENT Solutions and the European Union Chamber of Commerce in China.