Many Ecommerce business owners are, rightfully, worried about their suppliers duplicating their products. For many, a Non-Disclosure Agreement (NDA) seems to the logical method to prevent suppliers from ever making replicas.
It makes sense in theory. Make your supplier sign an NDA, and you go perpetual exclusive rights for that power bank or handbag you plan to sell on Amazon.
The reality is, as you will learn in this article, very different.
What is the purpose an NDA?
An NDA is a confidentiality agreement that is meant to prevent, for example, manufacturers from disclosing product information. This may include the following:
Bill of materials
In theory, an NDA prevents a supplier from using your product specifications to manufacture products, or share them with other companies. The NDA also sets penalties, in case the supplier would fail to comply with the terms.
In addition, an NDA can be set to be terminated after a certain time, or when a milestone (i.e., the product is officially launched) has been reached.
When dealing with Chinese manufacturers, however, things are not that straightforward.
When should I make my supplier sign an NDA?
The supplier shall sign the NDA before you share your product specification and other documents.
As you must share your product specification before they can send a quotation – the NDA shall be signed by all prospective suppliers you want to get price information from.
Assuming you’ve sourced 5 to 10 suppliers, getting them all to sign an NDA is rather time consuming, and may not be worth the effort. I’ll get back to that in a bit.
I work with a sourcing company. Should I ask them to sign an NDA?
Sourcing agents must have access to your product specification to identify qualified suppliers for your products. In addition, they must also share your specifications with potential manufacturers, to get price data.
Most sourcing companies agree to sign NDAs that prevent them from directly using your product designs.
That said, don’t expect the sourcing agency to take any responsibility for what suppliers do with your product designs.
That’s simply out of their control, regardless of how long they may have cooperated with the suppliers in question.
It’s not your Chinese supplier that you should worry about
In today’s online marketplace, getting a product out there is only the beginning. What makes the difference is how you develop sales channels and market your products.
Products get copied all the time, both by manufacturers and other importers. It’s how the system works.
Most likely, your own product is an improved version of something that’s already out there.
An NDA is not a cheap substitute for a patent, or a trademark registration
NDAs only apply to the signatories. Clearly, your supplier cannot be held responsible for other companies using ‘your product designs’. As I just explained, that’s also what’s likely going to happen, assuming that your product gains traction.
If you truly want to protect your product, you only have two options:
You can only get a patent if the products design, or function, is truly new and unique. Hence, most ecommerce companies can simply forget about patent protection for their products.
What’s left is the option to protect your brand name, which is perhaps what matters the most in the end – but it will not grant you exclusive right to sell something that already exists.
NDAs are costly to enforce
Let’s assume that someone in China starts mass producing and selling an exact replica of your product. Most likely, your supplier is not stupid enough to do it under their own company.
Instead, they’ll contract it to another factory, owned by a former employee or relative.
In such a scenario, you’d be forced to prove that your supplier shared this information with the factory in question – something that will be close to impossible.
Now, let’s assume that you actually catch your supplier red handed, and have video recordings of their manager bragging (insert evil laugh) about how they will conquer the world using your product design.
You’ll jump on a plane to Shenzhen and go to the nearest police station with contract in hand?
Perhaps send a really angry email?
For companies that actually have valuable intellectual property, and the resources to enforce a contract in China, an NDA can help to prevent the supplier from sharing product information during the prototype development phase.
However, such companies are also fully aware that an NDA is not a ‘poor man’s patent’. They protect their IP at home and abroad, using patents and trademark registrations – which allows them to actually enforce their IP.
For small Ecommerce businesses, importing their variation of something that already exists, the situation is different.
At best, an NDA can show a supplier that you’re to be taken seriously. Perhaps, they may think twice before using your designs. But they still can, in the unlikely scenario that they would actually want to.
Yet, many Importers are under the impression that the main threat comes from Chinese manufacturers, when the real threat comes from competition at home.
In the end, an NDA is not a substitute for proper IP protection in your target markets, or tool to prevent your competition from selling similar products.
Co-founder of Asiaimportal (HK) Limited and based in Hong Kong. He has been quoted in and contributed to Bloomberg, SCMP, Alibaba Insights, Globalsources.com, China Chief Executive, Quartz Magazine and more.
Hey there, I’m Fredrik!
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