China Law Blog post: 5 Legal Basics for Outsourcing

Sunday, October 8, 2006 9:41
Dan over at the China Law Blog has just reposted a great post entitled 5 Legal Basics for Reducing Risk that was written by his partner Steve Dickinson a couple years back.It gives an excellent overview of what companies need to do to protect themselves legally when working with manufacturers in China in terms of contracts, supplier agreements, and filing of patent/ trademarks.

The following five basic steps will greatly reduce your problems with Chinese manufacturers, while improving your chances of recovering should any problems arise.

  1. Create and properly register your intellectual property rights in the United States.
  2. Register your trademarks in China.
  3. Use a written agreement to protect your know how and trade secrets in China.
  4. Product Quality and Payment Terms.
  5. Use comprehensive OEM Agreements with each manufacturer.

This is a topic that we have previously discussed from operational and investigational angles in Cover Your Bases.. Cover your Patents.

In addition to the advice we gave in that post, and in addition to Steve’s advice, companies need to ensure from an operational standpoint that the power and knowledge of any single supplier is not too great.

Sure, there are going to be times where knowledge transfer is a must, and training a supplier on a process or technology will ensure the ongoing quality of a product. However, one must ensure that they are not are not catalyzing a situation where their supplier becomes their competitor.

When working with our clients, we have a few addition ways to mitigate this risk from the operational side:

1) We only work with trusted suppliers with whom we have worked with successfully for a long period of time. when bringing new suppliers into the supply chain, we will often identify a number of suppliers who have potential and then split the order so that 2-3 suppliers are given the chance to prove themselves. As orders are filled, it becomes clear in many cases who our preferred vendors will be and we will then move all production to them

2) We NEVER allow a single supplier to manufacturer an entire product. We will split the product into multiple components, identify multiple suppliers for each component, and then bring the components into a central location for assembly or consolidated shipments. No one supplier is allowed to see an entire product unless it is a simply commodity that already has multiple suppliers for that category (i.e. flashlights, screwdrivers, brake pads, etc).

3) Make frequent site visits and be nosy. Frequents site visits should be a apart of your China operations anyway to ensure quality standards are being met, and it is a great way to see whether or not a supplier is getting greedy. Look around and inquire when they add new lines (especially if you have not increased volume), a telltale sign. Check out their showroom (they all have one) and see what is on the wall. Look at boxes in finished inventory or goods in raw material for added measure.

4) Go to all trade shows that are related to your products, or send someone in your place, and see what goods your supplier is advertising. Stop in and say hi when the booth is busy as they will be most actively promoting all goods then, and you can also gauge who their potential buyers will be.

5) Develop codependent suppliers by bringing more products and offering to find other customers for them. The more a supplier relies on you, the less likely they are to go around you on a single product.

While all of these will add a measure of cost per unit, that cost is marginal when you consider you could lose your market should one of your products be copied by your supplier. Infringing on trademarks and patents in China, occurs frequents, and often times fault lies with the foreign manufacturer who did not take the proper steps to ensure they were protected.

Following the advice of the guys at China Law Blog, and the steps above, will enable you to not only mitigate your risk, it will allow you to see when infringements occur, and have the ability to take action.

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