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China outsourcing 101. Five basics for reducing risk.

By Dan Harris in 'China Law Blog'

The other day we did an extremely long post on the legal issues of outsourcing.  That post was based on an hour long speech I had just given at an International Association of Outsourcing Professionals meeting, so it was very, very long.

Since not everyone is going to read such a long post, I figure it a good idea to put out the basics and for that, I am pulling from an old article written by co-blogger Steve Dickinson, entitled, "Outsourcing in China: Five Basics for Reducing Risk."  Here is that article:

Many small and medium sized companies that engage in outsourcing to China fail to take the steps necessary to protect themselves. When problems arise, they can do little or nothing to protect themselves because they have no legal basis for protection. The fact is that in most instances outsourcing disputes must be resolved in China, under the Chinese legal system. The Chinese legal system has improved greatly over the past ten years and taking a few basic legal steps can greatly reduce your risk. The cost of such protection is modest compared to the protection it will provide.

The following five basic steps will greatly reduce your problems with the Chinese company you are using for your outsourcing (be that a company a manufacturer or a software coder or whatever), while improving your chances of recovering damages should any problems arise.

1. Create and properly register your intellectual property rights in the United States. Before you go to China, be sure your intellectual property is protected under U.S. law. Protect your brand identity by creating and registering your trademark, slogan or logo with the U.S. Patent and Trademark Office. Register your important copyrights with the U.S. Copyright Office. Carefully identify and protect your trade secrets, proprietary information and know how. Consider filing for any appropriate patents.

2. Register your trademarks in China. Registration can protect your future access to the Chinese market, prevent the export of counterfeit goods from China, and prevent a competitor from registering your mark in China, which would prohibit you from exporting your own product from China. Consider filing for any appropriate copyrights and/or patents. For more on the necessity of registering your trademarks in China, check out "China Trademarks -- Do You Feel Lucky? Do You?"

3. Use a written agreement to protect your know how and trade secrets in China. Small and medium companies usually do not have an extensive portfolio of patents. Their most valuable intangible assets typically are their know-how and trade secrets, which cannot be protected by formal registration. Chinese law, however, permits companies to contractually protect their know how and trade secrets by contract. Such agreements may also address issues such as non-competition and confidentiality. For more on this, check out "Why Non Disclosures (NDAs) Alone Are Not Enough For China" and "Why Non Disclosures (NDAs) Alone Are Not Enough For China, Part II. At Least Make It Enforceable.'

4. Product Quality and Payment Terms. The rule here is simple. If possible, do not make final payment to your Chinese manufacturer until you are confident you will be getting an on time shipment of the correct items and quantities at the quality standards you require. This usually means you must incur inspection costs in China and provide for a clear procedure for dealing with these problems as they arise. You must take the lead on this. You cannot depend on the OEM manufacturer to do this for you. If you are going to pay anything upfront, you need an agreement protecting you.

5. Use comprehensive OEM Agreements with each manufacturer. Small and medium sized businesses often enter into OEM manufacturing transactions with a simple purchase order. This is a mistake. The purchase order will protect the Chinese manufacturer, not you. Your protection depends on your securing a written OEM manufacturing agreement with each Chinese manufacturer with which you deal. The ideal OEM agreement will address all of the issues discussed above, while also addressing other basic legal issues such as jurisdiction and dispute resolution. This agreement should be in both Chinese and English, since the Chinese language version will control in China. For more on this, check out "China OEM Agreements. Ten Things To Consider," "China OEM Agreements. You Are Naked Without A Good Bill Of Materials," "China OEM Agreements. Yet Another Reason To Have One," and "OEM Agreements in China: Why Ours Are In Chinese."

What do you think?



Dan Harris is founder of the Harris & Moure law firm, a boutique international law firm focusing on small and medium sized businesses that operate internationally. China is the fastest growing area for the firm. Dan writes as a source of China legal and business information.

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