In response to yesterday's post containing tips for outsourcing to China from a business perspective a reader sent me an e-mail asking what to look out for on the legal side. Fortunately, I was able to find a short article fellow blogger Steve Dickinson had published a few years ago on just this topic. Here it is:

Many small and medium sized companies that engage in OEM manufacturing/ outsourcing in 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 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 outsourcing to 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. If you do not have a firm basis for your IP rights under U.S. law, you will have nothing to protect in China. 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 and 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. All of this will help prevent Chinese copies from entering the United States.

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.

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. Without such a written agreement, virtually no such protection is available.

4. Product Quality and Payment Terms. The rule here is simple. 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.

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. Better yet, get the agreement to provide for all disputes to be resolved before an international arbitration tribunal.

All of this was true a couple years ago and all of this is true today.

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Readers have left 2 comments.

 1. Group Managing Director
Abraham Olu (email :jedidiahglob, Unregistered

I want to secure a written OEM MANUFACTURING AGREEMENTS and to REGISTER MY TRADE MARK IN CHINA, what will it cost me.
The OEM agreement is in the areas of Mobile handsets and Electronics and home appliaces, i already have some companys to deal with in china, but i will not mind your link to highquality manufacture of dual sim mobile handsets, electronics and home appliance for worldwide sales.

 Posted 2008-01-12 02:28:09

 2. CEO
Emak Nig ltd, Unregistered

Please advise me on how to make claims against a supplier in China.
Firtly, failure to work according to d sales contract.Denied me of 6% discount agreed.
Secondly, delay of B/L which cost me $15,000 demurrage.
Thiredly, wrong colur of materials used and misplacement of logos on some goods.Loses of abt $8,000 and shortage of goods abt $2,000
A serious case of claim that somebody used my mail to order laptop, which cost abt $6600, subject to confirmation.But the cost of the laptop is about $200, while she claimed $1,100/pcs.Pls advise me what to do, to get my claims.
Austin

\n This e-mail address is being protected from spam bots, you need JavaScript enabled to view it ' target='_blank' title='Click to visit this website'> Posted 2008-01-15 00:02:32

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