By Dan Harris
When a company comes to us looking to have its product outsourced for manufacturing in a foreign country, they often do not have a fully final product. By this I mean that their “product” can be anything ranging from a mere idea to a prototype needing further development before large scale manufacturing to a product needing minor refinements to a fully-fledged ready-to-go product. Our international manufacturing lawyers deal with less than fully-fledged products more than half the time.
Often, a client will believe its product is “ready to go” when it actually can (and should be) further modified to reduce production costs or simply to make it just a little bit better. It is quite common for good overseas manufacturers to suggest at least a few helpful changes to so-called final products.
Whenever an overseas manufacturer modifies (even slightly) one of our client’s products (and even when they don’t), we as lawyers immediately have the following three questions:
- Will our client own the IP rights to the modifications?
- Will our client own the IP rights to the final product?
- How can we as the lawyers best protect our client’s IP rights in the modifications and the products?
These are not merely academic questions either as our international IP lawyers get a fairly steady stream of American (United States, Canada, Brazil and Mexico, mostly), Australian, and European companies seeking help to “recover” their IP rights taken by their (mostly) Asian manufacturers. Much of the time there is little our IP lawyers can do in these situations either because it is not clear who owns the IP rights or it is clear that our client unintentionally relinquished the IP rights to its manufacturer. Even worse, there are plenty of times where we have to tell our client that it is not clear who would prevail were we to bring a lawsuit but it is very clear that such a lawsuit will be incredibly time-consuming and expensive and require all sorts of highly paid experts.
Who owns the IP rights in your product? Do you really know? It is not uncommon for manufacturers to wait years before asserting their rights to “your” product. This assertion usually comes when your manufacturer decides the time has become right for it to begin selling its own products or when you decide you want to use another manufacturer. See Your China Factory as your Toughest Competitor and How to Stop Your China Manufacturer from Selling Your Product to Others: Don’t Let This Happen to You for how common the first of these scenarios has become and see Why Changing Suppliers Can Be So Risky for how incredibly common the second of these scenarios has always been.
The product development stage is the highest risk stage for foreign companies manufacturing overseas and yet also the most neglected stage. Foreign companies will use NNN agreements in the factory search stage and Manufacturing Agreements (ODM, CM and OEM) for the production stage, but they rarely use Product Development Agreements during the product development phase, oftentimes because they do not recognize they are in that stage or because they believe their NNN Agreement will protect them. This is a big mistake that often leads to one of two disasters for the foreign company.
In part 2 of this series we will set out why not having a timely and country-specific Product Development Agreement can a mistake, the two disasters our international lawyers often see that arise from this mistake and, most importantly, what you can do to prevent all this.