Many small and medium sized companies that engage in OEMmanufacturing/outsourcing in China fail to take the stepsnecessary to protect themselves. When problems arise, they cando little or nothing to protect themselves because they have nolegal basis for protection. The fact is that outsourcingdisputes must be resolved in China, under the Chinese legalsystem. The Chinese legal system has improved greatly over thepast ten years and taking a few basic legal steps can greatlyreduce your risk. The cost of such protection is modest comparedto the protection it will provide.
The following five basic steps will greatly reduce your problemswith Chinese manufacturers, while improving your chances ofrecovering should any problems arise.
1. Create and properly register your intellectual propertyrights in the United States. If you do not have a firm basis foryour IP rights under U.S. law, you will have nothing to protectin China. Before you go to China, be sure your intellectualproperty is protected under U.S. law. Protect your brandidentity by creating and registering your trademark, slogan andlogo with the U.S. Patent and Trademark Office. Register yourimportant copyrights with the U.S. Copyright Office. Carefullyidentify and protect your trade secrets, proprietary informationand know how.
2. Register your trademarks in China. Registration can protectyour future access to the Chinese market, prevent the export ofcounterfeit goods from China, and prevent a competitor fromregistering your mark in China, which would prohibit you fromexporting your own product from China.
3. Use a written agreement to protect your know how and tradesecrets in China. Small and medium companies usually do not havean extensive portfolio of patents. Their most valuableintangible assets typically are their know how and tradesecrets, which cannot be protected by formal registration.Chinese law, however, permits companies to contractually protecttheir know how and trade secrets by contract. Such agreementsmay also address issues such as non-competition andconfidentiality. Without such a written agreement, no suchprotection is available.
4. Product Quality and Payment Terms. The rule here is simple.Do not make final payment to your Chinese manufacturer until youare confident you will be getting an on time shipment of thecorrect items and quantities at the quality standards yourequire. This usually means you must incur inspection costs inChina and provide for a clear procedure for dealing with theseproblems as they arise. You must take the lead on this. Youcannot 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 OEMmanufacturing transactions with a simple purchase order. This isa mistake. The purchase order will protect the Chinesemanufacturer, not you. Your protection depends on your securinga written OEM agreement with each Chinesemanufacturer with which you deal. The ideal OEM agreement willaddress all of the issues discussed above while also addressingother basic legal issues such as jurisdiction and disputeresolution. This agreement should be in both Chinese andEnglish, since the Chinese language version will control inChina.
About the author:Steve Dickinson heads up the international corporate group atthe law firm of Harris & Moure (www.harrismoure.com), where hefocuses on assisting small and medium sized businesses withtheir international legal needs. Steve Dickinson is fluent inMandarin Chinese and has been doing business in China for morethan twenty years. He can be reached at firm@harrismoure.com.