Protecting Your Business From YOUR China Factory
Chinese factories are increasingly selling products directly to consumers, especially in industries hit hard by tariffs, tariff threats, and shifting geopolitical tensions. As manufacturers lose foreign buyers due to global supply chain changes, many are seizing the chance to create and market their own products—often in direct competition with the companies they once served. This trend has turned countless former Chinese factories into their ex-customers’ fiercest rivals.
Given the growing pressures on Chinese factories—including declining demand, increasing competition from lower-cost countries, and online platforms that facilitate direct sales—any company that is sourcing from or has sourced from China should be aware of these potential pitfalls and prepare accordingly.
The Perfect Storm: Why Chinese Factories Compete and “Steal” IP
Chinese factories face increasing pressure to find new revenue streams. This, combined with the relative ease of selling online and the challenges of international IP enforcement, creates a perfect storm for them to compete directly with their former customers, often using their former customers’ IP.
Declining orders and increased competition from lower-cost manufacturing hubs put immense pressure on Chinese factories. Selling existing product designs, even with minor modifications, is viewed as a quick way to boost revenue. Online marketplaces like Amazon, Alibaba, and AliExpress provide readily available platforms to reach global consumers, further incentivizing direct sales.
A key factor is the factory’s intimate knowledge of your product. They already possess the designs, molds, tooling, and established production processes. This significantly lowers the barrier to entry for them to produce and sell the same or similar products independently. Your own manufacturer, having worked closely with your product, has this advantage in spades.
Many Chinese factories operate under the (often correct) assumption that foreign companies will struggle to enforce their intellectual property rights in China. The complexities of Chinese law, the costs associated with litigation, and the distance involved can deter companies from taking legal action. Furthermore, China’s “first-to-file” trademark system means that even if you have a trademark in your home country, a Chinese factory could potentially register it in China, putting you at a disadvantage. This perceived lack of serious consequences, combined with the potential to gain control of valuable IP, emboldens Chinese factories to take the risk.
The Risks of Unprotected Businesses: Real-World Examples
We regularly hear from companies that have discovered their Chinese manufacturers are selling identical products, often with the same logo, at wholesale or retail to other businesses. Many of these companies want to know what it would cost to sue the manufacturer in China, which is often their current or former supplier.
Unfortunately, many of these companies do not have a contract that explicitly forbids such behavior. They also frequently lack China-specific intellectual property registrations (trademarks, patents, copyrights), leaving them with minimal legal leverage. Businesses are often shocked to discover their manufacturers selling their products directly. This underscores the importance of proactive protection. Absent strong legal barriers, many factories see little downside in profiting from someone else’s design. We have seen countless companies suffer major losses when a former Chinese partner starts marketing the very products they paid to develop.
Case Study 1: The Apparel Company
An apparel company discovered that its former Chinese factory was copying and selling its products. It had no contract with that Chinese manufacturer and had not registered its designs or trademarks in China. Lacking formal IP protection in China, the apparel company’s options were limited and my law firm’s international dispute attorneys advised them that legal action was unlikely to be cost-effective.
By the time the apparel company contacted us, its sales had already declined significantly due to the actions of its former Chinese factory. The company eventually found alternative manufacturing partners in Vietnam and we helped them register trademarks in China and in Vietnam for future protection.
This case highlights the importance of proactive IP protection before problems arise. Without contracts and IP registrations in China, businesses are extremely vulnerable.
Case Study 2: The Electronics Startup
A small electronics startup, dependent on a single Chinese factory, discovered that its manufacturer was selling its products online at much lower prices, threatening market share and profitability. Because the startup had implemented a China-specific manufacturing agreement and registered its trademark in China, our international IP attorneys were able to draft and send a strong cease and desist to its Chinese manufacturer.
The manufacturer immediately ceased its online sales of the infringing product and agreed to follow the contract’s terms. The startup preserved its market position. This example shows how even just one solid contract plus a trademark registration can dramatically influence the outcome of an IP theft scenario.
Protecting Your Business
Some companies proactively protect themselves by establishing robust legal safeguards before problems arise. These measures are essential for deterring infringement and providing effective recourse when it occurs.
1. China-Specific Manufacturing Agreements (OEM or Product Supply Agreements)
These agreements clearly define the terms of manufacturing, including ownership of designs, materials, and tooling, and prohibit the manufacturer from selling the products independently.
2. Mold Ownership Agreements
These explicitly state who owns the molds and tooling used in production, preventing the factory from using them for its own purposes.
3. China NNN Agreements (Non-use, Non-disclosure, Non-circumvention)
These agreements protect confidential information and trade secrets shared with the manufacturer, preventing unauthorized use.
4. China Product Development Agreements
If the factory is involved in product development, these clarify ownership of any resulting intellectual property.
5. Registered Trademarks, Patents, and Copyrights in China
Registering your IP in China is crucial for legal protection. Without these registrations, your ability to enforce your rights is severely limited. A U.S. or international patent or trademark does not automatically protect you in China. Chinese factories know this and may register your brand for themselves if you haven’t done so first.
When companies have the right combination of contractual protections and registered IP in place, they have strong legal grounds to take action against infringing manufacturers. In most cases, a well-crafted cease and desist letter, backed by these legal safeguards, is enough to stop the factory’s infringing activity. Chinese factories are aware of the significant legal and financial risks associated with ignoring such a letter, including potential lawsuits, injunctions, and financial penalties. These proactive measures not only deter infringement but also lay a solid foundation for pursuing other legal remedies, such as litigation or arbitration, if as necessary.
Enforcing Your Rights: What to Do When Infringement Occurs
When a Chinese factory infringes on your IP or breaches a contract, having the right protections in place gives you several enforcement options.
1. Sending a Cease and Desist Letter
If you have valid contracts and properly registered IP in China, a strongly worded cease and desist letter might stop your factory. Many Chinese manufacturers want to avoid litigation once they know you have a solid legal case.
2. Litigation and Arbitration
If the factory ignores your letter, you can consider suing in China. Chinese litigation can work if you have compelling evidence of IP ownership and contract breaches. Some companies use arbitration clauses—often in Hong Kong or Singapore—as an alternative. Be prepared for a lengthy, resource-intensive process in either scenario.
3. Online Takedowns
If your factory is selling your products on Amazon, Alibaba, or similar platforms, you may be able to file a takedown request. However, platforms usually require proof of your registered IP. Without it, they’re likely to side with the seller.
Act Now to Protect Your Future
If your current or former Chinese factory is not yet competing with you, it may only be a matter of time. Preemptive protection is far less costly and far more effective than scrambling to respond once a manufacturer has already gone rogue.
We recommend reading the following for more information:
- Manufacturing in China: Minimizing Your Risks by Doing Things Right
- China NNN Agreements
- China Product Development Agreements
- China Trademark Registration Q&A
- How to Move Your Manufacturing Out of China Safely (Where we explain why it is so important to protect your company against China even if you will soon be moving your manufacturing out of China)
If you’re already dealing with these issues or you’re worried about them, taking proactive steps to protect your intellectual property and draft solid contracts is crucial. Don’t wait until it’s too late.
