How to Reduce Your International Contract Manufacturing Risks
Doing Nothing is Not a Solution
Small and medium sized companies that engage in international OEM manufacturing/outsourcing too often 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.
A Five-Step Guide to Safer International Contract Manufacturing
The following five basic steps will greatly reduce your problems with your overseas manufacturers, while improving your chances of recovering damages from them should any problems arise.
1. Securing and Registering Intellectual Property: A Crucial First Step
Create and properly register your intellectual property rights domestically and every other country in which your product will be sold. Protect your brand identity by creating and registering your trademark, slogan and logo with the relevant Patent and Trademark Offices. Register your important copyrights with the relevant Copyright Office. Identify and protect your trade secrets, proprietary information and know how. All of this will help prevent copies from the country in which you are manufacturing from entering into your home country.
2. Trademark Registration: Safeguarding Against Counterfeits and Competitors
Register your trademarks in the country in which you are manufacturing. Registration can protect your future access to the market in that country, prevent the export of counterfeit goods from that country, and, most importantly, prevent a competitor from registering your brand name as their own trademark in that country and then use that trademark to prevent you from exporting your own product from that country.
3. Protecting Know-How and Trade Secrets through Written Agreements
Use a written agreement to protect your know-how and your trade secrets. Small and medium sized companies usually do not have an extensive portfolio of patents. Their most valuable intangible assets oftentimes are their know-how and trade secrets, which usually cannot be protected by formal registration. In most countries it is relatively easy to contractually protect your company’s know how and trade secrets by using an NNN agreement or by using NNN provisions in some other sort of contract, such as a manufacturing contract. Such agreements/provisions may also address issues such as non-competition and confidentiality. Absent such agreements, effective protection in most countries is often unattainable.
4. Ensuring Quality and Timeliness: Handling Product and Payment Matters
Product Quality and Payment Terms. The rule here is simple. If possible, do not make final payment to your 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 overseas inspection costs 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 your OEM manufacturer to do this for you. In addition to this, be sure your contract is crystal clear regarding product quality and product delivery dates.
5. Cultivating Secure and Clear Manufacturer Relationships with Comprehensive Agreements
Small and medium sized businesses often enter into OEM manufacturing transactions with a simple purchase order. This is almost always a mistake. Purchase orders usually protect your overseas manufacturer, not you. Your protection depends on you having country-specific Manufacturing Agreements with each of your manufacturers.
The ideal manufacturing agreement will address all of the issues discussed above, while also addressing other basic legal issues such as jurisdiction and dispute resolution. This agreement typically should be in both English (or the language of your home country) and the language of the country in which your manufacturer is located.
What are you seeing out there?