We often write on how companies outsourcing their product manufacturing oversees typically need an NNN Agreement, an OEM Agreement, and their trademarks registered in the country in which they are doing their manufacturing. For most companies seeking to manufacture product in a foreign country, those three are enough.
But for companies that do not have a finished product ready for manufacturing, a fourth item is oftentimes needed: a product development agreement. If you are going to work extensively with a foreign manufacturer to have it help you develop a new product, you probably are going to need a product development agreement. These agreements cover the cost and procedure for developing a product. Many companies fail to enter into this kind of agreement only to discover later that their foreign manufacturer owns “their” product IP or the molds or the tooling at the end of the process.
And what better way to give you a better idea of the sort of thing that should go into a product development agreement than to list out the initial set of questions our international manufacturing lawyers typically ask our clients to gather the information needed for drafting such an agreement?
Those questions are as follows:
1. Scope of Work
- What products will this development agreement cover?
- Will there be a formal timeline with specific milestones? If so, please describe the timeline and the milestones in as much detail as possible, including prototypes, the evaluation process and any required certifications.
2. Development Costs and Budgeting
- Which party will pay for development, design and engineering costs?
- Which party will pay for tooling and molds?
- Which party will pay for supplies and equipment?
- How will costing and approval of such expense items be handled?
- Will a formal development budget be drafted? If yes, how and on what schedule?
3. Development Proposal
In what form will the development proposal be provided to your foreign manufacturer? A general concept? Detailed drawings? A physical sample? Consider the following two extremes. In some cases, the foreign manufacturer simply has a very general idea of a product, perhaps just a sketch. In this case, the manufacturer typically will work with you to develop the product “from scratch.” At the other end of the scale, you have a fully developed working prototype and the issue is merely whether the foreign manufacturer can make the product at a certain price and quantity?
4. Final Product
How will the target for the final product be determined? Will a target of price, quantity, timing of delivery be set in advance, or will this be worked out during the development process?
5. IP Issues
- Which party will own the IP created during the development process (including physical items such as prototypes and tooling)?
- Will the foreign manufacturer have any restrictions on its use of the IP created during the development process? Will it be allowed to manufacture similar products for someone other than you?
6. The Product Development Agreement Versus the Subsequent Manufacturing Agreement
- If the foreign manufacturer meets its contracted targets/milestones, will you still need to enter into an OEM agreement with them to manufacture the developed products or can you have this done by other manufacturers?
- If there will be a Manufacturing Agreement, will it be an exclusive one? For example, can you go to another manufacturer? Can you go to a manufacturer in another country? Can you manufacture the product yourself in your home country or elsewhere?
- What happens if you decide not to manufacture the product at all?
- What if you use another manufacturer?
- What if you abandon the project entirely? For example, in a recent product development agreement we drafted, the parties agreed that if the foreign manufacturer met all of the requirements of the agreement and yet our client still decided not to go forward with actual production of the product, the foreign side would be required to pay an agreed-upon product development fee to its foreign manufacturer.
