5 Legal Tips for Outsourcing Manufacturing to China

CHINA_by_StephenWilkes_01U.S. companies face a variety of issues when manufacturing in China. Here is a list of typical issues our clients routinely encounter:

1) Confidentiality Agreement: Many U.S. companies meeting for the first time with potential Chinese manufacturers do not realize that a U.S. drafted Non-disclosure Agreement is of little or no value in protecting their trade secrets. Instead what is needed is a Non-disclosure, Non-compete, Non-circumvent (NNN) agreement that is drafted by an attorney. This agreement would be drafted in English, for later translation into Chinese.

2) Development Agreement: This agreement is particularly useful to cover ownership rights, procedures, cost, and other terms where the U.S. company does not yet have a finished product ready for manufacture. A development agreement can also be useful in some situations where the U.S. company needs to determine if the Chinese manufacturer can actually perform in manufacturing the product in terms of quality, timeframe, and cost.

3) Original Equipment Manufacturing (OEM) Agreement: An OEM Agreement covers product quality and payment terms, jurisdiction, dispute resolution, and related issues. Solely relying on a Purchase Order (PO) is not sufficient, because the PO generally serves to protect the manufacturer, not the U.S. company.

4) Register Trademark in China: China is considered a “first to file” trademark country. This means, with few exceptions, whoever files for a trademark in a particular category will get it. Even if the client has no plans to market their product in China, if a third party registers the client’s trademark in China, that third party has the right to stop client’s products from leaving China because they violate the third party’s China trademark.

5) Issue Resolution: A seasoned international business attorney experienced in manufacturing in China will have contacts in China who can help resolve issues for companies that did not follow the above best practices. For example, it is fairly common for manufacturers in China to refuse to return tooling; there are ways to deal with this in an OEM Agreement, but if that did not happen in the first instance, other steps can be taken to try to resolve it after the fact.