How to Frame a Solid Manufacturing Contract in China to Safeguard Intellectual Property

China has the lowest labor costs in the entire world for manufacturing employees. Their manufacturing capabilities have continued to grow since the inception of China manufacturing, and their factories produce private label products worldwide. China is the largest exporting nation in the world largely because it specializes in a number of different product categories. Especially if you’re looking to build custom product, you will save so much time and money by working with a manufacturer who specializes in your product category.

However, when a foreign company hires a Chinese manufacturer must ensure that the products they produce will meet the agreed quality criteria. Having a well-defined manufacturing contract can alleviate the various legal issues inherent in manufacturing in China along with safeguarding your intellectual property. You should contract with a China manufacturer that has sufficient financial resources. This seemingly simple principle is often overlooked because a lot of U.S. buyers contract with third-party sourcing companies unaffiliated with the contract manufacturer that owns the factory.

 

Register your IP in China

Arguably, this is one of the most important things that companies can do even before they start looking for manufacturers in China. Intellectual Property rights include trademarks, design patents and copyrights. Foreign companies are still at risk from IP ‘hijackers’ – for example, Chinese suppliers that file their foreign client’s IP without their permission. Align your IP strategy with your business strategy. Identify business goals, protectable IP, regional requirements, potential partners and capacity to expand into your target markets. IP rights are important—take the time to identify your IP to determine what can be registered and/or enforced in China as early as possible. Make IP protection a core responsibility of the entire China management team, not merely a function of the legal or brand protection teams, and adjust internal information flows and reporting structures to reflect those responsibilities.

 

Product Development Agreement

A product development agreement contract protects you and your work, as well as helps you obtain the final product you may want. Additionally, the agreement helps the designer by addressing and resolving disputes and aiding you in getting paid. A good product development agreement generally includes provisions addressing the following:0

  • The product to be developed.
  • The technology the foreign company and the Chinese manufacturer will contribute.
  • Who will provide the product specifications and in what form.
  • Who will own the IP rights to the resulting product.

 

NNN Agreement in China

Instead of drafting a pure NDA agreement, foreign companies should be opting for a Non-Disclosure, Non-Use and Non-Circumvention agreement (NNN) that includes the normal protections of a NDA including non-disclosure and non-use provisions but in addition to those, also non-circumvention protection. China NNN agreement prevents your Chinese manufacturer the distribution of your IP to 3rd parties. It stops Chinese suppliers from using your IP for any purpose other than manufacturing the product in question for you and prohibits a supplier from selling direct to your clients.

Over the past few years, the Chinese government has taken significant measures to improve the framework for IP protection. Nevertheless, it is important for the foreign companies to take a strategic approach from the very beginning to safeguard their intellectual property in the best possible manner with the help of experienced China business lawyers.

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Armed With NNN Agreement to Gain Better Business Advantage in China

Because of the exceptional cost savings, American businesses that sell physical products through online or brick and mortar stores, prefer to manufacture their products in China. Putting your manufacturing unit in China can be advantageous in many ways. China has the lowest labour costs in the entire world for manufacturing employees. Lower costs of living make China’s low wages manageable for the common manufacturing worker, and their factories are thriving by producing goods for the entire world.

Especially for mass-market products, low production cost means that you have enough supply to maintain competitiveness in the market. Some companies also choose to outsource to manufacturing facilities in China to ease the distribution process to other countries. When the manufacturing process is properly handled elsewhere, your company can focus its resources on research and development for future products. While there are lots of pros about getting your items manufactured in China, you need to keep in mind there are many pitfalls of doing business over here.

Opt for the NNN Agreement in China-

The most common mistake, American and other companies commit is to sign out an NDA agreement instead of an NNN agreement. It is a Non-Disclosure, Non-Use and Non-Circumvention agreement (NNN) that includes the normal protections of an NDA including non-disclosure and non-use provisions but in addition to those, also non-circumvention protection.

Must have Provisions in a China NNN Agreement-

  • NNN agreement should be written to be enforceable in a Chinese court with jurisdiction over the Chinese defendant.
  • It will need to be written in English and Chinese and we will need to be able to make slight edits (such as changing the supplier’s name in English and Chinese) so you can re-use the document (for the same product) but for different suppliers.
  • An NNN agreement must include a sum certain contract damage provision that a Chinese court can and will enforce by ordering seizure of the defendant’s assets.

How does NNN Agreement Protect You?

  • NNN agreement prevents your Chinese manufacturer the distribution of your IP to 3rd parties
  • Stops Chinese supplier from using your IP for any purpose other than manufacturing the product in question for you
  • Prohibits a supplier from selling direct to your clients

Do keep in mind that the U.S. model non-disclosure agreement will not work in China. Non-use means requiring the Chinese factory to agree by written contract not to make any use of your idea/concept/product in a manner competitive with you, the disclosing party.

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