Many small and medium sized companies that engage in OEMmanufacturing/outsourcing in China fail to take the steps necessary toprotect themselves. When problems arise, they can do little or nothing toprotect themselves because they have no legal basis for protection. The fact is that outsourcing disputes must be resolved in China, under the Chinese legal system. The Chinese legal system has improved greatly over the past ten years and takinga few basic legal steps can greatly reduce your risk. The cost of suchprotection is modest compared to the protection it will provide.
The following five basic steps will greatly reduce your problems withChinese manufacturers, while improving your chances of recovering should anyproblems arise.
1. Create and properly register your intellectual property rights inthe United States. If you do not have a firm basis for your IP rights underU.S. law, you will have nothing to protect in China. Before you go toChina, be sure your intellectual property is protected under U.S. law.Protect your brand identity by creating and registering your trademark,slogan and logo with the U.S. Patent and Trademark Office. Register yourimportant copyrights with the U.S. Copyright Office. Carefully identify andprotect your trade secrets, proprietary information and know how.
2. Register your trademarks in China. Registration can protect yourfuture access to the Chinese market, prevent the export of counterfeit goodsfrom China, and prevent a competitor from registering your mark in China,which would prohibit you from exporting your own product from China.
3. Use a written agreement to protect your know how and trade secretsin China. Small and medium companies usually do not have an extensiveportfolio of patents. Their most valuable intangible assets typically aretheir know how and trade secrets, which cannot be protected by formalregistration. Chinese law, however, permits companies to contractuallyprotect their know how and trade secrets by contract. Such agreements may also address issues such as non-competition and confidentiality. Without such a writtenagreement, no such protection is available.
4. Product Quality and Payment Terms. The rule here is simple. Do notmake final payment to your Chinese manufacturer until you are confident youwill be getting an on time shipment of the correct items and quantities atthe quality standards you require. This usually means you must incur inspection costs in China and provide for a clear procedurefor dealing with these problems as they arise. You must take the lead onthis. You cannot depend on the OEM manufacturer to do this for you.
5. Use comprehensive OEM Agreements with each manufacturer. Small andmedium sized businesses often enter into OEM manufacturing transactions witha simple purchase order. This is a mistake. The purchase order will protectthe Chinese manufacturer, not you. Your protection depends on your securinga written OEM manufacturing agreement with each Chinese manufacturer withwhich you deal. The ideal OEM agreement will address all of the issuesdiscussed above while also addressing other basic legal issues such asjurisdiction and dispute resolution. This agreement should be in both Chineseand English, since the Chinese language version will control in China.
