Define. Scrutinize. Monitor.
About 11 years ago my firm was retained by a large computer company to file a claim against an Original Equipment Manufacturer (OEM) based in Taiwan for theft of trade secrets. Our client had retained the OEM to manufacture what was then the first “all-in-one” motherboard. I’ll spare you the technical details but this technology was revolutionary.
The OEM was no dummy—it quickly identified the potential market for the technology. It subsequently went behind my client’s back and began selling the computers into other distribution channels under its own private label.
The OEM simply affixed its own label, “Brand X,” on top of my client’s equipment and passed it off as its own. The theft was ultimately uncovered at a trade show in Las Vegas several months later. One of my client’s engineers happened to stop by a booth displaying some interesting technology– a very familiar looking motherboard..
Upon closer inspection of the circuitry, it was discovered that the motherboard was exactly the same one that the engineer had designed 10 months earlier and outsourced to the shady OEM.
Upon learning of the trade theft, we immediately filed suit in federal court. An extensive 5-year international legal battle ensued culminating in a 2 month long federal trial in which we ultimately prevailed.
I tell you this story as a cautionary tale on how important it is to make sure all details of your clients’ outsourcing endeavors are closely defined, scrutinized and monitored.
The incomparable China Law Blog has a “not-to-be-missed” post on outsourcing appropriately titled China Outsourcing 101. The Legal Basics. While the post deals exclusively with China, I think it’s applicable when dealing with any OEM. My friend Dan Harris lists five outsourcing basics including the need for trademark registration and non disclosure agreements:
1. Create and properly register your intellectual property rights in the United States or whatever country or countries in which you sell the bulk of your products. If you do not have a firm basis for your IP rights under U.S. law, you will have nothing to protect in China. Before you go to China, be sure your intellectual property is protected under U.S. law or the laws of whatever country or countries in which you sell your products. Protect your brand identity by creating and registering your trademark, slogan and/or logo. Register your important copyrights. Carefully identify and protect your trade secrets, proprietary information and know how. Patent what you can.
Doing the above will mean that no matter what happens in China, you will at least be able to protect your product to the fullest extent possible in the country or countries in which you sell your products.
2. Register your trademarks in China. Registration can protect your future access to the Chinese market, prevent the export of counterfeit goods from China, and prevent a competitor from registering your mark in China, which would prohibit you from exporting your own product from China. For more on the necessity of registering your trademark in China, check out, "WHEN To Register Your China Trademark" and "China Trademarks — Do You Feel Lucky? Do You?"
3. Use a written agreement to protect your know how and trade secrets in China. Small and medium sized companies usually do not have an extensive portfolio of patents. Their most valuable intangible assets typically are their know-how and their trade secrets, which cannot be protected by formal registration. Chinese law, however, permits companies to contractually protect their know how and trade secrets by contract. Such agreements may (and in most cases should) also address issues such as non-competition and confidentiality. Without such a written agreement, no such protection is available. For more on using non disclosure agreements (NDA) in China, check out, "China Non Disclosure Agreements (NDA). A Really Good Thing."
4. Product Quality and Payment Terms. The rule here is simple. Do not make final payment to your Chinese 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 inspection costs in China 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 the OEM manufacturer to do this for you.
5. Use comprehensive OEM Agreements with each manufacturer. Small and medium sized businesses often enter into OEM manufacturing transactions with a simple purchase order. This is a mistake. The purchase order will not protect you. Your protection depends on your securing a signed written OEM manufacturing agreement with each Chinese manufacturer with which you deal. The ideal OEM agreement will address all of the issues discussed above while also addressing other basic legal issues such as jurisdiction and dispute resolution. This agreement should be in both Chinese and English, since the Chinese language version will control in China. For more on this, check out, "China OEM Agreements. Why Ours Are In Chinese. Flat Out."
I agree with all these points but would add where applicable drafting specifically tailored Technology Transfer Agreements where the OEM is also granted a license to market and sell the product within predefined parameters.
These agreements set forth exactly what a licensee is free to do under the patent rights. Depending on the claims in the patents, the licensee can be given the right to manufacture, have manufactured, use and/or sell the subject matter of the license. The agreements often set forth terms of exclusivity depending on the territorial rights granted.
The agreement should also state that the licensor owns the subject technology of the license (patents, patent applications, know-how trade secrets, trade marks and / or copyrights ), that it has the right to grant the license and that it has not granted a previous conflicting license.
What other precautions would you take when dealing with OEMs?