If you are having products made in China, you should take measures to protect your intellectual property from your Chinese manufacturer and other parties.
Unfortunately, manufacturers and business partners in China sometimes misuse the trade marks, patents, designs, copyright and know-how of foreign companies. This could include registering your trade mark or design under their own name, using your product to compete with you, or retaining moulds and plates to continue manufacturing your product even after the termination of your partnership.
However, there are steps you can take to protect your IP when manufacturing in China.
Register IP rights in China
In order to protect your IP rights in China, you first need to register them in China. Consider registering any trade marks you are applying to your product or packaging. If you have a new and innovative product or design, you might also consider applying for an invention patent, utility model patent, or design patent. Any patent or design applications must be filed before the product is disclosed to the public.
It is very important to conduct due diligence on potential manufacturers and business partners. Is the manufacturer able to meet your manufacturing specifications, including quality, cost, and timeliness? Will they be a reliable and honest partner? Due diligence will help you evaluate the risks to your business.
Due diligence may include reviewing the other party’s business license, legal representative, credit record, and corporate structure, and commercial reputation, as well as whether they have a history of IP infringement, involvement in litigation, and or been issued any administrative penalties.
It is best to start due diligence earlier rather than later, as this can help avoid wasting time, effort and money on transactions that are ultimately unsuccessful.
A local lawyer or other professional service provider can help perform due diligence. For more, see the due diligence section of Contracts for China.
A well-drafted and properly executed manufacturing agreement will help you protect your IP, and provide you with relief if the manufacturer breaches the agreement.
The agreement should set out all relevant details, including quality and timeliness requirements, inspection of goods, IP ownership, mould and tooling ownership, confidentiality, non-competition and non-circumvention, and termination. Select dispute resolution carefully, and make sure the contract is correctly executed.
As with other legal agreements for China, seek local legal advice. For more, see Contracts for China.
- Keep accurate records and copies of key correspondence relating to your manufacturing agreement, which may assist you in the event of a dispute.
- Consider compartmentalising the design, production, and assembly processes, and the equipment that produces your goods, so they are difficult to copy.
- Make yourself aware of the risks and potential pitfalls associated with manufacturing or assembling certain designs or latest-generation technologies in China.
- Consider incorporating specialised technologies or techniques that make it harder to duplicate your product, and allow you to verify whether a product is genuine.
- Actively monitor your manufacturer’s production to ensure they are not making extra products.
- After working with the manufacturer, ask them to return your moulds and plates so you can destroy them or ask a reliable third party to destroy them on your behalf.
- Another alternative might be to sell, or license the right to use the moulds and plates to your manufacturer.
- Manage confidential information carefully, even if you have a confidentiality agreement or manufacturing agreement in place.
- Classify confidential information, and use electronic and physical means to restrict access on a need-to-know basis.
- Consider tracking data flow and file transfers, and closely monitoring the entry and exit of flash disks, portable hard drives and laptops.
- Consider recording your IP rights with Chinese Customs, which allows them to seize suspected IP-infringing goods crossing China’s borders. For more, see Customs seizure of goods.
Actively monitor your manufacturer, and the market. If you find they are infringing your IP rights or violating your manufacturing agreement, seek professional legal advice on how to most effectively enforce your rights. For more, see Enforcing IP in China.
Original Equipment Manufacturing (OEM) exception to trade mark infringement
If a company is manufacturing in China exclusively for export, and not selling product in China, it may under some circumstances be able to defend against a claim of Chinese trade mark infringement. However, the legal guidance around the ‘OEM exception’ frequently changes, and companies should seek legal advice for their specific situation.
Guidance from China’s Supreme People's Court in April 2018 in the Dong Feng case was that branded products produced in China exclusively for export will generally not infringe upon Chinese trade marks, as long as the goods are not put into commercial circulation within China, and the exporter is the legitimate owner of the trade mark in the destination market. However, in the HondaKit case in October 2019, the Supreme People's Court appeared to change its position, ruling that products manufactured exclusively for export could infringe a Chinese trade mark, as the goods could circulate internationally and become available in the Chinese domestic market.
Whether an ‘OEM exception’ is available to a brand owner will depend on the latest legal guidance and the facts of each case. Australian companies manufacturing in China can minimise their risk by registering trade marks both in China and in destination export markets.