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Outsourcing manufacture to China: reduce your risk


21st Sep 2015

Are you considering outsourcing to China but concerned about the potential pitfalls? You are not alone.

While shifting production overseas offers significant cost reductions it does bring challenges, not least because it requires transmission of sensitive technical information to suppliers and the significant distances and time differences involved can make it difficult for you to monitor the their activities.

So how can you protect yourself? This is best done through a combination of protecting your IP rights, entering into effective confidentiality and supply agreements, working closely with suppliers and taking swift action to tackle unauthorised goods.

Protect Your IP At An Early Stage

Protecting IP rights in the outsourced products / processes at an early stage can demonstrate to potential suppliers that IP is treated seriously and act as a deterrent to anyone who may be considering misusing information or samples supplied to them. IP rights are critical for taking action through the Chinese courts against unauthorised goods and persuading enforcement and customs authorities to take action on your behalf.

  • Patents can be used to prevent a supplier, or other third party, from making or selling counterfeit products or using a process for their own advantage, and to limit their freedom to develop competing products and processes. As it can take a couple of years or more for a patent to be granted and provide enforceable rights in China, other types of rights can provide protection in the intervening period.
  • Utility models are quicker, cheaper and easier to obtain than patents and can provide useful rights (though typically narrower than patents) against unauthorised and counterfeit products. Although examination is becoming stricter, they are often registered in around 6 months, providing enforceable rights quickly. A patent application can be pursued in parallel with a view to securing broader rights for the same invention.
  • Copyright exists automatically in design drawings, technical drawings and CAD models. These should be dated and marked with a suitable copyright notice before being transmitted to suppliers. Consider inserting artefacts which have no purpose but can make it easier to prove copying. Copyright can be registered to provide evidence of its existence in China and make it easier to enforce.
  • Registered designs are often registered within 6 months, providing early rights in the appearance of the goods and more effective protection than copyright. They can be used to take swift action through the Chinese courts (in as little as a few a months in some cases) to secure an injunction to prevent further infringements.
  • Trade marks can be registered within a few months and are easy for local enforcement agencies to understand and to compare with potentially infringing marks. Applying the trade mark to the goods where they originate can make it easier to secure an injunction to prevent counterfeits, particularly where the mark can be applied to the goods themselves (as opposed to their packaging).

Your IP protection strategy should also cover Europe to enable you to prevent unauthorised goods being exported to your home market.

Preserve Confidentiality & Trade Secrets

Take care only to provide suppliers with the information and know-how they need to carry out the work they have been specifically asked to do. Consider spreading manufacture of components among different suppliers to minimise their access to the overall product.

Non Disclosure, Non Use/Non Compete, Non Circumvention Agreements (‘NNN’s), (like NDAs and popular in China), should be used to cover your initial correspondence and any commercial negotiations with potential suppliers. Any breach of the supplier’s obligations under the NNN is then actionable through the courts. These should be prepared in Chinese, include detailed information about the scope of work and provide details of your pending and registered IP rights.

Be Ready To Take action

If unauthorised or counterfeit products are discovered, you will need to act quickly to plug the leak and prevent them from flooding the local market or making their way to Europe. The ability to take swift and effective action is often dependent on having evidence of IP rights to hand and being able to prove that the goods are unauthorised. Having Chinese language versions of agreements and registration certificates for IP rights and an effective system for identifying unauthorised goods can enable action to be taken through the courts without delay.

Precautions such as these can reduce your risk and ensure the benefits of outsourcing go direct to your company’s bottom line.

This article is for general information only. Its content is not a statement of the law on any subject and does not constitute advice. Please contact Reddie & Grose LLP for advice before taking any action in reliance on it.

Author
Tom Sharman
Partner
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Would you like to know more? You can talk to Tom Sharman who will be able to help. Call +44 (0)20 7242 0901

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