Here’s an interesting, yet unfortunate scenario about IP infringement in China. You have designed a new product and have found a Chinese manufacturing partner (supplier) to help develop and manufacture it under a manufacturing agreement. Nothing uncommon here. But how about when you find out that this supplier has secretly filed a patent in China for your product?
Ownership of product ideas can be murky
Surely a supplier like this is behaving unethically?
Yes, this may be the case. Or it may be that you haven’t communicated your requirements clearly before working together. So, first, let’s confirm that the supplier actually has a case to answer.
To give some context, you need to understand what happens when you work with OEM or ODM suppliers in China. This type of supplier’s business model is that they develop products (often specializing in a specific type) and own the IP. They often don’t charge for the development work in order to attract customers, but they do make an assumption that they will own the product IP their team has worked on.
As such, you become a distributor of sorts.
If you are selling white-label products, let’s say coffee machines, that your supplier makes and adds your brand to (perhaps they make some very small cosmetic changes on request, too), then their ownership of the IP may not be such an issue for you and an ODM, in particular, could get you to market relatively quickly due to having already done a lot of development work in the past before you even became their customer.
However, if you go to a supplier like this with a product concept of your own and work with them to develop, test and validate, and finally mass produce it (an OEM typically works like this), it will be a dangerous assumption on your part that they are doing that development work with no intention to own the product IP, even if you brought the original concept before them! It may be that they have every right to take ownership if they did a lot of the work, especially if they did not charge you for some of that work!
What might happen if the supplier has filed the patent for your product in their own name?
If your supplier has filed a patent for your product, in theory, you’re still able to sell the product and make money from your market, but a lot of control is taken out of your hands. Here are some ‘nasty surprises’ you really don’t want:
- The supplier may raise your prices and you’re ‘locked in’ to using them as you cannot take your product design and other IP to a new supplier as they own it now. At the very least, you have little leverage to negotiate prices with.
- Ditto if you have issues with them, such as decreasing quality. Switching to a new supplier may be almost impossible.
- They may start selling your product design to other companies who compete with you in your own market and might even produce it themselves.
- They might stop working with you, depriving you of access to your own product.
Do you have grounds to fight back?
A good question at this point is, can you even do anything about the situation? IF you had an agreement that ringfenced your ownership of the design and other IP, it’s a maybe.
This post from China Law Blog has some helpful tips to follow if you think your IP has been compromised: Seven Steps To Take When Your IP Has Been Compromised.
Litigation after the fact is really a last resort, though. As Dan Harris says in the above blog post:
If the company that “stole” your IP is a “fly by night operator” there often is no point in suing that company for the millions of dollars it does not have. Often there is simply no point in suing a legit company either, particularly where your case is marginal. If you sue the legit company on a marginal case, it may decide it needs to fight you to the death to show the public that it was not violating any IP laws or your IP rights and to also demonstrate that it is “not a company to be messed with.” In these instances, a more diplomatic approach might work better.
This is not just a random company, they are your supplier and you’ve got an existing relationship and development/manufacturing agreement with them. With that being said, reminding them of their obligations and warning them that IP infringement like patenting your design in secret is unacceptable may be enough to spur them to back down without expensive and time-consuming litigation.
What can you do to protect your IP in advance?
In this case, there was an OEM agreement in place, but did it include a clause that explicitly stated that you would retain ownership of all product IP regardless?
It would be prudent to contact a lawyer with experience in China to check your agreement to find out if there is a case of IP infringement in China here. Maybe you can contact Dan Harris at Harris Bricken, or another law firm specializing in China business law?
A major risk is that another party (for example, a cousin of the boss of your supplier) registered that patent. You won’t have a way to prove it is related to your supplier.
You also need to understand the limitations of the patent they may have registered. It might not be a real constraint for your business.
Putting in place the right agreement and filing your patents in China
Locking down an enforceable product development agreement before sharing any kind of design can help stop IP infringement in China in its tracks. But a development or manufacturing agreement may not be enough to keep your product design out of the clutches of an over-zealous supplier if they file a design patent for it. It may control who is entitled to manufacture it and how the IP should be treated, but in certain cases, the patent may be required for the final say on who owns the product idea.
On co-development and design patents, Steve Dickinson stated on China Law Blog:
If the design is registered as a patent, the owner of the patent can prevent any other factory in China from making a product using that design. The patent owner can also register with customs, preventing the export of the knock-off product.
For this reason, both the foreign entity and the Chinese factory have a strong incentive to register a design patent so as to prevent knock offs from third party manufacturers.
However, he urges caution because:
Far too many foreign companies mistakenly believe they own the design because they came up with the design or because they made some or all of the payments for the design.
This belief is entirely mistaken.
The default rule in the case of patents is that absent a formal agreement to the contrary, whoever did the work owns the patent. It is therefore essential for the Chinese factory and for the foreign entity to make a formal, written decision on who has the right to register the design patent. But this simple agreement is not enough. Once the foreign entity secures the right to register the design patent, it must be sure to register that design before the product is revealed to the world because any form of disclosure of the design will destroy the right to register.
The point is made that China is ‘first to file’ and so it’s important that you register the trademark or patent to your product first as enterprising Chinese suppliers commonly will do so if they see that the product is unique and has market traction already.
Interestingly, filing trademarks may be preferable to patents in some cases.
Sourcing and vetting the right supplier before sharing IP
No one can see into the future with 100% certainty, but by strictly vetting the suppliers you originally source, you should be able to find suppliers who appear suitable but have red flags (such as evidence of past wrongdoing or financial irregularities) and discount them at an early stage before any IP is shared. This may sound like common sense, but it’s amazing how many importers still find a manufacturer on Alibaba and start working together without performing much/any due diligence on them.
It may be a shock to find out that your supplier, someone you thought was your ally, has registered a patent for your product! But what protection was put in place to prevent them from doing this? Trying to litigate after the fact could be costly and even useless, a case of closing the stable door after the horse has already bolted.
Filing trademarks or patents in China first is a good strategy, especially for importers with a very unique product that promises to be a hot seller. Signing enforceable development, manufacturing, and NNN agreements is also a critical step for those who’re serious about IP protection.
Furthermore, performing careful due diligence on potential suppliers is a wise first step before any paperwork is generated at all.
Have you been affected by IP infringement in China? What happened and how did you overcome the issue? Let us know. We aren’t lawyers, but we have some experience and will try to help. We are experienced in the steps to take to start a relationship securely with a new supplier, though, so if you’re looking into manufacturing in China or Asia and want to do so with minimal risks to your IP, do let us know, too!
You may also like these posts that are related to IP infringement in China!
- IP Protection For Manufacturers. Keep Component Suppliers In The Dark
- How To Create A Valid Manufacturing Contract In China To Protect Your IP
- How To Protect Product IP When Working With Contractors & Factories In Different Locations? [6 tips]
- Chinese Copycats: A Real Problem For Entrepreneurs?
- Will A China NNN Agreement Protect Us If We Start Assembling Products There?
- 6 Outcomes Of Signing A Strong Manufacturing Agreement With Your Supplier