Outsourcing in China: Five Basics for Reducing Risk

Many small and medium sized companies that engage in OEM
manufacturing/outsourcing in China fail to take the steps necessary to
protect themselves. When problems arise, they can do little or nothing to
protect 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 taking
a few basic legal steps can greatly reduce your risk. The cost of such
protection is modest compared to the protection it will provide.

The following five basic steps will greatly reduce your problems with
Chinese manufacturers, while improving your chances of recovering should any
problems arise.

1. Create and properly register your intellectual property rights in
the United States. 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.
Protect your brand identity by creating and registering your trademark,
slogan and logo with the U.S. Patent and Trademark Office. Register your
important copyrights with the U.S. Copyright Office. Carefully identify and
protect your trade secrets, proprietary information and know how.

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.

3. Use a written agreement to protect your know how and trade secrets
in China. Small and medium companies usually do not have an extensive
portfolio of patents. Their most valuable intangible assets typically are
their know how and 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 also address issues such as non-competition and confidentiality. Without such a written
agreement, no such protection is available.

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 protect
the Chinese manufacturer, not you. Your protection depends on your securing
a 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.

Steve Dickinson is an attorney with the international law firm of Harris & Moure (http://www.harrismoure.com), where he focuses on assisting small and medium sized businesses in or involved with China. Steve is fluent in mandarin Chinese and has been working on China matters for more than twenty years. He can be reached at firm@harrismoure.com.

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