Reducing Legal Risks When Outsourcing to China

The China Law Blog provides an impressive array of information regarding the legal issues involved in doing business with China.

Outsourcing in China: Five Legal Basics For Reducing Risk particularly offers some great suggestions, which presumably are applicable more generally to outsourcing elsewhere:

     "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. All of this will help prevent Chinese copies from entering the United States.

     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, virtually 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. Better yet, get the agreement to provide for all disputes to be resolved before an international arbitration tribunal."

Protecting one's intellectual property, getting non-disclosure agreements signed, and avoiding reliance on a simple purchase order are sound legal tips for any transaction, even domestically. With companies rushing to get into the China market, it is refreshing to find a source of information that provides legal pointers, based on years of practical experience.

Businesses should remember that a variety of intellectual property tools can be used in tandem -- for example, the law of confidence (contracting for confidentiality), copyright, and maintenance of trade secrets; further, some IP rights require registration (for example, trademarks and patents) while others (for example, copyright) exist irrespective of registration and merely by the product's creation. Another point to keep in mind is choice of law: each contract should set forth the governing law as well as agreement for the parties to be subject to the jurisdiction of a mutually-agreed state.