It’s common for overseas companies to choose China for OEM production. But even if negotiations and cooperation with your current supplier go smoothly, you should still have an alternative supplier ready.
Insufficient production capacity, quality issues, unreasonable price hikes by the supplier, or other reasons may make it impossible to continue cooperating with your current supplier, requiring an urgent transfer of production.
However, this obviously requires resolving two closely related key issues: molds and intellectual property (IP). Unclear ownership definitions of these two assets may lead to the supplier refusing to hand over molds when you want to transfer production; or your failure to fully own (100%) the IP required for production may delay the smooth implementation of the production transfer plan.
To avoid being “held hostage” by the supplier, when negotiating and signing contracts with your current supplier, you should consider the possibility of future production transfers and make corresponding provisions:
- Clearly stipulate that upon termination of cooperation, the supplier must deliver the molds promptly without setting any obstacles;
- Ensure you have complete and undisputed ownership of the product’s IP, and the supplier must not use or claim related rights without authorization. This requires detailed provisions from multiple aspects. Here are some key points for reference:
1) The contract should clearly list the types of IP involved, including but not limited to patents, trademarks, copyrights, and trade secrets. For key IP such as product designs, technical solutions, and brand logos, their ownership must be clearly defined as yours (this may also involve registering these IP rights in China in advance).
2) If the product involves parts co-developed by you and the supplier, clearer provisions must be made. It’s important to note that merely being the commissioning party for development does not guarantee that the developed technology belongs to you.
Article 861 of the Civil Code of the People’s Republic of China clearly stipulates:” For technical secret achievements obtained through commissioned or cooperative development, the methods for using, transferring, and distributing benefits shall be agreed upon by the parties; if there is no agreement or the agreement is unclear, and no determination can be made, all parties shall have the right to use and transfer such achievements before the same technical solution is granted a patent. However, the developer in a commissioned development shall not transfer the research and development results to a third party before delivering them to the commissioning party.”
It can be seen that when you commission a supplier for product development, unless the contract clearly stipulates that you own 100% of the developed technology, both you and the supplier have the right to use this technology. That is, even if you transfer production, your original supplier can still use this technology to compete with you.
To ensure full ownership of IP by the commissioning party, the contract should clearly and explicitly state that all IP generated based on the commissioned projects, including but not limited to patents, trademarks, copyrights, and technical secrets, shall belong exclusively to the commissioning party from the beginning. (For more information regarding this, you may check our previous post: The Top Three Tips You Need to Know While Sourcing in China)
We trust this article will serve as a practical guide for your operations in China. Should you encounter specific challenges in drafting manufacturing contracts or need tailored advice on intellectual property protection, our legal team stands ready to assist—feel free to reach out for further guidance.
