Last year, in Your China Factory as your Toughest Competitor, I wrote about how our China lawyers have “gotten more calls in the last year from companies whose China factories are now directly competing with them than in probably the three years before that combined.” I went on to explain how “Chinese factories are more confident now than they have ever been about going out into the world with their own products, and more willing to toss their foreign customers to the curb early. Amazon and Alibaba do not help matters as we are getting roughly a call a week from someone whose product is being sold on Amazon and/or Alibaba by their Chinese factory.”
The other day I secured permission to write about a sourcing company that contacted us regarding this problem for one of its clients that makes IoT (Internet of Things) products in China. The below is our email correspondence (stripped of any possible identifiers):
IoT Product Sourcing Company: I’ve got an interesting story for you which could potentially mean some China contract work for your team. One of our best clients currently has a written contract with its China manufacturer, but it was written for them by their regular attorney who does not know China and it is badly written. We told our client this going in, however it’s tricky telling our client that their contract is not good, or even that their colleagues have no idea what they are doing. I’m sure you can relate but it’s especially tough for us because we are not lawyers and we do not want our clients ever to think that we are providing them with any legal advice, but like I said, we figured from the contract that they would eventually have problems and now they are.
We have a factory producing a products for us. Various kinds of fairly high end IoT industrial products. Quite profitable too. The contract in place details minimum order quantities annually and clauses related to exclusivity for Spain, France and Italy. During the past 16 months our client has failed to meet the minimum order requirements so its exclusivity is now uncertain. The main reason for their not meeting the minimum order requirements is problems the Chinese factory had with packing the products in a way that protects them during shipment and also problems with the products themselves. These issues have been sorted out now and my client is ready to move ahead with large orders every month. There are also molds involved that are worth well over a million RMB in total.
My client received an email from the factory last week saying they will be attending the ____________ trade fair in __________ and they want my client to send a sales person to represent them. Just to be clear, the Chinese factory wants to show my client’s products in Europe, with a focus on selling it in Spain, France and Italy! This email was quite amusing as they also asked my client for some information regarding how to install the products and requested my client send them a technical person to give more details about the whole system. They offered even to pay for this technical help. My client is a concerned but I find it amusing because the Chinese company has no idea what testing or standards are required in Europe as they manufacture almost exclusively domestic products. It would be a bit like a factory in China exhibiting in the US and telling Home Depot (their client) that they were going to help Home Depot sell its own products. But at the same time, I also know that this Chinese company is probably just one technical and marketing person away from being able to sell my clients products all over the world for 30 to 40% less.
I am curious on your thoughts and I was thinking of the below, but would be open to more:
1. NNN contract. It may be too late for this as I am not sure the Chinese supplier would be keen to sign a new contract at this point. From their point of view, they already have a great contract.
2. Trademark in China. Just reading a bit on your site it seems to me my client should be doing this, or really should already have done this.
3. Have you heard of a trade show barring a supplier from attending because they are selling essentially stolen products?
Please let me know what you think when you have some time.
My response was as follows:
My first advice to you would be to stay completely away from ALL of the legal issues and let your client deal with all of these issues itself. Your client should not expect you to give it legal advice and your doing so just increases the odds of your being blamed when things go wrong and of your being sued and losing on the same grounds.
I would need to know more to be able to provide all options but I can say that separate and apart from what has been transpiring between your client and its factory, your client has indeed made a big mistake by not having already registered its trademark(s) in China. That is the one thing above all else that anyone manufacturing in China MUST must do. See Manufacturing in China: Trademark Registration Should be the First Thing You Do.
As for the issue regarding the factory, a trademark will shut down rival sales as the factory could still sell the same products under a different name, but at least it can stop it from selling your client’s products under your client’s name! We also should talk more as patents in China and elsewhere might be possible, and if they are, they might help. [It turned out the company was too late to secure any patents]. You can try to get the fairs to block this China factory, but I do not see how that will happen because near as I can tell, the China factory is acting legally because it is not violating any contract or any registration.
I cannot recommend doing anything with the factory without getting the whole story because I am scared to death of what could happen here. One part of me says your client should tell its Chinese factory to “sign a new (good) contract now or we walk,” but the other part of me says that would be crazy because this will likely cause the Chinese factory to say, “great, and we keep the molds because they belong to us” and we keep making your products and now we add your brand name to them them because there is nothing to stop us from doing so. And what will your client then do? By the time it has new molds made and starts even trying to fight back, it will likely have lost all or nearly all market share to its factory. I say this because I presume that the contract your client has with its China factory does not make clear that the molds belong to your client nor provide any real incentives to prevent the factory from hanging on to them. But really, the bottom line is that unless your client wants to retain us so we can get all the facts and figure out step by step what it can do there is really nothing we can do but speculate. A
The email address for the sourcing company no longer works and so I have no update on what eventually happened, but I very much doubt any good result.
What should you do to prevent the above? The following three things are key:
- Choose your China manufacturer wisely. Due diligence is the answer to this.
- Make your China manufacturer sign a contract making clear that you own the molds, that you own the products and that it will not compete with you.
- Register your trademarks in China and with China Customs, register your patents in China and register both of these wherever you sell your products.