Attorney Scott Sanders addressed sensitive concerns faced by many CHESS attendees whose companies manufacture products in China. Housewares makers often painfully discover that their intellectual property and supply chain is at risk when working with Chinese factories. Business there has changed dramatically in the past decade and contracts have become critical. Sanders posed the essential questions: Is there a good, safe way to do business with Chinese factories and suppliers? How can one protect proprietary rights in a “wild west” global economy? How can one prevent its factories from going directly to its retailers?
Attempting to simplify issues in dealing overseas, he gave his insights into benefits and detriments of doing business in China, and how to overcome impediments. While companies may have unique requirements and issues, Sanders alerted the audience to potential pitfalls common to manufacturers producing in China. Because of the complexities of the legal terms, Sanders distributed several handouts that explained details.
TO PROTECT YOUR BUSINESS IN CHINA:
- Vet and re-vet your Chinese factory
- Form financial, social and legal connections for building relationships
- Get “Multi-N agreements”: non-disclosure, non-compete and non-circumvention
- Contract with the factory is the best protection
- Contributory infringement possible by E-Markets
- Asset analysis is critical: Inventory, Receivables, Tangible assets, Real estate, Bank holdings
HOW TO DO BUSINESS WITH CHINESE FACTORIES/SUPPLIERS:
Chinese culture has a different understanding of agreements than in the U.S., resulting in numerous legal problems. Contracts are essential, as well as understanding the legal jurisdictions and options for recourse.
Assure ISO certification. Companies must use contracted inspectors, such as Bureau Veritas for all stages of testing and inspection from pre-production to loading. This is critical at containers before shipment. Watch for in house violations with suppliers/factories/associates/reps.
DERAIL PROBLEMS AT THE SOURCE WITH CONTRACTS TO PROTECT AGAINST:
- Breaches
- Nonfulfillment / Noncompliance
- Direct competition / Circumvention
- IP Violations
- Product Defects
- Regulatory violations
- Maintain distribution via strong contracts with reps, distributors, employees, factories and inspectors.
KEY TERMS TO IDENTIFY:
- Venue – where a lawsuit would be held; base venue on asset analysis
- Jurisdiction – establishing a courts’ authority to hear dispute
- ADR – alternative dispute resolution
- NNN – nondisclosure, noncompetition, non-circumvention
JUDGMENT ANALYSIS:
- China – reciprocity with U.S. is mostly lacking
- Korea – the new frontier of reciprocity? Evolution may be taking place allowing for mutual honoring of judgments.
IF ASSETS CAN BE FOUND IN CHINA:
- Should you sue in China? It’s expensive and difficult
- Pre-Judgment Writs recognized on K claims and for a liquid sum
- Strong settlement leverage
- Companies need payroll to operate
- Must hire quality Chinese litigators
Third party violations in e-marketplaces is a newly developing areas for case activity, though there is not yet a cohesive analysis of increased liability. Events are trending towards expanded (contributory) liability, expanded personal jurisdiction, injunctions / damages. The onus is on Alibaba and others to properly investigate their vendors. An important 2012 case determined that “If knowledge of infringement is not shown, then the patent owner must prove willful blindness…”
ELEMENTS OF SECONDARY LIABILITY FOR INFRINGMENT:
- Knew or had reason to know of the alleged infringement of trademarks / patents / copyrights
- Exercised sufficient control over the vendors engaged in the ongoing infringement
- Failed to take sufficient steps to stop it
- Failure to investigate known infringement may lead to liability.
LIABILITY AGAINST KNOCK-OFF ARTISTS:
- Few protections outside of US
- IP theories against offender if imported into or sold in US
- Seizure by U.S. Customs possible
- Contributory infringement v. E-marketplaces
PROBLEMS WITH RETAILERS:
- Going Direct – a big problem
- Demand effective Non-competition agreement, add to terms and conditions if won’t sign a contract
- Offer pricing incentives for long-term exclusivity
- Grant limited license for IP rights
- Terms and Conditions are negotiable in many cases
PROTECT YOURSELF:
Get protective N agreements with factory: Non-use, Non-compete, Non-disclosure, Non-circumvention. This can cut off competition problems at source.
Sanders outlined the prudent ways to do business in China to include vetting factories, confirming authorizations of agents and factory directors and getting proper agreements. Hire reputable staff and consultants, such as American-born Chinese individuals, who know the Chinese languages and local cultures and who understand your business. These individuals should have financial, social and legal connections in China.
Enforcement of U.S. judgements in China is unlikely, but a few U.S. laws on foreign judgements may be pertinent in rare circumstances. Consult your attorney.
Logical option might be alternative dispute resolution (ADR) if your adversary agrees to mediation/arbitration which has these benefits:
- Streamlined for quicker judgment
- Maybe less costly than a full-blown lawsuit, depending on process & agency
- Beware of prohibitive filing fees, such as International Chambers of Commerce
- Vet fees, length of process, enforceability of award
Sanders suggested approaching a conflict with an offer of minimal contract protections instead of a lawsuit. The factors may include the following:
- Minimal terms easier to negotiate
- Mutual exclusivity
- Venue
- ADR – including meeting via CEOs
- Notice and cure rights
- Exit options
- Attorneys’ fees provision
Disclosure agreements should extend to subcontractors, co-ownership, “umbrella” arrangements and associated factories.
When negotiating IP protection with an established counterpart:
- SEEK mutual exclusivity
- GET the 3N + Juris, venue, ADR
- GET longer duration + PRICE incentives on volume
- INCLUDE an exit vehicle
- PRESENT financial incentive to sign
Conclusions
Complex situations, such as contract protections and IP rights require experienced advisors. Accountants and sales managers are not lawyers. Don’t write your own contracts; hire lawyers as counselors, not adversaries. Big financial savings will result.
Questions from the audience brought up reciprocity with several Asian countries and how to verify authority in Chinese courts regarding NNN agreements with tooling and manufacturing details. Another question asked about design patents vs. utility patents for infringement risk. Sanders replied that this topic is a tough river to navigate, seek expert counsel.
