China’s rapidly evolving manufacturing landscape, underpinned by a comprehensive supply chain infrastructure and efficient production practices, has become a magnet for businesses across the globe. One of the core elements of this industrial behemoth is the production of molds and toolings – vital components that represent significant investments of time, money, and innovation. Unfortunately, these prized assets can also become a prime target for unauthorized use or replication, resulting in substantial financial losses and compromised market positions.
As the stakes are high, protecting molds and toolings in China requires a strategic approach involving legal, operational, and tactical measures. However, it’s common for foreign entities to commit several missteps in their attempts to secure their assets. This article highlights the top five mistakes to avoid and offers insights into navigating the complex Chinese legal environment. It is important to avoid these mistakes so you do not run into problems when you are, for example, changing your manufacturer in China.
Mistake 1: Neglecting Non-Use, Non-Disclosure, Non-Circumvention (NNN) Agreements
One of the most significant missteps is neglecting the role of NNN agreements. These serve as a crucial line of defense against the unauthorized use of molds and toolings. An NNN agreement adapted to Chinese law and set jurisdiction in China essentially ensures that your Chinese manufacturer cannot use, disclose, or circumvent your proprietary tools without your express permission. Overlooking these agreements or not ensuring their enforceability can lead to serious breaches.
Mistake 2: Inadequate Product Manufacturing Agreements (PMAs)
While NNN agreements are a solid start, they need to be supplemented with comprehensive Product Manufacturing Agreements (PMAs). PMAs should clearly define ownership rights, usage limitations, and penalties for violations. A common mistake many companies make is either not having a PMA at all or having a PMA that is too general and does not cover all the necessary aspects. A strong PMA not only provides legal protection but also sets a clear roadmap for your relationship with the manufacturer.
Mold maintenance, repair, replacement, and storage conditions should also be addressed in PMAs, as should the return or destruction of molds following the termination of the agreement.
Do remember that all contracts that you use should include 4 things to ensure enforceability and be effective in China: 1. Be adapted to Chinese law; 2. Have China as the jurisdiction area; 3. Be in Chinese (i.e., in addition to English) to prevent translation problems and lower protection; 4. Use the correct Chinese legal name of the Chinese company and the correct Chinese name of the legal person, and the Chinese company should use the correct Chinese business stamp when signing the contract.
Mistake 3: Failure to Register Designs and Patents
The Chinese legal environment, while complex, does offer robust protection for registered designs and patents. However, many foreign businesses fail to register their designs and patents in China, thus missing out on this added layer of legal security. Registering designs and patents in China can significantly deter unauthorized use of molds and toolings, as it grants the owner the legal right to take action against any breaches.
It is important to remember that China has a “first-to-file” system when it comes to intellectual property: the first to protect a patent in China is the legal owner in China. You do not want to end up in a situation where or manufacturer or other Chinese companies protect your patents in China. In this situation, you are breaking the laws in China because you are producing products (despite being your products) that a Chinese company now owns the patents for in China.
Mistake 4: Insufficient Due Diligence When Selecting a Manufacturing Partner
Choosing a manufacturing partner in China is a critical step that requires meticulous due diligence. This process includes reviewing the potential partner’s reputation, track record, and adherence to agreements. Many companies rush into partnerships without performing a thorough investigation, only to be stung later by subpar performance or violations of trust. A proper due diligence process can prevent such eventualities and pave the way for a fruitful relationship.
Mistake 5: Complacency in Ongoing Asset Protection Efforts
Protecting molds and toolings is not a one-off activity; it’s a continuous effort that demands vigilance and proactiveness. Some businesses, after setting up initial defenses, become complacent, thinking their assets are completely secure. This complacency can lead to vulnerabilities as unscrupulous entities continuously evolve their methods to bypass security measures. Regular reviews, updates to legal agreements, and ongoing communication with your manufacturing partner are all essential to maintaining a secure environment.
Safeguarding molds and toolings in China’s vibrant manufacturing landscape is a complex task that requires careful planning, legal finesse, and continuous vigilance. Companies must not underestimate the importance of solid legal agreements like NNN and PMAs, which offer robust protection against unauthorized usage.
Additionally, the role of thorough due diligence in choosing a manufacturing partner cannot be overstated. By avoiding common mistakes such as complacency in ongoing asset protection and neglecting the registration of designs and patents, businesses can significantly reduce their risk exposure. Ultimately, effective protection of molds and toolings ensures that businesses can harness the full potential of China’s manufacturing prowess while safeguarding their investments and competitive edge.
Contact us if you need legal help in China, like drafting contracts that follow Chinese law, background investigation of Chinese companies, protecting patents, trademarks, and verification of contracts to the law in China, etc.
If you require our assistance or have further questions about our services, please do not hesitate to contact our Customer Relationship Manager, Jan Erik Christensen, at firstname.lastname@example.org. We look forward to hearing from you and helping your business succeed in China.