Why You MUST Have A China OEM Agreement.
Recently received an email from CLB co-blogger Steve Dickinson, who is based in China. I have removed all of the names and any other potential identifiers, but have retained the gist of the story. My firm has gone through nearly this exact same scenario at least a half a dozen times over the last few years.
Here it is:
I met with X Company [new client] yesterday. In our discussion, X Company asked about supply agreements. I said they are necessary and that one important part was to provide no copying, no placing of products in the supplier show room and no placing of the product in the supplier catalog. As a remark, I said: "The reason you need all this is to try to prevent the supplier from copying your line and selling it as their own. You will really feel bad when you go to a trade show and see you entire product line for sale with all your products on display and in your suppliers own catalog.
This morning, X Company called me to say they had just received a call from one of their employees attending a trade show in a city outside China. Their supplier from China was at the show. On display was X Company's entire product line down to the part numbers with all the products on display and all of this in their supplier's own catalog. So now I am trying to deal with this issue.Another interesting point. They actually have a really complete supply agreement from a New York law firm. The agreement is subject to New York law, excludes CISG [United Nations Convention on Contracts for the International Sale of Goods] and provides for UNCITRAL arbitration in Hong Kong. Meaning, of course, that by law they have absolutely no remedy in China against the offending party. In fact, their 18 page supply agreement does not deal with any of the real issues involved in China and it takes the stance that China and Chinese law do not exist. I do not see us being able to get any sort of injunctive relief here to stop this Chinese company quickly.
Bottom Line: Get a good supply (OEM) agreement that provides you with the possibility of securing injunctive relief in China. This oftentimes can be achieved using a carve out from arbitration. This provision will be what will allow you to go to the Chinese courts for an order requiring your supplier to do something such as stop exhibiting and selling your products.
Comments (17)
Read through and enter the discussion by using the form at the endBen - May 26, 2008 1:54 AM
I have seen this too many times from my clients. I am an outsourcing agent dealing with non Chinese companies who wish to buy from Chinese factories, including prototypes. We however are a foreign run Hong Kong registered company which gives us a slight advantage in the legal department. My advice is simply be aware, be very aware of the legal standings of your contract in China. No one needs to tell you copies happen here but don't get caught out with your factory supplying them legally without at least paying you for the technical specs first.
Law Office of Todd L. Platek - May 26, 2008 6:27 AM
Good article. Key point for enforcing your rights is doing it where it counts. Don't sue in a forum, and under a choice of law, which is distant from your prospective "defendant." If you, as foreign company, are unaware of your rights as a prospective "plaintiff" under Chinese law, you may be equally unaware of your other rights and obligations as an operating entity under Chinese law. Dragging a Chinese company into a lawsuit or arbitration in a third forum, e.g. HK or London or NY, and applying that or another locale's law, can have a useless psychological effect on the Chinese company, causing that company to ignore the problem. The resulting default award or order or judgment will be unenforceable in China, and a big yawn.
Do it right the first time and seek relief on the Chinese company's homeground, where judicial assistance is local and immediate.
Tine - May 26, 2008 12:32 PM
It might seem a stupid question but I have only just begun to study transnational commercial law, and I'm curious about its practical applicability when it comes to contracts with China specifically. Obviously it would have been smarter of the company not to ignore Chinese law given that it is at least an adequate instrument should a problem such as the one described occur. But even so, there is the possibility of arbitration. I get the feeling that at least for the short term, Mr Dickinson doesn't see the arbitration clause in the contract as a possible way to solve the problem. Is this because it would take too long to get control over the situation as soon as possible? Because it is supposed to take place outside the country? Because of the exclusion of CISG? Because arbitration is, in your experience, not a good way to go when handling such cases despite the usual Chinese preference for arbitration in other areas of the law? Or am I entirely wrong in my interpretation and arbitration is what is going to be happening to resolve this case?
My transnational law professor (Berger, Cologne) is a true enthusiast when it comes to arbitration and its positive impact on problem solving of international contract disputes, but I'd be very interested to know what you as currently practising lawyers in the field think about the chances of arbitration in this case.
Luckyone - May 26, 2008 6:42 PM
But according to current PRC legal framework, injunctive relief will only be available under Trademark Law, Copyright Law, Trademark Law and Maritime Law. I can not see how an OEM agreement can secure injunctive relief.
FOARP - May 27, 2008 6:00 AM
@Luckyone - That's news to me - is there not even preliminary relief for breach of contract? Even if this is true though, if breach of contract is found any IP licensed under the agreement should presumably revert back to X, at which point injunctions should be available under IP law. I'm not sure what can be done if the agreement is a know-how licence though.
@Tine - I guess it's just like Todd said: the contract does not give recourse under Chinese law in any way that is going to have immediate or meaningful effect. The reason why this behaviour is such a problem, and why immediate action is so necessary, is because even if X have no interest in selling their products in China and even if the supplier sells only into the Chinese market, they will soon find the allegedly infringing articles being exported from China by third parties, at which point they'll find themselves in a world of hurt. Arbitration under foreign law distant from the jurisdiction in which the problem is occuring will not bring the immediate injunctive effect required to prevent this.
Luckyone - May 29, 2008 7:23 PM
FOARP,
I should say no for a normal commercial contract. You can go to the court to seek security (freezing bank account etc.) before commencement of proceedings but you cannot obtain any order to stop the breaching party.
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[...]You can go to the court to seek security (freezing bank account etc.) before commencement of proceedings but you cannot obtain any order to stop the breaching party.[...]
Tony Brown - September 24, 2009 4:20 AM
I don't know If I said it already but ...Great site...keep up the good work. :). A definite great read.
Percy - April 24, 2010 1:13 PM
I agree with you, you have a good point here.
Ethanael - April 24, 2010 1:29 PM
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james - September 29, 2010 10:00 PM
Chinese quality regulator said that nearly a fifth of the food and consumer products it checked in a nationwide were defective. Do you believe it?
LB - October 18, 2010 1:01 AM
Now you tell me. I just wish I had used one of these before the Chinese company sent me over $300,000 of junk and my lawyer told me that I probably have no case because I don't have anything in writing clearly setting out what was expected of the Chinese factory. I'm done with China.
BB - November 24, 2010 6:30 AM
Great information here - thanks. It seems to me that having an OEM agreement is better than none, however there seems to be a lack of agreement that it is enforceable unless I had substantial financial resources for legal battles. The general consensus here seems to be that there are few if any remedies for a rogue manufacturer to have my products go out the back door as well as the front. What good does a well drafted OEM supplier agreement do for a small shop like mine?
I work hard at getting my products commercialized and the biggest headache by far is getting them manufactured. I have no financial backing so I work on a shoestring budget. In order to get a quote, I need to send all the technical information protected only by NDA agreements. My products are patented in the US but the only resources for manufacturing them appears to be in China. I fear that when infringing products hit the US shores, I will not have the deep financial pockets to enforce my IP against fairly well established China based manufacturers and that I will have to rely on the FTC and US courts to stem any infringement activity in the US.
Any better suggestions out there?
Sad and Sorry - March 20, 2011 11:47 PM
I just wish I had read this before I bought my product using just purchase orders. My manufacturer did not produce anywhere near the quality of my sample but without a contract making clear what was to be made, I did not have a case even worth bringing. I thank you for trying to help American companies by getting the word out on this.
Nakachi law - April 6, 2011 11:09 PM
@BB: IMO: 1. Branding. Brand your product heavily with protected copyrights, trademarks. Not only is this ultimately good for business (& think of when your patent shortly expires), but you can record that IP with U.S. Customs which will attempt to enforce your IP at the boarders. If the vendor copies your brand, then these remedies (including trade dress) are clearer and more cost effective to bring than patent infringement. U.S. retailers are likely to eschew unauthorized suppliers when you notify them that the goods they carry are counterfeit. This even works against gray market copyrights in the 9th circuit. 2. Relationship building. This is difficult, time consuming and etc. However, nothing is more effective. Try not to approach China vendors as as turnkey manufacturing solutions. Grow a small vendor with the same dreams you have, who values your business and who can be a long term partner.
Baltech - April 28, 2011 8:02 PM
100% agree. We used to just use POs but added the manufacturing agreement when an ex-employee of one of our Chinese suppliers told me that his old company felt they didn't need to follow our "agreement" because they had never signed anything with their seal.