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Kickstarter And China Manufacturing. You Are So Wrong On Your China Risks.

Posted in Legal News

Every so often we get calls from companies either in the process of raising funds on Kickstarter or just having completed their Kickstarter fund-raising.

Almost invariably, our conversation goes something like the following:

Company with product:  We just raised money on Kickstarter and we have lined up a China manufacturer for our product and we are thinking it is time to get a China lawyer involved, though we do not have much money for legal yet.

Me: Well, if you are going to spend money on anything, the most important thing is your intellectual property.

Company with product:  We figured we would deal with that later. Right now we just want someone to review our NDA and then review the manufacturing contract we will be drafting.

Me: Who drafted your NDA, an attorney with China experience.

Company with product:  No, we did it ourselves. It really just needs a quick review.

Me: I have never seen a self-drafted NDA that just needs a quick review for China. To work for China, you need a China NDA, which we actually call an NNN Agreement. NDAs are geared towards preventing disclosures of information but your biggest risk in China is typically not going to be your manufacturer disclosing your information; it’s going to be your manufacturer stealing your product and selling it worldwide and to your own customers.  Also, to be effective, the NNN Agreement should be in Chinese and it should contain liquidated damages provisions. There are all sorts of other things that need to go into it as well, but these are the basics. The same holds true for an OEM Agreement. But really, my biggest concern is your IP.

Company with product:  Well, to be honest with you, when we listed the risks on our Kickstarter, we said that the risks were manufacturing delays. We didn’t even mention our IP and so I don’t see how we can pay you anything right now to protect that.

Me: Well, if you cannot afford to protect your IP, it is probably not worth your money to pay for contracts. I mean why spend money for an NNN to protect yourself against a few companies — your potential manufacturers — when you are not able to spend money to protect yourself against the millions of other people out there who could steal your product. And as I hinted, we will need to start over on these contracts, using your draft contracts for nothing more than to determine certain facts regarding what you are doing. I really think that you should at least register your key trademarks.

Company with product:  Yeah, well, I’ll talk all of this over with my partners.

I am writing on this now because twice this week I have received calls from “companies with product” who are now encountering serious (and expensive to remedy) difficulties arising from their failures to button down their IP protections when we spoke a year or two ago.

Bottom Line:  Failing to protect IP early on is probably the most common mistake made by start-up companies.

 

  • Devin Petty

    I had a discussion with a potential client whose remedy for their China manufactured “American” clothing was to uncut the price of their hijacked product being listed on Taobao. They did not see the value of my services… among other things.

  • lacompacida

    Do foreign businesses know that they are not in Kansas any more when they do business in, with, or about China. Hope they will come to their senses when they get their rude awakening.

  • plus8star

    Hey Dan it’s been a while! I came across this new post from the Sinocism newsletter. I have joined a hardware-focused startup accelerator last year and we do a whole lot of crowdfunding and china manufacturing- we are actually based in Shenzhen so it helps :) would be great to chat about your legal adventures with china manufacturing! Our IP approach is generally that beyond the brand the startups we work with have either/and hard to copy software and algorithms, a service and business model that is not just a straight hardware sale, or a community of users. This form of IP could be said to be “doing something hard to copy” and that’s rarely the physical part.
    Benjamin @ +8* / HAXLR8R

    • http://www.chinalawblog.com/ Dan Harris

      Benjamin,

      What you are doing is definitely a good idea and we have a number of clients doing the same thing. I call it “holding back the secret sauce,” with the sauce in this case being the code or the algorithms.

  • wolfgroupasia

    As time passes, I see doing business in China for a growing number of companies more as a defensive play that a pure market opportunity. Those companies come into China as a way of understanding their current or future China-based competitors, and possibly to put those competitors on their back foot in their home market as a way of distracting them from their efforts to go abroad. There are notable exceptions, but the numbers of companies who have more to gain by betting on China than they have to lose is falling – especially if IP is involved.

  • http://www.chinalawblog.com/ Dan Harris

    You are right that going up against an SOE for IP infringement will be considerably tougher than going up against a private company for the same thing. But even if prevailing against an SOE were impossible, in most instances, the infringer is not going to be an SOE and so it still makes sense to register, especially when you consider how inexpensive doing so can be. Also, in the kickstarter examples given above, the U.S. company’s biggest risk is usally not just not being able to stop someone from using “their” IP; no, the biggest risk is usually that some Chinese company will go off and register the U.S. company’s putative IP and then STOP THE U.S. COMPANY FROM GETTING ITS PRODUCT MANUFACTURED IN CHINA OR SHIPPED OUT OF CHINA EVER AGAIN.

    • bendbrad

      Or getting your products made elsewhere and exporting into China. If someone in China registers your IP in China and you try to sell your foreign made products in China, you are infringing upon their IP, is this correct?

      • bystander

        I’m no lawyer, but I certainly think the answer is yes, in that the patent registration is first-to-file in China with (according to my understanding) not nearly the same kind of prior art treatment as is standard in the US.

  • Richmond Lee

    Hi Dan, great blog! Very helpful! I have a question for you. If I’m manufacturing goods based off of a cartoon character driven franchise, do I have to file for IP protection for each character individually? Or would it be enough to copyright just the name of the business and logo mark? I have many different characters, and US law firms charge around $5k per mark registered overseas, so the costs could balloon very quickly. What’s the best way to approach this?