What with China’s economic downturn, our China lawyers are getting an increasing number of emails and phone calls from companies seeking our help to “get their molds” back from their Chinese manufacturers. Whenever a foreign company terminates its Chinese manufacturer, it is at great risk of having the Chinese manufacturer keep the foreign company’s molds. The Chinese manufacturer typically holds on to the molds to extract money from the foreign company, but sometimes it does this simply for revenge. And what we are seeing more of these days is the situation where a Chinese manufacturer shuts down and one of the manufacturer’s creditors swoops in to take the foreign company’s mold.
And the thing about molds is that their true value so often exceeds their actual value. We have on more than one occasion been retained by American companies who have expressed a willingness to pay 2-3 times the actual value of their tooling to get it back. They are willing to do this is because they want to prevent their former manufacturer or some other company that has bought their molds from their former manufacturer from being able to use their molds and duplicate their product or because they need their molds fast to be able to fulfill already pending orders.
If you want to position yourself to be able to hang on to your mold, there are some relatively simple and inexpensive steps you should take.
The first thing you should do is identify the heck out of your molds by etching or engraving (in Chinese) the fact that the mold is your property and, if possible, do this both where it is obvious (to deter others) and where it is well hidden (to deter those who might try to remove your markings).
The second thing you should do is require your manufacturer sign (and properly seal) a contract (in Chinese) making clear that you own the molds and what will happen to the Chinese manufacturer (specific damages) if it fails to return your molds to you. It is also critical that your contract be written with a Chinese (civil) law system in mind and not a U.S./British common law system. In other words, your contract needs to work for China because that is where your dispute over your molds will need to be resolved.
The third thing you can do, if possible get a deposit from your manufacturer for your molds, which deposit you will return when your molds are returned to you. If your Chinese manufacturer refuses to give you a deposit for your molds, (which is what happens way more often than not), use its refusal as a leverage point to justify your putting in the liquidated damages provision that applies if your mold is not returned when specified. That provision alone goes a long way towards taking away any incentive for your Chinese manufacturer to hang on to your molds.
When we are retained to draft a stand-alone mold or tooling ownership/return agreement or when we put a mold or a tooling provision in a China OEM Agreement, we start by sending the following questions (among others) to our client:
- Please provide a 1-2 paragraph description of what you will be doing in China that will be covered by this mold/tooling agreement.
- What kind of items will be the subject of the agreement: molds, tooling, equipment?
- Where will the tooling be located? One manufacturer? Numerous?
- Do you have a direct relationship with the manufacturer, or are you working with an intermediary (sourcing agent or similar)?
- What agreements do you already have in place concerning the basic business relationship with the various parties? If you have any written agreements, please send them.
- Does the tooling already exist?
- What will be the source of the tooling? Will the manufacturer design and manufacture the tooling? Will the manufacturer purchase from others? If yes, under what kind of agreement? Will the tooling be contributed to the manufacturer by the buyer? By the buyer’s agent? Some other entity?
- What will be the payment method for the tooling, and who will pay?
- Who will design the tooling? In what form will the design be provided to whoever will manufacture the tooling?
Do the above and your odds of keeping your molds will go way up.