You may own it, but if you have not done the right things to hang on to it, you ain't gonna get it.
You may own it, but if you have not done the right things to hang on to it, you ain’t gonna get it.

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.

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Dan Harris

I am a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

I mostly represent companies doing business in emerging market countries. It has taken me many years to build my network and it takes constant communication and travel to maintain it. My work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, setting up a legal framework to move slag from Canada to Poland’s interior, overseeing hundreds of litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt.

I was named as one of only three Washington State Amazing Lawyers in International Law, I am AV rated by Martindale-Hubbell Law Directory (its highest rating), I am rated 10.0 by AVVO.com (its highest rating), and I am a SuperLawyer.

I am a frequent writer and public speaker on doing business in Asia and I constantly travel between the United States and Asia. I most commonly speak on China law issues and I am the lead writer of the award winning China Law Blog (www.chinalawblog.com). Forbes Magazine, Fortune Magazine, the Wall Street Journal, Investors Business Daily, Business Week, The National Law Journal, The Washington Post, The ABA Journal, The Economist, Newsweek, NPR, The New York Times and Inside Counsel have all interviewed me regarding various aspects of my international law practice.

I am licensed in Washington, Illinois, and Alaska.

In tandem with the international law team at my firm, I focus on setting up/registering companies overseas (via WFOEs, Rep Offices or Joint Ventures), drafting international contracts (NDAs, OEM Agreements, licensing, distribution, etc.), protecting IP (trademarks, trade secrets, copyrights and patents), and overseeing M&A transactions.

  • The Chinese factory will usually hold on to the molds as a leverage to keep a business relationship existent or to extract money, as you wrote. But often they are eager to make the same product for another company, and for that they will need the molds. They often give samples to various traders and other factories, in the hope that their own customers place orders for these designs — in the end it will usually come back to the factory that already has the molds.

  • Saskatchewan Immigrant

    What’s the Bracebridge & Muskoka Lakes School image in Ontario Canada about anything to do with China? Did they invest in some molds?

  • Benjamin Schwall

    Another reason why folks will pay more than the value for the molds is the pain of a disrupted supply chain. It takes maybe 2 months to remake a mold and tune it. If your clients are screaming for product, you will pay the ransom…

    • Really good point. And one I should have mentioned (and will now add to the blog). I should have mentioned it because our China lawyers have negotiated many a time to try to get back molds for new clients who are willing to re-pay to get their molds because that will be way cheaper than having to pay late penalties to their own customers for late deliveries. Thanks for pointing this out!

  • Ward Chartier

    More suggestions:

    1. Permanently mark each major part of the tool (mold) in both Chinese characters and Roman letters “Property of XYZ Company”. There should also be a tool number and, if needed, a serial number on each part of the tool.

    2. Routinely retrieve all tools for “calibration and maintenance”. In this way, the supplier holding the tools becomes accustomed to the tools returning to the owner periodically. Some day, the tool will not return to the supplier.

    3. It might be possible for the tool to mold into the part the name of the owning company. It would be a problem for ABC Company to sell products with the name of its competitor XYZ Company molded into the part. Modifying the tool to remove the legend “XYZ Company” from the tool would be a difficult process.

    4. If the finished product uses two or more parts that use tooling to fabricate them, then source these parts from different manufacturers a long distance from each other. This makes using XYZ Company’s tool to make products for ABC Company more difficult since ABC Company would have to find the source for the matching parts.

  • Francis Fletcher Fontenot

    Whether the mfg keeps the original tool or not is of little consequence. A new tool based off the dwg can be made in no time. As long as the builder of the tool has the prints is all that matters. Building trust with your tooler is thus kinda important.