China trademark law firmNobody disputes that Chinese factories that make OEM products for American and European companies are increasingly looking to make their own products for selling directly to consumers. Nobody disputes that online marketplaces have made this much easier.

And yet….

And yet, without fail and probably at least twice a week, we get emails from stunned companies reporting to us that they have just learned that their Chinese factory has registered “my trademark” or “my patent” in China and is selling our product for 25-75% less. We have gotten more such emails/calls in the last year from companies whose China factories are now directly competing with them than in the three years prior combined. And yet we also still get emails from companies that tell us that they “like” or “trust” their China supplier so much that it does not even make sense for them to spend money trying to stop this company from competing with them or that even asking their trusted China partner to sign anything would be viewed as an insult.

WRONG.

When companies tell me no contract is necessary I usually simply wish them the best of luck. When companies tell me that they are worried about asking their Chinese company to sign anything, I tell them that Chinese manufacturers expect to sign contracts these days and they view foreign companies that do not require them to do so as suckers. But what I want to tell the companies that are planning to rely on their good and trusted relationship with their Chinese suppliers is that pretty much all business relationships start with trust because who goes into a relationship with someone they either hate or know to be dishonest? You want a contract to memorialize your good relationship. You want a contract when you are in agreement and therefore have something to put on paper in the form of a contract. Contracts cannot be written if the two sides cannot agree.

With online selling having become so easy for Chinese factories, your product has never been more at risk for competition by the very same factory to whom you provide your molds and your know-how and your technology. Chinese factories know this and many are agreeing to manufacture products at money-losing prices simply to acquire the knowledge that will allow them to sell those same products directly themselves.

Some of these Chinese factories will not create duplicates of your products for their foreign buyers — be they your competitors or your customers. They instead take what they have learned from manufacturing for you and use that information to compete directly with you. Since you will essentially be educating your Chinese manufacturer on how to compete with you, you need contracts and IP registrations that will at least limit what it can do when it does.

Chinese factories are becoming increasingly confident about selling their own products online and therefore more willing to risk losing their foreign OEM product customers to do so. Add to this that nearly all of the online retail platforms are focusing on helping Chinese manufacturers sell directly and you should be able to see exactly where all of this is leading.

What though can you do to stop this? The better question is what can you do to slow down and reduce this sort of competition? I suggest you read the following:

Despite the need to have a contract (or multiple contracts) with your Chinese supplier and despite the need to always be alert to what your Chinese supplier is doing with your product and in your product marketplace, there is still room for a good relationship and having such a relationship is important. Think of the contract as a way to bolster your good relationship with your supplier by reducing the issues on which there will be disagreements.

Trust yet verify.

What are you seeing out there?

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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.