Product sample contractIn Part 1 of this series, we wrote about how the product development stage is fraught with risk for foreign companies manufacturing overseas and yet frequently neglected. In Part 2, we wrote about how foreign companies \routinely use NNN agreements in the factory search stage and Manufacturing Agreements (ODM, CM and OEM) for the production stage, but rarely use Product Development Agreements during the product development phase because they often do not realize they are in that stage or because they believe their NNN Agreement will protect them. We then explained why this often is a big mistake, the results we often see from this “big mistake” and, most importantly, how to avoid it. In Part 3, we wrote about how when manufacturing overseas, the manufacturing contracts that make sense for you and your company are the manufacturing contracts that make sense for YOU and that is not usually going to be what you read on the internet nor what some other company tells you it did nor what you tell some law firm you need nor what some law firm wants to sell you.This part 4 is a riff on an interview I did for Global Sources the other day focused on getting a product sample before you buy. This interview is titled, Expert talk part 3, Dan Harris: Buy samples, cover all the bases and its preface notes how a “common thread” with my two previous interviewees was that “product samples can spell the difference between a successful sourcing journey and an importing disaster.” It then gives the following quotes from the two previous interviewees:
  • As John Niggl put it, “Buyers who skip the product sampling stage do so at their own peril. The benefit that comes from being able to “try before you buy”—review and approve a sample before committing to an order—is simply too great.”
  • Gary Huang, meanwhile, underscored the importance of product samples by comparing it to an audition where you can get a glimpse of quality and capability.

Well I’m here to tell you somewhat the opposite. Product samples are overrated. Sort of.

I am not going to deny that product samples are valuable and I am not going to tell you not to get product samples. No. Product samples are valuable and you should get them. But, from a legal perspective, they can be both highly risky in terms of your IP and worthless in terms of protecting you from bad quality.

Let me explain via the interview, with the interview questions in italics and my answers in normal font (modified slightly to enhance your reading pleasure)

Global Sources: What’s your take on buying product samples from overseas? What are the challenges?

Dan Harris: As a lawyer, three things always scare me about foreign companies having a sample made by an overseas factory:

First, does the foreign company have an enforceable agreement that will stop the overseas factory from copying the foreign company’s product and selling it around the world?

Second, did the foreign company apply for a trademark in the manufacturer’s country (China, Vietnam, Thailand, Indonesia, etc.) before it revealed its brand name to its manufacturer? This is critical because the first to apply for a trademark in most countries gets it, regardless of whether the foreign company previously registered its trademark in its home country. See e.g., China Trademarks: Register Yours BEFORE You Do ANYTHING Else.

Third, many foreign companies just assume that if they get a good sample the products will match the sample and if they do not, they will be legally protected. Neither of these are true, though.

Global Sources: Do you have a story of sample orders gone wrong?

Dan Harris: Our manufacturing team have definitely seen nightmare scenarios. The most common is when a foreign company has an overseas factory make the molds and make the sample and then learns that the overseas factory is using the molds for itself and selling the product either to competitors of the foreign company or direct to consumers.

Often when this happens (surprise, surprise), the overseas factory is also supplying bad quality products to the foreign company. This way the overseas company can not only sell the foreign company’s own products, it can sell better quality products than the foreign company.

Global Sources: Despite these challenges, what benefit do buyers get out of product samples?

Dan Harris: You can use samples to determine whether the factory is capable of meeting your quality standards. The problem is that one factory might have another factory make your sample and then pass it off as its own. This is particularly common in China where factories are so often clustered by product. Foreign company buyers should be certain to protect their IP by using an enforceable NNN Agreement and by seeking to register their company name, brand name and logos in the country in which their manufacturer is located and they should do this before they reveal any of those to anyone overseas. See e.g., China Contracts: Make Them Enforceable Or Don’t Bother. And if you are going to legally obligate your overseas factory to make your products to the specifications of your initial sample, you need an enforceable written contract mandating that it do so.

Global Sources: A buyer gets samples from three or more manufacturers. All samples meet his requirements and he’s satisfied with quality? Which manufacturer does he work with?

Dan Harris: I am a big believer in having the client visit the factory and meet with the people in person. This usually tells you a lot. See Overseas Product Sourcing: Being There.

Global Sources: How can Harris Bricken [my law firm] help buyers with the sample order stage?

Dan Harris: We help with the contracts and the IP registrations. I have to note that the biggest change we have been seeing from our clients in terms of buying products from overseas is that they very much want to start buying from countries in Asia beyond China (such as Vietnam and Thailand and Indonesia and the Philipines) and from Eastern Europe and Latin America.

Bottom Line: Product Samples can be great for determining whether an overseas factory has the capability to make your product at the quality you want, so long as the product sample you are given actually comes from the particular overseas factory with which you are dealing. But just getting the sample has its IP and other risks against which you should be protected early.