In seeking to protect our clients’ molds — both in and outside China — one of the primary goals is to draft a contract that makes clear our client (the foreign buyer) owns the physical molds. Whether drafting mold provisions that are part of a larger contract (such as a manufacturing agreement or a product development agreement) or one that essentially stands alone as part of a mold ownership agreement.
The first thing we want our contract to make clear is that the overseas factory can use our client’s molds only for producing our client’s product; not for producing anything for any other party. We also want to make clear that if our client has the contractual and legal right to take possession of the molds and transport them to a new manufacturing location anywhere in the world whenever it wishes to do so. Negotiating these terms with overseas manufacturers is sometimes difficult, since these manufacturers have an incentive to hold molds as “hostage” to prevent their foreign buyers from switching their manufacturing to another factory. For why it is so important to be clear regarding mold ownership and for some additional information on what you must do to prevent your overseas factory from keeping your molds, check out Product Molds And Tooling: Three Things You Must Do to Hang on to Yours.
As outsourced manufacturing has become more complex, molds for products have also become more complex and, in many cases, our clients’ molds embody much (sometimes all) of their product’s intellectual property. In some products, the interior mechanism is based entirely on open source hardware. The external enclosure surrounding the mechanism is therefore the primary protectable IP for the product and the IP resides entirely in the molds used to manufacture the product case. The ”look and feel” of the enclosure becomes the identity of the product and if that “look and feel” is not protected their overseas factories can freely copy their product.
With some of our clients, the form embodied in the mold constitutes nearly the entire value of their product. Take for example a complex part used to manufacture a turbine or jet engine. After all the engineering and testing, all that remains is a single part produced by casting into a mold that embodies the entire intellectual property in that part. In this sort of situation, whoever controls the intellectual property in the molds controls the product. If — as our international IP lawyers so often see — no party owns any IP in the molds, the molds are effectively open source. So in figuring out what to put into contractual mold provisions, our manufacturing lawyers focus on the ownership of the physical molds and the ownership of the intellectual property inherent in the molds.
Mold IP issues can arise both when dealing with third party mold fabrication shops and with the outsource factories themselves. Further complicating the legal side of all this is that these two facilities are often in two different countries, thus necessitating two different mold ownership and mold IP protection provisions.
Third Party Mold Fabrication Issues
It is standard procedure to require the factory making your product be responsible for fabricating the molds for that product. In the old days, the same factory nearly always made both the molds and the product. Today, however, it is more common for the product factory to outsource mold fabrication to a third party. This means that the IP protections in your mold agreement with your factory are compromised when your mold’s specifications are sent to a third party mold manufacturer. Your fundamental IP risk is that the mold manufacturer will sell copies of your molds to other factories interested in cloning your product. This cloning and then selling molds has become a thriving business in China and around the world and we often see molds made outside China end up in China and used for product cloning and molds made in China end up in Vietnam or Thailand or wherever.
The factory that manufactures your product has an incentive to keep your mold for its own use because if it gets out into the world it will be used by your factory’s competitors. When this happens, your factory is damaged in much the same way as you because its production of your product will likely decline or even cease. Your mold manufacturer views you as a one-shot buyer and selling your molds as increasing its revenues.
Though losing molds via third party mold fabrication shops is a big risk, few foreign product designers or factories make much effort to control the mold fabricator. Not only do foreign product designers seldom enter into a contract with the mold fabricator, they usually do not even know their mold fabricator’s identity. They mostly just assume their product factory is also their mold factory.
Because many product designs are protected primarily as trade secrets, the release of the design to a third party mold fabrication shop with no written agreement breaks the secrecy in the product itself and thereby eliminates any trade secrecy protection. Third party mold production leaves a gigantic hole in IP protection that can and should be closed with contracts.
The protection you give your molds also implicates your product’s patent protection. If you outsource your mold to a third party mold fabrication shop, the question of who actually designed your product becomes far less clear. Is it the foreign designer who developed the basic idea behind the product? Is it the product factory that did some preliminary drawings of the product? Or is it the third party mold fabricator that did the detailed drawings and produced the final working model? Or is it all three, with each entitled to an uncertain portion of the patent?
In our next installment in this series, we will discuss how to approach the above issues when dealing with the overseas factory to which you are outsourcing your product manufacturing.
Mold Issues with Your Foreign Product Manufacturer
Once a product becomes commercially successful, our international manufacturing lawyers often need to be retained to deal with the following problems:
- The foreign outsource product manufacturer proclaims it will substantially increase its price for the product it manufactures for the product buyer. This often surprises the product buyer who expected its per unit price would decline as production increased.
- The foreign outsource product manufacturer is not able to keep up with the product buyer’s increased production requirements. This often surprises the product buyer who had been assured by the foreign outsource product manufacturer that it had sufficient capacity for pretty much any scale of product orders.
- An increase in production demand causes a decrease in quality from the foreign outsource product manufacturer. This often surprises the product buyer who expected quality would improve over time.
In response to these issues, the product buyer informs its foreign outsource product manufacturer that it will be moving some or all of its production to a different manufacturer. In the old days, the issues that arose at this stage mostly focused on ownership of the physical molds, which issue can be resolved with a relatively simple mold ownership agreement. See Product Molds And Tooling : Three Things You Must Do to Hang on to Yours.
These days, the foreign outsource product manufacturer often makes arguments that render the situation far more complex, such as the following:
- The foreign outsource product manufacturer factory tells you: “You did pay us to make molds, but that fee only covered our time and material costs. We spent additional time and money on the CAD drawings and on the related specifications required to fabricate your molds and we also spent additional engineering time integrating the molds into our production process, so before you can take the molds, you must compensate us for these costs.” Then the manufacturer demands an unreasonably high amount and if you do not pay that amount it will hold your molds hostage. This has become a fairly standard practice in outsource manufacturing, particularly in China. It is therefore essential you have an enforceable written contract that makes clear your payments for molds includes all costs and that no additional payments will be required when you seek to take possession of the molds.
- The foreign outsource product manufacturer tells you: “Because we did the mold design work we own the design embodied in the molds. We will give you a limited license to use the molds for producing your products at some other factory, but you may not copy the molds and we retain the right to copy and use the mold design for our own production and to sell the molds to third party factories for their own production. The only thing you own is the physical object. You do not own anything else.”
- The foreign outsource product manufacturer tells you: “We did the mold design work so we own the mold design and we registered a design patent in the molds. It does not matter that you paid us for the molds because we invented them and our design patent proves that and protects us. You can use the molds for production at a different factory but for that you must pay us a royalty fee.” This royalty demanded is so high that you cannot economically have your product produced at a third party facility. Many country’s laws (especially in Asia) legally support this argument.
The honest foreign outsource product manufacturers make the situation clear upfront. The product buyer pays for having the mold made but that payment does not give it any ownership interest in the molds. The foreign outsource product manufacturer does the mold design work and it owns the molds and you have no right to move the molds to any other factory. Some manufacturers will say that you are free to make new molds at your new factory, but some will assert ownership to the mold design and not allow you to have copies made. In other words, the foreign outsource product manufacturer is essentially telling you upfront that it intends to hold you hostage by not allowing you to go anywhere else to have your product made. This ensures the foreign outsource product manufacturer of being free to raise its price or deliver your products late or produce defective products. You are pretty much trapped with no real leverage for dealing with these issues.
Why does a foreign product buyer sign a contract that relinquishes its product to its foreign outsource product manufacturer? Sometimes it is because the contract is in a foreign language they don’t understand and do not get translated. Other times it is because they simply do not understand what they are signing, no matter the language. Just about every week one of our international manufacturing lawyers will get contacted by someone who has fallen prey to one of these contracts.
Product buyers/product designers need to protect their molds and their mold designs. The simplest way to do this is with enforceable written contracts that provide these protections. At the most basic level, the key is to recognize when a foreign product outsource manufacturer is seeking to position itself so as to be able to hold your molds “hostage” and to act accordingly.