China Manufacturing Gone Bad

One of the most common emails we get are those from someone having problems with their China manufacturer. Those problems are all over the map, but one of the more common ones is the Chinese manufacturer starting to make the foreign company’s products and starting to compete with the foreign company in the foreign company’s own market. There is a simple remedy for this and that is to have your manufacturing agreement forbid your China manufacturer from making or selling your product and from using your trade name or your logos. The other thing to do is to register your brand name as a trademark in China and wherever you sell your products. But nearly always when we get an email from someone with this sort of problem with their China manufacturer, they have done few or none of these things.

The below is a very typical email exchange, modified in various ways to hide any identifiers. I am running this because it is a good lesson of how planning is essential when you are having your products made in China. For the basics on protecting your company when manufacturing in China, check out Having Your Product Made In China: The Basics on Protecting It and You.

EMAIL FROM CHINA CONSULTANT TO ONE OF MY FIRM’S CHINA LAWYERS: I hope you are doing well. I’ve got an interesting story for you which could potentially mean some contract work for your China team. This is our largest client who would definitely see the value in paying for an enforceable contract in China. They currently have a contract, but it was badly written. We knew this going in, however it’s sometimes a little tricky telling your client that their contract is not good, or even that their colleagues have no idea what they are doing. I’m sure you can relate.

Our client has a Chinese factory producing product for them. There is a contract in place which details minimum order quantities annually and clauses related to exclusivity in the EU. For the last year or so, our client has failed to meet the minimum order quantities, hence exclusivity would not be certain. The main reason for not meeting the order quantities is problems the factory has had with packing the product in a way that protects it during shipment and also problems with the product itself. These issues have now been sorted out my client is ready to move ahead with up to 60 containers a month. There are also moulds involved that are worth well over a half million RMB.

My client received an email from the factory last week telling them they will be attending the ___________ trade fair, and asked for my client to send a sales person to represent them. So they want to exhibit in Europe and show my client’s product! Though this email was quite amusing as they also asked for information regarding how the product was installed and to send a technical person to give them more details about the whole system, my client is very concerned. I say amusing because the supplier has no idea what testing or standards are required in Europe as they manufacture almost exclusively domestic product. It would be a bit like a factory in China exhibiting in the US and telling Home Depot (their client) that they were going to help them sell their own product.

I am curious on your thoughts and what areas you may be able to help us. I was thinking of the below, but would be open to more.

1. NNN contract. It may be too late for this as I am not sure the supplier will not be keen to sign a new contract at this point. From their point of view, they already have a great contract.

2. Trademark in China. Just reading a bit on your site that my client may want to register their trademarks in China. Are you able to help with this and also do you know the time it would take to do this?

3. Have you heard of a trade show barring a supplier from attending because they are selling essentially stolen products?

Please let me know what you think when you have some time.

RESPONSE EMAIL FROM ONE OF MY FIRM’S CHINA LAWYERS TO THE CHINA CONSULTANT would need to know more to be able to provide all options but I can say that separate and apart from what has been transpiring between your client and its factory, your client may have already suffered permanent damage by not having already registered its trademark in China. That is the one thing above all else that anyone manufacturing in China MUST do. We can get your client first in line for the various trademarks it will need in a week or two (assuming those trademarks are even still available to your client, which they very well may not be) but it will take 12-15 months for the trademarks to actually issue.

As for the issue regarding the factory, a trademark will not help your client in that the factory could sell the same product under a different name but your client securing a design patent in China and elsewhere might help for this. It will depend.

I cannot recommend doing anything with the factory without getting the whole story because I am scared to death of what could happen here. One part of me says your client should tell the factory to sign a new (good) contract now “or we walk,” but the other part of me says that could be a huge mistake because the factory will almost certainly say, “great, and we keep the moulds because they belong to us and now we will be going into the EU in full force. Oh, and it seems that my cousin has registered all of your brand names and logos here in China, so you will no longer be able to put those on any of your products made in China.” I say this presuming that when you say your client does not have a good contract with its China factory that it does not have a written and sealed agreement in Chinese making clear that it owns the moulds and that it owns its various trade names and logos and the China factory cannot use those without your client’s written permission to do so.

So next step here is for your client to retain us so we can gather up all of the facts and figure out step by step what it can do to protect itself now, if anything.

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.