Manufacturing in China is not exactly a legal topic; however, it’s a concept attorneys and clients regularly discuss. It’s a cost effective way to produce products, but is it the best option?
The Start-Up Scenario
When a start-up is centered around a product, one of the main considerations is finding a manufacturer.
Picture this: Susie finds a product that’s selling well on Amazon with high margins and low competition. She knows she can offer a better product and starts a business offering just that.
We’ll say the product is a ski goggle. The current products on Amazon are selling well, but they look bad; the product is low quality with poor marketing. By improving on these aspects, Susie creates a best-selling product and begins making lots of money. To grow her business, she needs to manufacture on a larger scale at lower cost, and China seems the obvious option.
However, there are a number of issues Susie could face should she opt to manufacture in China.
The Manufacturer Has Another Company On The Side
Susie receives a take-down notice through her Amazon listing; another company has filed a complaint. It turns out their design is virtually identical to hers.
The Chinese manufacturer helped Susie create the design, so hers should be unique. In actual fact, the manufacturer is employed by the company serving the take down notice and that third-party company owns IP relating to the product.
The manufacturer has violated two agreements and Susie has ripped off the other company without even knowing it.
Why is Susie in trouble?
The third-party company has gone after Susie (under US law) because it’s too hard to go after a manufacturer in China under Chinese law. Susie is the easier target.
The Manufacturer Rips Off Susie’s Product
The manufacturer designs the product with Susie and produces it for her, and Susie owns it.
Susie’s product is selling well, so the manufacturer decides to sell an identical version of the product themselves. Since they are cutting out the middleman, they undercut Susie; they are now listing a virtually identical (but cheaper) product on Amazon alongside Susie’s. Now the product may seem identical, but it’ll be just different enough to avoid copyright or trademark violations.
Rather than having a product that competes on quality and marketing, Susie now has a product that is competing on price, and Susie is losing.
What Can Businesses Do In These Situations?
Some companies try to have the other product removed from the sales channel utilizing copyright, trademark or trade dress claims. In some cases, these claims can discourage the other company (manufacturer or third party).
But more often, they can lead to a very expensive volley between the two companies involved, becoming a lose-lose situation.
Some companies take their intellectual property to US border patrol, hoping the US government will seize any knock offs before they enter the country. However, many Chinese companies know how border patrol works; if it’s not a direct knock off, it may pass.
The manufacturer or third party knows this and will brand it as their own, making it hard for the border patrol to seize.
Some companies try to sue the Chinese manufacturer; however, this route will cost tens of thousands of dollars, and the outcome is uncertain.
Avoid Future Problems By Planning
In terms of practical aspects, manufacturing in China is not recommended; companies are better suited to seek an American or Mexican manufacturer or a 3D printing company.
When it comes to legal aspects, design the product independent of the manufacturer (as much as possible — they may need to have some input). Get the general functionality down, and then design a unique point of difference — in the case of Susie’s goggles, this may be a unique shape that makes them recognizable. Think trade dress — i.e. look and feel rather than functionality. An example of this is Tiffany’s turquoise box; everyone associates that color with the brand.
Plan from the beginning — it will be more costly, but the end product will be protectable. Inventors can patent a new idea; however, entrepreneurs such as Susie aren’t necessarily inventors, and in this case, Susie can’t protect her ski goggles since she didn’t invent goggles. Therefore, most start-ups look to protect a unique design instead, to ensure the manufacturer or third-party company can’t sell an identical product.
In conclusion, though it may work for some, manufacturing in China may not be the best option. If China is on the roadmap, the best advice is to plan ahead to avoid traffic jams and detours.
Andrew Eisenberg is an intellectual property partner at Michael Best & Friedrich LLP. He works closely with start-ups and emerging businesses to structure their corporate formations, patents and trademarks for long-term value and provides strategic direction regarding the creation of IP assets.