How To NOT Get Knocked Off When Sourcing From China
Do you want to learn How To NOT Get Knocked Off When Sourcing From China?
If you are asking these kinds of questions, this article is for you!
I got a great idea, but I worry that it will get knocked off by the factory? I’m not sure if I should file the patent first or use an NDA to protect me? Who owns and controls the idea when you jointly develop it with the factory? If I sign an agreement am I locked in to buy from this unproven supplier? What is the time frame to get my contracts and IP protection in order?
Below is the Q&A with a buyer who was stuck in an awkward situation with their supplier. Basically, they started cooperation on a project with a China supplier without agreement in advance on the costs involved to finish the idea and who ones the IP. Shame on the buyer for not sorting these items out in advanced. But, sadly, it’s a common mistake, so in this blog post we share the Q&A. We also offer some related resources at the end of the blog post.
Tips on How To NOT Get Knocked Off When Sourcing From China
The first issue is whether to sign the NNN with the Chinese company or file the patent first. File the patent ASAP because every day you wait there is risk somebody else will file it first. China is first to register not first to market
But if we register the patent won't the supplier feel that we did it behind them, considering the NNN still hasn't been signed?
That's a business decision rather than legal decision. So if you want the IP to be co-registered, you could, but it is not very common and full of potential headaches. If you paid the supplier for design work, then you have a right to own the design. It was your idea. What happens if you don't own the IP and the supplier does a bad job? Very hard to change supplier and you have lost control of your own idea.
That is true. I understand. The other problem is if we try to file the patent first - we don't have the original designs with us. As noted only the idea and suggestions were from us whereas they did the CAD design and the sample design as well.
If you don't have designs, then yes, you may want to sign the NNN (NNN= non-disclosure, non-complete, non-circumvention) first. But if you have a rough design, you should file ASAP. If you worry about being "fair" with the supplier, then after you register the IP, give them some orders and let them make money as a supplier. Everybody win.
I understand but the rough design I have was provided by the supplier. So can we use that?
It's worth a try. And if you need a more detailed design, we can find a 3rd party engineer/freelancer to formalize the design prints. Doesn't the supplier assume you own the IP if you came to them with the design idea?
I understand. I can do that as well in my side. The problem is the design doesn't have the internal mechanism of how the automatic stick part works. They know the situation because we asked them to do the design. Saying that I have indicated to them at the start itself that we will be filing for patents in US & China in our side when they indicated they will file for patent in China. They didn't object but we didn't go into the terms.
If your design is not done and if you need the help of the supplier to finalize the design, then the lawyer can state that in the agreement w the supplier that they are helping you for X USD finalize the design which you own. The problem is that if they say "no thanks", they can tomorrow go finalize the design and go to market without you. So without IP ownership, your leverage is limited. If you told them you would be filing, then you should file ASAP, IMHO.
I understand your point. I was actually thinking along the same line. With US$1000 already being paid for development I was thinking about negotiating with them that we will file the patents and need the designs to do so. In return they will expect a hold for them. What they are afraid at the moment is we will take the sample and go to another supplier and might cut them off. So they want a NNN whereby we will only buy from them and they will only sell to us. They also want to hold a deposit.
"What they are afraid at the moment is we will take the sample and go to another supplier and might cut them off." then when you ask them to sign the PC, also show them a "Tentative PO". Meaning if they get XYZ done for you, they get the order. Everybody happy. Everything is a negotiation, including the deposit.
I understand. Please do understand I am new to the buying process as it's not my expertise.
You are asking the right s and should be proud of yourself. Too many buyers don't ask until it's too late. Well done!
If we sign a purchase contract are we bound to place the order?
The PC sets the frame work for cooperation, the PO is a commitment to placing an order. You can sign the PC and show a DRAFT PO that is not binding or perhaps binding only if supplier does the things you need them to do like "finish design by X date" and "produce parts at Y RMB".
I understand. In that case we can't go for a PO because first I have to finish the funding campaign which will take 4 to 6 weeks. Then there might be a need to do some changes in the design.
Show them the PC is a good idea as it sets the tone and shows you are serious/professional. And verbally tell them about your plans for the funding and such. It's honest and effective motivation.
I understand. So shall I proceed this way. Correct me / guide me as I go along.
Happy to offer my suggestions on your ideas for next steps
I will indicate to them that we need to file the patent on our own as we will be filing for patents in China & US. I will say that $1000 is part of the cost for development for us. They might ask for additional payment / some sort of term to protect them in the agreement / deposit.
Step one: engage the lawyer for the general counsel block of time.
Step two: use that block of time to have the lawyer clarify how close your patent is to being able to apply.
In the meantime, use the lawyer's block of time to customize the PO/PC/NNN and get those terms in place w the supplier.
Step three: if the patent is ready to apply, apply ASAP. If it needs more clarification of design, you can work w the supplier or use a 3rd party.
I understand. In that case when we are discussing the PO/PC/NNN if the supplier applies for patent then it's a problem isn't it considering they might do that once they know we are serious about this deal. Shall I let them know beforehand this is how are going to proceed and in order to get the deal most probably they will agree but as noted above might need some sort of compensation / deposit.
Yep, the biggest danger you face at the moment is the supplier registering the patent. But if hired, the lawyer could quickly confirm if your application is ready or not to apply. I don't know if it is possible, but perhaps we can submit the application with what you have now, then additional engineering designs submitted later. The key is to be the first person to apply. I suggest you think on it over the weekend and know we are happy to proceed as you see fit first thing in the new week.
I understand. Anyway once I sign the agreement with you won't I get the feedback from the lawyer over the weekend? What I meant to say was can I use the blocks to discuss this over the weekend?
If we sign the agreement now, I’ll update the lawyer and paralegal, but their formal opinion wouldn't be until early in the week. Unless you wish to pay OT. But I don't suggest it as even Chinese lawyers ask for extra pay for weekend work. But don't worry, I’ll do all I can to expedite the process.
For my reference say we file the patent on Monday and does that mean we are the first to file or do we have to wait for few days. I know the complete process where we get the final patent takes months
If the lawyer says your application is ready to file, then the file can take place very soon. Yes, it takes months, BUT the most important thing is to be the first person to the patent office with the idea. When you are "in the door" then "cutting in line" is not allowed in China.
In that case we can submit additional sketches / designs later?
I am hoping that is possible, but we'd need to ask the lawyer.
Because in that case we can take steps to file the patent on Monday then discuss the patent situation with the supplier. Is it any way possible for you to let me know tomorrow? Then I can take an informed decision.
Please manage your expectations about the time frame to "get in the door" with your patent. It may take the lawyer days/week to translate everything and get it ready to submit. But I can answer the "can the design draft be sufficient to get in the door?" very quickly. If you move forward with the invoice/agreement as presented, I will personally call the lawyer tomorrow and do my best to get an answer, but lawyers can be sensitive about working on the weekend, so I can't promise an answer over the weekend, but I will do my best for you.
Then please do let me know on whether the design draft is sufficient and whether you can submit additional designs (once we get the approval of the supplier) further down the line.
Yes, of course
- First Step: engage the lawyer
- Second Step: send us the design that you have so far
- Third Step: lawyer will offer opinion on the design's readiness for submission to Beijing.
I will do so as you had suggested.
BTW, if the lawyer says the design isn't ready, we will not spend any of the funds we invoice for the patent application until the patent application is ready. So if you don't want to send all the money upfront, that's OK with us. Fine to do step by step.
- The page at Bilingual Contract Templates & Customization answers the following questions in detail: Do contracts mean anything in China? Do I need a bilingual contracts?
- Members of the AsiaBridge Law Advisory Board have created a series of short video tutorials. These videos are open to the public and hosted on our YouTube Channel.
- Inside look at the courts- An American in China
- Domestic vs International Contracts
- Getting the Supplier to Give a S%#@
- Contract Essentials
- Chop vs Signature
- How to Find a Good Lawyer in China
- Penalty Clauses
- Official Language & So-Called verified Suppliers
- Liability & Compliance
About the Author: Michael J. Bellamy
Originally from Upstate New York, Mike moved to Asia in 1993 and is a China business advisor to both Fortune 500 companies and small businesses. Recognized as an expert on doing business in China, he has been interviewed by WSJ, CNBC, FT & Bloomberg.
A featured presenter on China issues at seminars, trade shows and corporate events across the globe.
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