Intellectual Property And Sourcing from China

A startling proportion of products sold in the UK are sourced from China. In today’s competitive market UK retailers are seeking to cut costs and sourcing directly from China is a common solution. In doing so, retailers need to take steps to avoid infringing their original supplier’s intellectual property rights ("IP rights").

The main IP rights of relevance to retailers are patents, designs, copyright and trade marks:

• Patents
• Patents protect new products (or parts of products) for up to 20 years. For example, if the product in question is an umbrella with an innovative opening mechanism, that mechanism could be protected with a patent.
• Designs
• Designs protect the appearance of products . There are different types of design rights, the registered right lasts for up to 25 years and the unregistered right lasts for 3 years. Taking the example of the umbrella, a design could protect any patterns on the material of the umbrella, or the shape of the handle or case. In the UK there is an additional design right which protects the shape and/or configuration of products for 10 to 15 years. This right is unique to the UK and can be a particular problem when dealing with Chinese factories who have not dealt with the UK before because they are often unaware of the right. Hence product which can be sold successfully into continental Europe cannot always be sold in the UK.
• Trade Marks
• Trade Marks are words or logos which distinguish one trader’s products from another’s. Examples include ‘Coca Cola’, ‘Sony’ or ‘IBM’.
• Copyright
• Copyright protects recorded material, such as writing, music and films. In the context of fast moving consumer goods, copyright is mainly encountered in the context of instruction booklets, point of sale material (such as photographs) and packaging.

Having selected the products to be re-sourced, retailers need to assess whether direct sourcing could infringe their original supplier’s IP rights.

As part of this assessment retailers should review their contract with the original supplier. Some retailer’s contracts will have passed IP rights in the relevant products to the retailer, meaning that direct sourcing is low risk.  Realistically, however, many retailer’s contracts will not mention IP rights, or there will be no written contract.

Retailers will generally need to assess the products and work out what IP rights could apply. Retailers need to assess the position both in the country of manufacture (China) and in the country of sale (the UK) as they could be sued for infringement in both territories.

For example, if the target product is an umbrella it would be safe to assume that the general concept of an umbrella was clear of IP rights. This is because the concept of an umbrella (i.e. fabric held on a collapsible frame of thin ribs radiating from the top of a carrying stick or handle) would be protected by patents, which last for up to 20 years, and the appearance would be protected by design rights (which last for up to 25 years). As standard umbrellas have existed for more than 25 years, therefore, you could be confident that standard umbrellas can be manufactured and sold without infringing third party’s IP rights. 

However, more recent aspects of the umbrella (such as patterns on the material or the shape of the handle or case) would need to be reviewed as these could be covered by current IP rights.

Successfully sourcing product from China depends largely on choosing the right factory to work with and this requires due diligence. There is a Chinese saying – "sharpening the axe before chopping the tree is not a waste of time".  This is apt advice in the context of choosing who to work with in China.  In general, you will want to consider:

• Company structure and ownership
• Financial stability
• Existing client list and track record
• Industry reputation
• Geographic location and the level of protection afforded by local authorities (some local authorities are easier to deal with than others)

In most cases, you will need to work with a local agency or law firm in order to carry out effective due diligence.

Once you have selected a factory to work with, you need to enter into an appropriate contract.  The contract should deal with:

• IP ownership: The employer of the individual who designs a product is generally the first owner of the IP rights in that product.  For this reason, unless you say otherwise in your contract, the Chinese factory will often be the owner of the IP rights in your product and the tooling. Therefore, where appropriate, include an IP transfer in your contract.
• Provision of information: Where you do not own the IP rights in a product for whatever reason, it is useful to oblige the factory to give you information about those rights, as this will be useful in future years when you want to be able to switch supply to a new factory.
• Ownership of tooling:  If you own the tooling, you should have the right to smash it on termination. You should also prohibit the factory from using it to produce products for other retailers.
• Exclusivity: Where appropriate, ban the factory from selling the same / substantially similar products to third parties.
• Audit: Have the right to enter the factory to review their processes.
• Brand protection: Specify what trade marks are to be used on the products and how. Prohibit any other use of your trade marks.
• Stock Levels: There are problems with power supply in China, in some areas factories are suddenly faced with no power which can affect production times. Some retailers require priority when supply is resumed, or insist on certain stock levels being maintained.

You should have your contract checked by a local law firm to ensure that it complies with Chinese law.

There is limited value in entering into a tight contract unless you monitor compliance. For example, waste products from authorised factories are often used to create counterfeit products and factories sometimes use genuine tooling to overproduce product which they sell to third parties. You therefore need to take active steps to oversee the factory’s production.  In many cases, this can be done through the use of local investigators.

You should assess what IP you own in China and the UK, and protect it with registrations where appropriate. People sometimes say that there is nothing you can do to stop infringements of IP rights in China. This is not true, the Chinese IP system is becoming increasingly sophisticated and, with careful preparation, it is possible to take effective action against infringers.

‘Brand hygiene’

Many companies have policies relating to the conditions in which they obtain their products.  For example, they say that their products are produced in factories without child labour or using sustainable resources. If you make these claims, you need to monitor the factory’s compliance, if for no other reason than the bad publicity that would results from non compliance becoming public.

If your products already came from China and you are now seeking to source directly, don’t forget to factor in the responsibilities previously borne by the middle man. UK retailers sometimes do not appreciate all the work which is done by their sourcing agents in terms of working with the factory to ensure adequate quality control and hitting deadlines. Sourcing directly does not always work out cheaper and better!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.