Many businesses forget that a manufacturing agreement is essentially a form of Intellectual Property licence. Yes, there are key provisions around service provision (and we will touch on these later) but, at its heart, a manufacturing agreement sees you taking your IP, handing it over to someone else and permitting them to use it for a specific purpose.
It is surprising how often this element is overlooked. Here, we look at some of the key issues to remember when appointing a manufacturer to avoid some of the common pitfalls.
The manufacturer will generate IP
From developing tooling to suggesting improvements, it is almost inevitable that a manufacturer will generate IP and you will want to ensure you benefit from this.
Let’s look at a couple of examples. In working for you, a manufacturer may design tooling which is used to make your product. This tooling will be protected by IP. That IP will belong to the manufacturer. If you want to be able to take that tooling to another manufacturer in the future, or even just design identical tooling later with someone else, you will want to make sure you own in the tooling to do this, you will need to ensure that IP in the tooling is assigned to you in the manufacturing agreement.
You may also want to ensure your brand (especially if it is registered) is embedded into the tooling. This can make it harder for the manufacturer to use your tooling for others.
Think also about improvements. Often, a business will go to a manufacturer with a version of the product which the manufacturer may recommend improvements to – for example to ease the manufacturing process. Where this happens, unless agreed otherwise in your manufacturing agreement – the manufacturer will own the IP in those improvements. This means that you may not be able to get the ‘improved’ version manufactured elsewhere.
Both of these issues can be avoided by ensuring you own the IP you pass to the manufacturer and by including relevant provisions in your agreement.
Be clear about what you are handing over and who owns it
When you instruct a manufacturer, you will provide them with the information they need to make your product; designs, schematics, instructions, whatever form these take, they will contain intellectual property.
Review what you are handing over, ensure that you have agreements in place with any third parties who may have created this content to ensure you own it or at least have the right to share it with the manufacturer.
If you want to ensure your manufacturer does not make unauthorised copies – either during your engagement or afterwards, you should spell this out in the agreement. It is also essential that you take steps to register any IP wherever possible (in both the territory of manufacture and of distribution).
Play your cards close to your chest
Remember that there is no automatic duty of confidentiality. To get a manufacturer on board, you will inevitably need to share information about your business – much of this will be commercially sensitive and much may need to be disclosed before the manufacturing agreement is signed.
To ensure you are protected, put an effective non disclosure agreement (NDA) in place and do it early. Your manufacturer agreement, should you enter in to one should have robust confidentiality provisions which supersede the NDA but in the early stages, the NDA is critical (click here for more information on NDAs).
Protect your brand
As well as protecting the IP in the items to be manufactured, you should ensure that relevant brands are registered as trade marks, both in the country of manufacture as well as those territories where the product is to be sold.
This can help to prevent a manufacturer making unauthorised copies but also help you to control your reputation should, for example, the manufacturer not meet your standards, resulting in negative publicity.
Quality is everything
When you appoint a manufacturer, you trust a third party with your brand and reputation. Any defects will harm your image whilst, in the public eye, the manufacturer will remain anonymous.
To reduce the risks you should set out clear expectations as to quality and should reserve the right to make regular inspections of both the productions facility and its output.
Where it is possible to set out written objective standards, you should do this. You could also consider having a sample product which meets your requirements against which you check future output.
If quality does drop you should reserve the right to insist on improvements or to move your business elsewhere. You should also ensure you control any PR and have the tools in place for a product recall if necessary. In such circumstances your trade mark being registered will be an advantage.
What if you need to change manufacturer?
There are many reasons why you may need to change manufacturer. For example, they may no longer meet your standards, be able to meet volume or, you may have decided to move manufacturer to another territory.
Whatever the reason, it is unlikely the manufacturer will be happy to lose the work. In these circumstances, they may be reluctant to help you move.
To counter this, your agreement should oblige the manufacturer to provide you with the infrastructure and materials you need for a seamless transition. At times like these, the provisions ensuring you own the tooling and any improvement will be really important.
To wrap up
The relationship with your manufacturer requires a leap of faith as you place your reputation in their hands. It is therefore appropriate that you insist on a robust and enforceable agreement to protect your interests.
There are many issues to consider when approaching a manufacturer. These include, for example, issues around service contracts, insurance, payment and shipping issues which we have not considered here. You manufacturer agreement will be one of the most important agreements your business enters in to, it’s important to get it right first time.