Many newly formed companies opt to manufacture overseas because the cost can be considerably lower than manufacturing in the United States. In addition to the argument that manufacturing in the good-old USA helps our economy, other considerations come into play to make one rethink the efficiency and safety of manufacturing abroad.
Intellectual Property Protections
From an intellectual property ("IP") perspective (and speaking about trademarks and patents in particular), rights are largely territorial. If your company manufactures branded and/or packaged products overseas – whether medical devices, fashion apparel or toys – you may be giving your foreign manufacturer a road map to infringe on your rights, with little or no recourse unless your IP rights are protected in the country of manufacture.
Failure to proactively guard your foreign IP rights may expose your company to infringement risks that are harmful to its reputation and bottom line. This is not to say that all foreign manufacturers are would-be infringers, but many are "opportunists" and would argue (reasonably) that they are not actually doing anything unlawful by adopting a U.S. company’s IP and business model as their own, in their own market.
There are international conventions through which U.S. IP rights can be extended to foreign jurisdictions, but there is no such thing as a true "international patent" or "international trademark" that affords a company blanket rights covering the globe. Widespread protection and enforcement of IP rights takes time, planning and strategy. And while it is often thought to be expensive, in most cases it is not as expensive as attempting to cure infringement problems in jurisdictions where IP protection was not properly secured.
From a purely trademark standpoint, there are certain foreign jurisdictions (and, significantly, jurisdictions that are popular choices for manufacturing activities) where rights can only be obtained through registration. There are many examples of U.S. companies sending manufacturing work to these so-called "first to file" jurisdictions without filing for any trademark protection of their own. The companies subsequently learn – far too late – that the manufacturer they engaged with went ahead and registered the U.S. company’s trademark in the manufacturer’s name.
In extreme cases, the manufacturer records the registration with the jurisdictions’ customs office, killing the U.S. company’s ability to get its own branded products out of that country. A situation like this can take years and hundreds of thousands of dollars to fight, and in some cases with no success.
Trademark registration in the U.S. is the opposite of a first-to-file jurisdiction: The United States is a common law jurisdiction that recognizes unregistered trademark rights. Trademark rights here are based on actual use of a mark and can be enforced without a registration, so lack of formal protection in the United States does not necessarily leave a company exposed in an infringement scenario. U.S. IP laws – while not perfect – are far more owner-friendly than IP rights in some other jurisdictions.
Similarly, under the America Invents Act, patent protection in the United States has switched to a first-inventor-to-file system. However, U.S. law still affords certain protections to inventions and innovations that are not patented or not yet patented (for example, trade secret or provisional patent protection). Not all foreign jurisdictions afford equivalent protection.
Contract Issues
When manufacturing in the United States, the parties involved understand the general rules and custom and practice of issues such as down payments, who pays for what and general transfer of risks. They also understand the enforcement of contract terms including what will occur if one breaches the contract, how to resolve the issues and the costs of breach. Quality of the product, timing and quantity of shipments are key contract terms and without the ability to enforce, enforcing a contract in another country may be difficult, if not impossible.
Additionally, many people use nondisclosure agreements ("NDAs") to protect their confidential information. NDAs are an important and effective tool when used in the United States where people understand that breach of the agreement may cause them to incur damages. But elsewhere, NDAs are not always respected, and thus, assuming you can determine the NDA was breached, enforcement of a NDA may be impossible. And due to distance, by the time you learn of the breach, it may be too late to undo the harm done.
Quality Control
Controlling the quality of a product manufactured outside the U.S. can be challenging and potentially an expensive proposition if not done well. Once produced, shipped and back in the states, it may be too late for quality control except at a huge expense. Manufacturing overseas literally puts an ocean (and with it, significant time differences, long flights and, potentially, language barriers) between your business’ center of operations and design, and a manufacturer that is supposed to be executing on them.
Further, quality standards, regulations and audits are different and likely unfamiliar in foreign jurisdictions. Import issues need to be taken into consideration as well. Indeed, the challenge of controlling the quality of overseas vendors is at the heart of a current trademark dispute before the Supreme Court.
The Takeaway
While manufacturing overseas appears at first blush to be a cost-efficient alternative to manufacturing in the United States, the costs, risks and exposure created by being an ocean away (distance, flight costs, time differences, culture and language barriers) can be significant, and indeed more expensive and inefficient in the long run. And perhaps most troubling is the risk of losing your confidential business information or IP. On balance, you must ask yourself: Is it really worth the risks?
Dominica Anderson and Christiane Schuman Campbell are partners at Duane Morris, a law firm with more than 800 attorneys in offices across the United States and internationally.
This article first appeared in Manufacturing Best Practices. Reprinted with permission.
