Internet of Things (IoT) products are red hot and this means my law firm’s China lawyers are getting a steady diet of China IoT legal matters. The biggest problem we are seeing in this industry is that few of the Western (mostly American, European and Australian) companies that are coming to my law firm quite know who owns what when it comes to the intellectual property tied to “their” IoT product. Needless to say, this causes all sorts of problems.
How did we get to this point? Sourcing of products from China has worked its way through the following three general stages over time.
Stage One. In the good old days (roughly 1981 to 1995), most everything was simple. There were basically two possibilities. In the first, the Chinese manufacturer made a standard consumer product. The Western buyer purchased that existing product and perhaps required the manufacturer take the extra step of placing the Western buyer’s own trademark/logo on the product. In this situation, IP ownership was clear: the Chinese manufacturer owned the product design and the Western buyer owned its trademark/logo. In the second, the product was a long-standing, well-developed product of the Western buyer. The buyer contracted with a Chinese manufacturer to have the Chinese manufacturer make the American company’s product in China. Again, ownership of the intellectual property was clear: the Western buyer owned all of the intellectual property and the Chinese manufacturer owned nothing. Think sweat socks or rubber ducky toys.
The simplicity of the relationship encouraged the lazy practice of documenting everything with purchase orders and invoices. NNN agreements, product development agreements, and manufacturing agreements were seldom used, since IP ownership was clear and the PO took care of the price and delivery terms. This approach led to disasters resulting from product defects. But that is an issue for another post.
Stage Two. In stage two (roughly 1995 to 2015), a new form of relationship developed. Western buyers began going to China without a completed product in mind. The Chinese manufacturer would then work with their Western buyer to co-develop the product. In some cases, the role of the Chinese manufacturer was simply to figure out how to mass produce a completed prototype.
Normally, the Chinese manufacturer offered to perform all of the development work at its own expense, with an implied agreement that the manufacturer would be the exclusive manufacturer of the product. This co-development process typically proceeded using the same lazy “purchase order only” approach from Stage One. This lazy approach then led to the typical issues we see today that make answering the “who owns what” question so difficult.
Where these agreements do not exist, a standard set of issues arises: Who owns the product design? Who owns the molds and other tooling? Who owns the manufacturing know-how and similar trade secrets? If the buyer decides to have the product made by a different factory, what compensation is owed to the manufacturer who co-developed the product? What is the Chinese manufacturer’s obligation to comply with the Western buyer’s price and quantity requirements? What happens if the manufacturer terminates its relationship with the buyer and manufactures the product under its own trademark/logo? Absent clear written agreements, all of these questions lack clear answers. In these unclear situations, the Chinese factory is virtually always in the strongest position.
Stage Three. In stage three (roughly 2015 to today), we arrive at the IoT era. In designing, developing, and manufacturing products for the Internet of Things market, the already unclear and problem-filled relationships of the Stage Two era are magnified and a whole new set of issues arises. In the Stage Two era, there was at least the simplicity of two entities designing/manufacturing a single product. In the IoT era, the situation is much more complex. In most of the IoT projects on which my firm’s China lawyers have worked, the development process has expanded to include the following:
- A product “concept” from the Western buyer.
- A product external design, from an international design firm.
- Design of the IoT product “app” (usually for a smart phone).
- An internal design and function, owned by the Western buyer and/or the Chinese manufacturer and/or the provider of sensors and other components required to connect the IoT product to an outside network.
This then involves two completely separate sets of software: the communication-sending software residing on the IoT product and the communication-receiving software residing on the application in possibly multiple forms. In the same manner as the internal design, these software components may be written/designed by multiple parties: the Western buyer, the Chinese manufacturer, and (quite often) third-party software design firms.
So what happens in the above sort of situation when the product design is complete, manufacturing is ready to start, and the Western buyer goes out to seek funding? The funding source then says: who owns this IoT product? Who owns its underlying IP? What we have found when we ask the Western buyer (our client) is that they often don’t know. And their initial backers and sourcing companies don’t know either. As you can imagine, the “we don’t know” response does not sit well with those contemplating investment.
This article was written by Dan Harris from Forbes and was legally licensed through the NewsCred publisher network.