Every so often one of my law firm’s China lawyers will get a call from companies in the process of raising funds on Kickstarter or Indigogo or just having completed their Kickstarter fund-raising. Almost invariably, our conversation goes something like the following:
Company with product: We just raised money on Kickstarter and we have lined up a China manufacturer for our product and we are thinking it is time to get a China lawyer involved, though we do not have much money for legal yet.
China Lawyer: Well, if you are going to spend money on anything, the most important thing is your intellectual property.
Company with product: We figured we would deal with that later. Right now we just want someone to review our NDA and then review the manufacturing contract we will be drafting.
China Lawyer: Who drafted your NDA, an attorney with China experience?
Company with product: No, we did it ourselves. It really just needs a quick review.
China Lawyer: I have never seen a self-drafted NDA that just needs a quick review for China. To work for China, you need a China NDA, which we actually call an NNN Agreement. NDAs are geared toward preventing disclosures of information but your biggest risk in China is typically not going to be your manufacturer disclosing your information; it’s going to be your manufacturer stealing your product and selling it worldwide and to your own customers, oftentimes before you can. Also, to be effective, the NNN Agreement must be in Chinese and it should contain liquidated damages provisions. There are all sorts of other things that need to go into it as well, but these are the basics. The same holds true for the M Manufacturing. But really, my biggest concern is your IP. It sounds like you have already revealed your IP to Chinese manufacturers without adequate protection.
Company with product: Well, to be honest with you, when we listed the risks on our Kickstarter, we the risks were manufacturing delays. We didn’t even mention our IP and so I don’t see how we can pay you anything right now to protect that.
China Lawyer: Well, if you cannot afford to protect your IP, it probably will not be worth your money to pay us to review contracts that we know cannot work. I mean why spend money for us to review contracts with a few companies — your potential manufacturers — when you are not able to spend money to protect yourself against the millions of other people out there who could steal your product? It since we will need to start over on these contracts and you do not want to pay for that, our reviewing them does not make sense. Above all else, I really think you need to at least register your key trademarks.
Company with product: Yeah, well, I’ll talk all of this over with my partners.
I am writing on this now because twice this week I received calls from “companies with product” that are now encountering serious (and expensive to remedy) difficulties arising from their failures to button down their IP protections when we had conversations very similar to the above a year ago.
Bottom Line: Failing to protect IP early is probably the most common mistake made by start-up companies.