How to Protect Your Molds and Tooling When Manufacturing Overseas, Part 2

In part 1 of this series, we discussed how the increasing complexity of products being made overseas has led to a corresponding increase in the complexity of product molds and how our international manufacturing attorneys increasingly must draft country-specific contracts to protect our client’s IP within those molds.
The first part of this series concluded by noting how most mold IP issues arise in two settings: dealing with third party mold fabrication shops and dealing with the product outsource factories themselves. In this part 2 we address mold IP issues when dealing with third party mold fabricators, sometimes called mold fabrication shops. .
The issues that typically arise with mold fabrication shops arise because of a change in procedure no one has really noticed. It is standard procedure to provide that the factory making your product is responsible for fabricating the molds for the product. In the old days, the same factory almost always made the molds and the product. However, it is now at least as common for the product factory to outsource mold fabrication to a third party. In many cases, even the design of the molds is outsourced to that third party.
What this means is that a mold agreement with your factory to control ownership of the molds and the IP in your product is compromised or eliminated when all of the specifications and the responsibility for mold fabrication is with a third party mold manufacturer. Given the economics of mold fabrication, it is not likely the mold fabricator will use the mold design for its own purposes. Rather, the fundamental risk is that the mold manufacturer will sell copies of your molds to other factories interested in cloning your product.
This type of cloning is a thriving business in China and around the world. With manufacturing leaving China for places like Vietnam, Cambodia, Malaysia, Thailand, India, etc., we are “seeing” many instances where a mold made in one country ends up in China being used for product cloning. We have also dealt with many instances where the product mold is made in China for a product made somewhere like Vietnam and the foreign company failed to protect its IP in both countries, as is virtually always necessary.
Foreign product designers often wonder how a terrific copy of their product got to market even before they have gone into full scale product production. This is how it happens: the mold manufacturers conduct a thriving trade in selling the “latest” molds. Though it is common to blame the product factories for this leakage, this blame is often misplaced. Your product factory often has an incentive to keep your mold for its own use since once your mold gets out into the world it is then used by your factory’s competitors. When this happens, your factory is damaged in much the same way as you because its production of your product will likely decrease or end.
Though losing one’s molds via a third party mold fabrication shop is an enormous risk, few foreign product designers and virtually no factories in Asia make much effort to control the mold fabricator. In other words, clearly drafted written contracts dealing with this issue are rarely entered into between the Asia factory and the mold fabricator. The foreign product designer not only does not usually enter into any sort of contract with the mold fabricator, the foreign product designer normally does not even know the identity of its mold fabricator; much of the time it just assumes its product factory is also its mold factory.
Because many products designs are protected primarily as trade secrets , the release of the design to a third party mold fabrication shop with no written agreement breaks the secrecy in the product itself and this eliminates any trade secrecy protection. Third party mold production leaves a gigantic hole in IP protection that can and should be closed through a simple set of contracts.
Consider also the issue of patent protection. In acquiring a patent anywhere in the world, one of the first questions that has to be answered is who invented the item. In a case where the design of the mold has been outsourced to a third party mold fabrication shop, the question of who actually designed the product becomes far less clear. Is it the foreign designer who developed the basic idea? Is it the product factory that did some preliminary drawings? Or is it the third party mold fabricator that did the detailed drawings and produced the final working model? Or is it all three, each entitled to an uncertain percentage of the patent? These are not theoretical questions; these are questions being asked in patent cases all around the world.
For the product, the question is who owns the design for the product. For the molds, the question is who owns the design in the molds. Where the molds ARE the product, this becomes a core issue that cannot be ignored.
And yet, this sort of tripartite structure, the usual answer is that no one owns any IP in the molds: no patents, no trade secrets. Often this means nobody owns any IP in the product itself. This can be a disaster for the foreign product company.
In our next installment in this series, we will discuss how to approach the above issues when dealing with the overseas factory to which you are outsourcing your product manufacturing.