With China manufacturing becoming increasingly risky, many companies looking to have their products manufactured overseas are retaining product sourcing companies to help them find new suppliers in other countries for their manufacturing. This in turn is forcing product sourcing companies to themselves diversify into other countries and many (most?) of them do not seem to realize the risks or the legal implications of their doing this. Our job as their international lawyers is to explain those risks and seek to eliminate or reduce them. This post is on that.
The first thing we tell these consultants/sourcing companies is the following:
If something/anything goes wrong for your client YOU will be your client’s first choice for legal redress.
What can go wrong? And what can you as a product sourcing consultant do to prevent or ameliorate it? Corporate planning to protect your personal assets is an absolutely necessary first step. Beyond that, however, and more specific to product sourcing, there is a lot you can and should be doing to better protect your client and thereby better protect yourself.
A typical international product sourcing project, might go like this:
- Western company retains an international product sourcing consultant to find “the best widget manufacturer” in terms of cost/quality/dependability.
- The sourcing consultant requests and secures a sample widget from a number of manufacturers in various countries.
- The sourcing consultant meets with a number of manufacturers in search of the “best” one.
- The sourcing consultant recommends company X in country Y to manufacture 100 million widgets.
- The sourcing consultant is to be paid a percentage of the manufacturing costs.
- Company X in country Y starts manufacturing the widgets.
By this point, I am guessing the sourcing consultants reading this are saying, “yes,” while the international attorneys out there are already apoplectic. Let’s deconstruct this hypothetical project and note where the consultant has potentially harmed the client and needlessly taken on huge liabilities for itself.
- The sourcing consultant agreed to find “the best” widget manufacturer. Is that best in a particular country or best in the world? What if the widget manufacturer charges one hundred dollars a widget for 100 million widgets, but your client’s competitor is able to find another widget manufacturer who will do it for ninety dollar? Are you liable for the ten dollar difference your client has to pay? Even worse, what if your client’s competitor gets the same widget manufacturer to do 100 million widgets for ten dollars less? Do you really think a US jury, for instance, is going to believe you were doing your best when your fee was a percentage of the final costs? Are you responsible for the manufacturer’s late deliveries? Are you responsible for the manufacturer’s bad product? Is it clear exactly on what your percentage is going to be based and have you set things up so that your client cannot just go around you? The Solution: Use a well-crafted written contract with your client to make clear exactly what you will and will not do and put in a non-circumvention provision to make sure you get paid.
- If you show a product sample or a CAD drawing from your client to various potential manufacturers overseas without FIRST putting in place various safeguards, you are courting disaster. We had a consultant call one of our international lawyers in a panic after returning from Asia and learning that one of the manufacturers to which he had shown a sample had already started manufacturing the exact same product for someone else using the consultant client’s brand name which it had gleaned from the Internet. The Solution: Never show a sample or product plan or reveal your trade name(s) without first making the potential manufacturer sign a country-specific NNN Agreement (these are essentially hopped up NDAs that protect against competition, circumvention and disclosure). Legitimate international manufacturers tend to be quite familiar with NNN agreements and if you give them a simple and reasonable one, in their native language, they will almost always sign it.
- If you as the product sourcing consultant will just be figuring out and negotiating the basics, such as the price and delivery dates and then essentially walking away, you should at make clear in writing that these are your only tasks. Product sourcing consultants often oversee the manufacturing contract with the manufacturer and by doing so, they face major liability issues if that contract is not up to snuff. You are your client’s “international person/company” and your client is counting on you to guide it through all of the business minefields it might face in having its products manufactured in a strange country and as their international consultant, many will just take it as a given that you know everything about what it takes to do business internationally. Equally importantly, with the manufacturing of its product, your client is probably turning over to the manufacturer all sorts of critical intellectual property. Your client probably thinks its existing patents, trademarks and copyrights will protect it overseas, but a court will expect you as the expert to know better. The Solution: Put in writing with your client that you will not be providing legal advice and that your client should retain its own lawyer to draft its manufacturing agreements to protect itself. Put in writing that it is your client’s responsibility to protect its intellectual property and that to do so, it should consult with its own lawyers about registering its IP overseas.
Just remember that your client sees you as the expert at doing business internationally and it is looking to you for help in all areas and if you fall short in any way, you are at risk for a lawsuit. And then make sure that your contract addresses these issues and protects you from them.