Kickstarter and China Manufacturing: You’ve Got it Wrong

The China Price

A Titoma article entitled Kickstarter Prototype to Production: $100K is not Enough is getting a lot of play on Linkedin among the China manufacturing crowd, with those I know who know China manufacturing agreeing with it. The article provides a list of compelling reasons why getting an electronics product manufactured in China will nearly always require more than $100,000.  Few companies understand how complicated and expensive and time consuming it is to get an electronics product ready to be made in China and the fact that “4 out of 5 hardware campaigns . . . don’t manage to ship in time shows most teams still underestimate the DFM (Design For Manufacturing) process.”

1. Protect Your IP from China Before Going on Kickstarter

Allow me to now pile on from a legal perspective and talk about how my law firm’s international IP lawyers too often have to deal with the remnants of companies that have had their IP “stolen by China” before they even made their first product. Protecting your IP before you go on Kickstarter is critical and far too few companies do this. This also costs money, but almost always less than $10,000, even for companies with steep IP requirements.

The Titoma article recognizes how consistently and ruthlessly and quickly Chinese companies are to make Kickstarter projects their own:

As a soon as a project is starting to get some good traction on the internet you can rest assured there are factories in China working on a lower cost version. This means the market window to establish yourself as the actual leader of the segment you’re creating shrinks rapidly with every month delay.

I can and will top this by describing what our lawyers see Chinese companies do with Kickstarter products. Now don’t get me wrong, we love both Kickstarter. We’ve had clients start from nothing and raise hundreds of thousands of dollars from Kickstarter and then use that proof of concept to raise hundreds of thousands (sometimes millions) more. We’ve also had companies come to us after going up in flames due to Kickstarter.

In Dear Kickstarter Companies: It’s All About the IP we talked about a typical kickstarter China conversation:

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.
Me: 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.
Me: Who drafted your NDA, an attorney with China experience?
Company with product:  No, we did it ourselves. It really just needs a quick review.
Me: 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 towards 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.  Also, to be effective, the NNN Agreement should 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 Manufacturing Agreement. But really, my biggest concern is your IP.
Company with product:  When we listed the risks on our Kickstarter, we said the risks were manufacturing delays and we didn’t even mention our IP and so I don’t see how we can pay anything right now to protect that.
Me: If you cannot afford to protect your IP, it is probably not worth your money to pay for contracts. Why spend money for an NNN to protect yourself against a few companies — your potential manufacturers — when you are not able to spend money to protect yourself against the millions of others out there who could steal your product? And as I hinted, we will need to start over on these contracts, using your draft contracts for nothing more than to determine certain facts regarding what you are doing. I really think you should at least register your key trademarks.

Company with product:  Yeah, well, I’ll talk all of this over with my partners.

2. At Minimum, Protect Your Brand Name with a China Trademark

If you are going to do just one thing to protect your company and your product before you go on Kickstarter, register your brand name as a China trademark. In China: Do Just ONE Thing: Register Your Trademarks AND Your Design Patents, I talk about why this is so important:

When it comes to the need to secure the appropriate trademarks in China, I am blunt: anyone who doesn’t do it is making a big mistake. I tell companies that if they do nothing else, they should immediately register their trademarks in China. This one usually surprises them and they often think I have misunderstood what they are planning for China. They at first do not understand why I am emphasizing the need for filing a trademark in China when they have no plans to sell their product in China. I then explain how China is a first to file country, which means that (with very few exceptions) whoever files for a particular trademark in a particular category gets it. So if the name of your company is XYZ and you make shoes and you have been manufacturing your shoes in China for the last three years and someone registers the “XYZ” trademark for shoes, that company gets the trademark. And then, armed with the XYZ trademark, that company has every legal right to stop your XYZ shoes from leaving China because they violate that other company’s trademark.

I had a similar discussion the other day with a company that told me they will soon be listing on Kickstarter. I strongly suggested they register their brand name as a trademark in China (where it would be having its product made) before they go on Kickstarter and I sent them some blog link as to why. They responded as follows:

Thanks Dan – a good read. So, ok here are my questions/responses.

1. It seems you keep seeing the same pattern over and over (i.e. ignoring your good and  prudent advice) –- so what is the common root cause of the theme? Said in another way, why do so many smart/rational folks decide to act less smart/irrational by not doing IP/Trademark in China? I am sure a balanced analysis may show they are, at minimum, acting rationally, but tough choices are being made. My guess is the cost seems prohibitive or there is no “on ramp” to an effective  China IP  highway. The feeling is overwhelming and akin to going from 0-65 mph in 3.5 seconds and asking everyone to drive a Ferrari because it has the 0-65 speed you need.

2. I see trademark as something worth reviewing, possibly an “on ramp” strategy – what is the cost? I am probably not too dissimilar to those other startups. All things considered, if I have a choice between using limited/scarce funds to allocate between textbook perfect China IP vs. getting to a revenue state, I will, like most, choose allocating towards revenue.

I responded as follows:

They think the world is the United States. The problem is it isn’t. They’ve been trained to go to market and then build the foundation. That works for the United States, but not for China. In the United States, the first to use a brand name gets the trademark and to get a trademark you must use it. This leads American companies not to worry much about trademarks. In China, it’s the first to register who gets it and use is almost irrelevant. There is no trademark via use.

American companies also ignore that just manufacturing in China requires a trademark because if someone registers your brand name as a trademark they get it and then they can stop your product from leaving China.

And here’s the big thing. As soon as any product goes up on Kickstarter, a ton of people in China will review it and if they like it they will register the product’s brand name as their own China trademark and then start making it. Oftentimes the company that makes it will be the same one you are talking to about having your product made and they will keep talking to you just to stall you. In the meantime they will beat you to market with your product and then block your product from leaving China because it violates their trademark. See China Trademark Theft. It’s Baaaaaack in a Big Way. And it is mostly American companies that pay for this because the EU trademark system is more like China’s and so most of our European (and Latin American) clients get it. In fact, many Western European governments will pay for their start-up companies to secure their IP in China early. 

Also, Americans love patents and underestimate the value of trademarks. See Trademarks Good, Patents Bad for more on this. Patents are expensive and difficult to enforce and they rarely help you get something taken off an online marketplace. Trademarks are cheap and easy and surprisingly powerful.

So for the thousandth time, register your brand name as a China trademark. EARLY — before anyone in China knows what it is and can beat you to it.

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