Mold Protection When Manufacturing Overseas: The Long Version

1. Mold Protection When Manufacturing Overseas is Critically Important

With so many companies moving their manufacturing from China, mold protection when manufacturing overseas has become a critically important issue, largely for two reasons. First, we are seeing many companies losing their molds and/or their tooling in their exodus from China. These are the companies that failed to protect their molds/tooling when they first went into China. On the flip side, with so many companies establishing new manufacturing relationships outside China, it becomes critical they understand the need and the methods for protecting their molds/tooling.

In seeking to protect our clients’ molds/tooling, both in and outside China, one of the primary goals of our international manufacturing lawyers is to get a contract signed between our client and its overseas manufacturers that makes clear our client (the foreign buyer) owns the physical molds/tooling. To accomplish this, our lawyers typically focus on two issues when drafting mold/tooling provisions that are part of a larger contract (such as a manufacturing agreement or a product development agreement) or that essentially stand alone as part of a mold/tooling ownership contract.

First, we want to make clear that the overseas factory can use our client’s molds/tooling only for producing our client’s product and not for producing anything for any other party. Second, we want to make clear that when our client chooses to move its production to a different factory anywhere in the world it has the contractual and legal right to take possession of the molds/tooling and transport them to its new manufacturing location.

Negotiation of these terms is often quite difficult, since overseas manufacturers have every incentive to hold our clients’ molds/tooling “hostage” to prevent them from moving their manufacturing to another factory/another country. For why it is so important to be clear regarding molds/tooling ownership and some additional specifics on what you should do to prevent your overseas factory from walking away with your molds, check out Product Molds And Tooling: Three Things You Must Do to Hang on to Yours.

As outsourced manufacturing has become more complex, molds/tooling for products have become correspondingly more complex as well. In many cases, our clients’ molds/tooling embodies most or all of their products’ intellectual property. In some products, the interior mechanism is based entirely on open source hardware. The external enclosure surrounding the mechanism is therefore the primary protectable IP for the product. Their IP resides entirely in the molds used to manufacture the product case. The “look and feel” of the enclosure becomes the identity of the product, and if that “look and feel” is unprotected, their overseas factories can freely copy the product.

With some of our clients, the form embodied in their molds essentially constitutes the entire value of their product. Take for example a complex part used to manufacture a car engine. After all the engineering and testing, all that remains is a single part produced by casting into a mold that embodies the entire intellectual property in that part. In this sort of situation, whoever controls the intellectual property in the molds controls the product as well. If no party owns any IP in the molds, the molds are effectively open source.

2. Mold Protection Agreements Must be Clear on Who Owns the Molds AND the Intellectual Property in the Molds

This means that in figuring out what to put into contractual mold/tooling provisions our lawyers usually focus on two things: (1) ownership of the physical molds/tooling and (2) ownership of the intellectual property in the molds as well.

Mold IP issues frequently arise when dealing with third party mold fabrication shops and when dealing with the outsource factories themselves. Further complicating things is that these two facilities are these days just as likely to be in two different countries, necessitating two oftentimes quite different mold ownership/mold IP protection agreements.

The issues that typically arise with mold fabrication shops arise because of a change in procedure no one really noticed. It is standard procedure to provide that the factories that make your products are responsible for fabricating the molds for the products. These used to pretty much always mean that the same factory that was making your products also made made the molds for the products. But today, it is probably more common for the product factory to outsource mold fabrication to a third party than to make the molds themselves. In many cases, even the design of the molds is outsourced to a third party.

If all of the specifications and the responsibility for mold fabrication are with a third-party mold manufacturer, the value of a mold agreement with just your factory can be compromised or even eliminated. 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 in which a mold made in one country ends up in China being used for product cloning. We have also dealt with many instances in which a product mold is made in China for a product manufactured somewhere like Vietnam and the foreign company failed to protect its IP in both countries, as is virtually always necessary.

3. Mold Manufacturers Conduct a Thriving Trade in Selling the “Latest” Molds — YOUR Molds

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: mold manufacturers conduct a thriving trade in selling the “latest” molds. Though it is common to blame the product manufacturing 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 can be 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 or factories 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 product manufacturing factory and the mold fabricator. The foreign product designer not only does not usually enter into any sort of contract with the mold fabricator, but also 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 product designs are protected primarily as trade secrets, releasing a product 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 gigantic holes in IP protection that can and should/must be closed with a relatively simple set of contracts.

4. Mold Patent Protection Issues

Consider also the issue of patent protection. In acquiring a patent anywhere in the world, one of the first questions is who invented the item. If the design of the mold has been outsourced to a third party mold fabrication shop, the question of who designed the product becomes less clear. Is it the foreign designer who developed the basic idea? Is it the product manufacturing 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, with each of the three now entitled to some uncertain percentage of the patent? These are real-world questions being asked in patent cases all around the world.And yet, under this sort of tripartite structure, the usual answer is that no one owns any IP in the molds: no patents, no trade secrets.

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, everything gets murkier.

Take the case in which a foreign product manufacturer produces a series of molds for a product for one of its foreign buyers. Now that the product has become commercially successful, the following three basic problems often will arise:

  • The foreign product manufacturer announces a substantial increase in the price of the product. This is often a surprise to the foreign product buyer, who had expected the per unit price of the product to go down as production increased.
  • The foreign product manufacturer is not able to keep up with increased production requirements. This is often a surprise to the foreign product buyer, who had been assured by the foreign manufacturer that it had ample capacity for any scale of orders.
  • The stress of increased production demand causes the quality level from the foreign product manufacturer to progressively decline, reaching unacceptable levels. This is often a surprise to the foreign product buyer, who had expected quality to improve over time.

In response to these issues, the foreign product buyer gives notice to its product manufacturer that it intends to move production to a different manufacturer, often a direct competitor of the current manufacturer. In the past, the issues that arose at this stage mostly focused on ownership of the physical molds. This issue can be resolved by a relatively simple mold ownership agreement.

5. How Factories Usurp Mold Protections

With all the recent turmoil and movement in international manufacturing, we have seen factories make arguments (like those below) that render the situation far more complex:

  • The outsource product manufacturing factory says: “You did pay us to make the molds, but that fee only covered our material costs and our time. We also spent considerable time and money on the CAD drawings and on the related specifications required to fabricate the molds. On top of these costs, we also spent considerable engineering time integrating the molds into our production processes. Therefore, before you can take the molds, you must compensate us for all of these costs.” Then the factory provides an unreasonably high invoice for those costs and if you do not pay the invoice, the factory will continue holding your molds hostage. This has become a fairly standard practice in outsource manufacturing, particularly in southern China. It is therefore essential for product designers/buyers to make clear with an enforceable written contract that its payments for molds include both design and fabrication costs and that no additional payments will be required when the foreign buyer seeks possession of the molds.
  • The outsource product manufacturing factory says: “I agree that you own the molds and I agree that you can take them whenever you want. But because we did the mold design work, we own the design embodied by the molds. We will give you a limited license to use the molds for production in another factory, but you may not copy the molds and we retain the right to copy and use the mold design for our own production and we also retain the right to provide copies of the molds to third party factories for their own production. The only thing you own is the physical object. You do not own anything else.
  • The outsource product manufacturing factory says: “We did all the mold design work so we own the mold design and we registered a design patent for the molds. It does not matter that you paid us for the molds because we invented the molds and our design patent protects our IP in the molds. You can have the physical molds, but if you want to use those molds for production at a different factory, you must pay us a royalty fee.” This royalty is then quoted at such a high price that you cannot economically have your product produced at any third-party facility. Many country’s laws (especially in Asia) support this tactic.

6. The Mold Contracts Many Companies Are Signing That They Should NEVER Be Signing

The more honest factories make the situation clear from the beginning. The foreign buyer pays for fabricating the mold, but that payment does not give it any ownership interest in the molds. You as the foreign buyer have no right to move the molds to another factory. Some factories will say that you are free to make new molds at your new factory, but some will assert ownership to the mold design and not allow you to have copies made at the new factory. In other words, the factory is essentially telling you upfront that it intends to hold your molds hostage to prevent you from going to another factory to make your product. By holding you hostage, the factory is free to raise its prices or deliver your products late or produce defective products. You are pretty much trapped, with no real leverage for dealing with the issues. This is just one of many reasons why our international dispute resolution lawyers always insist on actually looking at all contracts between our clients and their manufacturers before opining on the likelihood of success on any manufacturing claims.

Why does a company sign a contract that essentially turns over its product to its manufacturer? Because they do not realize what they are signing and oftentimes this is because what they are signing is in a foreign language they don’t understand and never get translated. Increasingly, foreign product buying companies are coming to our law firm after their own lawyers (or fake lawyers) lied to them about what their contract really said or actually were the lawyers who drafted them. See China Contract Drafting Scams: From Bad to Much Worse.

Other times the foreign product buying company simply did not understand what they are signing even though it was clearly explained in their own language. Sometimes they tell us they thought this sort of thing was “standard” and they did not realize that they could negotiate to have it removed.

7. Mold Protection When Manufacturing Overseas is Possible and Here’s How

Product buyers and product designers need to know how to protect their molds and their mold designs. The simplest way is via enforceable written contracts that provide mold protection when manufacturing overseas. At the most basic level, however, the key is to be able to recognize when a factory is intending to hold your molds “hostage” and to do a cost-benefit analysis of whether it makes sense to proceed or walk away.