A client of ours sent me a 2015 article by Case Engelen (a leading international electronic designer) the other day, entitled Kickstarter Prototype to Production: $100K is not Enough, and asked whether I agreed with it. I most certainly do. 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.”
Below I pile on from a legal 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.
1. Protect Your IP Before Going on Kickstarter
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.
Case’s 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 (and Indigogo too). We have seen many companies start from nothing and raise hundreds of thousands of dollars from Kickstarter and then use that proof of concept to raise hundreds of thousands of dollars more (sometimes even 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.
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. See NDAs Do NOT Work for China but NNN Agreements Do. 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 Manufacturing Agreement. 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 focused almost exclusively on 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? Above all else, I really think you need to at least register your key trademarks in China.
Company with product: Yeah, well, I’ll talk all of this over with my partners.
I am writing this now because twice this week I received calls from “companies with product” that are 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 about a year ago.
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, we wrote 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 a 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:
These people think the world is the United States but it most emphatically isn’t. They’ve been trained to go to market and then build the foundation of their company later. 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 trains American companies not to worry too much about trademarks. In China, it’s the first to register for a trademark who gets the trademark 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 and secure their China trademarks before as soon as they come up with their company/brand name.
Also, American tech companies 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 beats you to it.