Authored by Akshat Singh - 5th Semester | NLUJAA
Introduction
Global supply chain management benefits significantly from exporting the manufacturing of physical components abroad. Despite that, the manufacturing equipment, or the physical manifestation of the process, sits at the fringes of tangible personal property and intangible intellectual property. For example, an Original Equipment Manufacturer (OEM) may have invested significant amounts of money into the non-recurring engineering (NRE) costs, yet when the overseas manufacturer refuses to return the tool, conducts unauthorised production, or claims to hold proprietary rights over engineering improvements brought along the production, such a manufacturer loses the chance to act. The complexity of this issue is further complicated by the fact that international manufacturing contracts often confuse ownership with intellectual property rights. In international commercial law, possession of a tool invoice does not give its holder unlimited access to it, nor does it confer proprietary rights over its essential design elements. The involvement of an OEM sharing private CAD files with an overseas manufacturing location leads to a scenario that involves a risk of exposing its proprietary engineering information embedded in physical metals. If disputes arise regarding these properties, it is imperative to understand the respective legal systems of the territories involved with regard to goods, bailment, copyright, industrial design, patent and trade secret issues.
Deconstructing Ownership: Moulds, Tooling, Technical Drawings, and Modifications
To set up an enforceable manufacturing framework, legal advisers need to make the distinction between the physical tooling asset, the prior intellectual property included in it, and innovations produced within the manufacturing process. The physical mold itself is a movable property or tangible personal property. When the OEM pays the NRE fee, the transaction falls under the commercial law definition of the contract of sale and purchase of tailor-made equipment. But if no explicit stipulation is provided to the nature of the transaction as direct sales of goods, the ownership might be retained by the manufacturer under the local property law until the actual delivery takes place.
The regime in force for the technical drawings, blueprints, and CAD models used for tooling equipment differs from the one used for the actual physical molds. Those digital assets are Background Intellectual Property and are mostly protected as original works of art or science in terms of copyright laws and confidential information in terms of statutory trade secret law. The license allows the manufacturer to use the information only in the process of producing the tools and making the required number of parts without transferring any ownership rights or any rights for the derivative exploitation of this information.
The complex issue of ownership arises in issues of Foreground Intellectual Property and variation of products. In the process of designing tools, which is known as Design for Manufacturability (DFM), factory engineers change gate locations, alter parting lines, change cooling channels’ configuration and change draft angles among others. According to the laws of common law countries and civil law countries, a person who makes the modification automatically becomes the creator under the principles of intellectual property. Unless the manufacturing contract explicitly states that ownership rights for modifications are passed to the OEM, the foreign factory can assert ownership rights over the modification.
Operational Hazards: Supplier Retention, Unauthorized Reuse, and Inter-Factory Movement
When it comes to real-world cross-border transactions, three serious business risks can affect an OEM's operations. These risks include the problems of keeping suppliers, the issue of unauthorised third-shift production, and the logistical difficulties related to the movement of tools from one place to another.
Keeping suppliers refers to the process of claiming a possessory lien. If there is a dispute between companies over the minimum order quantity, prices for parts, costs that were not absorbed, and quality due to rejection, suppliers often take possession of physical moulds, and there can be no transfer thereof until the amount owed has been paid. According to the civil codes and commercial law of major countries manufacturing products, a craftsman or bailee who worked on a product has the right to keep that product until he or she is paid completely. If a contract does not explicitly indicate that there are no statutory and common law liens that can be defined in the contract, a supplier will legally have the ability to use the tools as a hostage in the supply chain of the company.
The second main danger is the illegal reuse of client-funded moulds, which is commonly referred to as “third-shift” or “ghost-run” production. Since precision moulds can withstand many thousands of injection cycles, dishonest suppliers take advantage of off-peak hours for client-owned utensils and produce identical products with much cheaper resin formulations, distributing them on unauthorised secondary markets. This practice constitutes a case of obvious trademark infringement, misappropriation of trade secrets, and violation of bailment obligations. The only way to prevent this is for OEMs to put different contracts and physical protections in place. The above protection methods include requiring permanent metal name plates on the mould basis stating the proprietary rights on the product, using tamper-proof shot counters or electronic cycle counters for production auditing, and establishing strict non-compete, non-disclosure and non-circumvention obligations with pre-established damages.
The third challenge occurs when an organisation tries to move its tools from one plant to another to either overcome supply chain issues or switch to a cheaper supplier. Moving custom tools requires following an extraction process determined by specific contractual stipulations. If the extraction procedures were not negotiated beforehand, the factories usually will fail to return damaged tools and necessary maintenance records, claiming at the same time that the critical components are not the property of the OEM and belong to the factories instead. In this respect, a good supply contract should describe specific transition procedures, mandatory inspection sign-off before the transfer, packing standards, and liability allocation during transportation.
Strategic Cross-Border Asset Protection in ASEAN Jurisdictions
Indian hardware and manufacturing companies scaling up and outsourcing component production to important manufacturing regions in ASEAN - such as Vietnam, Thailand, Malaysia, and Indonesia—are exposed to considerable legal risks if they depend on their domestic Indian IP registrations or use cookie-cutter supply contracts. The enforcement of IP rights is affected by the principle of territoriality. A patent issued pursuant to the Indian Patents Act, 1970, or an industrial design registered under the Indian Designs Act, 2000, provides no statutory exclusivity or enforcement option for infringements taking place in ASEAN countries.
Indian companies need to have a territorial registration plan before putting CAD files or technical drawings on international markets. This involves making relevant design and utility model applications in countries belonging to ASEAN before revealing their proprietary designs to manufacturers. Companies can always opt for the six-month priority period provided in the Paris Convention for the Protection of Industrial Property or use the optional Patent Cooperation Treaty mechanism. Once the local rights are established, the OEM is entitled to administrative remedies, customs border registration aimed at preventing counterfeits from being exported, and special IP courts enabling them to seek a quick temporary remedy.
Moreover, standard Western Non-Disclosure Agreements (NDAs) are not effective enough at preventing misappropriation in manufacturing centres in Southeast Asia. Foreign suppliers usually comply with the non-disclosure clauses while competing with the original equipment manufacturer (OEM) by using the shared knowledge via associated businesses. Instead, Indian companies should be using specifically designed Non-Disclosure, Non-Use and Non-Circumvention (NNN) agreements under the laws of the country of manufacture or of important centres in the region such as Singapore. It is also important to arrange dispute resolution correctly. On one hand, the possibility of international commercial arbitration with used agencies like Singapore International Arbitration Centre (SIAC) has advantages for solving complex contractual breaches; however, such arbitral courts cannot issue a physical search and seizure judgment against the local factory. In this situation, the best agreement will include a dual-forum option: compulsory institutional arbitration for material breach and damages and voluntary additional submission to a relevant civil court of the country where the factory is located, in order to achieve emergency decisions suitable for ex parte establishment of the tool machinery.
Supply-Contract IP and Tooling Bailment Schedule (Model Legal Schedule)
To prevent ambiguous ownership claims, cross-border manufacturing and supply agreements should integrate a dedicated Intellectual Property and Tooling Bailment Schedule. The following model provisions illustrate the necessary contractual protections:
1. Who Owns the Tools and Moulds
Since the Buyer is the one who pays for or reimburses the costs of all tools, moulds, dies, patterns, designs, and design files (the “Tools”), it is the 100% legal owner of these Tools right from the beginning. The Supplier is merely a temporary custodian (or bailee) of these Tools and has no claim over the ownership of the Tools whatsoever, even if they are present on the premises of its factory.
2. Ownership of Any Design Improvements
In case the Supplier or its employees or subcontractors arrive at any improvements or modifications to the Tools or Products, then these changes also belong to the Buyer absolutely. The Supplier will have to surrender all its rights to these new designs and sign all necessary documents confirming their ownership.
3. Nameplates, Location, and Factory Visits
The Supplier shall place a permanent metal plate on every tool that states: “This is the property of [Buyer Name] and confidential.” The Tools must remain in the predetermined location: [Insert Factory Address]. The Supplier will cease to be entitled to move and modify the Tools. The Buyer can enter the factory during business hours, giving at least 24 hours’ notice for inspection purposes.
4. No Holding Tools Hostage and Returning Them Fast
The Supplier renounces any rights to possess the Tools, regardless of payment or contract disputes. The Supplier has to pack and deliver the Tools to the Buyer’s carrier, with no additional costs or conditions. If the Buyer requests the return of the Tools in writing or the agreement terminates, the case will be the same.
5. Prohibition of Unauthorized Use, Duplication, and Production
- The Tools can be utilised for the orders made to the Supplier exclusively.
- Unauthorised use of the Tools for own production or production for competitors during unauthorised hours is prohibited for the Supplier.
- In case the Supplier breaches this condition, the Buyer can obtain an emergency court order to stop the production immediately. In addition, the Supplier may be obliged to pay the penalty specified in the agreement of [e.g., $300.000 or an amount five times exceeding the value of the Tools used, whichever is higher].
Conclusion
During the process of outsourcing manufacturing, it is imperative that the management of tooling is treated the same as that of managing access to the commercial market. Proper management of the equipment and machining tools should be done so that the operations of your company are not thrown into disarray by supply chain interruptions, leakage caused by third-party shifts, and other issues. With different countries having different sets of regulations that govern the aspects of bailment, possession, and the creation of intellectual property, lawyers must ensure that the corporation’s domestic strategy conforms with the laws of the manufacturing jurisdiction.
To obtain the assets needed for cross-border manufacturing, a twofold plan of action must be adopted—provision of industrial design services and patent registrations for the manufacturing bases in question, and entering into contracts with manufacturers with the requisite bailments, lien waivers, assumptions of rights to the intellectual property, and enforcement of the transport of the equipment. Only by having organised taps on the physical assets will a corporation be able to achieve effective use of the resources for production purposes.
Endnotes
- The Patents Act, 1970, No. 39, Acts of Parliament, 1970 (India), §§ 2(1)(j), 6, 20, 48.
- The Designs Act, 2000, No. 16, Acts of Parliament, 2000 (India), §§ 2(d), 4, 11, 22.
- The Indian Contract Act, 1872, No. 9, Acts of Parliament, 1872 (India), §§ 148, 170 (Bailee’s Particular Lien).
- Paris Convention for the Protection of Industrial Property, Mar. 20, 1883, 21 U.S.T. 1583, 828 U.N.T.S. 305 (as revised).
- Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement), Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organisation, Annex 1C, 1869 U.N.T.S. 299, Arts. 25, 26, 39.
- Civil Code of the Socialist Republic of Vietnam, Law No. 91/2015/QH13, Arts. 346–350 (Right of Retention).
- Civil and Commercial Code of Thailand, B.E. 2468 (1925), §§ 241–250 (Right of Retention and Bailment).
- Dan Harris & Fred Rocafort, China NNN Agreements: How to Prevent Chinese Factories from Copying Your Product, Harris Sliwoski International Law Review (2021).
- Mark Anderson & Victor Warner, Drafting and Negotiating Commercial Contracts, 4th ed., Bloomsbury Professional (2016).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.