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Deal with China manufacturer

petercampbell01's Avatar

Hello EN friends, I have a novelty product that I've developed over the last year. I have submitted a design patent in US and only a provisional utility patent which will expire soon. So I am considering the full utility patent using the same attorney that submitted my others. 

Through the process the last year, I have been working with a Chinese company to source a manufacturer and to build a mold and finally my plastic product samples. I've been gaining traction on selling this item to potential customers in the US. Recently this company in China said they had shown my sample to their customers in China and they are interested in placing order, but they declined because it's my product. Since they have asked if I would create an agreement with them to sell in China. 

Here's the big issue: my attorney says I should develop an agreement because they're probably going to sell it on their own anyway. He says we can protect against sales in the US, but cannot enforce or monitor their sales in China or internationally. I believe their customers are large resellers and so I have to believe that my product would have to be resold online. I can't imagine that my potential customers won't find my same product online for less than I can sell it, and so their sales will undercut my margins and opportunities. 

My attorney has advised that in China their culture views inventions and ideas as public domain, and basically disregards patents and agreements. 

I am considering an agreement that outlines the process for their direct sales which would include them funneling the new customers info into my online form and then being approved by me before purchase. I am also hoping I could require their customers to buy from me, to not sell online and to retail at the same US rates that we will be offering the product. I also need to establish a percentage that I'd receive from their sales. 

So, it appears that I NEED to provide them with an agreement - that they may or may not abide by - while doing my best to protect my product. But I fear ANY agreement will open up the flood gates of them selling to anyone and at any price, either because they can't resist a large order and providing a discounted rate and/or the agreement that I provide to them is viewed as insufficient and unfair percentages or restrictive arrangements. 

Does anyone here have experience with this type of situation? Any advice and feedback will help shape my agreement with them. 

Thanks

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shmidster's Avatar

Hi Peter,

A couple of thoughts on this, firstly congrat getting a new distributer.

You should be aware that manufacturers generally sell to distributers for the FOB (freight on board) price, not the whole sale price so an item that would normally retail for $20, wholesale for $11 will FOB for $4. So you would get a royalty on the $4 instead of the usual $11. 

That being said, you would have to do a lot of volume, depending on the royalty % payout, to make a significant sum. So just keep that in mind, for negotiating royalties.

Also, Make sure you have a minimum guarantee in the agreement, it is likely that that amount is all you will receive from them. 

Cheers!

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kabuj's Avataree_badge

I had a China manufacturer propose the same type of deal with me and it seems to be working fine (of course what I do not know does not hurt me), 

I know I'm receiving consideration on a quarterly basis from them, so I trust it's fair. Also,you should remember that they do have a personal incentive to work reasonably honest with you to to maintain their position as the primary (or only) manufacturing source for your U.S. market which is obviously very large. 

Technically, I can go to a different manufacturer if they piss me off and a different company will reap the benefits of manufacturing my product(s) for LEGAL sell in the U.S. market since product is patented.

My only point is, do not under-estimate the leverage you  do have (to whatever extent) with your overseas manufacturer.

My two cents!

Best of Luck!

Jacob Downey
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petercampbell01's Avatar

Thanks for the feedback. KJ, what percentage did you agree to? I am not sure what to ask since they are manufacturing and selling and fulfilling these orders. Also, what is the process to prevent them from selling to another company that will in-turn sell online to the US? It seems difficult to track. Also, I don't have much market share yet. Is there a way for me to hold them off? This is a sunglass product, and they claim March to June is their hot sales time, so they're anxious to get going...

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petercampbell01's Avatar

Also, would you be able to share the legal doc with me? I don't want to pay an attorney to write it, if I can avoid it. But having a hard time finding an international sales agreement contract template. I think it would also have to be interpreted into Chinese?

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