Outsourced Manufacturing and Trade Secrets: Final Considerations
Transition Services
After termination or expiration, the company should require the manufacturer to provide extensive transition services to the company. In addition to customary provisions, the agreement could provide for the transfer to the company of key equipment; materials; or facilities. The agreement can further require the manufacturer to offer severance to crucial employees and encourage them to accept future employment with the company directly.
Trademark Protection
The company should require that the products manufactured by the outsourced manufacturer prominently bear the company’s trademarks and are not offered in association with the name or mark of the manufacturer, or any other third party.
The agreement should also include appropriate quality control obligations and oversight relating to the use of the marks. This should help the company create and maintain equity in the marketplace concerning company-authorized products.
Non-Compete Covenants
Where possible under local law, the company should consider requiring certain non-compete covenants from the manufacturer so that the manufacturer has less incentive to misuse company trade secrets. These can also be included in modified employment agreements with the manufacturer’s employees. These provisions may be limited to a specific industry or sector, or in connection with specific company competitors.
Assignment and Change-of-Control Restrictions
Change-of-control and assignment restrictions are important protections in any outsourced manufacturing agreement. They can provide the company with assurances that:
- The identity of the manufacturer will not change during the term of the agreement; and
- A competitor will not obtain access to the company’s sensitive information through corporate affiliation with the service provider.
Applicable Law Considerations
The laws of each particular jurisdiction define what constitutes a trade secret in that country and the protective measures that owners must take to be eligible for legal remedies for misappropriation. Local counsel should, therefore, be consulted in each relevant jurisdiction to review the proposed agreement and to help determine the most effective means under local law to protect the applicable IP.
With respect to trade secrets, at least as it relates to the US, the Defendant Trade Secrets Act (DTSA), enacted in 2016, expands certain protections under US law by creating a private federal cause of action for trade secret misappropriation. Additionally, 49 states (with the notable exception of New York, which relies on common law) have adopted a version of the Uniform Trade Secrets Act (UTSA). The UTSA shares many similar provisions with the DTSA and may provide an additional or alternative cause of action if the misappropriation is within the state’s jurisdiction.
In sum, outsourced manufacturing is a very important part of the global economy. Along with the benefits, there are significant risks. Accordingly, a thoughtful approach to choosing a manufacturing partner, and to protecting one’s intellectual crown jewels, is paramount.
Related articles:
1. Outsourced Manufacturing and Trade Secrets: An Economic Overview
2. Outsourced Manufacturing and Trade Secrets: Outsourced Manufacturing
3. Outsourced Manufacturing and Trade Secrets: Risks & Benefits
4. Outsourced Manufacturing and Trade Secrets: Internal Controls
5. Outsourced Manufacturing and Trade Secrets: Due Diligence
6. Outsourced Manufacturing and Trade Secrets: Transaction Structure & Contract
7. Outsourced Manufacturing and Trade Secrets: Manufacturing Process & Personnel
8. Outsourced Manufacturing and Trade Secrets: Controlling the Manufacturing Process
9. Outsourced Manufacturing and Trade Secrets: Contractual Trade Secret Protection Measures
10. Outsourced Manufacturing and Trade Secrets: The Manufacturer Relationship
David L. Cohen, P.C. – Kidon IP
123 West 93rd Street
New York, NY 10025
dlc@davidlcohenpc.com
(914) 357-5196
The outsourced manufacturing agreement should require procedures that limit access to the company’s confidential information to specific, identified manufacturer personnel and solely to the extent they need to know the information for performing the services.
Perhaps the single most important part of outsourced manufacturing is to select a trustworthy partner. A company should not enter into any transaction unless it has a good basis to believe that the manufacturer will be an acceptable partner. This requires rigorous due diligence, including: