Having seen multiple sides of contract manufacturing, in the roles of IP advisor and independent director, I know how in an industry with ever tightening margins, an understanding of intellectual property can make the critical difference between success and struggle.
Understand why contract manufacturers are different
Contract manufacturers often haven different traits to other businesses. These traits can include:
- Not being consumer facing, and thereby having market and price set by their client.
- Often in highly regulated industries (for example, pharma) the associated barriers to entry can either be an advantage or disadvantage, depending on how it can be worked.
- The IP is usually owned by the client.
- It is a competitive industry, with low margins and little room for premium pricing.
While contract manufacturing may seem a stark business to be in, a savvy working knowledge of IP issues can be of significant advantage.
Recognise your contribution
It is rare for a new job to come to a contract manufacturer that is production ready. Often, the manufacturer has some input into product design, and at the very least, the operating parameters of the production machinery. These may be the subject of patents, trade secrets and/or design registrations.
A client relies on its manufacturer to deliver quality goods on time. The manufacturer’s ability to deliver depends upon the rigour of their systems. For example, the level of recording, reporting and overall quality control required in a high-volume plastics manufacturing company was an eye-opener to me, and I have the deepest respect for contract manufacturers as a consequence.
The “paperwork” and compliance required in regulated industries such as veterinary, CBD, and pharma is stringent, and they are regularly audited to very high standards. Failure to comply can mean that a client cannot enter a particular market.
Further, often regulated industries only permit registration of a particular SKU from a specific manufacturing site. This can mean that if a customer wanted to shift manufacture to a different site, then a new, lengthy, and expensive registration could be required.
Understanding the barriers to entry that both parties face, along with respective contributions, can be useful for strategising in the market, and for strengthening client relationships. All of the above systems and inputs have potentially protectable and valuable IP for either the manufacturer or its client.
Flip it around
Quite often, a contract manufacturer recognises that their client has valuable IP which can be protected, even if their client is unaware of the possibility.
It may seem counter-intuitive, but it can be of benefit to the manufacture to be pro-active and point out the protectability of the client’s IP. The mantra “your success is my success” comes into play here. If the client can enjoy a monopoly in the market because they protected their IP, the manufacturer can enjoy a long and lucrative contract.
Failure of the manufacturer’s client to protect their rights can mean that they will face serious competition in the market, and subsequently a diminishing market, for both parties.
Therefore, learning to spot what is protectable is important for both the manufacturer and its client.
Have the IP conversation at the start
When times are tight, the conversation between a contract manufacturer and potential clients can be tentative, and the manufacturer can be reluctant to raise potentially sticky issues such as IP. However, raising these early can be a good thing.
Ideally each new project needs to have a letter of engagement, which not only confirms exactly what the job is, the pricing, and timing, but also the following:
- That the manufacturer owns all IP generated because of the engagement
- That the manufacturer is free to use the IP for other projects (providing scalability)
- That information around the project is kept confidential until the manufacturer says otherwise (this enables valid patent and design applications to be filed)
Though the manufacturer may be concerned at customer pushback, this could be a good thing. A considered approach could be to have a multi-tier charging system that is dependent upon what rights each party wants (and is prepared to pay for).
Some possible scenarios are below:
- The client doesn’t pay for design work, just the product, and the manufacturer retains all rights and is free to manufacture similar products for the client’s competitors.
- The client pays more for the manufacturer not to manufacture for directly competing markets, but the manufacturer can sell elsewhere (e.g. Australia). The manufacturer retains exclusive manufacturing rights.
- The client pays a premium for exclusive rights. The manufacturer cannot manufacture for anyone else, but retains exclusive manufacturing rights for the client.
- The client pays an uber premium for exclusive rights. The manufacturer cannot manufacture for anyone else, and cannot stop the client from engaging another manufacturer.
Contract manufacturers can clearly benefit by having a good knowledge of IP issues, and by applying strategic thinking to their practices.
