Hidden IP risks for local manufacturers

Amid ongoing supply chain disruptions, local manufacturers and business leaders are innovating how and where goods are produced. But these changes carry significant legal risks that must be addressed before relocating operations or suppliers.

Supply chains have come under increasing scrutiny over the past few years. Beginning during the pandemic, the flow of goods and materials through seemingly reliable trade routes was substantially restricted if not shut off entirely. This disruption caused manufacturers and retailers to begin looking to reshore or near-shore at least some of their manufacturing or supply base. Just as new supply chains were being established, a new tariff regime was implemented, which has caused further reevaluation of supply logistics. Businesses need a predictable supply of retail goods and manufacturing supplies. However, in an eagerness to address these new business challenges, companies should not lose sight of the legal concerns with manufacturing in new territories.

Territorial IP rights create hidden vulnerabilities
For well-established supply networks, often a company has done its due diligence in ensuring that it has secured intellectual property rights in that jurisdiction, as well as considered competitor intellectual property rights. To this point, it is important to remember that intellectual property rights are territorial; that is, a country can only enforce patents granted in or extending to that country. In other words, a U.S. patent is not enforceable in China just as a Chinese patent is not enforceable in the U.S. For this reason, mitigation of legal risk with respect to intellectual property should consider the laws and protections available in each country implicated in a company’s supply chain.

For example, a company may have researched the potential patent liability for manufacturing its product in China by reviewing and avoiding the scope of competitors’ Chinese patents. However, if that manufacturing is relocated to Vietnam or Thailand, for example, the territorial rights of patentholders in those countries must be taken into account. Neglecting this factor could otherwise make the seemingly cost-effective move of a link in the supply chain costly in the long term if it runs afoul of patentholders’ rights in the new country.

From a protection standpoint, relocating manufacturing may also mean that patent protection is no longer covering the manufacturing process or product. While ultimately this may not seem like it matters if the end market is the U.S. and the company also has patent protection in the U.S., the inability to enforce patent protection in the new manufacturing market may mean that your supplier is able to supply others in that country. Put differently, a company’s patent in the previous manufacturing country could be used to enforce restrictions on a supplier in that country, but without patent protection in the new manufacturing country, there is one less tool to enforce exclusivity. The supplier may then flood the local market with a glut of the company’s product. And once the product enters the flow of international commerce, a company may find knockoffs of its product on websites like Amazon, eBay, and Alibaba. These websites may offer takedown services, but this creates a never-ending game of whack-a-mole in which new seller pages spring up as fast as old ones are taken down.

Protecting your brand in new markets
When considering trademark rights, a company entering a new jurisdiction may find that it is not even entitled to use its own name because another company may have already adopted that name in the new jurisdiction. As with patents, trademark rights are territorial. But unlike patents, there is no need to be the inventor or creator in order to obtain rights. In other words, trademark rights are conferred by using the trademark in the relevant jurisdiction. If Company A is not actively using its name in a particular jurisdiction, then Company B may take the opportunity to adopt that name in that area. This situation could ultimately prevent Company A from using its own name there in the future.

Patent and trademark rights are associated with creativity and innovation, but they are ultimately tools of business. The financial reality of a company may dictate strategy with respect to supply chain logistics, but intellectual property is critical and must be considered in that calculation. As outlined above, existing intellectual property protections should be considered when deciding whether to move a link in a supply chain, and offensive and defensive strategies should be updated to reflect the territorial scope of intellectual property rights.

Reinhart is a full-service, business-oriented law firm. With more than 200 lawyers, they serve clients throughout the U.S. and internationally with a combination of legal advice, industry understanding, and superior client service. For help navigating international intellectual property rights for your business, please contact an attorney at Reinhart for assistance.

The views expressed are those of the author(s) and do not necessarily represent those of the Greater Rockford Chamber of Commerce.