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OEM Contracts with Chinese Factories: 10 IP Clauses

5 min readFLAT LAW FIRM
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OEM Contracts with Chinese Factories: 10 IP Clauses That Decide Survival

You order a Chinese factory to manufacture to your design. A year later, a "90% similar" product hits the market — sold by that same factory (or its affiliate), 30% cheaper. This scenario is not rare; it is a structural risk of the OEM model. A good OEM contract cannot stop every risk, but a bad one guarantees you have no tools to fight back.

Contents

1. Why China OEM needs special IP contracting

In OEM, the buyer (often a Vietnamese business) supplies designs, trademarks, know-how — the Chinese factory only manufactures. But the factory physically holds the technical drawings, processes, moulds and — most importantly — the capacity to produce finished goods. This information asymmetry breeds risks: off-order production, design copying, IP "squatting."

An OEM contract therefore cannot be an ordinary purchase contract with a few IP sentences bolted on. It must be an IP contract disguised as a manufacturing agreement.

2. The 10 must-have IP clauses

1. Background IP: list each side's pre-existing IP (buyer's designs, trademarks, patents; factory's manufacturing know-how). Principle: background IP belongs to the contributing party; the other side may use it only to perform the contract.

2. Tooling/moulds: who paid for tooling? If the buyer paid, state the buyer owns it, the factory may use it only for the buyer's production, must maintain it, and hand it over/destroy it on termination. The most-disputed clause when left unclear.

3. Improvements: improvements relating to the buyer's design/product — buyer's property, or at least buyer-licensed. Improvements to general manufacturing know-how — may belong to the factory. Silence = certain dispute.

4. Trademarks: the factory may affix the buyer's marks only on ordered products; must not register similar marks in China or anywhere; must assist the buyer against infringements.

5. IP filing rights: all patent, design, and trademark filings arising from the OEM project in the buyer's name (or as agreed); the factory must sign all necessary documents.

6. Confidentiality: drawings, formulas, BOMs confidential — during and after termination (specific period, e.g., 5 years).

7. Audit rights: the buyer's right to surprise-inspect the factory, production records, finished-goods warehouses — the key tool against overproduction.

8. No subcontracting: the factory may not outsource production without written consent — each subcontracting link is an IP leak channel.

9. Anti-counterfeit/overproduction: no production beyond orders; defective/excess goods destroyed under supervision; traceability (batch codes, security labels).

10. Penalties and damages: deterrent penalties; unilateral termination rights for IP breaches; actual-damage compensation.

3. Register trademarks in China: before signing OEM

China follows first-to-file for trademarks: whoever files first is protected first, regardless of prior use. Practice has recorded many cases of Chinese factories/partners pre-registering foreign buyers' marks and demanding ransom (trademark squatting).

Lesson: register trademarks in China before signing the OEM contract, before sending drawings, before deep negotiations. Filing costs are negligible versus ransom costs.

4. Fighting overproduction and counterfeits

Unauthorized overproduction — the factory making beyond ordered quantities for side sales — is hardest to detect because the goods are genuine, only the channel differs. The toolkit:

  • Surprise audit rights (clause 7);
  • Reconciling component intake vs finished-goods output;
  • Batch codes and anti-counterfeit labels controlled only by the buyer;
  • Heavy penalties + immediate termination rights.

Upon discovery, pursue two tracks in parallel: breach of contract (damages, termination) and IP infringement (registered trademarks, designs).

5. Territory and dispute resolution

  • Territory: the factory may sell OEM products only to the buyer; no sales in any other territory in any form.
  • Governing law: choose carefully — Chinese law eases enforcement in China but the buyer must understand Chinese law.
  • Dispute resolution: arbitration (e.g., HKIAC, SIAC) in a neutral seat is usually more practical than suing in one country's courts; awards are recognized in China under the 1958 New York Convention.

The pre-OEM IP audit. Before sending a single drawing to a Chinese factory, run a pre-OEM IP audit: (1) confirm which IP is registered where (Vietnam, China, target markets); (2) file in China for anything unprotected — trademarks first, designs and patents on a timeline; (3) clean up ownership chains (employee inventions, contractor designs) so the "background IP" schedule in the OEM contract is accurate. Factories respect counterparts who arrive with registrations in hand; the audit costs a fraction of one squatting dispute.

6. FAQs

Q: In China OEM, who owns the moulds/tooling?

A: It depends on the OEM contract. If the buyer paid for tooling, the contract should state the buyer owns it, the factory may only use it for the buyer's production, and must hand it over/destroy it on termination. Without clear terms, tooling ownership disputes are very hard to resolve with a factory in China.

Q: What if the Chinese factory overproduces OEM goods for side sales?

A: This "unauthorized overproduction" risk is common. Contracts need: a ban on off-order production; surprise audit rights; deterrent penalties; and product traceability. Upon discovery, pursue breach-of-contract and IP-infringement claims in parallel.

Q: Should I register my trademark in China for OEM?

A: Yes — before signing the OEM contract. China follows first-to-file: whoever files first is protected first. There are many cases of Chinese factories/partners pre-registering foreign buyers' trademarks and demanding ransom.

Q: Who owns technical improvements made by the factory during OEM?

A: It depends on agreement. Best practice: improvements relating to the buyer's design/product belong to the buyer (or at least the buyer gets a license); improvements to the factory's general manufacturing know-how may belong to the factory with buyer usage rights. Silence = dispute.

7. When to work with a lawyer

Work with a lawyer when: preparing to sign OEM contracts with Chinese factories and needing the 10 IP clauses drafted/reviewed; registering trademarks and designs in China before OEM; or discovering factory breaches (overproduction, design copying) needing action. FLAT Law Firm advises on OEM transactions and cross-border Vietnam–China IP protection — hotline 0988424851.

References

  • Vietnam Intellectual Property Law (No. 50/2005/QH11, as amended).
  • Civil Code of the People's Republic of China (effective 1/1/2021) — principles referenced.
  • Cross-checked as of drafting (28/9/2026).

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