Do You Know Who Is Manufacturing Your Products? You Better!

By: Joshua Kaufman, Esq. &
Lindsay Meyer, Esq.

Offshore! offshoreoffshore!  It is the mantra that we hear nonstop in all fields of manufacturing in the United States today.  Send the work offshore, have it made offshore, it is so much cheaper offshore, American companies can not compete with the prices we get offshore.  These all may be true statements, but sending production offshore is not without hidden costs.  There are consequences for both the licensee and licensor when the licensee transfers the manufacturing of goods offshore; particularly, to the Far East.  It comes as no surprise to anyone that a large percentage of the counterfeit goods that we find in the United States come from offshore; particularly, Far East sites.  When a licensee ships a design or an item overseas for manufacturing it is like sending a sheep into the lions' den.  In the off chance that the knockoff artist or counterfeiters have missed your products as they roam through trade shows throughout theUnited States, by sending a design, pattern, or a popular item to China (or other countries with similar lax enforcement of intellectual property rights) you are ensuring that the knockoff artists will become aware of your product.  This will greatly enhance the possibility or likelihood of infringing products being made and making their way into the United States.

Royalty calculation practices also differ when goods are shipped from abroad.  These types of arrangements often base their royalties on FOB rates rather then on wholesale sale prices in the United States.  There is nothing wrong with basing royalties on FOB rates; however, they require more investigation and information sharing in order that the royalties being paid are comparable to the traditional royalties due a licensor.  The royalty payments may also become part of the Customs duty rate that must be declared, if the importer has not set its arrangements carefully.

Going offshore causes licensors many other problems; particularly, when the goods don't conform to the orders placed.  How do you go back to China, or Thailand, or Korea and try to enforce a breach of contract claim against a local entity?  What if there are shortages or defects in the goods?  What to do, in an even more likely scenario, when the goods are knockoffs and you have been found liable to the copyright owner in the United States and paid damages.  In such instances you have to go back to the foreign companies and try to get reimbursed for the monies that you have paid out as a result of their infringement -- good luck! 

One less obvious area of concern to licensees and licensors alike is the issue of the actual manufacturers labor practices.  One can not exercise the "ostrich theory" of putting their heads in the sand and ignoring how their goods are manufactured abroad.  Besides being morally responsible there are obvious business reasons to be concerned about such issues as well.  The PR consequences of it becoming known that your goods are being made by "slave laborers", "sweatshops", or child labor can have a devastating impact.  Just ask Nike or Kathy Lee Gifford.  In addition to bad PR, it is illegal under United States Law to have goods manufactured by slave labor, indentured labor, convict labor, forced labor, or child labor.

It has been a longstanding prohibition in the U.S. to import such goods.  Section 307 of the United States Tariff Act of 1930 prohibits the importation of these type of goods as follows

"All goods, wares, articles, and merchandise . . . produced or manufactured wholly or in part in any foreign country by convict labor and/or forced labor and/or indentured labor under penal section shall not be entitled to entry in any of the ports of the United States. Any importation thereof is hereby prohibited.  The Secretary of Treasury is authorized and directed to prescribe such regulations as may be necessary for the enforcement of these provisions.  The provisions of the section relating to goods whereas articles and merchandise . . . produced and/or manufactured by forced labor and/or indentured labor shall take effect on January 1, 1932." (emphasis added)

This Act also covers forced child labor and indentured child labor. 

Any Customs Port Director or other customs officers who have reason to believe that merchandise which is (or is likely to be) imported in violation of Section 307 is required to communicate their belief to the Commissioner of Customs.  Additionally, anyone can file a claim with the U.S. Customs Services and Border Protection ("U.S. CBP") that imported goods are being manufactured based on "slave labor", convict labor, indentured labor, child labor, etc.  Therefore, a competitor who believes that its competitor is gaining an edge on pricing by using inappropriate labor from abroad has the standing to file a complaint with U.S. CBP and have the goods detained at the border.  The Commissioner of Customs is required to review these claims and if he finds that they have no merit the goods are released.  However, if the Commissioner finds that the claim has merit, U.S. CBP will notify the importer who will then have the burden to prove that the goods were not manufactured in violation of the law.  If they do not succeed, the goods will be barred from the U.S. and typically or forfeited and destroyed. 

So how does a licensor ensure that its good name is not besmirched by its licensee using "slave labor", "sweatshops", or child labor in violation of the law?  Even if the manufacturing techniques employed do not go to the extremes violating Section 307, but are considered substandard by the American public, the licensor and licensee's names can be damaged, as they are the ones who contracted with the foreign manufacturing companies.  Therefore, it is important to have people "in country" who can go in and investigate where their goods are being manufactured and what the conditions are like.  Don't simply take the word of the foreign manufacturer that they are in compliance with this U.S. law and that the conditions are appropriate.  As more goods are being manufactured offshore, more licensors are putting specific warranties and representations into their contracts that the licensee must make which guarantees that the goods are being manufactured appropriately.  Below is a sample set of clauses dealing with this issue, that if followed will ensure that the goods are created in a way that protects all parties concerned.  These are comprehensive provisions and some people might resist adding this type of lengthy clause to their contract. However, this type of language is routine among major licensors and it is certainly something that every licensor should consider.  If it is presented to a licensee who then refuses to sign the agreement that should raise yellow flags of caution as to the manufacturing practice used by that licensee.

(We will use "ACME" as a hypothetical Licensor)

1.      Licensee and the Manufacturer(s) agree that they will only employ persons whose work is voluntary.  Licensee and the Manufacturer(s) agree that they will not to use any forced or involuntary labor, whether prison, bonded, indentured, etc.

2.      Licensee and the Manufacturers agree not to use corporal punishment, threats of violence, or other forms of physical, sexual, psychological or verbal harassment or abuse on any employee or contractor.

3.      Licensee and the Manufacturer(s) agree not to discriminate in hiring and employment practices, including salary, benefits, advancement, discipline, termination, or retirement, on the basis of race, religion, age, nationality, social or ethnic origin, sexual orientation, gender, political opinion or disability.  Unless they are required by law to treat a specific group of employees differently.

4.      Licensee and its Manufacturer(s) agree that they will not to use child labor in any facet of the production, packaging or distribution of Acme's merchandise.  The term "child" refers to a person younger than the local legal minimum age for employment or the age for completing compulsory education, but in no case shall any child younger than fifteen (15) years of age (or fourteen (14) years of age where local law allows) be employed in the printing, production, packaging or distribution of Acme merchandise. Licensee and the Manufacturer(s) employing young persons, but those who do not strictly fall within the definition of a "child" agree to comply with any and all Laws applicable to such individuals.

5.      At a minimum, Licensee and the Manufacturer(s) agree to comply with all applicable wage and hour Laws, including minimum wage, overtime, maximum hours, piece rates and other elements of compensation, and to provide all legally mandated benefits.  If local Laws do not provide for overtime pay, Licensee and Manufacturer(s) agree to pay at least regular wages for overtime work.  Licensee and the Manufacturers will not require employees to work more than the lesser of (a) 48 hours per week and 12 hours overtime or (b) the limits on regular and overtime hours set by local law, where local law does not limit the hours of work.  Employees will be entitled to at least one day off in every-seven-day period.  Licensee and the Manufacturer(s) agree that, where local industry standards are higher than applicable legal requirements, they will meet the higher standards.

6.      Licensee and the Manufacturer(s) agree to provide employees with a safe and healthy workplace in compliance with all applicable Laws, ensuring, at a minimum, reasonable access to potable water and sanitary facilities, adequate lighting and ventilation.  Licensee and the Manufacturer(s) also agree to ensure that the same standards of health and safety are applied in any housing they provide for employees.  Licensee and the Manufacturer(s) agree to provide Acme with all information Acme may request about production, packaging and distribution facilities for Acme products.

7.      In accordance with applicable laws, licensee and the Manufacturer(s) agree to respect the rights of employees to associate, organize and bargain collectively in a lawful and peaceful manner, without penalty or interference.

8.      Licensee and the Manufacturer(s) agree to abide by all applicable environmental Laws.

9.      Licensee and the Manufacturer(s), agree to comply with all applicable Laws, including those pertaining to the production, pricing, sale and distribution of the Acme products.

10.  Licensee and the Manufacturer(s) agree that Acme and its designated agents (including third parties), may monitor their activities to confirm compliance with this Agreement, including unannounced on-site inspections of production, packaging and distribution facilities, and employer-provided housing, such inspections to include reviews of books and records relating to employment matters and private interviews with employees.  Licensee and the Manufacturer(s) agree to maintain on site all documentation necessary to demonstrate compliance with this Agreement.  Licensee agrees to promptly reimburse Acme for the reasonable cost of inspections performed pursuant to this Agreement when any manufacturing, packaging or distribution facilities of Licensee or any Manufacturer does not pass the inspection(s).

11.  Licensee and the Manufacturer(s) agree to take appropriate steps to ensure that the provisions of this Agreement are communicated to employees, including the prominent posting of a copy of the terms of this Agreement in the local language and in a place readily accessible to employees at all times.

12.  Licensee agrees to take appropriate steps, in consultation with Acme, to develop, implement and maintain procedures to evaluate and monitor the Manufacturer(s) it uses to produce the Acme product and to ensure compliance with this Agreement.

Offshore, offshore, offshore -- let the licensor and licensee beware!

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Joshua Kaufman and Lindsay Meyer are partners in the law firm of Venable, LLP based in Washington, DC. Ms. Meyer heads the International Trade Practice at Venable LLP where she specializes in import/export and custom matters.  Joshua Kaufman is the chair of Venable's Licensing, Copyright, Unfair Trade and Entertainment Group and has published numerous articles on copyright and licensing many can be found at www.jjkaufman.com.

Venable's Licensing Group consists of approximately 50 attorneys; it is one of the nation's largest Licensing practices. It is international in scope and broad based covering all aspect of copyright, trademark, patent, technology and government licensing including contract negotiations, import-export, customs, tax, franchising, foreign exchange, off shore companies, publicity rights,  infringement matters, bankruptcy, litigation, advertising, infomercials,  regulatory issues, etc..