Is your supplier really cheap or just a wolf in sheep’s clothing?

In Insights, Uncategorized

19 August, 2009

It is well known that many companies, for cost reasons, choose to manufacture and buy products in low-cost countries, such as China. The possibility of manufacturing in low-cost countries is now being offered widely to Swedish companies through agents. These agents are often Swedes, who themselves have worked in production, procurement and logistics in such countries, and who contact Swedish companies, offering them the same components as they are buying from other suppliers, but at a substantially lower price.

It is, of course, very tempting to save big money on lower cost sourcing from manufacturers in low-cost countries, but there are risks, which are not always obvious. Assume that the previous supplier has a patent or a design protection covering his product. When your company instead buys the same product from someone else, you may actually be infringing that patent or design registration. If your company switches suppliers abruptly, there is a clear risk that the previous supplier will notice and start investigating what happened.

Swedish law provides for damages corresponding to the profit that the previous supplier would have made but for the infringement. In addition, your company may have to compensate the previous supplier for its costs in connection with policing its rights. Such costs, often referred to as “attorney cost” may be quite substantial.

It is also possible for a court to issue an injunction against an infringer, effectively preventing them from continuing the infringing activities. Such injunctions may also be issued as a preliminary measure, before the court has ultimately decided on the issue of infringement.

An infringer will not be excused for not knowing about the existence of an intellectual property right. Patents and design registrations are published, and are thus deemed to be known to everyone, just like everyone is deemed to know the laws of our country. It may be risky to rely on procurement terms stipulating that the new supplier assumes responsibility for any damages or legal costs incurred resulting from an infringement proceeding.

A preliminary injunction may bring your company’s production to an immediate halt, with delivery problems ensuing, which, in turn, may damage customer and market relations in ways that may be difficult to assess and remedy. There is also a risk that the new supplier simply ceases to exist, in which case there would be no one to claim compensation from.

So, there is a problem: how do we solve it?

For starters, unless you know for sure, you could ask the new supplier, or his agent, to demonstrate that the old product is not subject to intellectual property protection, such as patents, design registrations, or even copyrights.

It is prudent to have any “assurance” presented by the new supplier reviewed by an IP attorney or a patent attorney.

It is not uncommon that a producer in a low cost country himself turns out to have filed a utility model registration showing the product, and then simply stating that “we have our own patent on the product, how could it possibly infringe another patent?” Utility model registrations operate almost like patents, but are granted quickly, without any substantive examination. Denmark, Germany, Austria, Finland, China and Japan are examples of countries where utility model protection is available as a faster and less costly alternative to patent protection.

However, if such a utility model registration was filed after the previous supplier’s patent or design registration was published, it is invalid, and can most likely not serve as a defense in an infringement case.

At the end of the day, it is your responsibility to make sure that you do not infringe anyone’s patent. Hence, your best insurance is to make your own assessment of whether the product offered to you is really safe to buy and use.

So, if you’re contacted by a cheap supplier, we are there to help you find out whether they really are cheap, or just a wolf in sheep’s clothing.

Ole Bokinge, European Patent Attorney

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