To Prevent Patent Infringement in ODM

A well-known domestic air-conditioning brand company A likes the products designed by an air-conditioning manufacturer company B. Both parties agreed that company B will design and manufacture products with the brand of company A, and company A will sell the product. Unexpectedly, when company A is selling the product, company C believes the product has infringed its patent, and brings a lawsuit against company A and company B. Whether company A shall undertake the patent infringement liabilities related to the product which is designed and manufactured by company B? If company A has to undertake such liabilities, then it shall be deemed as the “manufacturer” or “seller”?

Many people may be puzzled by the question, because the significant feature of ODM is that the consignee shall be responsible for the design and manufacture, and it is none of the consigner’s business. Why the consigner shall undertake the liabilities as the “manufacturer”? The consigner is only a “seller”, which means the consigner could use “legal source” to defend itself.

This is thought is risky.

There is no laws or judicial interpretations which stipulates the rules on identifying whether the consigner is a “manufacturer” under the ODM business model. However, based on the analysis of the judicial practice, there are 3 opinions on this puzzle.

The first opinion is that as long as the consigner has attached its own brand to the alleged infringing product, it shall be deemed as the “manufacturer” (e.g. (2006) Gao Min Zhong Zi No. 1570, (2006) Gao Min Zhong Zi No. 515, (2006) Yue Gao Fa Min Third Zhong Zi No. 365). Many courts would be in favor of this opinion.

The second opinion is that although the consigner’s brand has been attached to the product, if other evidence could prove that the consigner does not have the manufacturing capacity, then it shall be deemed as the “seller” (e.g. (2015) Yue Gao Fa Min Zhong Zi No.329, (2014) Yue Gao Fa Min San Zhong Zi No. 91, (2014) Cheng Min Chu Zi No. 332).

The third opinion is that the alleged infringing product reflects a party’s creation and technical requirements, and this party shall be deemed as the “manufacturer” (e.g. (2003) Nan Shi Min San Chu Zi No.21, (2012) Min Shen Zi No.197). This opinion could be further interpreted as the consigner shall not be deemed as the “manufacturer” under the ODM business model.

In view of the above, if the court is in favor of the first two opinions, then the consigner might be deemed as the “manufacturer” under the ODM business model. This might harm the reputation and social image of those well-known brand, and it would be difficult to claim to the consignee. To put it further, even the consigner could be deemed as a “seller” in accordance with the second and third opinion, then it is not certain that the consigner could use “legal source” to defend itself. It would be decided case by case, for example, if the plaintiff could prove that the consigner knows or should have known the consignee has infringed the plaintiff’s patent, then the consigner would not use this excuse.
Therefore, under the ODM business model, the consigner shall strengthen its sense of the risk related to patent infringement. In order to reduce the relevant risk, the following aspects could be taken into consideration.

Firstly, to conduct FTO (Free to Operate) investigation while choosing the consignee. The consigner shall comprehensively review whether the product manufactured by the consigner has any patent, if it does have any patent, then the consigner shall check the status of the relevant IP and require the counterparty to provide IP documents for review and analyze whether any patent of the third party has been used.
Secondly, to stipulate the IP infringement warranty in the ODM contract. Once the consigner is sued for the IP infringement, the consigner could claim compensation to the consignee by this article. In addition, the article shall have special design on the scope and method of compensation.