Do you know where your products are manufactured and under what conditions? If not, you'd better find out.
Offshore! Offshore! Offshore! That is the mantra heard nonstop in all fields of manufacturing in the U.S. today. Send the work offshore, have it made offshore, it is so much cheaper offshore, American companies cannot 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 manufacture of goods offshore, particularly to the Far East. A large percentage of the counterfeit goods found in the U.S. comes 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 lion's den. On the off chance the knockoff artist or counterfeiters missed your products as they roam trade shows throughout the U.S., 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 knockoff artists will become aware of your product. This greatly enhances the possibility or likelihood of infringing products being made and making their way into the U.S.
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 prices in the U.S. There is nothing wrong with basing royalties on FOB rates; however, they require more investigation and information sharing so the royalties being paid are comparable to the traditional royalties due a licensor. The royalty payments also may 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, 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 happens when the goods are knockoffs and you have been found liable to the copyright owner in the U.S. and required to pay damages? In such instances you have to go back to the foreign companies and try to get reimbursed for the monies you 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 manufacturer's labor practices. You cannot exercise the "ostrich theory" of burying your head in the sand and ignoring how your 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 U.S. Law to have goods manufactured by slave labor, indentured labor, convict labor, forced labor, or child labor. It has been a long-standing prohibition in the U.S. to import such goods. Section 307 of the U.S. Tariff Act of 1930 prohibits the importation of these types 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 U.S. 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."
This Act also covers forced child labor and indentured child labor.
Any Customs port director or other Customs officers who have reason to believe merchandise is (or is likely to be) imported in violation of Section 307 is required to communicate his or her 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 company that believes 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 they have no merit, the goods are released. However, if the Commissioner finds the claim has merit, U.S. CBP will notify the importer, who then will have the burden to prove 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 forfeited and destroyed.
So how does a licensor ensure 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 that 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 it is in compliance with this U.S. law and that the conditions are appropriate. As more goods are manufactured offshore, more licensors are putting specific warranties and representations into their contracts, which guarantees that the goods are being manufactured appropriately.
Here is a sample set of clauses dealing with this issue that, if followed, will ensure 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 every licensor should consider. If it is presented to a licensee that refuses to sign the agreement, it should raise yellow flags of caution as to the manufacturing practice used by that licensee.
("Acme" will refer to the hypothetical Licensor)
Licensee and Manufacturer(s) agree they will only employ persons whose work is voluntary. Licensee and Manufacturer(s) agree they will not use any forced or involuntary labor, whether prison, bonded, indentured, etc.
Licensee and Manufacturer(s) 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.
Licensee and 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.
Licensee and Manufacturer(s) agree they will not 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 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.
At a minimum, Licensee and 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 Manufacturer(s) 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 Manufacturer(s) agree that, where local industry standards are higher than applicable legal requirements, they will meet the higher standards.
Licensee and 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 Manufacturer(s) also agree to ensure the same standards of health and safety are applied in any housing they provide for employees. Licensee and Manufacturer(s) agree to provide Acme with all information Acme may request about production, packaging, and distribution facilities for Acme products.
In accordance with applicable laws, Licensee and 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.
Licensee and Manufacturer(s) agree to abide by all applicable environmental Laws.
Licensee and Manufacturer(s) agree to comply with all applicable Laws, including those pertaining to the production, pricing, sale, and distribution of Acme products.
Licensee and 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 Manufacturer(s) agree to maintain on-site all documentation necessary to demonstrate compliance with this Agreement. Licensee and Manufacturer(s) agree to promptly reimburse Acme for the reasonable cost of inspections performed pursuant to this Agreement when any manufacturing, packaging, or distribution facilities of Licensee and Manufacturer(s) does not pass the inspection(s).
Licensee and Manufacturer(s) agree to take appropriate steps to ensure 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.
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.