Academic journal article Santa Clara High Technology Law Journal

Internet-of-Things Devices, Intellectual Property, Venture Capital, China Manufacturing, and the Art of a Clean Deal: Who Owns What?

Academic journal article Santa Clara High Technology Law Journal

Internet-of-Things Devices, Intellectual Property, Venture Capital, China Manufacturing, and the Art of a Clean Deal: Who Owns What?

Article excerpt

Table of Contents  Introduction I. Sourcing From China: Relevant History    A. Stage One--The Gold Old Days (circa 1981 to 1995)    B. Stage Two (circa 1995 to 2015)    C. Stage Three (circa 2015 to Today) II. The Standard Scenario III. Moving Forward: Law Meets IP Strategy    A. Threshold Questions to Get Started       1. Who Does What, When?       2. Costs, Allocation, Dates?       3. Return of IP?       4. Manufacturing Control?    B. Legal Documents and Registrations to Implement Those    Answers & IP Strategy       1. Non-Compete, Non-Circumvention, Non-Disclosure       ("NNN") Agreements       2. Mold/Tooling Ownership Agreements       3. Product Ownership Agreement       4. Product Development Agreements (PDAs)       5. China-Focused Manufacturing Agreements       6. China Trademark Registration       7. China Invention and Design Patents Conclusion & Implications 

Introduction

Investor and consumer interest in Intemet-of-Things ("IoT") startups and the size of their potential markets remains strong. From 2012 to 2016, venture capitalists poured over $4 billion USD into these startups, (1) and that number is expected to grow well into the future. (2) Some analysts predict that 20 to 30 billion IoT devices will be connected to the Internet by 2020, (3) with a potential impact on the global economy of up to $6.2 trillion by 2025. (4)

China, Shenzhen in particular, is home to thousands of companies providing a wide range of services to foreign IoT startups, including the design and production of semiconductors, IoT modules, subsystems and finished devices. Shenzhen's ecosystem includes suppliers of components, equipment, personnel, chemicals, wafers and product packaging--in short, pretty much everything one would need to build and ship an IoT product to any part of the world. (5)

Many foreign IoT startups are making the pilgrimage to Shenzhen to take advantage of this rich ecosystem. (6) As China lawyers advising these companies, we regularly see IoT products that have reached the mass production stage and need to be produced quickly and in large quantities. Now that it has a commercial product, the startup seeks financing. The wise angel, venture capitalist, or private equity firm asks, "But who really owns the intellectual property in the product? Do you own it? Will or does the Chinese manufacturer/factory in Shenzhen own it? Or does some third party own all or part of it?"

Investors like clean deals, and intellectual property stability and predictability are important to them. (7) IP-intensive industries have more than doubled the sales and capital spending of non-IP-intensive industries, and wages are more than 50% higher in IP-intensive industries. (8) Further, for early-stage companies, intangible assets can account for as much as 80% of their value. (9)

It is often awkward for the (usually) young entrepreneur to have to answer these important IP questions from investors. With the rise of IoT devices, these questions have become even more difficult to answer in a definitive way. The purpose of this article is to assist academic scholars in law and business, their students, legal practitioners, policymakers, entrepreneurs and investors to better understand the relevant history, issues, and risks related to making an IoT product in China and provide strategic recommendations to move forward.

I. Sourcing from China: Relevant History

How did we get to this point? The process has worked its way through the following general stages.

A. Stage One--The Gold Old Days (circa 1981 to 1995)

Here, the landscape was pretty straightforward and simple, and there were two scenarios. In the first scenario, the Chinese manufacturer made standard consumer products. The U.S. buyer simply purchased that product and would ask the Chinese manufacturer to take the additional step of putting the trademark/logo of the U.S. buyer on the product or its packaging. …

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