We are seeing in an uptick in China-related matters involving cannabis brands. Here are three tips for cannabis brands that are getting their products made in China:
1. Sign a Contract
As I recently wrote in our sister blog, “while having a contract provides no guarantee of smooth operations or favorable dispute resolution, a well-drafted agreement can mitigate many risks.” Moreover, it “is almost guaranteed, though, is that if a dispute arises and you do not have a contract, you will have no chance of legal recourse in China.”
We see far too many companies doing business in China without proper contractual protection. In some cases, this is because they mistakenly assume a Chinese court would not enforce a contract anyway. Others assume that an exchange of emails and WhatsApp messages with their supplier would be considered a contract, if push came to shove.
The bottom line is that Chinese courts regularly enforce written contracts. Moreover, the existence of such a contract greatly reduces the likelihood of a dispute, precisely because the Chinese supplier is likely to know that a breach of a written contract is very damning in the eyes of a local court. At the same time, in the absence of a written contract, it is almost certain that a legal dispute against a supplier will go nowhere.
2. Have a Plan B
Relying on a single supplier is a very risky proposition, but more so when that supplier is in China. In addition to the inherent risks associated with depending on a single source, a supplier that knows itself to be indispensable could well decide to take advantage of the leverage it has.
Ideally, a Plan B will involve a supplier in a country other than China. This will help guard against China-specific risks, such as possible disruptions to China trade in case of rising tensions between the United States (and its allies) and China. But even a Plan B that involves a different supplier in China is better than not having a Plan B.
Taking the long view, the potentially business-saving upside of channeling 1o% or 20% of production to a different supplier could well offset the associated costs. It could also help canna brands keep their suppliers on their toes, as they know there is always the potential for further production shifts depending on which supplier is offering better terms. If they wanted to, companies like Nike and Adidas could work with a handful of suppliers, yet they work with dozens, spread out over Asia (and beyond). Why do you think that is?
3. Register Your Trademarks and Other IP (in China)
Even if you do not sell in China, there are compelling reasons to register your trademarks and other key intellectual property in China. More than anything, this will prevent others from registering it first, and then using it against you (potentially siccing the authorities on you for infringing on “their” IP). Others might be hitherto unknown parties, looking for a quick buck or actually thinking of using the IP themselves, but it could also be your own supplier, looking to have more leverage over you, or making provisions for possible departure on your part.
Avoid troublesome scenarios by registering your cannabis brand IP in China now. Once you do that, record those IP rights with China Customs to have them be on the lookout for infringing goods leaving China. And of course make sure that your U.S. cannabis brand IP protections are complete and up-to-date, to the extent they are securable.
