7/05/2013

Legal Basics on Outsourcing from Korea

So you have decided to outsource the manufacturing of your products to Korea. Good choice in choosing quality-focused Korea over quantity-focused China, but don't make the bad choice of not even taking the basic legal steps necessary to protect your good name, technology, brand and the future of your business.

If you plan on just dealing through a purchase order (PO) in Korea, you are heading down a path that will invariably lead to a kick in the tail.

The recession has hit small/medium-sized manufacturers even harder than large manufacturers. Many of these SMEs have decided that the only way to survive is OEM (original equipment manufacturing) outsourcing to China, India, Korea and other parts of Asia.

I, also, do a good deal of enjoyable work in China and India. I am, however, always happy to see clients choose Korea over India and China, since many of the headaches you will experience in China and India will never be felt in Korea.

The legal system, in Korea, is generally transparent, fair, and the judges tend, with a little guidance, to be able to understand commercial disputes. Also, I have been told that Korean manufacturers need much less guidance than Indian and Chinese manufacturers and the cost of doing business in Korea is not substantially greater, for high quality products.

This situation being known, foreign companies often make the poorest of choices when doing business with Korean companies. Korea is still far behind the United States and the West in terms of business ethics, protection of intellectual property and legal transparency. Many risks, not even considered potential risks in the West, are regularly realized in Korea.

Before entering into any Korean OEM agreements, please consider and follow these very basic pieces of advice. As in an article I wrote for a Korean daily entitled Listen to your Mother -- always look both ways before crossing the street, carry an umbrella in the spring and don't go out alone at night.

1. Request and obtain the company’s business registration number and perform a credit check on the company. A basic credit check can be obtained through the Korean Investors Service (www.kisrating.com).

2. Register all your intellectual property rights (copyright, patents, trademarks etc.) in Korea. Registration will help to prevent your competitor, a disgruntled distributor, or your manufacturer from counterfeiting your goods and exporting your product from Korea to your customers and potential customers. Registration in the United States and Europe does not guarantee that your intellectual property rights are protected in Korea. IP treaties only provide you a window of time to register in a member state.

3. Your Korean license, distribution, OEM agreements and other agreements used in other nations are not adequate for Korea. All “standard” distribution, license, OEM agreements and other agreements should only be used as guides in Korea. Korea has a unique legal system with unique business risks. If you are planning to deal only through a purchase order (PO), you are a goat waiting to be milked.

4. All agreements, to avoid any initial misunderstandings, should be drafted in English and Korean. A well drafted Korean OEM agreement is not complete until it is translated. Even the best English speaking Koreans, are ill prepared to understand agreements of this nature. Clear misunderstandings upfront and avoid legal fees down the road.

5. Know-how, trade secrets and the like should be protected through a written agreement. A standard non-disclosure agreement (NDA) is not enough. This agreement should be signed prior to any course of dealing and normally should include confidentiality, non-use, non-circumvention, non-competition clauses with a liquidated damage clause.

6. For at least the first few shipments, don’t pay until the goods are inspected. For the first shipment, check the goods at the port yourself. Afterwards, procedures can be put in place that guarantees the quality, quantity and delivery time through local channels.

If you heed these simple pieces of advice you are well on your way to having a successful relationship with a Korean manufacturer.
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Sean Hayes may be contacted at: SeanHayes@ipglegal.com.

Sean Hayes is co-chair of the Korea Practice Team at IPG Legal. He is the only non-Korean to have worked as an attorney for the Korean court system (Constitutional Court of Korea) and one of the first non-Koreans to be a regular member of a Korean law faculty.