Notes on manufacturing, exclusivity and competition

20 Oct 2012
Alasdair Taylor

One of the more contested provisions in many types of manufacturing contract is the non-compete or exclusivity clause. Customers often want to restrict the rights of manufacturers to use customer know-how to compete against the customer. Indeed, they may want to go further than this, restricting the rights of manufacturers to use know-how gained simply as a result of the contract, even if it wasn’t disclosed by the customer. Manufacturers, on the other hand, will usually wish to retain a free hand to apply know-how gained in one area of their business to other areas.

Whether a customer is able to insist on a non-compete clause will in large part depend upon the type of manufacturing arrangement contemplated, as well as the parties’ relative bargaining power. For instance, under a traditional contract manufacturing arrangement, where the product is specified by the customer, the customer is more likely to be able to insist upon some kind of exclusivity.  By contrast, the customer under an ODM (original design manufacturer) agreement, where the product is specified by the manufacturer, is less likely to be able to insist on exclusivity of any kind.

Here we see the close link between contractual exclusivity and rights under intellectual property law. If a product is designed by the customer and protected by IP rights, then contractual exclusivity provisions may be less of a burden on the manufacturer. If a product is designed by the manufacturer and is protected by IP rights, then unless those rights are assigned or exclusively licensed to the customer, it makes little sense to contractually restrict the manufacturer’s rights to do things that fall within the area of exclusive action protected by the IP.

A range of different IP rights may come into play: patents may protect inventions manifested in a product; registered and unregistered design rights may protect a range of different aspects of a product’s design; even copyright may protect some types of product. If you’re drafting a non-compete clause, the IP rights protecting the product itself should (usually) be distinguished from those protecting the customer’s brand, i.e. trade mark rights and rights in passing off. These different categories of rights often require different treatment.

A big advantage of IP rights over contractual non-compete clauses is that the latter may be subject to much more invasive regulatory restrictions. In English law, non-compete clauses are regulated by competition law (including the common law restraints of trade doctrine). Non-compete clauses should always be drafted with one eye on the competition law. In some cases, you will want to take advantage of the Vertical Agreements Block Exemption to ensure that your clauses and contracts are protected from the EU competition law regime.

This brings us to the problem of international manufacturing agreements. Consider an agreement between an customer based in England and a manufacturer in the Far East. Even if such agreements are specified to be governed by English law, the courts in the jurisdiction in which the manufacturer is based may apply their own competition law to rule that non-compete or exclusivity clauses are unenforceable, or even unlawful. Having a good lawyer in the jurisdiction of the manufacturer to review the non-compete and exclusivity clauses is therefore essential in high-value contracts, whatever their governing law.

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