China · Case commentary
The Factory Owned the Design, the Brand Owned the Moulds: Three Questions to Separate
A brand came to me with what looked like one problem and turned out to be three.
For several years it had bought a product from a Chinese factory through an intermediary. It had paid, in full, for the moulds. It had been promised exclusive sales rights for North America. Then the factory began supplying a near-identical version to other customers.
The brand's first question was "who owns this product?" That question has to be broken up before it can be answered:
- Who owns the design and the drawings?
- Who owns the physical moulds?
- Does the factory still owe the brand exclusivity?
The answers weren't the same, and the brand's options depended on keeping them apart.
Question 1: the design
The factory had created the product. The original concept, drawings and CAD files came from the factory, and the brand hadn't asked for substantive changes to this model. On those facts there was no sound basis for the brand to claim it owned the underlying design, the drawings or the mounting structure.
That's a common position. Many overseas brands pick a product from a factory's own range and pay to have it made. The brand gets a product. It doesn't get the design unless the contract transfers it.
Question 2: the moulds
The physical moulds are a different asset. Here the proforma invoice listed the mould cost as a separate item, the brand paid it in full, and only then did the factory start making the moulds. In my view, and absent any written term to the contrary, moulds made to order and paid for in full by the customer belong to that customer.
The moulds stayed at the factory for production. That's normal, and it doesn't make them the factory's. The factory holds them to carry out the production arrangement.
There was a complication. The proforma invoice named an affiliated company as the buyer, not the brand's current operating company. On that document, ownership sat with the affiliate. Before the current company could demand the moulds in its own name, it needed a written assignment or authorisation from the affiliate.
Can the factory keep the moulds anyway?
Factories often say they'll hold the moulds until every account is settled. Chinese law gives a creditor a right to hold property it lawfully possesses when a debt is unpaid, but it's narrower than factories suggest:
- Normally the property must relate to the same legal relationship as the debt. Between businesses that link isn't required (Civil Code art. 448).
- A creditor can hold a third party's property it lawfully possesses if the debt arises from the same legal relationship. But where the link is missing, a business can't hold a third party's property for an unrelated debt: if the owner asks for it back, the court should order its return (SPC Interpretation on the Guarantee System under the Civil Code, art. 62). This matters when you buy through an intermediary. If the intermediary owes the factory money for something other than your moulds, the factory's claim to keep your moulds is weak. If the unpaid amount is for the moulds themselves, it's a different argument.
- Nothing can be held where the law or the parties' agreement says it can't be (Civil Code art. 449). A mould clause that excludes any right to hold the moulds removes most of the argument before it starts.
Question 3: the exclusivity
The factory's changes were small: a decorative trim added to one part, and one plastic component replaced with a brass one.
Two things followed.
- If the factory had used the brand's moulds, even modified, to make the new version, that was an unauthorised use of the brand's property.
- If it had made new moulds from the same underlying design, the argument would move to whether such minor changes took the product outside the exclusivity promise. Owning the original design didn't give the factory a right to get around an exclusivity promise it had made for those markets.
The exclusivity was a contract right, separate from both design and moulds, and that raised the last difficulty. The brand had bought through an intermediary, and the exclusivity sat in the intermediary's contract with the factory. The brand wasn't a party to it and had no direct right to demand a copy. An email from the intermediary's side acknowledging the arrangement was useful evidence that it existed, but no substitute for the terms.
Why I advised against spending more, for now
The brand was about to pay for a second, broader phase of document review. I advised it not to. The documents it already had were enough to answer the three questions, and a wider review was unlikely to change the answers. Further spending would only make sense if the intermediary or the factory denied the mould ownership, refused to say where the moulds were, or the brand decided to take formal action.
The low-conflict route
The brand still wanted supply to continue. So instead of an accusation, the next step was a written request for confirmation, framed around a long relationship. The request made clear the brand wasn't asking to see prices or unrelated terms of the intermediary's contract, only the exclusivity terms: product scope, territory, duration and whether they were still in force. A redacted copy would do.
This is the request, adapted for general use:
Show the clause wording
We value our long relationship with you and [factory], and we want supply to continue as normal. To keep our records complete, could you confirm in writing, for each mould listed in the attached schedule:
- that it still exists, and where it is kept;
- its present condition;
- whether it has been modified or used to make products for any other customer; and
- that it can be transferred to another factory at our request.
We would also be grateful for a copy of the exclusivity terms that apply to our products (scope, territory, duration). You may remove prices and any other terms that don't concern us.
At the same time, the brand gathered its evidence: every proforma invoice and payment record for the moulds; the emails about mould fees, starting the moulds and exclusivity; photographs comparing the original product with the new version; product numbers, invoices and sales pages for each version; and the documents showing how the affiliate's rights had passed to the operating company.
What the contract should have said
Show the clause wording
Moulds. (a) All moulds, tools and fixtures listed in Schedule [ ], and any made to replace or modify them, belong to the Buyer from the date the Buyer pays for them, whether paid separately or through the unit price. (b) The Supplier holds them for the Buyer, shall use them only to make goods for the Buyer, shall mark them "Property of [Buyer]", and shall not hold them as security or claim any right to retain them for any amount owed by the Buyer or any other person. (c) Within [15] days of the Buyer's written request, the Supplier shall make them available for collection in working condition, together with [related spare parts and drawings]. (d) On request, the Supplier shall confirm in writing where each item is kept, its condition and whether it has been modified.
And three decisions to make before paying for tooling:
- Design ownership, stated either way. If the factory keeps the design, say so, and say what you're getting instead.
- Mould ownership in the company that will operate the business, so you don't need an assignment later.
- Exclusivity in a document you sign with the factory itself, defining the product by function and structure, not just a model number, so that small changes don't take a product outside it.
If you've paid for moulds for a product you didn't design, send me the invoices and whatever you have in writing about exclusivity. Discuss your manufacturing agreement →
Part of my guide to China manufacturing agreements.
This article is based on a matter I handled. Names, products, places, dates, amounts, quantities and other identifying details have been removed or changed. It describes the advice in one matter and isn't a prediction for any other.