A Toll Manufacturing Agreement is an agreement between a company with a product design, or product idea, and a manufacturing company that will manufacture the product or parts of it. In addition to the design or idea, the company also provides the raw materials, or the component parts required to create the finished product. The manufacturer provides the skills, labor, and equipment necessary to make or complete the product.
What is a Toll Manufacturing Agreement?
A toll manufacturing agreement protects the company with the product design from the theft of trade secrets or intellectual property. It also prohibits the manufacturer from using the product design to compete against them. Finally, a toll manufacturing agreement places restrictions on the manufacturer’s employees and contractors in order to protect the trade secrets or intellectual property.
Toll manufacturing agreements benefit companies, as they do not have to create a factory or invest in the equipment necessary to bring the idea or product to life. By using an external manufacturer, the company has the freedom to customize the product as they deem appropriate. The company pays the manufacturer a “toll” for the privilege of using the manufacturer’s employees, equipment, and facilities.
An effective toll manufacturing agreement should contain detailed specifics, so there is no confusion about the expectations of the company seeking manufactured items and the obligations of the manufacturers.
At a minimum, the agreement should include the following:
- Trade Secrets: to be protected, the trade secrets at issue must be outlined in the toll manufacturing agreement.
- Manufacturer obligations: expectations regarding preserving trade secrets must be detailed in the agreement.
- Expected information security procedures: this includes procedures for information accessed, stored, and transmitted to others externally and internally at the manufacturing plant.
- Conditions when employees are terminated: this may include withholding a final paycheck until a security check has been completed; disabling email and access to sensitive information prior to informing the employee of their termination; and escorting employees from the building immediately after termination.
- Materials supplied: a detailed list of the materials the company will supply, whether raw materials or component parts.
- Product specifications: product specifications include how a product is manufactured, when samples should be provided for inspection and review, and methods for changing the design or specifications.
- Product requirements: this includes the anticipated time table, delivery, shipment requirements, and conditions of acceptance.
- Trademark preservation: a requirement the products manufactured include the company’s trademark.
- Costs paid: of course, the contract is not complete without details of the fee the company will pay the manufacturer. This could be by the project, by the day, or by the number of items manufactured.
The time taken to establish expectations and obligations in a written agreement executed with the manufacturer is worth its weight in gold.
As a reference, people often call this document by other names:
- Tolling Agreement
- Toll Processing Agreement
When a Toll Manufacturing Agreement is Needed
Any time you are trusting another person to make, design, manufacture, or compile a product that involves trade secrets or intellectual property. A toll manufacturing agreement conveys the value you place on the information, your expectations about how others protect the information, and provides you a remedy if the person or company you rely upon tries to capitalize on your information. The agreement also details the materials the company will supply, and the employee skills, equipment, or factory supplied by the manufacturer.
Toll manufacturing agreements protect against the following:
- A manufacturer using the information to create and sell their own product based on your idea;
- Theft of the information by an employee who had access in the course of their employment;
- Sale of your idea by the manufacturer to a third party; or
- Dissemination of your information through carelessness.
Toll manufacturing agreements protect business owners from losing their competitive advantage due to the secret nature of their idea or product. Once a secret is made public, it can never be returned to its prior status. Toll manufacturing agreements also protect companies and manufacturers, allowing them to engage in mutually beneficial agreements to create products.
Consequences of Not Having an Agreement
Without a tolling manufacturing agreement, you are at the manufacturer’s mercy. You have no assurances the manufacturer will protect your intellectual property or trade secrets. Even if you trust your manufacturer, without an agreement, a rogue employee may sell the information or use it for their own purposes.
Alternatively, your design may be improved upon. Without an agreement preserving your right to the intellectual property as improved, the manufacturer or an employee could take the improved design, and make a better widget. Ultimately, this could result in the complete loss of your business.
Without an agreement, there may be confusion about product specifications or product requirements. When creating a product with various components, the difference of a single millimeter can be the difference between a product constructed properly, and a product that can’t be constructed at all. Without a detailed list of shipment requirements, the manufacturer may send components using a method that results in missed deadlines.
Obviously, product specifications and product requirements are critical to a product’s success. Without a written document detailing the agreement between the company and the manufacturer, the company opens itself up to unnecessary risk.
In any situation where intellectual property or trade secrets are at risk of being pilfered, a toll manufacturing agreement is a good idea. It clearly delineates the expectations and responsibilities of the parties, which reduces the potential for litigation later.
Most Common Situations for Using a Toll Manufacturing Agreement
Most commonly, toll manufacturing agreements are used when companies seek to obtain significant cost savings via outsourcing. Countries such as Brazil, Russia, India, and China, offer a lower-cost workforce while still technologically able to meet the demands of highly technical manufacturing needs. Even within the United States, protecting intellectual property is paramount.
Some companies seek to thwart those who might attempt to misappropriate intellectual property by using different manufacturers to create different parts. For example, a company may make a machine motor in one plant, the electrical circuit boards in another, and the case in a third. However, even with layers of protection, the product, and the company making the product are better protected by a toll manufacturing agreement – even when the company relies on different manufacturing plants.
Toll manufacturing agreements allow companies to supply raw materials or component parts to ready-made facilities. Also, companies have greater flexibility to customize their product. These mutually beneficial agreements save companies time and money.
A toll manufacturing agreement also details product specifications. This allows a company using many factories to create different parts to maintain quality control. It also ensures the component parts will fit together to create the product. By listing product requirements, including delivery requirements, this ensures the timely delivery of component parts for construction. It also ensures the timely delivery of finished products.
Toll manufacturing agreements protect the owner of the intellectual property or trade secret. If an owner is even slightly concerned about the potential for theft or misappropriation, or new competition in the marketplace, a toll manufacturer agreement is a good idea.
What Should be Included
Toll manufacturing agreements must be tailored to the facts of each specific case. However, there are certain elements that should be present in every case. Also included in the list below are some elements which may be suitable for some, but not all, agreements.
- Relevant dates: the agreement should address the start of the agreement, as well as the end date. Additionally, it should include the date or dates for product completion, shipment, and/or delivery should reflect the company’s preference.
- Trade secrets: to be protected, the trade secrets at issue must be outlined in the toll manufacturing agreement.
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Manufacturer obligations: expectations regarding preserving trade secrets must be detailed in the agreement. This may include:
- Limitations on who has access to confidential information, including the identity of those with access;
- Confidentiality agreements signed by all employees and contractors who may work on the project, or, in the alternative, a prohibition on contractors working on the project;
- An acknowledgment that all IP developed from the manufacturing process, including improvements on the trade secret, belong to the company, not the manufacturer;
- A commitment to educating employees in handling and protecting sensitive information, including the consequences for neglecting to handle sensitive information properly; and
- Signed non-compete agreements.
- Expected information security procedures: this includes procedures for information accessed, stored, and transmitted to others externally and internally at the manufacturing plant;
- Expected building security systems: building security, including guards, secured entrances, badge access, video surveillance, and employee clearance levels.
- Conditions when employees are terminated: this may include withholding a final paycheck until a security check has been completed; disabling email and access to sensitive information prior to informing the employee of their termination; and escorting employees from the building immediately after termination.
- Materials Supplied: a detailed list of the materials the company will supply, whether raw materials or component parts.
- Product specifications: includes how a product is manufactured, when samples should be provided for inspection and review, and methods for changing the design or specifications.
- Product requirements: this includes the anticipated time table, delivery, shipment requirements, and conditions of acceptance.
- Trademark preservation: a requirement that the products manufactured include the company’s trademark.
- Costs paid: of course, the contract is not complete without details of the fee the company will pay the manufacturer. This could be by the project, by the day, or by the number of items manufactured.
- Right to terminate for convenience: due to the sensitive nature of toll manufacturing agreements, the company should consider a right to terminate the contract for convenience.
- Dispute resolution: No agreement is complete without a clause dictating the relevant court of law and method of dispute resolution, such as arbitration.
Frequently Asked Questions
Q: If all the employees at a manufacturing plant sign confidentiality agreements, do I still need a toll manufacture agreement?
A: Yes, if you want to impose requirements on the manufacturing plant regarding security, training, and data management, and/or control over the product. Confidentiality agreements are a good start, however, they don’t begin to cover the topics encompassed in a toll manufacturing agreement. Both should be employed when you are manufacturing part or all of your product involving intellectual property or trade secrets off-site.
Q: I hired a manufacturing plant to make my widget. I didn’t insist on a toll manufacturing agreement. One of their employees discovered a way to improve the product and reduce manufacturing costs. Can I write a toll manufacturing agreement that is retroactive, so the advancements are mine?
A: You can write whatever agreement you desire. The issue is more, can you make an employee or manufacturer sign it after the fact? The answer is, no, you cannot make someone sign away their rights in this situation.
Q: Does a toll manufacture agreement prevent theft?
A: No, but it does provide for a remedy if your idea is stolen due to negligence or a deliberate disregard for the contract terms.