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.
Toll Manufacturing Agreement Sample
Here’s what a typical toll manufacturing agreement looks like:
Toll Manufacturing Agreement
| State of ______________ | |
| TOLL MANUFACTURING AGREEMENT | |
This Toll Manufacturing Agreement (this “Agreement”) is made as of the ______ day of _______________, 20______ (the “Effective Date”) by and between:
Buyer: _____________________________ (“Company), a(n) (Check one) ☐ individual
☐ corporation ☐ limited liability company ☐ partnership ☐ limited partnership ☐ limited liability partnership located at ________________________________________ [Address] and
Manufacturer: _____________________________ (“Manufacturer”), a(n) (Check one) ☐ individual
☐ corporation ☐ limited liability company ☐ partnership ☐ limited partnership ☐ limited liability partnership located at ________________________________________ [Address].
The parties agree as follows:
- Toll Manufacturing. Company shall retain Manufacturer for the production of ____________________ __________________________________________________________________________________________________________________________________________ [Product description] (the “Products”) in accordance with the specifications contained in the statement of work attached hereto as Exhibit A (the “SOW”). Company will make all reasonable efforts to provide clear instructions, documentation, and product specifications to Manufacturer. Manufacturer must manufacture the Products in accordance with this Agreement, in compliance with applicable laws and regulation, and using generally accepted industry practice.
- Supply of Materials. Except as otherwise agreed upon herein, Company shall supply, or arrange to supply, to Manufacturer all raw materials need for the production of the Products (☐ as specified in Exhibit B).
- Purchase Orders. Company shall submit orders for the Products by submitting a purchase order to Manufacturer (the “Purchase Order”) detailing the number of units of the Products to be produced and the date of delivery. Supplier will be entitled to produce no more than the number of units of the Products shown on the Purchase Order. Manufacturer must acknowledge receipt of any Purchase Orders.
- Grant of License. Company grants to Manufacturer a limited, non-transferrable and non-exclusive license to use the any intellectual property necessary to produce the Products during the term of this Agreement. Nothing in this Agreement shall give Manufacturer any right, title or interest in such intellectual property.
- Ownership of Products. Company owns all rights to the Products produced by Manufacturer.
- Payment. Manufacturer will be paid $______________ per unit of Product produced under this Agreement.
Tolling Fee (Check one)
☐ In addition, Manufacturer shall pay a tolling fee of $______________.
☐ There is NO tolling fee.
Payment (Check one)
☐ Payment will be made within __________ days from the date the Products are delivered.
☐ Payment will be made within __________ days from receiving an invoice from Manufacturer.
☐ Payment will be made ______________________________________________________________
__________________________________________________________________________________.
- Late Payments. (Check one)
☐ Manufacturer will be entitled to charge interest of __________% on any unpaid balance more than __________ days past due.
☐ Not applicable.
- Shipments. The Products will be delivered by Manufacturer to Company at the following address: ________________________________________ or in accordance with the agreed upon terms and delivery schedule in the Purchase Order. The Products will be suitably packaged in accordance with the SOW. (Check one) ☐ Manufacturer ☐ Buyer will pay for all freight, insurance and other shipping expenses. Title and risk of loss will pass to Company: (Check one)
☐ Upon delivery of the Products.
☐ Upon shipment of the Products.
Manufacturer will use commercially reasonable efforts to deliver the Products on the agreed-upon delivery dates and notify Company of any anticipated delays.
- Product Acceptance. The Products delivered by Manufacturer will be inspected and tested by Company within __________ days of delivery. If the Products delivered do not comply with the specifications in the SOW and/or Purchase Order, Company has the right to reject the non-conforming Products. Products not rejected within __________ days of delivery will be deemed to be accepted by Company. In the event any Products do not comply with the specifications in the SOW and are rejected by Company, Company may, at its option: (Check all that apply)
☐ Return for a replacement
☐ Return for a credit
☐ Return for a refund
- Warranties. Manufacturer warrants that it will perform the SOW in a good, professional and workmanlike manner, and Manufacturer will promptly notify Company of any delay or defect in the production of the Products. Manufacturer warrants that the Products will be produced in compliance with the specifications and quality control standards, if any, in the SOW and any Purchase Order, and in compliance with all governmental and environmental regulations.
Substantive defects (Check one)
☐ Manufacturer does NOT warrant that the Products will be free from substantive defects in workmanship. MANUFACTURER MAKES NO REPRESENTATIONS OR WARRANTIES, WHETHER EXPRESS OR IMPLIED, AND EXPRESSLY DISCLAIMS ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
☐ Manufacturer warrants that the Products will be free from substantive defects in workmanship for a period of: (Check one)
☐ __________ days from the date of shipment.
☐ __________ months from the date of shipment.
☐ __________ years from the date of shipment.
☐ Other: ________________________________________________ from the date of shipment.
The warranty does not apply to any Products that are damaged due to the misuse, abuse, alteration or negligence of any party other than Manufacturer. MANUFACTURER MAKES NO OTHER REPRESENTATIONS OR WARRANTIES, WHETHER EXPRESS OR IMPLIED, AND EXPRESSLY DISCLAIMS ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
- Term. This Agreement commences on the Effective Date and will remain in effect for __________ years. This Agreement will automatically: (Check one)
☐ Renew for a term of __________ year(s), unless either party has given at least __________ days written notice not to renew to the other party.
☐ Terminate, unless the parties have mutually agreed in writing to renew it for an additional term.
- Termination. Company and Manufacturer may at any time by mutual consent decide to terminate this Agreement pursuant to written and delivered notice to the other party.Company may terminate Manufacturer’s rights to produce the Products for any reason on __________ days’ written notice of termination. Manufacturer retains the right at any time to terminate its obligations to produce the Products on __________ days’ written notice of termination. This Agreement also may be terminated automatically, without notice, (i) upon the institution by or against Company and Manufacturer of any insolvency, receivership or bankruptcy proceedings or any other proceedings for the settlement of debts, (ii) upon Company’s or Manufacturer’s making an assignment for the benefit of creditors, or (iii) upon Company’s or Manufacturer’s dissolution.
- Default. If either party should fail to perform its respective obligations under the terms of this Agreement, the other party will notify of the party that it is presumed to be in default and give reasonable recourse to cure the stated issue. The defaulting party will have the opportunity to cure the default within __________ days of notice by the other party. In the event of a failure to cure a breach or default within the stipulated time, the other parties will have the right to terminate this Agreement immediately.
- Effect of Termination. Upon the termination of this Agreement, the rights and licenses granted to Manufacturer pursuant to this Agreement, including without limitation the right to use the intellectual property and manufacture the Products, will automatically terminate. All payments owing from Company to Manufacturer, or refunds due from Manufacturer, will become immediately due and payable, and legally enforceable, upon termination. Manufacturer will not make or retain any copies or samples of any confidential items or information which may have been entrusted to it.
- Confidentiality. In the course of producing the Products, each party may be exposed to confidential and proprietary information of the other party, including designs, drawings, materials, manufacturing specifications, trade secrets, business and financial information and other confidential information (the “Confidential Information). Manufacturer will keep confidential all Confidential Information of Company, including details of the manufacturing the Products, and will manufacture the Products in accordance with strict security procedures. During the term of this Agreement, each party will refrain from disclosing any Confidential Information of the other party, except for the strict purposes or activities specifically authorized in this Agreement or if required by law. Each party will use all reasonable efforts to maintain the privacy of the Confidential Information in its possession or control.
- Prohibited Acts. Neither Manufacturer, nor any agent, representative, affiliate, or subcontractor of Manufacturer, will have the right to copy, manufacture or distribute the Products without the express prior written approval of Company. Anyone who copies, manufactures or distributes the Products without a license and prior written approval of Company will be liable for any cost or loss in sales, revenue or profits by Company, plus all applicable attorneys’ fees and costs incurred in investigating and prosecuting an action against the offending party. Company will notify those to whom it entrusts knowledge of, or access to, the Products that Company and the offending party will be liable for losses.
- Inspection of Books. Company will have the right, upon reasonable request, to audit and review the books and records of Manufacturer sufficient to verify the number and quality of the Products being manufactured. Any such audit will be conducted at Company’s expense and at such times and in such a manner as to not unreasonably interfere with Manufacturer’s normal operations. Manufacturer shall maintain all such books and records for a period of __________ years after shipment of the Products.
- Insurance. Company and Manufacturer agree to maintain appropriate insurance to adequately cover their respective risks under this Agreement, with coverage amounts commensurate with levels in their respective markets.
- Limitation of Liability. In no event will either party be liable for costs, expenses, or damages in connection with this Agreement in excess of actual costs, expenses, damages, or provable and actual lost revenue.
- Force Majeure. Neither party will be liable for the costs or expenses arising from any failure or delay in the performance of this Agreement that is due and attributable to causes beyond the control of either party, including but not limited to acts of God, weather, war, civil unrest, strikes, lockouts, destruction of production facilities, riots, insurrection, terrorist attacks, government regulatory actions, acts or decrees of governmental or military bodies, fire, casualty, flood, earthquake, or any other force majeure event, provided that the party has used commercially reasonable efforts to mitigate the effects of the cause. Supplier will not be liable for any delays in the normal production or interruption in the workflow process caused by changes to the specifications by.
- Amendments. This Agreement may not be modified or amended except by a written agreement signed by all of the parties.
- Notices. Any notice or communication under this Agreement must be in writing and sent via personal delivery, overnight courier service, or certified or registered mail, postage prepaid, return receipt requested and addressed to the to the address stated above or to another address as that party may subsequently designate by notice and shall be deemed given on the date of delivery.
- No Waiver. No party shall be deemed to have waived any provision of this Agreement or the exercise of any rights held under this Agreement unless such waiver is made expressly and in writing. Waiver by any party of a breach or violation of any provision of this Agreement shall not constitute a waiver of any other subsequent breach or violation.
- Assignment. The parties agree that their rights and obligations under this Agreement may not be transferred or assigned without the prior written consent of Buyer. Buyer may assign its rights and obligations under this Agreement without Supplier’s consent.
- Successors and Assigns. This Agreement shall be binding and inure to the benefit of the parties and their respective legal representatives, heirs, administrators, executors, successors and permitted assigns.
- Governing Law. This Agreement and the rights and obligations of the parties hereto shall be governed by and construed in accordance with the laws of the State of _________________, without regard to its conflicts of laws provisions.
- Disputes. Any dispute arising from this Agreement shall be resolved through: (Check one)
☐ Court litigation. Disputes shall be resolved in the courts of the State of _________________.
(Check if applicable)
☐ If either party brings legal action to enforce its rights under this Agreement, the prevailing party will be entitled to recover from the other party its expenses (including reasonable attorneys’ fees and costs) incurred in connection with the action and any appeal.
☐ Binding arbitration. Binding arbitration shall be conducted in accordance with the rules of the American Arbitration Association.
☐ Mediation.
☐ Mediation, then binding arbitration. If the dispute cannot be resolved through mediation, then the dispute will be resolved through binding arbitration conducted in accordance with the rules of the American Arbitration Association.
- 28. If any provision of this Agreement is held to be invalid, illegal or unenforceable in whole or in part, the remaining provisions shall not be affected and shall continue to be valid, legal and enforceable as though the invalid, illegal or unenforceable part had not been included in this Agreement.
- 29. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together, shall constitute one and the same document.
- 30. The section headings herein are for reference purposes only and shall not otherwise affect the meaning, construction or interpretation of any provision of this Agreement.
- 31. Entire Agreement. This Agreement contains the entire agreement between the parties hereto with respect to the subject matter hereof, and supersedes all prior negotiations, understandings and agreements.
- 32. ___________________________________________________________________
____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
IN WITNESS WHEREOF, the parties have executed this Agreement as of the Effective Date.
| Company Full Name | Company Signature | Company Representative Name and Title |
| Manufacturer Full Name | Manufacturer Signature | Manufacturer Representative Name and Title |
Exhibit A
STATEMENT OF WORK
Exhibit B
RAW MATERIALS
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.