A Toll Manufacturing Agreement is an outsourcing 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 provides the raw materials or the 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 stealing trade secrets or intellectual property. It also prohibits the manufacturer from using the product design to compete against them.
Finally, a toll manufacturing agreement restricts the manufacturer’s employees and contractors to protect 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. Using an external manufacturer allows the company to customize the product as appropriate.
The company pays the manufacturer a “toll” for 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: the trade secrets must be outlined in the toll manufacturing agreement to be protected.
- Manufacturer obligations: expectations regarding preserving trade secrets must be detailed in the agreement.
- Expected information security procedures: this includes methods for information accessed, stored, and transmitted to others externally and internally at the manufacturing plant.
- Conditions when employees are terminated – may include withholding a final paycheck until a security check has been completed, turning off email and access to sensitive information before 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 provide, whether raw or parts.
- 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 timetable, delivery, shipment requirements, and conditions of acceptance.
- Trademark preservation: the products manufactured must include the company’s trademark.
- Costs paid: the contract is incomplete 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 a Toll Processing Agreement.
When a Toll Manufacturing Agreement is Needed
Any time you trust 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 and your expectations about how others protect the data and provide 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 provided by the manufacturer.
Toll manufacturing agreements protect against the following:
- A manufacturer using the information to create and sell their 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, a rogue employee may sell the information or use it for their purposes without an agreement.
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, a single millimeter can be the difference between an appropriately constructed product and a product that can’t be constructed.
Without a detailed list of shipment requirements, the manufacturer may send components using a method that results in missed deadlines.
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 stolen, a toll manufacturing agreement is a good idea. It delineates the parties’ expectations and responsibilities, reducing the potential for litigation later.
Most Common Situations for Using a Toll Manufacturing Agreement
Toll manufacturing agreements are commonly used when companies seek 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 other 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 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 to use many factories to create different parts to maintain quality control. It also ensures the parts will fit together to create the product.
Listing product requirements, including delivery requirements, ensures the timely delivery of parts for construction. It also provides the timely delivery of finished products.
Toll manufacturing agreements protect the owner of the intellectual property or trade secret. A toll manufacturer agreement is a good idea if an owner is even slightly concerned about the potential for theft, misappropriation, or new market competition.
What Should Be Included
Toll manufacturing agreements must be tailored to the facts of each specific case. However, certain elements should be present in every case. Also included in the list below are some aspects which may be suitable for some, but not all, agreements.
- Relevant dates: the agreement should address the contract’s start and 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 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 adequately;
- 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, turning off email and access to sensitive information before 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 or 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 timetable, delivery, shipment requirements, and conditions of acceptance.
- Trademark preservation: the products manufactured must include the company’s trademark.
- Costs paid: the contract is incomplete 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. We also provide free templates you can download in either PDF or Word format and fill out independently.
Frequently Asked Questions
If all the employees at a manufacturing plant sign confidentiality agreements, do I still need a toll manufacturer agreement?
Yes, if you want to impose requirements on the manufacturing plant regarding security, training, data management, and/or control over the product. Confidentiality agreements are a good start.
However, they don’t begin to cover the topics in a toll manufacturing agreement. Both should be employed when manufacturing part or all of your product involving intellectual property or trade secrets off-site.
Can I write a toll manufacturing agreement that is retroactive, so the advancements are mine?
The answer is no; you cannot make someone sign away their rights in this situation.
Does a toll manufacture agreement prevent theft?
No, but it does provide for a remedy if your idea is stolen due to negligence or a deliberate disregard for the contract terms.