Legal Agreements about Ownership of Tooling?

One of my larger customers had a lawyer draw up an NDA and Memorandum of Understanding on ownership of tooling. The backstory is I have developed a number of products from them. From the initial design to manufacture on there behalf and they own these products. Of which I have no issue with. The reason I am getting this legal paperwork is we did some molds for them which they think are too expensive, and they wanted a bunch of changes too.... I told them one way to lower the cost of the molds was to not have the product exclusive to themselves, and the design changes they where asking for where excessive. The problem is these molds make great parts at a price less than the competition, which is great for them! So they own these two molds now, and I have no issue with that, they got a great deal on a mold I didn't charge enough for(ironically these molds are pretty useless without the exact equipment I have).

But we do other parts for them, and now they are under the impression that everything is like one of these molds... If I made it for there products they own it! And this seriously pisses me off. Especially the part that says they own my fixtures. Half of their fixtures where recycled from other jobs. They consist of about $250 of aluminum on a zero point system, with some specialized inserts. When these jobs run out I'll deck off the fixture and use for them for something else.

This legal document is kinda vague about the CAD. And I doubt them or there lawyer really know the difference between CAD and CAM. In my opinion they own their 2D blue prints and any non-native 3D files. Native files with my CAM programming, fixture designs, information on form tools, how I construct a complex 3D CAD Model or lay out a fixture are non of there damn business.

Overall they are OK customers, they are local, pay on time, and drop ship material so I don't have to buy it. One downside is they are excessively picky on the smallest design details and don't really understand much about manufacturing.

Any input from other shop owners would be appreciated. Right now I am thinking about recusing myself from developing any more products for them.

There's a lot of overreach from customers or employers nowadays (look at recent articles on hiring procedures that have really stringent non-compete agreements in them), and it might be wise to either have your own lawyer go over this new statement, or redline it yourself and refuse to sign if they won't make the changes. You have to protect yourself, and yes, if they won't budge you may want to drop them.

You need to lay out exactly what they are buying. Here are a few items to consider who owns them:

Design/Engineering data for stuff you design (stress analysis, spreadsheets, etc.)
Prints/3D model of stuff you design, for planning use, but not for manufacturing elsewhere
Prints/3D models, and the right to have them made elsewhere
CAM files
G-code
design of fixtures/special tools (prints, etc.)
actual physical fixtures

How much they get is related to how much they're willing to pay. Based on your description of what they want, you might suggest the following as deliverables:

1) PDF's of the 2D drawings
2) STEP Model of the entire part
3) physical parts
4) fixture, but you will keep it at your shop. Standard thing seems to be that if the job doesn't run in one year, you contact them and they can either pick it up, pay the shipping to them, or you can scrap it for them.

If they want to own the fixture, just charge them for it up front.

The other issue is whether they paid for the tooling up front or if you amortized it over your entire shop and shop production. If this tooling is used for other work and you paid to develop the tooling it is yours. If they paid for the tooling up front in a separate PO, it belongs to them. For any job forward, you need to split the two. They don't own your process, nor your intellectual knowledge and this also needs to be spelled out up front. This issue comes up all the time in the automotive industry.

If they paid you for the tooling as a separate line item it is theirs. If building the tooling for a job is one of the costs built into the part/piece price, unless otherwise specified, it's yours.

As said above, NDA's can be marked up and modified. Remember, anytime a customer hands you a document to sign, you can bet that it is all in their favor. FYI, I NEVER signed a purchase order acknowledgement attached to the back of a customers PO, most times they never asked for it. But, in the couple of instances they demanded it I wrote my own and had them sign it. They did it begrudgingly, but they did it. Remember, the seller (you) ALWAYS dictates the terms of the sale.

Tonytn36 said:

The other issue is whether they paid for the tooling up front or if you amortized it over your entire shop and shop production. If this tooling is used for other work and you paid to develop the tooling it is yours. If they paid for the tooling up front in a separate PO, it belongs to them. For any job forward, you need to split the two. They don't own your process, nor your intellectual knowledge and this also needs to be spelled out up front. This issue comes up all the time in the automotive industry.

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Tooling was definitely amortized over time and first used on other production jobs for other companies completely unrelated to this product line or company.

Intellectual proprietary isn't specifically spelled out in the document but if you read between the lines is mentioned with a "future related product" clause.

We do work for other other companies with-in the same industry and see similar design concepts from other clients. The process of making the parts is pretty much all the same. Even to the extent I keep 20-28 "standard" tools in my mills that will make about anything that comes across my desk including the fixture. And if its not loaded in a machine chances are I have it in the tool box.

Its been a while since I've seen a part I would consider unique.

Wild West said:

Remember, anytime a customer hands you a document to sign, you can bet that it is all in their favor.... Remember, the seller (you) ALWAYS dictates the terms of the sale.

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Pretty much this^^^ well said

From my experience, if it's not on paper, they're barking up the wrong tree. Unless there is a paper trail saying they own it, it's not theirs.

Your customer is trying to put the horse back in the barn when it is already in the next county. Ever heard the term "Possesion is 9/10 of the law." It is mostly true. We had a lumberyard customer that we heard was going to go bankrupt so we charged a truckload of material to our account. They went bankrupt owing us money. Bankruptcy lawyer called trying to collect. I said "No problem come get a check, and bring your checkbook to cover what you owe us" He says "You can't do that it's not legal!" I said "I know, sue me!" Never heard from them again.
My first wife planned on cleaning out the house on Monday. Sunday night I beat her to it. I said I was so angry I took the whole load to the dump. Kept everything, still have a lot of the furniture 40 years later.
Don't sign anything, hold onto everything. You can even keep selling them parts as long as they pay on time. Ignore their lawyer, that will run up his bill on their dime.
They made a huge mistake not contracting with you properly BEFORE they got to this point. Their mistake not yours. That's the price of their education as my dad would say.

If you do "sell" it to them charge storage, even when you are running the job.......

Wild West said:

...Remember, the seller (you) ALWAYS dictates the terms of the sale...

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Words to live by. One of my pet peeves is when a new or potential customer sends a PO stating their terms of payment. I always
make sure we get that straightened out before anything happens and, not surprisingly, a lot of them never do become customers. I
figure if they're that pushy before we do any work for them it ain't gonna get any better...

ewlsey said:

From my experience, if it's not on paper, they're barking up the wrong tree. Unless there is a paper trail saying they own it, it's not theirs.

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This is true. But, in a small business you have to work with a customer because they can take their work to another shop and I've seen it happen. I have never had a tooling issue with a customer but I've had other issues that, if not resolved diplomatically, could have lost me a customer.

JS said:

If you do "sell" it to them charge storage, even when you are running the job.......

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Crap like this can cause a customer to walk. You work with customers and make yourself a member of their team, or at least you make them think that.

Crap like this can cause a customer to walk. You work with customers and make yourself a member of their team, or at least you make them think that.

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If that's the case, then they pay shipping for their tool(s), when the job is done...

Storage isn't free.

Delusions of being on their team will hurt you in the end. You're in business to make money, not for them for yourself. You sell your strengths and skill set.

That applies to working for companies as well.....

Money, is how we deal with each other if someone doesn't want my strengths , skill set or product at the agreed upon price, then they can go somewhere else or I can find another place to work.

Supply and demand economics

It's simple, if employed and the check bounces you leave with your personal tools. If Self employed, you run the show, you charge what you want either they pay or they shop somewhere else.

I watched a guy chase his ass on molds, mind you, the quotes included making the mold and the parts run and when your a long way to right of the decimal point for a job and they still don't want it because it cost too much. Your not making any money..... cater to your strengths.

Wild West said:

Crap like this can cause a customer to walk. You work with customers and make yourself a member of their team, or at least you make them think that.

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The problem with this is that many company lawyers are forever aiming to justify their existence by screwing suppliers. You can have great working relationships with engineering and sometimes even purchasing, while corporate lawyers sit in their offices inserting boiler plate into contracts.

It's one thing to be a valued member of a company's engineering or production "team" - which I fully agree is a good thing. Lot harder to do it with a growing legal department trying to justify its existence. Sometimes you can explain the situation to your technical contact and get a general manager etc. to readjust thinking.

JS said:

If that's the case, then they pay shipping for their tool(s), when the job is done...

Storage isn't free.

Delusions of being on their team will hurt you in the end. You're in business to make money, not for them for yourself. You sell your strengths and skill set.

That applies to working for companies as well.....

Money, is how we deal with each other if someone doesn't want my strengths , skill set or product at the agreed upon price, then they can go somewhere else or I can find another place to work.

Supply and demand economics

It's simple, if employed and the check bounces you leave with your personal tools. If Self employed, you run the show, you charge what you want either they pay or they shop somewhere else.

I watched a guy chase his ass on molds, mind you, the quotes included making the mold and the parts run and when your a long way to right of the decimal point for a job and they still don't want it because it cost too much. Your not making any money..... cater to your strengths.

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Do you own your own shop and deal with customers a few times a week? You don't sound like you do.

PeteM said:

The problem with this is that many company lawyers are forever aiming to justify their existence by screwing suppliers. You can have great working relationships with engineering and sometimes even purchasing, while corporate lawyers sit in their offices inserting boiler plate into contracts.

It's one thing to be a valued member of a company's engineering or production "team" - which I fully agree is a good thing. Lot harder to do it with a growing legal department trying to justify its existence. Sometimes you can explain the situation to your technical contact and get a general manager etc. to readjust thinking.

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I'll ask you the same question; do you own a shop and deal with the customers? It doesn't sound like you do. I have dealt with very large corporations and NEVER once had to deal with their lawyers etc.. This is just BS. Believe it or not, companies as customers work very hard developing a dependable supplier base. They look for competitive pricing but more importantly they look for suppliers that continue to deliver over the long haul. You don't get this hanging over a suppliers head with lawyers and unreasonable demands. Believe it or not, it is both the customer and supplier working together toward a common goal.

I have a small molding machine (Williams and Hussey.) If a customer wants a custom molding, they pay for the knives, and I keep them. If it's a common profile, that might get used in the future, I might cut them a break on the price, but that's it.

If it's 100 feet or so, I just add the price of the knives into the total cost of the molding.

If it's a small run, I make this clear up front, and it hasn't been a problem.

Wild West said:

I'll ask you the same question; do you own a shop and deal with the customers? It doesn't sound like you do. . . ..

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I owned a product development and manufacturing consultancy. Dealt with large customers around the world -- Ford, GM, HP, IBM, Schlumberger, Ricoh, Caterpillar, Deere, Volvo, Siemens, Baxter, GE, etc. etc.

My personal experience is that when companies starting adding to a legal department, buying it's own corporate law office building and the like, they started trying to add clauses to our contracts that essentiallly said every bit of IP I'd developed over decades became theirs the second I did the next contract with them.

In one case -- a huge (500,000 or so people at the time) company -- we had a very productive relationship. At least three books were written talking about how wonderfully they had done and how my methods of research were a part of that. Another case was a billion plus manufacturing software company. Eventually, they both just became a huge pain to deal with in any contract. Might also add that this was mostly a US-based company phenomenon and directly related to these companies adding huge legal departments. I was able to mark up the contracts and send them back -- but it became a huge hassle. In the early days, I learned not to deal with government contracts -- because the paperwork would kill you if you weren't set up for it. A lot of Fortune 500 companies have gone the same route.

What may be different in my case is that I developed a number of proprietary methods that were the basis of our consultancy. It was all "tooling" if you will. I was happy to give my long term clients unrestricted use -- but not for them to own decades of work and exclude me from my livelihood. FWIW, the large US company ended up taking my methods anyhow and using some of it as the basis of its corporate consultancy with Samsung and others.

Good lawyers try to help companies and suppliers have productive working relationships. Too many, though, see everything as an adversarial process. They add "friction" to the process. IMO anyone who develops proprietary methods needs to read their contracts and take steps to protect themselves. If protecting yourself becomes too much of a hassle, move on.

I like the above post on the matter, you do your own thinking and logic, you come up with your own methods, you make parts.
The better you protect how you do things the more they are reliant on you to do things others cannot. The more details you reveal the more you give away for free for them to take elsewhere.

Your business is built on you doing things productively.

Bundle things up so they don't know the fine details.

Contracts can become a pain to administer, just look at all the lawyers employed to understand the legal system and administer it.

Keep your contract law simple in your dealings it will be a lower cost to you.

I just read your first post again if moulds are used on your machines which you developed and you sold them to the customer, they own them. However in future you may look at production runs to amortise the moulds over a run and not sell moulds to them. Min order lots.
What happens if a mould is damaged or indeed lost in your premises or accidentally thrown out in 10 years time? then they try and claim their mould?

Again keep it simple.