A small product business decides to move production to a contract manufacturer. The decision compares unit cost, capital avoided and time to market. It is a sound comparison, and it describes a transaction. What follows over the next few years is not a transaction. It is a migration: first the drawings, then the tooling, then the process settings, then the working knowledge of why the settings are what they are, then the relationships with the manufacturer’s own suppliers. Each step is small and sensible. Nobody approves the whole.
A few years later the unit costs are as planned, and a question that was never asked becomes important: if this relationship ended badly, what could we take back, where could we make the product instead, and how long would it take? For many businesses the honest answer is “not much, nowhere quickly, and longer than our customers would wait”.
The same pattern applies to people. A key salesperson or technician holds relationships and methods the business has never written down, and when they leave, the business discovers that a restraint clause in their contract is a much weaker protection than it assumed. This article explains what actually crosses the boundary when you outsource or rely on key people, why legal instruments protect less than people think, and how to focus on keeping things recoverable rather than simply “protected”. It is general information. Intellectual property, confidentiality and restraint-of-trade law are technical and vary by jurisdiction; IP Australia publishes guidance, and advice from a lawyer or IP attorney is worth getting for important products and relationships.
Protection versus recoverability
The usual question is “is our intellectual property protected?” A more useful one is “what have we kept recoverable, and how quickly?”
Protection is a legal state: you have a registration, a confidentiality agreement, a restraint clause. Recoverability is an operational state: if the relationship failed tomorrow, could you resume the work yourself or with someone else, and within what time? Recoverability determines what actually happens when things go wrong. Some items cannot be recovered at any speed, and the right response is not to protect them harder but to recognise the dependency and price it honestly.
There is also an asymmetry no contract removes. A manufacturer you outsource to gains, gradually and permanently, the ability to make your product. You gain, contingently, a right to take action if they misuse it. One is a capability they can use at will. The other is a claim you must detect, prove and pursue, at a cost, in a court with jurisdiction over a party with assets worth pursuing.
What actually crosses the boundary
Six different things move when production is outsourced. The usual checklist covers the first two:
| What is transferred | Can you recover it? | What decides | Where to act |
|---|---|---|---|
| Documented specifications and drawings | Yes | Whether you hold the controlled master copy | Keep version control yourself |
| Tooling and fixtures | Sometimes | Who owns it, where it is, whether you can remove it | Clear ownership and removal rights; keep drawings of tooling |
| Process settings and know-how | Rarely | Whether your people are present when it is developed | Regular presence of your own technical staff |
| Yield improvements and learning | No | Where production happens | A second source, or accept it knowingly |
| Relationships with sub-suppliers | Rarely | Who places the orders | Contract directly with critical sub-suppliers |
| The ability to compete with you | Never | Nothing | Recognise it when deciding to outsource |
Process knowledge is usually the largest transfer and the one nobody documents, because it is created inside the manufacturer’s plant, on their equipment, as they learn to make your product well. Learning accumulates wherever production happens. Sub-supplier relationships move quietly, because the supplier knows whoever places the orders. And the manufacturer’s new capability to serve a competitor, or become one, breaches nothing unless you contracted against it, and even then may be hard to stop.
Confidentiality agreements protect what can be proved; registrations protect what can be registered; supply agreements protect what is written down. Unwritten know-how is none of these. That is why a checklist can be complete while the real exposure is untouched.
Two protections need no court at all: refreshing the design regularly and improving the product faster than a copier can follow. They do not prevent copying; they make copies obsolete. Both must be funded deliberately, or they quietly stop happening.
Sequence matters more than wording
Legal instruments protect going forward, almost never backward. A confidentiality agreement signed after drawings were shared does not make them confidential again. A design or trade mark application filed after the product was shown publicly may be compromised by that disclosure.
Ordinary business processes defeat good intentions. Choosing a manufacturer requires technical evaluation, and evaluation requires showing drawings to several candidates, most of whom will not be appointed. By the time a lawyer prepares the contract, the most important disclosure has already happened. Three rules help:
- Confidentiality obligations are signed before technical evaluation begins, with every candidate, not only the one appointed.
- Ownership of improvements is agreed before development starts. A good manufacturer will improve your process. If the contract is silent, ownership of those improvements may be contested exactly when you want to leave.
- Registrations are filed before the product is shown, in the countries where it will be made as well as where it will be sold.
Protections that stop at a border
Registered rights are national. An Australian trade mark registration protects the mark in Australia. There is no single worldwide registration. The Madrid Protocol allows one international application that designates several member countries, but each country examines and decides on its own designation. It is a convenient channel, not a global right.
Businesses often register where they sell and not where their goods are made. That protects the market where they would sue and leaves unprotected the place where a copy would most likely be made first. Coverage should be a deliberate map, reviewed against both your manufacturing and your sales footprint.
Two Australian details are often misunderstood:
- The ® symbol should only be used for a trade mark registered in Australia for the relevant goods or services. Falsely representing that a mark is registered can be an offence, so do not use ® in a market simply because the mark is registered somewhere else.
- Registered designs in Australia generally need to be examined and certified before they can be enforced. A registration that has not been certified may not be usable at the moment a copy appears.
Check the details for your situation with IP Australia’s guidance or an IP attorney. The trade marks for small businesses article covers registration in more detail.
Your brand is probably not on your balance sheet
Under Australian accounting standards, internally created brands, customer lists and similar items generally cannot be recognised as assets; they appear on a balance sheet only when bought from someone else. That has a governance consequence. Assets with a book value attract attention automatically: a register, insurance, a question when the value changes. An asset recorded at nothing may have no named owner, no register of rights by country, no renewal calendar and no budget to defend it. Create those deliberately, because the accounts will not prompt you.
People: restraints are weaker than they look
When a key person leaves, businesses often rely on a restraint clause that restricts where they can work, for how long and with which customers. Courts in Australia have long assessed restraints for reasonableness and refused to enforce those that go further than needed to protect a legitimate interest. Restraint law is also changing, including announced reforms affecting non-compete clauses for many employees, so the current position should be checked with a lawyer.
The better question is not “how do we stop people competing with us?” but “what legitimate asset are we protecting, and what is the narrowest control that protects it?” That asset may be a trade secret, confidential pricing method, customer relationship or product plan. General skill and experience belong to the person, not the business.
A layered approach works better than one broad clause:
- Classify the information that is genuinely confidential.
- Limit access to it.
- Record ownership of intellectual property and confidentiality obligations in contracts.
- Use narrow, targeted restraints only where they are justified, such as non-solicitation of specific customers for a reasonable period.
- Plan exits: return of devices and documents, handover of customers.
- Reduce dependence: document methods, share customer relationships across more than one person, and make knowledge part of the business rather than one person’s memory.
Sale-of-business restraints are treated differently from employment restraints, because a buyer paying for goodwill can reasonably expect the seller not to recreate the same business next door. Even then, the scope should match the goodwill being bought.
The key person dependence article covers reducing reliance on individuals, which is the most durable protection of all.
A worked example
This is an illustration. A small Australian company designs and sells specialised bicycle storage racks to apartment developers and councils. It moves production from a local fabricator to an overseas contract manufacturer to cut unit costs.
A review two years later finds several gaps:
- Sequence. Drawings were sent to three candidate manufacturers before any confidentiality agreement was signed. Only the appointed manufacturer signed one, afterwards.
- Improvements. The manufacturer developed a faster welding jig and a better coating process. The contract says nothing about who owns them.
- Sub-suppliers. The powder-coat supplier now deals only with the manufacturer.
- Registrations. The trade mark is registered in Australia only. The rack’s design was registered but never certified.
- People. The sales manager holds almost all the council relationships, and their contract has a broad two-year non-compete that a lawyer says would be difficult to enforce.
The company acts on recoverability:
- It brings master drawings under its own version control and obtains drawings of the jigs.
- It negotiates an amendment confirming it owns improvements made specifically for its products, in exchange for a longer supply term.
- It contracts directly with the powder-coat supplier for its colour range.
- It requests examination and certification of the design, and, on an IP attorney’s advice, extends trade mark protection through the Madrid Protocol to the manufacturing country and two export markets.
- Its engineer now spends a week at the factory twice a year.
- It identifies a local fabricator who could produce a limited range within eight weeks, and keeps that option alive with a small annual order.
- For the sales role, it replaces the broad non-compete with a narrower customer non-solicitation clause on legal advice, introduces a second council contact for each key account, and documents the quoting method.
How this applies to a small Australian business
- List what you have transferred to manufacturers, contractors and key staff, and when, relative to the agreements meant to cover it.
- Ask how long it would take to resume elsewhere for each critical item.
- Sign confidentiality obligations before sharing drawings, with every candidate.
- Agree ownership of improvements before development starts.
- Map registrations against where you make and where you sell.
- Keep your own people involved where know-how is created.
- Use narrow, justified restraints, and reduce dependence on individuals.
- Get advice from IP Australia’s resources, an IP attorney or a lawyer for important products and relationships.
Signals worth watching
- Drawings shared before agreements were signed.
- Contracts silent on who owns improvements.
- Critical sub-suppliers that deal only with your manufacturer.
- Trade marks registered only where you sell.
- Designs registered but never certified.
- Customer relationships held by one person.
Common mistakes
- Treating outsourcing as a pure cost decision.
- Relying on a confidentiality agreement as if it were a barrier rather than a promise.
- Assuming registration is worldwide.
- Using ® where the mark is not registered.
- Drafting the broadest possible restraint instead of the narrowest effective one.
- Cutting the visits that keep know-how inside the business.
Frequently asked questions
Should we avoid outsourcing to protect our know-how? Not necessarily. Outsourcing can be the right choice. Decide which steps must stay in-house because they create your advantage, and manage recoverability for the rest.
Is a confidentiality agreement worth having? Yes, especially if signed before disclosure. Just recognise that it creates an obligation and a possible claim, not a physical barrier.
Where should we register our trade mark overseas? Where you sell, and where your goods are made or could easily be copied. An IP attorney can advise on priorities and cost.
Are restraint clauses useless? No, but broad ones are often unenforceable, and the law is changing. Narrow, well-justified clauses protecting specific interests are more useful.
What is the cheapest protection? Often, staying ahead: improving the product regularly and keeping your own people close to where it is made.
Questions to ask
- What have we handed to suppliers and staff that we could not easily get back?
- How long would it take us to make our product somewhere else?
- Did our agreements come before or after the disclosures they were meant to cover?
- Who owns the improvements our manufacturer has made?
- Where are our trade marks and designs protected, and where are our goods made?
- Which customer relationships depend on one person?
Bringing it together
Outsourcing and reliance on key people both transfer capability, and capability is far harder to recover than cost. Focus on recoverability: keep control of specifications, secure tooling and sub-supplier relationships, keep your own people where know-how is created, and know how long it would take to resume elsewhere. Get the sequence right, with confidentiality before disclosure, improvement ownership before development and registration before launch, in the countries where goods are made as well as sold. Protect people-held knowledge with narrow, justified controls and, above all, by making it part of the business rather than one person’s memory.
Source: KEVOS notes, drawing on teaching material on contract manufacturing, intellectual property, confidentiality and restraint of trade, and on the treatment of internally generated intangibles under AASB 138. Examples in this article are illustrations. This article is general information, not legal or accounting advice.
