Original Equipment Manufacturer (OEM) Agreements: How to Draft One That Protects Your Products

OEMs are an essential lifeline for many businesses. They allow you to outsource part or all of your manufacturing, and in return, you get speed, scale, and cost savings without having to build your own factory or infrastructure.

But here’s the mistake some companies make: they finalize the design, get production lined up and then start thinking about the agreement.

That’s backwards.

The OEM agreement or contract should come first not after the machines are warming up. This is because it will ultimately determine who owns the product design. Who pays when parts are defective. Who takes the fall when deadlines are missed. And if your OEM is overseas, it also determines whether you’ll be able to enforce your rights at all.

When these details aren’t nailed down early, legal risks start stacking up in the background.

In this guide, you’ll learn:

• What an OEM agreement really needs to cover (not just what templates offer)
• How it affects your product quality, brand control, pricing, and legal risk
• Key clauses that protect your business especially in cross-border relationships
• How to avoid the most common drafting mistakes

What is an OEM agreement?

An OEM agreement (original equipment manufacturer agreement) is a legal contract where a manufacturing company produces parts, components, or even entire products for another company, which then sells them under its own brand.

For instance, consider a Dell laptop with an Intel processor – this is a classic example of an OEM in action. Intel, the OEM, supplies the processor. Dell integrates it, assembles the final product, brands it and sells it.

OEM agreements can also cover access to proprietary systems or infrastructure. In 2023, Ford, GM, and Rivian entered OEM agreements with Tesla to allow their electric vehicles (EVs) to use Tesla’s Supercharger network. In this case, Tesla is the OEM providing a proprietary charging system, rather than a manufactured component.

Which business areas can OEM agreements impact?

It may seem like an OEM agreement only concerns your production line, but in reality, it shapes critical parts of your business. If you're not thinking holistically about its impact, you're likely leaving value (or risk) on the table.

Let’s break down the key areas it affects and why each one matters.

Product development and innovation

OEMs often do more than build;, they can influence the materials, structure, and even the user experience of your product. This is especially true in tech, automotive, and consumer electronics, where OEMs often co-engineer solutions or make design adjustments on their end.

But this creates a key tension: who owns the innovation?

For example, if your OEM tweaks your original product design to improve battery life or performance, does that improvement become their intellectual property or yours? Without clear terms, you could lose ownership of a major feature that your product depends on.

Brand control and reputation

When an OEM produces substandard goods or misses a delivery window, your brand takes the hit. A poor-quality OEM product can damage customer trust, product reviews, future sales, and repeat business. This is why smart OEM contracts include strict quality control, inspection rights, and sometimes even the approval of third-party suppliers.

Legal and intellectual property (IP) protection

OEM deals are fertile ground for IP disputes, especially when you’re working across borders. It gets even messier in jurisdictions like China, where a first-to-file trademark system grants rights to the first applicant, regardless of prior use. In such environments, issues like trademark squatting or unauthorized production by the OEM are common.

That’s why it’s essential to trademark your products early and include airtight IP clauses in your agreement. From tooling ownership and design files to packaging and source code, every asset needs to be clearly accounted for. Also, ensure your agreement is enforceable under the OEM’s local laws.

Compliance and regulations

Some industries (like defense, aviation, and healthcare) have strict regulations that require traceability, certifications, or approved vendor lists. A good example is the U.S. Coast Guard case, where the agency tried to require bidders to hold an OEM license. Though the court struck it down for being overly restrictive, it still shows how OEM credentials can affect eligibility for certain contracts.

If your product needs regulatory approval like the European Medicines Agency (EMA) and Food and Drug Administration (FDA), your OEM’s processes and materials must comply. Your agreement should reflect these standards and allow for audits or documentation review.

Financial planning and pricing strategy

An OEM agreement directly impacts your cost of goods, profit margin, and long-term pricing flexibility.

Watch out for:

• Hidden tooling or setup fees
• Volume commitments that lock you in
• Raw material clauses that shift inflation risk to you
• Currency fluctuation when working internationally

You’ll also need to negotiate what happens if the OEM’s costs go up. Can they change your unit price mid-contract? This is where price adjustment clauses and review schedules become critical.

OEM agreement template: common components

Once you’ve decided to go the OEM route, the agreement becomes your safety net. It’s what holds both sides accountable on quality, timelines, pricing, ownership, and everything in between.

But most templates barely scratch the surface. Here’s a breakdown of the core components you’ll find in a well-drafted OEM contract, along with why each one matters beyond legal formality.

Product specifications and quality control

This section defines exactly what the OEM is expected to build:

• Design files or blueprints
• Material types and performance standards
• Packaging, labeling, and certifications

If the contract doesn’t nail this down in measurable terms (e.g tolerances, defect thresholds), then enforcing quality standards later becomes a guessing game. 

Tip: Include inspection procedures and testing methods. Some agreements also allow for third-party audits.

Intellectual property ownership

OEM agreements often involve sharing sensitive assets like CAD files, software code, formulas, or proprietary processes. This clause should spell out exactly who owns what.

What’s often overlooked is how to handle improvements. If the OEM modifies your design or tooling to improve efficiency or durability, does that improvement belong to you or them? Without clarity, you risk losing rights to a feature your customers value and that your OEM can now offer to competitors.

Licensing terms

If the product contains proprietary software, patented technology, or embedded systems, the OEM will likely need a license to use your IP. This section should define the scope of that access: is it time-limited? Should they only use it for your products? Are they allowed to subcontract production?

Even for non-tech products, licensing can come into play. For example, a skincare brand sharing a proprietary blend with an OEM lab should clearly state how and where that formula can be used and whether it's exclusive to them.

Ordering, lead times, and forecasting

When it comes to ordering and lead times, your agreement should lay out how the process works: how far in advance you need to place purchase orders, the minimum quantities required, and what happens if timelines aren’t met. Without clear terms, production can stall.

Many OEMs prioritize their biggest clients. If you're a smaller buyer without negotiated volume forecasts or deadlines, you risk being pushed to the back of the queue. Including forecasting obligations and delivery penalties gives you leverage and helps keep your production on track.

Pricing and payment

The financial terms should include:

• Unit prices and volume discounts
• Currency and tax details
• Payment milestones or schedules (e.g. 30% upfront, 70% on delivery)
• What happens when raw material costs rise

Some agreements lock prices for 6–12 months, with clauses allowing review if commodity prices spike. If you don’t build in these mechanisms, sudden cost changes could eat into your margins with no warning.

Warranties, defects, and returns

What happens when a batch arrives damaged? Or a customer reports consistent malfunctions?

This clause outlines how long your OEM is responsible for defective products, what counts as a defect, how quickly they must respond, and who covers the cost of replacements or repairs. Weak warranty language often leaves buyers holding the bag, especially if the issue surfaces after distribution.

In regulated industries, failure to handle this correctly can trigger recalls, fines, or lost certifications.

Confidentiality and non-compete

The OEM might learn everything from your unit cost to your supplier network. A confidentiality clause ensures they can’t use that information to compete with you or leak it to your rivals.

In some cases, the agreement will also restrict the OEM from working with direct competitors for a fixed period, especially if your design or process is unique.

Termination and transition

No business relationship lasts forever, so this clause prepares for what happens when it ends, whether early or at the agreed conclusion.

Key things to include here:

• Notice period for OEM process termination
• What happens to leftover inventory or raw materials
• Whether you retain rights to tooling or designs created during the relationship
• Any support the OEM must provide to help you transition to a new supplier

Without this, you're at risk of a sudden shutdown with no backup.

Dispute resolution and governing law

If your OEM process is overseas, this clause is non-negotiable. It decides which country's laws apply, which courts (or arbitration bodies) have authority, and even which language will be used to interpret the contract.

For example, Chinese courts often won’t enforce contracts governed by foreign law and they prefer the Chinese version of the contract as the legally binding one. If your agreement isn’t drafted accordingly, you may have no enforceable recourse.

For a real-world example, take a look at Dell’s OEM agreement here.

Best practices for drafting an effective OEM agreement

Many companies default to a free template or borrow clauses from a previous deal. The problem is, those generic terms won’t cover the real risks you’re taking. Here's how to do it right from the start:

Don’t rely on templates blindly

No two OEM arrangements are the same. A medical device startup and a consumer electronics brand won’t face the same regulatory requirements, delivery risks, or IP threats. Generic templates miss these nuances.

Instead, sit with your legal advisor and walk through your product lifecycle. Build terms around your specific failure points: supply delays, quality standards, packaging, inspection, data handling, or proprietary tech.

Be specific about product expectations

Vague language like “high quality” or “industry standard” can backfire. Define product specs in measurable terms like materials, dimensions, certifications, defect rates, and packaging requirements. If possible, attach technical drawings, approved samples, or bills of materials to the agreement.

Tip: Include provisions for inspections, testing procedures, and what happens if the product fails to meet your standards.

Build in regular review points

Your business, market, and manufacturing needs will evolve. Bake in opportunities to revisit pricing, quality expectations, or volume targets every 6–12 months. Don’t wait until problems arise;, make contract reviews a normal part of your relationship with the OEM.

Make it enforceable where it matters

If your OEM is based overseas, make sure your contract is legally enforceable in their country. That often means:

• Drafting the agreement in both English and the local language (e.g. Mandarin)
• Choosing a local jurisdiction for legal disputes
• Working with a lawyer familiar with the local legal environment

For example, Chinese courts often won’t enforce foreign judgments but they will honor well-written contracts governed by Chinese law, especially if the Chinese version is the ruling text.

Don’t skip legal review 

OEM agreements are often long-term and involve high production stakes. Even if the first order is small, a poorly written agreement can cause problems that grow with your business. A qualified lawyer can help you flag weak clauses, ensure IP protection, and tailor the agreement to your jurisdiction and industry.

Before you sign: what to remember about OEM agreements

OEM deals can open up incredible scale like automakers gaining access to Tesla’s charging network. But poorly structured agreements can spark legal disputes, create production delays, or leave companies unable to enforce their rights across borders.

If you’re entering your first OEM deal, don’t treat the agreement as a formality. Treat it as the legal and operational framework that will hold your product, brand, and supplier relationships together.

Take the time to:

• Define exactly what’s being made
• Protect your intellectual property and brand
• Plan for success, but structure for worst-case scenarios
• Choose jurisdiction and legal language with enforcement in mind
• Get professional legal help, especially with international partners

If you're handling documents like NDAs, licensing schedules, or quality checklists, check out Docupilot. It lets you create templates, automate bulk document creation, and send them for signing, all in one place.