Custom skincare formulas do not come with a default owner. The answer depends on whether the brand hired the factory to make the brand’s formula, asked the factory to supply one the factory already owns, or paid for both development and tooling. The contract is the only place where the answer becomes enforceable, and most disputes come from clauses that read as if they answered the question when they did not.

Below is how we walk through ownership questions with B2B clients, and which contract clauses we usually push for when the brand wants the formula to stay with the brand.

Two pairs of hands shake across a desk stacked with paper folders, close-up on a contract page and a small amber sample bottle

Where does IP start for each manufacturing model?

The three manufacturing models give different starting positions for ownership. The wording in the contract then decides what happens at the edges.

  • OEM (Original Equipment Manufacturer). The brand submits a brief, a formula, or both. The factory executes. The formula IP is open to negotiation; many contracts grant the brand ownership of foreground (newly developed) IP, while the factory keeps its background manufacturing know-how.
  • ODM (Original Design Manufacturer). The factory provides an existing formula and the brand labels and sells it. The base formula usually stays with the factory. The brand acquires commercial rights through a buy-out, a license, or an exclusivity arrangement.
  • OBM (Original Brand Manufacturer). The factory both produces and sells the same formula under its own brand. The formula and the commercial use stay with the factory.

OEM, ODM and OBM are not the same starting line for IP. A clause that works in one often misfires in another, and we have seen contracts copy-pasted between the three with no adjustment.

Which clauses actually draw the IP line?

Ownership of a custom formula sits across several clauses, not one. Six usually decide the answer.

  • Formula IP ownership clause. States which party owns the formulation work created under the contract. Avoid catch-all language like "all IP belongs to the factory," because that kind of language tends to swallow the brand’s foreground development.
  • Background IP versus Foreground IP. Background IP is what each side brought to the table. Foreground IP is what gets created during the project. The two stay on separate tracks.
  • Derivative formulas. When the brand or factory tweaks an ODM base by one active, pH, or fragrance, who owns the new work, and who has rights to keep iterating on it.
  • Buy-out, license, or exclusive use. In an ODM deal, these are three different commercial structures. A buy-out is a one-time payment plus an ongoing right to use. A license is paid by period or volume. An exclusive grant locks the formula to one brand in a defined scope, usually for an additional fee.
  • Confidentiality period. Industry practice runs from three years up. The end of the contract’s confidentiality period does not unlock the formula publicly; it just ends the contract’s confidentiality obligation. Trade secret law, where it applies, runs in parallel.
  • Sample and documentation retention. Who keeps production samples for how long, who keeps the batch records, and who can retrieve them.

A clean OEM contract will treat these as separate clauses with separate answers. A weak one tends to bundle them under broad language that no one re-reads until there is a dispute.

Which decisions tend to start disputes?

Most IP disputes we see end up at one of three boundaries. None of them are unusual, and all of them are usually predictable.

The first is brand contribution. If the brand supplied a key active, an ingredient ratio that defines the formula, or a process trick that materially altered performance, the brand’s contribution can flip the default assignment. Joint development tends to leave room for both sides to claim part of the foreground IP, which is why written records matter.

The second is the kind of brief the brand handed over. A short brief that the factory interpreted on its own (position, price band, top-line benefits) usually leaves foreground IP with the factory, with the brand holding commercial rights through exclusivity or buy-out. A long brief that specifies actives, ratios and process conditions usually pushes some or all of the foreground back toward the brand.

The third is reuse of the same formula across multiple brand customers. This is normal practice for an ODM factory. If the brand wants exclusivity, the contract should say so explicitly, usually with an extra fee and a defined geographic or channel scope.

Do the rules change across jurisdictions?

Yes, and the differences are large enough that the contract should pick one and stick with it. In China, contract law and the anti-unfair-competition law cover trade secrets, and courts tend to look closely at whether the contract clearly defined the confidential information and the obligations on each side.

In the EU, Directive (EU) 2016/943 set a minimum standard for trade secret protection across member states. Member states translate that into their own national law with local detail (Germany, France and the Netherlands are common manufacturing hubs for cosmetics and each reads the law differently in court).

In the US, the Defend Trade Secrets Act (DTSA) of 2016 protects trade secrets at the federal level, with state law filling in. Courts often look for three things in an NDA: a clear written marking of what is confidential, a statement of commercial value, and reasonable measures to keep the information private.

South Korea has detailed rules on unfair competition and trade secret protection, though enforcement tends to lean on contract terms and industry practice more than on aggressive public litigation.

This article is not legal advice. For a contract that has to hold up under one of these regimes, local counsel is the right call.

What we usually push into the contract

The contract language we recommend for clients who want the formula to stay with the brand usually covers six items.

  • An explicit formula IP ownership clause. Foreground IP belongs to the brand, background IP stays with each side, derivative formulas follow the foreground rules unless renegotiated.
  • NDA with a defined confidentiality period and an explicit list of what counts as confidential (formulas, ratios, processes, briefs).
  • Sample and documentation retention with a defined retention period and a defined retrieval right for the brand.
  • A derivative formula clause that decides how new work gets owned if the ODM base is tweaked.
  • A clear buy-out, license, or exclusive grant arrangement, with the commercial scope (region, channel, period) written out.
  • A dispute resolution clause that picks the law, the venue, and the language of any arbitration.

The work between NDA signing and contract signature matters as much as the clauses themselves. Brand briefs, phone calls with the factory’s R&D lead, sample formula sheets, and even WhatsApp threads should end up in writing, because written records are what a court or an arbitrator looks at first.

For brands that want help shaping an OEM, ODM or OBM contract before signing, our team can walk through the IP clauses against a specific brief and flag the points that tend to get missed.

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