WHEN A TRUSTED DISTRIBUTOR “HIJACKS” A PRODUCT DESIGN: THE TRAP OF FAILING TO PREVENT SPECULATIVE REGISTRATION AND THE LESSONS ON PROTECTING A STARTUP’S LEGAL ENTITY

1. Summary of the Real-Life Situation

Mr. M and Mr. K are two founders and long-time close neighbors in the [LOCAL] residential community. In 2024, they pooled their capital to establish TechShape Digital Solutions Joint Stock Company [LOCAL]. The company specializes in manufacturing premium smart-home devices.

Mr. M serves as Chief Executive Officer (CEO), overseeing administration, human resources, and the allocation and disbursement of funds. Mr. K serves as Chief Technology Officer (CTO), responsible for the company’s technological infrastructure and for sketching the form and design of device casings.

Because of their close neighborhood relationship, Mr. K entrusted Mr. M with full authority to carry out legal registration procedures for the company’s products.

In early 2026, Mr. K completed the design of a highly distinctive and commercially innovative device casing. Shortly after being launched on the market, the product generated substantial quarterly revenue.

Seeing that the product was selling well, one of the company’s trusted distributors secretly filed an application with the Intellectual Property Office of Vietnam to register exclusive protection for the industrial design in their own name.

When Mr. K subsequently reviewed the company’s legal records, he was shocked to discover that Mr. M had previously handled the administrative procedures carelessly and superficially and had completely failed to file an application for registration of the product design.

The distributor immediately issued a threatening demand, pressuring TechShape [LOCAL] to double its discount rate. Otherwise, the distributor threatened to initiate legal action to force the company to stop manufacturing the product on the grounds of infringement of their priority rights.

Revenue fell dramatically, the company’s financial operations became frozen, and the core project collapsed completely.

The entire joint investment capital was lost. Mr. K became extremely angry and demanded that Mr. M compensate for the full economic loss using his personal assets.

Their neighborhood relationship immediately broke down. The two families engaged in heated arguments and exchanged serious insults in the neighborhood. They threw dirty substances at each other’s houses, causing public-order disturbances and requiring intervention by the local police.

2. Legal Perspective – “A Strong Shield”

From the perspectives of civil law, enterprise law, and intellectual property law, the unilateral registration by a distributor of an industrial design belonging to the party that commissioned manufacturing or supplied the product, without authorization, may raise serious issues concerning bad-faith registration and abuse of intellectual property rights. At the same time, the manager’s failure to follow the filing procedure may constitute a breach of the duty of care.

• Registration Rights and the First-to-File Principle

Pursuant to Articles 6 and 87 of the 2005 Law on Intellectual Property, industrial property rights over an industrial design are established on the basis of a decision granting a protection title by the competent state authority.

Vietnam applies the first-to-file principle under Article 90 of the 2005 Law on Intellectual Property, under which protection is generally granted to a valid application having the earliest priority date.

However, regulations concerning bad-faith registration may be relevant where a distributor seeks to register the industrial design of a supplier or business partner without authorization or consent.

Mr. M’s failure to properly carry out the administrative procedures referred to in Article 162 of the 2020 Law on Enterprises weakened the organization’s ability to defend its rights and may create risks of unauthorized appropriation of assets and potential liability for damage under Article 584 of the 2015 Civil Code.

• Civil Liability Arising from Personal Managerial Fault

Pursuant to Article 165 of the 2020 Law on Enterprises, managers are required to perform their duties honestly and with the highest degree of care in order to protect the legitimate interests of the company.

Mr. M’s decision to rush the product onto the market without completing the necessary review and verification of exclusive-protection applications may constitute a managerial failure.

Under Article 585 of the 2015 Civil Code, a person responsible for causing damage may be required to compensate for the economic losses caused by their fault in accordance with applicable law.

3. Psychological – Educational – Management Perspective – “The Human Key”

Psychological and Educational Perspective

• The Partner’s Material Greed and the Psychology of Betrayal and Extortion

The trusted distributor was driven by financial gain and was willing to exploit the startup’s documentary gaps by turning the exclusive product design into leverage for extracting additional financial benefits.

For Mr. M, excessive confidence in their long-standing “close-knit” relationship created complacency and caused him to cut corners in the company’s periodic document-review procedures.

When the incident occurred, Mr. K experienced severe anxiety and fear that the company’s accumulated intellectual assets could be lost, ultimately destroying their long-standing neighborhood relationship.

• Lack of Education in Commercial Intellectual Property Risk Management

Many startup business managers mistakenly believe that because they commission a factory to manufacture products and sell them through familiar distributors, the resulting product design automatically belongs to them and no business partner would dare to betray their trust.

They lack sufficient awareness of administrative compliance and the importance of legal governance within an enterprise.

They fundamentally confuse informal, relationship-based business practices with the need to establish a legally secure framework for protecting the company’s trade secrets and intellectual property.

Management Perspective

• Critical Failure in External Distribution-Channel IP Risk Management

Mr. M effectively placed the survival of the TechShape [LOCAL] brand in the hands of the distributor’s personal integrity.

Managing a company without an effective intellectual-property protection framework creates significant risks. The absence of a systematic review process for exclusive-protection applications weakened the company’s ability to defend itself against a potential blocking registration by a third party.

• Serious Gap in the Process for Controlling the Release of New Product Designs

TechShape [LOCAL] completely lacked a formal process governing the release of new product designs.

A properly governed enterprise should establish clear requirements whereby 100% of technical drawings and industrial designs must, before being provided to distributors or manufacturing facilities, be covered by an external Non-Disclosure Agreement (NDA), supported by evidence of an application having been filed with the Intellectual Property Office of Vietnam, and approved in writing by the Board of Directors through a resolution containing dual signatures.

4. Comprehensive Solutions Proposed by Expert Nguyễn Hữu Long

Step 1: Emergency Opposition to the Grant of Protection and Neighborhood Mediation (Short Term)

• Emergency Neighborhood Mediation

Mr. M and Mr. K must immediately stop throwing dirty substances at each other’s houses in order to prevent further public-order disturbances and potential legal consequences.

Mr. M should remain calm, put aside his personal pride, and proactively invite the neighborhood leader to act as a mediator and organize a private meeting.

The objective is to prepare a written neighborhood mediation record and establish commitments to protect the safety of both families before addressing the underlying financial dispute.

• Establishing Evidence of the Distributor’s Bad-Faith Registration

Mr. M should immediately cooperate with legal counsel to submit an opposition to the distributor’s industrial design application to the Intellectual Property Office of Vietnam in accordance with the Law on Intellectual Property.

The company should present all original design records and CAD drawings bearing the signature of CTO K and predating the distributor’s application in order to establish evidence relevant to the distributor’s alleged bad faith.

The company should reject the distributor’s extortionate demands, issue a notice terminating the distributor relationship where legally justified, and seek appropriate court measures concerning the company’s bank accounts and cash flow in order to stabilize its operations.

Step 2: Restructuring Corporate Document Governance and Internal Financial Compensation (Medium Term)

• Written Commitment to Assume Personal Financial Responsibility for Corrective Action

To compensate for the lost budget and reduce internal uncertainty, the two parties should enter into a supplementary written commitment based on the 2015 Civil Code.

Mr. M may voluntarily agree to use his existing personal assets or reduce his future dividend entitlement to secure the obligation to compensate Mr. K for losses attributable to his negligent management, thereby helping rebuild trust and restore the company’s financial stability.

• Establishing an IP Due Diligence Policy and Applying Dual External Approval

The company should immediately draft and promulgate a new Corporate Brand & Design Governance Policy governing the acquisition, protection, and secure management of product designs and intangible assets, based on the 2020 Law on Enterprises and other applicable regulations.

The policy should establish strict deadlines and controls.

The company should prohibit the disbursement of production funds or the transfer of design files to any business partner unless there is documented confirmation that an application has been filed and an official application number has been issued by the competent authority.

All distributor agreements should be subject to quarterly cross-review and approval by both founders in order to establish a comprehensive internal control mechanism.

Step 3: Long-Term Lesson on Separating Personal Relationships from Business Assets

• Strict Industrial Design Protection Is a Sustainable Way to Protect Capital

The hard-earned lesson for startup managers is:

“If a startup’s product designs are not clearly defined and securely protected through an exclusive-protection application before being handed over to business partners, a distributor’s betrayal may ultimately destroy the entire business.”

Clarity and discipline in strategic management of the brand and financial assets, together with respect for the legal framework from the very beginning, should not be viewed as unnecessary costs.

On the contrary, they constitute an essential protective shield for safeguarding personal assets, protecting corporate capital, and preserving strong neighborhood relationships against the turbulence of the business environment.

EXPERT PERSPECTIVE

• This article was developed based on professional consultation and advice from Nguyễn Hữu Long, M.A. – Leadership, Legal, Psychology & Education Expert. Through an interdisciplinary approach, we aim not only to provide a strong legal shield but also to offer comprehensive risk-management and psychologically informed solutions for the sustainable development of the community.
• If you or your organization is facing similar difficulties relating to land or educational matters, please contact us via our hotline or submit your questions through the website tuvanphapluattamlygiaoduc.vn, or call 0898.627.762, for timely assistance.