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Tooling Agreements: Essential Guide for Businesses and Manufacturers

Learn how tooling agreements protect your business interests when outsourcing manufacturing. Essential information for startups, small businesses, and established companies expanding their supply chain.

Introduction

A Tooling Agreement is a critical legal document that defines the ownership, use, and maintenance of tools, molds, dies, and other equipment used in manufacturing your products. Whether you're a startup founder with an innovative product, a small business owner, or an established company expanding your supply chain, this agreement protects your investment in specialized manufacturing equipment while establishing clear expectations with your manufacturing partners. This document helps prevent disputes over who owns the tooling, how it can be used, and what happens to it when your business relationship ends.

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Key Things to Know

  1. 1

    Tooling agreements establish clear ownership of manufacturing tools and equipment, typically ensuring that you (the customer) retain ownership of tooling you've paid for.

  2. 2

    These agreements prevent manufacturers from using your custom tooling to produce products for your competitors or themselves.

  3. 3

    A good tooling agreement addresses maintenance responsibilities, storage conditions, and quality standards for the tooling.

  4. 4

    The agreement should specify what happens to the tooling if the manufacturing relationship ends or if the manufacturer goes out of business.

  5. 5

    Pricing terms should be clearly defined, including initial costs, payment schedules, and any ongoing maintenance fees.

  6. 6

    Intellectual property protections are crucial, especially for proprietary designs embedded in the tooling.

  7. 7

    Insurance and liability provisions protect your investment if tooling is damaged, lost, or stolen.

Key decisions before you file

Before you file a Tooling Agreement in Tennessee, a few decisions shape the document: which option to choose and what each one means. The Tooling Agreement guide walks through them.

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Tennessee Requirements for Tooling Agreement

  • Uniform Commercial Code Compliance (Tennessee Code Annotated § 47-2-101 et seq. and § 47-9-101 et seq.)

    The agreement must comply with Tennessee's adoption of the Uniform Commercial Code (UCC), particularly Article 2 governing sales of goods and Article 9 covering secured transactions, which would apply to tooling ownership and security interests.

  • Tennessee Statute of Frauds (Tennessee Code Annotated § 47-2-201)

    The agreement must be in writing if the value of the tooling exceeds $500 to be enforceable under Tennessee's Statute of Frauds provisions.

  • Tennessee Contract Formation Requirements (Tennessee common law and Tennessee Code Annotated § 47-2-204)

    The agreement must meet Tennessee's requirements for valid contract formation, including offer, acceptance, consideration, legal purpose, and competent parties.

  • Tennessee Property Tax Compliance (Tennessee Code Annotated § 67-5-901 et seq.)

    The agreement should address responsibility for payment of Tennessee personal property taxes on the tooling, as manufacturing equipment is subject to personal property tax in Tennessee.

  • Tennessee Sales and Use Tax (Tennessee Code Annotated § 67-6-101 et seq.)

    The agreement should address responsibility for Tennessee sales and use tax on the tooling, including potential manufacturing exemptions that may apply.

  • Tennessee Uniform Trade Secrets Act (Tennessee Code Annotated § 47-25-1701 et seq.)

    The agreement should include provisions protecting proprietary information and trade secrets related to the tooling design and specifications.

  • Tennessee Choice of Law and Venue (Tennessee Code Annotated § 47-1-301)

    The agreement should specify Tennessee law as governing and designate appropriate Tennessee venues for dispute resolution.

  • Tennessee Limitation of Actions (Tennessee Code Annotated § 28-3-109)

    The agreement should acknowledge Tennessee's statute of limitations for contract actions, which is generally six years for written contracts.

  • Federal Intellectual Property Protection (35 U.S.C. § 1 et seq. (Patents); 15 U.S.C. § 1051 et seq. (Trademarks); 17 U.S.C. § 101 et seq. (Copyrights))

    The agreement should address ownership and protection of any intellectual property rights associated with the tooling, including patents, trademarks, and copyrights.

  • Federal Defend Trade Secrets Act (18 U.S.C. § 1836 et seq.)

    The agreement should include provisions complying with federal trade secret protections, which provide additional remedies beyond state law.

  • Federal Tax Depreciation (26 U.S.C. § 168)

    The agreement should address ownership for purposes of federal tax depreciation of the tooling assets under the Modified Accelerated Cost Recovery System (MACRS).

  • Federal Environmental Compliance (42 U.S.C. § 7401 et seq. (Clean Air Act); 33 U.S.C. § 1251 et seq. (Clean Water Act))

    The agreement should address compliance with federal environmental regulations related to the materials and processes used in the tooling.

  • Tennessee Consumer Protection Act (Tennessee Code Annotated § 47-18-101 et seq.)

    If the tooling is used to manufacture consumer products, the agreement should address compliance with Tennessee consumer protection laws.

  • Tennessee Product Liability (Tennessee Code Annotated § 29-28-101 et seq.)

    The agreement should address allocation of liability for products manufactured using the tooling, including indemnification provisions.

  • Federal Product Safety Standards (15 U.S.C. § 2051 et seq. (Consumer Product Safety Act))

    The agreement should address compliance with federal product safety standards for items manufactured using the tooling.

  • Tennessee Bailment Law (Tennessee common law of bailment)

    The agreement should address bailment responsibilities if the tooling is possessed by a party who does not own it, establishing care standards and liability for damage.

  • Tennessee Uniform Commercial Code - Warranties (Tennessee Code Annotated § 47-2-312 through § 47-2-318)

    The agreement should address warranties related to the tooling, including warranties of merchantability and fitness for particular purpose.

  • Federal Bankruptcy Code Implications (11 U.S.C. § 101 et seq.)

    The agreement should address rights to the tooling in the event of bankruptcy by either party, including provisions for reclamation of tooling.

  • Tennessee Enforcement of Security Interests (Tennessee Code Annotated § 47-9-601 et seq.)

    The agreement should include provisions for perfecting security interests in the tooling and enforcement rights upon default.

  • Federal Export Control Regulations (15 C.F.R. Parts 730-774 (Export Administration Regulations); 22 C.F.R. Parts 120-130 (International Traffic in Arms Regulations))

    If the tooling or products manufactured may be exported, the agreement should address compliance with federal export control laws.

Frequently Asked Questions