Outsourcing is common today for companies both large and small. Outsourcing allows niche companies to focus on their own core competency and rely on third parties to offset the lack of other required expertise. However, once product development or manufacturing is handed over to an outside party – perhaps in another country – certain dangers can arise. The loss of, or creating ambiguity in, the company’s intellectual property rights are risks when outsourcing, especially for technology companies. Here are five suggestions for protecting intellectual property once the decision has been made to outsource.
Begin the relationship with a Non-Disclosure Agreement – NDA. It is important that the NDA be signed by both sides before talks begin with a potential outsourcing vendor, rather than after the fact, when the vendor may refuse to sign. An NDA is advisable when the company has to disclose trade secrets and other confidential information to explain the products or services to be outsourced. Ensuring the ideas disclosed are kept secret through NDAs and other procedures is required to continue to enjoy protection for trade secrets and to maintain the ability to file for patent protection on these ideas. The NDA should prohibit the vendor from disclosing – and using for its own benefit – the company’s confidential information and IP, even after a specific project or any term set in the NDA ends. It should limit the vendor’s use of the information to a specific purpose. The NDA should reserve to the company all rights in IP shared and provide for the destruction or return of the company’s confidential information upon completion of the project.
Registering Your IP
Consider registration of intellectual property as early as possible, especially in foreign jurisdictions where there are business operations or contractors. Generally speaking, it will be difficult and expensive, or impossible, to enforce and defend IP rights without a registration, particularly in countries where the “first to file” an application for registration is generally considered the senior rights holder. In the U.S., registration of patents and copyrights is generally required to initiate infringement suits, and federal registration of trademarks provides valuable statutory protections and remedies not otherwise available. Provisional patent and intent-to-use trademark applications pending with the U.S. Patent & Trademark Office can help provide an earlier priority date and serve as a deterrent to the vendor. Early registration of copyrights in the U.S. can ensure the availability of statutory damages in an infringement suit.
Before the work begins, clarify in writing who will own the IP rights relating to what the vendor is developing or manufacturing. Many mistakenly believe that simply because a customer pays the vendor to develop the software or device or provide other creative services, the customer automatically owns the IP rights in and to the finished product. This is incorrect. Under U.S. copyright law, a third-party programmer who creates a software program is the owner of the copyright to the software, unless the written agreement with the programmer explicitly assigns ownership to the company. Avoid ownership disputes later on by specifically identifying before the work begins who owns and will own the intellectual property rights in and to the product being manufactured or developed. If the vendor wants to retain ownership of its own IP that will be incorporated into the company’s product, it should specify in advance and in writing what that IP is and provide the company with a license to use it for the company’s intended purpose. Beware of joint ownership of IP. While joint ownership may sound appealing, it can lead to unintended consequences regarding licensing and/or the requirement that the company and vendor share any revenue generated by the jointly owned IP.
Forum Selection Clauses
If filing a lawsuit to protect IP, or if the vendor is going to file against the company, have the lawsuit proceed where it is convenient to the organization. It is recommended that outsourcing agreements contain a provision that says, “Any lawsuit or proceeding arising out of this agreement shall be filed in the courts located in [your city or county], to the exclusion of all other courts,” or something similar. This is referred to as a “forum selection” clause. Moreover, particularly with respect to crossborder agreements, the clause can specify that the laws of a particular state or the United States will govern the contract and relationship, and that the vendor consents to the venue and personal jurisdiction in the particular courts you have selected. Other terms particular to overseas vendors may apply. A properly worded forum selection clause can reduce the company’s cost and time to obtain a judicial declaration clarifying its IP rights or to enforce them against the vendor.
Right of Inspection
The outsourcing agreement should contain a right of inspection. The company should have the right to visit the facility where its product is being manufactured to assess things first-hand and ensure quality control and other company standards are being followed. Is there security for the facility? Is access to the area where the company’s products are being manufactured limited or controlled? Are procedures in place to protect the confidentiality of the company’s IP? Are materials called for in the product specifications being used, or cheaper alternatives? Is electronic data secured? The agreement should include the right of the company to make this first-hand assessment, even if it is not exercised on a regular basis.
Following these basic suggestions – and seeking legal counsel – can contribute to a successful outsourcing arrangement and reduce the risk that intellectual property will be disclosed, stolen or claimed by the outsourcing vendor.
Albert Carrion specializes in intellectual property on Husch Blackwell’s Technology, Manufacturing & Transportation team, advising clients on the licensing, development, ownership and protection of intellectual property assets, and is a Partner in their Austin office.
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