How to Protect Your Intellectual Property When Outsourcing

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Thinking about outsourcing? Take a deep breadth and you may want sit down till the thought passes. Many outsourcing arrangements fail for a variety of reasons and even when they succeed the costs incurred may be more than the costs saved.

One of the biggest risks is protecting your intellectual property (“IP”) when it is outsourced. There are no silver bullets that will guarantee protection. But if you choose to outsource, there are some guidelines you might wish to follow to reduce the risk that your IP will be compromised when outsourcing to an overseas vendor (“Vendor”). Here they are.

Know the IP Your Are Outsourcing

The first step is to inventory the IP you plan to outsource. IP can take many forms (copyrights, trademarks, trade secrets and patents); it can be structured into databases, embedded in software code or written on a whiteboard in a conference room.

Identify what your IP consists of; where it is located; who controls it; who adds or enhances it; who protects it; how it is protected and how vulnerable it is to attack.

Examine you IP licensing agreements–those from you to others and from 3rd parties to you. Determine whether these agreements prohibit outsourcing the IP without the permission of your licensing partner.

Some Other Considerations

Do you have personnel that can monitor the transaction? You will at least need a competent IT manager and an in house project manager. You will also need an accountant to audit the financials of the agreement and a security person to ensure there are no security breaches.

Consider whether you want to begin the relationship by outsourcing your lesser-valued IP, saving your “core” IP until after you have developed a trusting relationship with the Vendor.

Consider also whether you want to keep all the IP you intend to outsource on servers located in the US allowing your Vendor access to the IP on only permission basis.

Steps in Identifying an Outsourcing Vendor

Second, let’s assume you have inventoried and selected the IP you wish to outsource and determined you have the personnel to make the transaction work. What steps should you take to find an appropriate Vendor? There are many and will take time to complete.

You want to examine the potential Vendor’s reputation, financial and technical resources and compatibility with your corporate culture.

You also want to examine the Vendor’s ability to safeguard your IP against accidental, inadvertent or willful misappropriation, misuse, sabotage, loss or theft.

Your need to investigate the Vendor’s track record; talk to its references and assess its security and/or IP protection program and check on the background of the Vendor’s project manager. That examination will most likely require that you make site visits to the Vendor’s place of business, wherever located.

You further must assess the legal environment in the jurisdiction where your Vendor is located. Determine how likely the courts in that jurisdiction will provide you with legal protection and a remedy if something goes wrong. Retain local counsel in that jurisdiction to possibly even lead that evaluation.

Also assess whether you will be able to enforce the remedy against the Vendor either where it is located, where it may have assets or is doing business.

You also need to determine the privacy policies in the Vendor’s jurisdiction and the likelihood that the government there will attempt to access your IP for whatever reason or turn a blind eye if someone else does.

Also examine the Vendor’s insurance coverage to see whether it is sufficient to protect you for the damage you may suffer if your IP (including your trade secrets) are compromised. Security breaches of your core IP can be costly.

In addition, assess the adequacy of any disaster recovery plans the outsourcing company has. Tsunamis, nuclear accidents, natural disasters and political upheavals happen. What steps will the Vendor take in response?

Further examine the steps you are prepared to take if the relationship deteriorates; outsourcing relationships fail for many reasons; what is your exit strategy; do you have the resources to set up shop elsewhere quickly and relatively easily if this relationship fails?

Ask yourself whether the costs of initiating, negotiating, monitoring and enforcing an outsourcing agreement and the risks to your IP you will be assuming are greater than the savings you anticipate through outsourcing. In other words, is it worth it?

Key Provisions You Will Need in an Outsourcing Agreement

Third, if you have located an appropriate Vendor and are ready to negotiate an outsourcing agreement, what are some provisions to include to protect your IP? Outsourcing agreements can run for more than 40 pages. Here are just a few of the clauses you may want to have.

Make sure the agreement provides that you will own the rights to any IP the Vendor creates during the term of the relationship; for instance if the Vendor creates any joint interfaces, you should own them. In other words, all the IP the Vendor creates during the relationship should be considered works for hire.

Why own it all? Because you want to be able to take that IP with you to a new vendor at the end of the relationship.

The agreement needs to specify how the Vendor will guard and protect your IP; who will access it and under what circumstances. Detail is important here. For instance, the contract should provide that the Vendor will write over and not simply erase any data no longer needed.

The agreement should provide that when the contract ends for any reason you will have immediate access to your IP.

If you are outsourcing to countries like India or China, require your Vendor to register your copyrights and trademarks at the appropriate government agencies in those countries. You should ensure through local counsel that your Vendor has properly done so.

Finally, you should provide a US choice of law clause and a US forum for any breach of the agreement. To ensure the enforceability of these provisions, the agreement should specify all the points of contact the agreement and the Vendor have with the US.

This is by necessity a general summary. Your agreement will change depending on the country to which the IP will be outsourced and the nature of the IP.

Also remember that IP is highly perishable. Once the secret is out, the genie is out of the bottle. But these guidelines may help reduce your risks.

I welcome comments and any suggestions you would like to also offer to those contemplating outsourcing.

I will be speaking on this subject on February 15 at a webinar sponsored by Global Outsourcing Association of Lawyers (GOAL); click here for more information.



6 thoughts on “How to Protect Your Intellectual Property When Outsourcing

  1. Thanks Andrew for bringing up this topic as many businesses, large or small, still fall victim to violations against IP.. and we all know that if you’re filing a claim on international grounds, the process can be costly and time consuming. I hope you can highlight this statement as I believe it’s the most important and often ignored task: “You further must assess the legal environment in the jurisdiction where your Vendor is located.”

  2. Shaleen: I agree that assessing the legal environment is most important; but it is also most difficult. A company in the US outsourcing to China for the firs time for instance is not going to be able to assess the legal landscape there. They will need to reach out to local counsel in the vendor’s jurisdiction. Local counsel then has the responsibility of warning the US company about the extent of IP and privacy protection which may not be as extensive as the protection the US company enjoyed in this country. Thus the US company must select not only an appropriate outsourcing vendor but one located in a jurisdiction that respects IP. No easy task for sure. Thanks Shaleen for highlighting this issue.

  3. Fantastic information Andrew. Couldn’t agree more on you about consulting the local counsel for IP coverage and protection. It does vary per country.

  4. Mikael here is why: the vendor should be and often is more familiar with the registration procedures in the country in which it does business. Therefore it is easier for the vendor to effectively register. And of course by having the vendor register the IP owner saves money in navigating a foreign registration regime with which it is probably unfamiliar.

    Registration is also an initial step in establishing a trusting relationship between the parties. If the vendor balks about taking the necessary steps to register that suggests the IP owner find a new vendor. Thanks for your question; I am sure other readers wondered about the same.

  5. Outsourcing can make or break one’s business. It may be cheaper to hire overseas, but if you plan to have your customers interact with your outsourced workforce, there will surely be some sort of drop in customer satisfaction. Basically, it’s a huge gamble, but if you land a great outsourced workforce, profits will come rolling in like its nobody’s business.

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