Worldwide: Outsourcing, IT Outsourcing And Intellectual Property Rights Issues

INTRODUCTION – OUTSOURCING OVERVIEW

The most frequently quoted reason for outsourcing is cost savings. As the technology industry is highly competitive and grows rapidly, organizations focus on reducing costs in a bid to strive to retain and/or gain the competitive advantage. The improvement of services and added value that third party expertise can bring cannot be doubt. By outsourcing one or more non-core activities/functions of the organization, management gets the chance to focus resources on core competencies of the organization allowing in that way the organization to achieve the highest possible level of services and meet its own customers' needs, thus effectively protecting its market share from other organizations wishing to enter the market.

By outsourcing, organizations have immediate access to the innovations, the economies of scale and the specialized capabilities of the service provider which, would otherwise be costly to achieve internally. Indeed, service providers can acquire new technology more quickly and can spread the cost over a number of customers/organizations. The fact that many organizations share the service provider's investment between them reduces the risk which would otherwise be born by a single organization.

The use of a third party service provider improves access to new technology, new methodologies and workers/staff that are capable of evaluating and implementing new technology more rapidly than within the organization. It is important to know –and this is a great advantage of outsourcing- that, service providers are often able to negotiate discounts from the price of new technology products.

There are, however, some disadvantages and risks associated with outsourcing that worth to be considered. These include losing control over the activity/service outsourced and increasing reliance on the service provider.

During an outsourcing agreement the customer will provide its proprietary information and intellectual property to the outsourcing provider in order for the outsourcing provider to prepare for or deliver services to the customer. However, while the outsourcing provider has access to use the enterprise customer's data which are generally entitled to copyright protection or to use techniques and processes that have been patented, the outsourcing provider's service delivery platform will contain software and technological processes that are works of authorship and thus entitled to copyright or techniques and processes that may be patentable. In addition, in most of the outsourcing transactions the outsourcing provider's employees and the enterprises personnel work under the same trademark which may be proved damaging if, for example, the outsourcing provider fails to perform as required.

There is a possibility, that, a careless drafted outsourcing agreement, instead of achieving costs reduction increases customers' costs. This may happen in cases where the required services and services levels and standards are not specifically defined in the contract, enabling the service provider/supplier to demand additional charges to provide services or services levels that were not specifically provided for or included in the outsourcing agreement.

The outsourcing of an IT activity/function usually involves the transfer of skilled staff and expertise to the service provider, the latter often being left without any person with the necessary technical skills to run that function; In such cases, should the customer seek to change service provider or bringing the IT operation back in house will find it very difficult or even impossible to do that and will probably be forced to rely on the service provider and continue the outsourcing relationship with that service provider.

Therefore, parties who wish to enter into an outsourcing arrangement must be very careful when negotiating the provisions of such contract and must introduce into the contract such provisions to control and/or minimize any of the abovementioned possible risks or potential downsides.

INTELLECTUAL PROPERTY – INTELLECTUAL CAPITAL

Intellectual Property is not just copyrights, patents and trademarks it is also processes and techniques, methodology and talent described by many experts as intellectual capital. This intellectual capital, these intellectual property assets in other words, will need to be shared between the customer and the outsourcing provider. Sharing involves risks such as challenges in monitoring and/or dealing effectively with various types of breaches of contract clauses, theft or misappropriation of trade secrets, as above mentioned, misuse or loss of other types of intellectual property rights, poor or inconsistent quality of goods and services and enforcement of intellectual property rights.1 Therefore, the customer and the outsourcing provider must discuss these issues or it can be very damaging to both sides.

INTELLECTUAL PROPERTY CREATED – INTELLECTUAL PROPERTY TO BE IMPROVED AND/OR TO BE CREATED

There are two kinds of intellectual property that a company has to consider; on the one hand, is the intellectual property that one company created and the other side has no rights to it. These are intellectual property assets that come into the relationship prior to concluding the agreement. On the other hand, during the outsourcing relationship both sides will cooperatively improve or create intellectual property. In this case, since both sides work together to create new patents or know-how, this is going to be protected by trade secrets. The right to this type of intellectual property is different and the two companies must decide how these rights are distributed.

NEGOTIATING THE OUTSOURCING AGREEMENT – ISSUES AND CONCERNS – INTELLECTUAL PROPERTY DUE DILIGENCE – INTELLECTUAL PROPERTY AUDIT

The outsourcing agreement therefore, will need to deal with these issues and specify ownership of intellectual property rights. Ownership of intellectual property may be a sticking point. Both parties must exercise great caution. They must properly administer their intellectual property in order to mitigate intellectual property-related risks, and improve the competitiveness of the product or service offered by the enterprise. Therefore, an intellectual property due diligence enquiry and an intellectual property audit should be undertaken before the final outsourcing plan is communicated by the customer to the potential outsourcing providers. The intellectual property rights must be identified and documented, the inventors, creators or authors of the intellectual property must be identified and the owners of those intellectual property rights be specified. Contracts or other agreements such as licensing agreements associated with the intellectual property must be identified. Any assigned or licensed intellectual property used by the interested organisation and any intellectual property rights of third parties or of employees must be identified and ascertained. Furthermore it is important to identify any existing or alleged breaches and or infringements of such assignments or licenses. It is also important not to omit to determine jurisdiction and enforcement of intellectual property rights in case of any dispute that will arise and will need to be resolved. Termination of the outsourcing agreement and relevant exit clauses must always be considered by the parties and whether any indemnity against infringement will be provided for.

IT OUTSOURCING AND INTELLECTUAL PROPERTY RIGHTS

Intellectual property rights are absolutely critical in IT/IS outsourcing. An IT outsourcing inevitably involves the taking over of the service from the customer's IT in-house function by the service provider which actually means the taking over of the know-how, software and hardware that currently provide those services. "Knowledge economy" and intellectual property economy are very closely related, if not the same.2 Knowledge in the intellectual property industry has a particularly significant value. Therefore, all that knowledge, computing operating systems, software, information and data they process (customer data, training materials, tools and other technology, customer guidelines and procedures, processes and methodologies used by the customer and any improvements on those that the customer or provider make) are protected by intellectual property rights which must be safeguarded. It is usual that some of these intellectual property rights belong to third parties. Furthermore, it is important to consider whether different intellectual property rights apply simultaneously to one " product" such as software. Therefore, specifying ownership is vital.3

SOFTWARE OWNED BY CUSTOMER – ISSUES AND CONCERNS

Regarding software that is owned by the customer, it must be pointed out that, if the customer is the owner of the intellectual property rights in the bespoke software then it will have to decide whether those rights should and can be transferred to the service provider. In case those rights are transferred, the customer will require a license to use the service provider's software. At a minimum the customer may need to use a client-side version of the provider's software on its own computers to receive the services.4

If software is to belong to the customer, however, questions arise as to whether such intellectual property asset is been properly transferred or assigned to the company. If the software was produced by a third party, or by contractors rather than employees, ownership will only reside in the customer if the relevant contacts so provide. It is therefore important for the customer to conduct a due diligence enquiry to determine who owns the relevant intellectual property rights and keep proper records. Where the customer possesses rights to use software, an important question is whether the license permits its transfer to the service provider. Unless the customer had agreed with third party software licensors specific rights for the customer to transfer that software to the service provider or allow the provider to use that software as a sub-licensee, the customer cannot transfer, or sub-license the use of the software as this would amount to an infringement of the licensor's intellectual property rights.

Most third party software licenses are subject to many restrictions and are often non-transferable. Usually, they include standard terms which prohibit the transfer of the software, either in object or source code to anyone outside the licensee's organisation, restrict the use of the software to the customer's internal business purposes, expressly prohibit the customer's use of the software to provide data processing or outsourced services to third parties, impose confidentiality obligations on the customer so as to prevent the customer disclosing the software to third parties.5 Therefore, the customer must have the licensor's consent in order to legally transfer the software to the outsourcing provider. If the customer transfers the licensor's software to the outsourcing provider without the licensor's consent, will most probably be in breach of the licensor's license terms. Consequently this will affect the outsourcing agreement negatively or kill it; the licensor may successfully manage to obtain an order by the court to prevent the transfer of the software from the customer/licensee to the outsourcing provider or even prevent the use of the software by the outsourcing provider. In addition the licensor may successfully claim damages from the customer/licensee for breaches of the terms of the software license and/or claim damages from the customer/licensee and the outsourcing provider for the infringement of its intellectual property right. Furthermore, the licensor may choose to terminate the software license which will prove to be catastrophic for the outsourcing customer/licensee.

For the above reasons, the customer must approach third party software licensors as early as possible to secure their consent to assigning the software to the service provider or to allow the service provider to use it. The same will apply with regard to any third party data as software licenses very often restrict the licensee from using the software to process third party data. Normally this involves the customer/licensee paying additional license fees to the licensor/software owner and that is one of the main reasons that any attempt to secure third parties' consent must take place at an early stage even prior to the official beginning of the negotiations.

As indicated above, the most effective way of identifying third party intellectual property issues and specify third party intellectual property rights is, to initiate a full due diligence procedure as early as possible.

A question arises as to how the existing software licenses will transfer to the outsourcing service provider. It is argued that the most effective form of transfer is novation. The software license agreement between the customer licensee and the software licensor terminates and a new software license agreement starts between the software licensor and the outsourcing provider on the same terms. In such cases the question of who is to be held liable for historic liabilities in relation to the novated agreement is critical and must be agreed before the agreement is novated. Transfer by novation of the software license may involve also some other extra payments required by the third party software licensor and therefore the parties need to agree on whether and how these payments will be shared between them. Furthermore the outsourcing customer, on the one hand, will probably be asked to warrant that it has fulfilled all obligations and liabilities up to the date of novation and will demand to be assured that the outsourcing service provider will be responsible for any problem that may arise after that date. The service provider may require indemnities from the customer to cover any breaches of copyright or infringement of any license terms prior to the transfer.6

In any case, if the parties fail to get the third party software licensor's consent before the commencement date of the outsourcing then they may agree to postpone the commencement date of the outsourcing agreement or not to transfer the relevant software licenses. Another available option to the parties would be to agree to defer the transfer of the particular software licenses. Any such option, however, should be provided for in the outsourcing contract.

SPECIAL CONCERNS REGARDING THE INTELLECTUAL PROPERTY THAT IS IMPROVED OR CREATED/INVENTED DURING THE OUTSOURCING AGREEMENT

The other kind of intellectual property that a company has to consider is the intellectual property that is improved or created/invented, during the outsourcing relationship. It is crucial for both parties to discuss this issue and include relevant provisions in their agreement.

Obviously, the customer will try not to lose intellectual property ownership in its pre-existing works just because the outsourcing service provider made some improvements. On the other hand the outsourcing provider will probably demand the intellectual property ownership in the improvements and will also attempt to acquire ownership of any part of the pre-existing work that is related to the improvements. 7

Each party's approach on this important issue will depend upon several factors; if the intellectual property that is improved or modified or created is unique and specific to the customer's business, the customer will want to own it. However, if the intellectual property is generic to the outsourcing business or necessary for the provider to provide services to others, the service provider will typically try to retain its ownership. If either side retains ownership of certain intellectual property, the other side should try to obtain a license to use/exploit that intellectual asset.

It is important for the customer to know whether the service provider is planning to use the software for serving more customers. If that is the case and if the customer believes that by serving other customers, the customer will eventually lose their competitive advantage then the customer must try to prevent the software being used to service its competitors by refusing to grant to the service provider any such license to use it.

Another approach would be for both the customer and the service provider to own jointly the developed intellectual property.8 Joint ownership in the intellectual property sounds to be a fair approach in cases where the customer and the service provider worked together to create, improve or develop it. For example in relation to copyright works, such as software, joint ownership may be agreed to exist where an improvement resulted in the creation of co-authorship, where each author have created copyrightable subject matter in the work. Therefore determining whether ownership will be exclusive to one party or another or held jointly is an issue which must be very carefully considered. It is indeed a complex and complicated issue and one of the most difficult areas in the area of intellectual property.

Each approach should be carefully evaluated and negotiated by the parties before entering into the outsourcing agreement. Whatever is agreed must be reflected in the agreement in detail. Furthermore, the agreement should include detailed termination provisions with regard to intellectual property rights. What will happen with intellectual property when the contract comes to an end or what will happen in case of early termination? Usually under an expected termination both sides have greater rights to intellectual property. For example the customer may seek to obtain a royalty free license to use the intellectual property accompanied by an indemnity in the customer's favor against infringement of third party rights.9 Under an early termination (breach of the agreement) the parties should expect to have fewer rights or no rights at all. Therefore relevant provisions must be included in the contract dealing with issues like where the customer does not wish to continue with the particular service provider and wish to transfer rights to other service provide. At such case, for example, the ownership and use restrictions relating to the software are critical and it is of considerable importance to the customer to achieve a satisfactory solution here. Therefore, the customer must never lose sight of its business objectives; using the service provider skill and resources to facilitate migration to new operating systems, applications and technology. As it is pointed out above, if the intellectual property is unique and specific to the customer's need then the customer must try to retain ownership. It is, however, advisable to the customer to avoid agreeing to joint ownership of intellectual property assets as this would cause difficulties in the event of early termination of the outsourcing relationship, but again if, detailed provisions regarding the management of the intellectual property which is jointly owned, are expressly provided by the outsourcing contract, then the problems are minimized. If for example, the service provider is to own any software used to perform services to the customer, the contract should ensure that the customer will have all rights necessary to ensure the continuing use of the software to perform its IT functions after the contract ends. It is generally preferable for one party to own the rights and grant appropriate rights to the other party.

CONCLUSION

An outsourcing business strategy, if well implemented by following an exhaustive Intellectual property due diligence, will mitigate intellectual property related risks.

The agreement must be detailed, and, amongst other things should deal with ownership and use of the intellectual property assets both during termination and after the outsourcing relationship is terminate or comes to the end. Both parties must focus on structuring a relationship that gives them sufficient protection. Relevant warranties and indemnities should be carefully drafted and included in the agreement. As Nagel and Murphy point out, the keys to a successful relationship are comprehensive planning, rigorous evaluation and attention to detail.

Footnotes

1 Donna Ghelfi, Program Officer, SMEs Division, WIPO " The Outsourcing Offshore Conundrum: An intellectual Property Perpective" Page 4 http://wipo.int/sme/en/documents/outsourcing.htm

2 Kenneth Brown, Outsourcing and the Devaluation of Intellectual Property, page 2 http:// darwinmag.com/read/writeon/column.html?ArticleID=1072

3 Tabenbaum WA, "The Outsourcing Revolution: Protecting critical business Functions Using Outsourcing, ASP & Web Service Agreements Outsourcing specific business Application Functions: Critical issues in information technology and business process outsourcing", Practicing Law Institute Order No. GO-0163, October, 2002 724 PLI/Pat 125. Page 22

4 ibid., page 21

5 Angel J, Technology Outsourcing, A Practitioner's Guide, The Law Society 2003, Page 118

6 Anassutzi M, "Issues to be considered in outsourcing contracts", ICCLR 2002, 13 (5), 205-210, page 3

7 Tabenbaum WA, "The Outsourcing Revolution: Protecting critical business Functions Using Outsourcing, ASP & Web Service Agreements Outsourcing specific business Application Functions: Critical issues in information technology and business process outsourcing", Practising Law Institute Order No. GO-0163, October, 2002 724 PLI/Pat 125. Page 22

8 ibid., page 23

9 Anassutzi M, "Issues to be considered in outsourcing contracts", ICCLR 2002, 13 (5), 205-210, page 6

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.