United States: Outsourced Manufacturing: Taking A Proactive Approach With Your Intellectual Property

TIPS FOR OUTSOURCED MANUFACTURING

Companies developing new products sometimes opt to outsource the fabrication of prototypes or the pilot-stage manufacture of products for beta testing. Outsourcing may make sense for companies that do not have in-house prototyping capability, or if the manufacture requires special technical expertise. By outsourcing the fabrication of prototypes during product development, however, a company may risk losing valuable intellectual property rights. In light of recent developments in patent and trade secret law, companies should take several precautions to protect their intellectual property rights.

Under the Patent Act, an inventor must file a patent application on any invention within one year after the first public use, disclosure, or commercial offer for sale. See 35 U.S.C. §§ 102(a) and (b). If a patent application is not filed by that time, then a statutory bar prevents the inventor from obtaining a patent on the invention. In some cases, the sale of even a single item (such as a prototype fabricated by a contract manufacturer) could block patentability. To prevent this possibility, companies should consider the following precautions:

File Provisional Applications

One way to prevent loss of patent rights is to file a provisional application describing the invention prior to any public use, disclosure, or attempted sale of a product containing the invention. If an applicant files a provisional application, and then follows up by filing a nonprovisional claiming the same invention within one year of the provisional application filing date, then the later application is treated as having been filed on the provisional application filing date. 35 U.S.C. § 119(e). Provisional applications generally are less costly than nonprovisional applications. They are not published by the Patent Office until the subsequent nonprovisional application is published, so they do not result in the loss of confidentiality. Provisional applications have the added benefit of establishing a filing date for subsequent foreign applications, which is important because most foreign patent systems require an application to be filed prior to any disclosure of the invention. Provisional applications also have some significant limitations. They are ineffective for design patents, which cover the shape or ornamental appearance of a product. In addition, filing a provisional application does not itself result in patent protection. The applicant must file a nonprovisional application claiming the invention within one year to initiate the examination process.

Additionally, a nonprovisional patent application may claim priority to multiple provisional patent applications. A company may file a first provisional application before working with a manufacturer and then file a second provisional application including any minor improvements to the invention made during manufacturing. Then, within one year of the filing date of the first provisional application, the company may file a nonprovisional application claiming priority to one or both provisional applications.

Structure the Work as a Custom Manufacturing Agreement

A company may prevent an outsourcing contract from being interpreted as a commercial product sale by structuring it as a contract for manufacturing services, rather than for the sale of a product of manufacture. In a recent case, the U.S. Court of Appeals for the Federal Circuit ruled that when an inventor contracts with another party to fabricate a product containing an invention, but the title to the product does not change hands and the work is priced and invoiced as custom manufacturing services, a commercial sale of the product does not occur. Thus, the fabrication services did not trigger the one-year period for the inventor to file a patent application. The Medicines Company v. Hospira, Inc., No. 2014-1469 (Fed. Cir. July 11, 2016) (en banc). In order to take advantage of this rule, outsourcing contracts should clearly state that the contract is for custom prototyping or manufacturing services, indicate that the originator retains title to the product and any intellectual property in the product at all times, and provide that the fabricator has no rights in the product and is unable to sell the product to any other person. In addition, the contract should be priced and invoiced for the value of the manufacturing services, rather than the anticipated price of the product.

Keep the Agreement Confidential

The Leahy-Smith America Invents Act implemented important changes to the rules for

identifying prior art for most patent applications filed after March 16, 2013. Although these AIA provisions have not yet been interpreted by the courts, the Patent Office has interpreted the AIA to require any use or attempted sale to be publicly available in order to become prior art that could defeat patentability. As a result, nonpublic transactions, including those subject to confidentiality or nondisclosure controls, or taking place only within a corporate entity, generally are not prior art and cannot bar patentability. Thus, contracts for outsourced prototyping or manufacturing should contain detailed nondisclosure provisions. Agreements should require the fabricator to keep confidential the design, composition, functionality of the product, as well as the financial terms of the agreement. In addition, any specifications or other technical information provided to the contractor should be marked as "Highly Confidential," and should be returned or destroyed after the work is complete.

For innovations that are not likely to be patentable, companies should consider trade secret protection. In Michigan, as in most states, trade secrets are governed by the Uniform Trade Secrets Act. In order to be protected as a trade secret, proprietary information must have economic value, not be generally known in the industry or readily ascertainable, and must be subject to reasonable policies and procedures to protect secrecy. One recent development in trade secret law is the enactment of the federal Defend Trade Secrets Act of 2016. The DTSA permits companies that are victims of trade secret misappropriation to sue in federal court and provides new remedies in some cases, including multiple damages and ex parte seizure orders.

In order to preserve the ability to seek relief under the DTSA, however, companies must provide written notice to employees, consultants, and contractors entering into agreements containing nondisclosure or confidentiality provisions that the DTSA provides immunity from liability in certain limited situations. For example, a person may disclose a trade secret in confidence to a government official or an attorney solely to report or investigate a violation of the law, and also may disclose a trade secret to an attorney or in court proceedings in connection with a lawsuit alleging retaliation by an employer for reporting a suspected violation of the law. If a company does not provide notice of these DTSA immunities, then it cannot recover exemplary damages (up to two times actual damages), or attorney fees under the Act. In order to provide notice, companies should ensure that outsourcing contracts contain a sufficient DTSA notice, or contain a reference to a posted company policy explaining the

DTSA immunities.

Protection of intellectual property rights may prove critical to the success of a new product or technology. By taking simple precautions, including carefully structuring agreements to outsource prototyping or manufacturing, companies may reduce the risk of losing those valuable rights.

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
 
In association with
Related Topics
 
Related Articles
 
Related Video
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions