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  1. 1. Topic X IP Issues in Outsourcing & Exports: The Challenges
  2. 2. <ul><li>What & Why is Outsourcing? 2. Merits & Demerits of Outsourcing 3. Risk Management of Outsourcing 4. Outsourcing to/from SMEs 5. IP Issues in Outsourcing 6. Termination Provisions 7. Conclusion </li></ul>Contents
  3. 3. What is Outsourcing? Vendor (Outsourcee) A company’s retaining a 3rd party to perform some function that was or would be performed by the company itself Customer (Outsourcer) Transferring a company’s non-core functions to another service providing company so that it can focus on its core business
  4. 4. Why is Outsourcing Necessary? Vendor (Outsourcee) Customer (Outsourcer) Logical Reason - efficiency - Empirical Evidence - boom -
  5. 5. Why is Outsourcing Necessary? - The same reason international trade is more efficient than local self-supply - Somebody can do the same job more efficiently or with lower cost Logical Reason
  6. 6. Why is Outsourcing Necessary? <ul><li>30% British companies have moved to abroad(china , India) </li></ul><ul><li>Up to 80% of leading enterprises will include outsourcing in their biz. by 2005 </li></ul><ul><li>The US IT industry will save $390 billion by 2010 through offshore outsourcing software development(IBM….India) </li></ul><ul><li>- In the USA alone, $100 billion revenue in 2000 and up to $200 billion by 2005 </li></ul>Empirical Evidence
  7. 7. Why is Outsourcing Necessary? <ul><li>IT Industry has led outsourcing boom </li></ul><ul><ul><li>the easiest & most profitable field </li></ul></ul><ul><li>Proliferates deeper & wider </li></ul><ul><ul><li>offshore outsourcing being common </li></ul></ul><ul><ul><li>outsourcing common to SMEs </li></ul></ul><ul><ul><li>even in the biz. of the Patent Offices </li></ul></ul>Areas of Outsourcing
  8. 8. Outsourcing: KIPO’s Experiences 1st Step: Non-core jobs (cleaning, security) - from the 1980s 3rd Step: Even semi - core function (searching) - from the New Millennium 2nd Step: Information Technology (KIPOnet) - from the 1990s
  9. 9. Outsourcing: IP Office of Singapore Even Core Business <ul><li>Outsourcing patent examinations to other big Offices which are more efficient in examinations </li></ul><ul><li>Without substantive examination, recognizing examination results of some reliable Offices </li></ul><ul><li>Focusing on the area where it can be more efficient than other Offices </li></ul>
  10. 10. Outsourcing: IP Office of Singapore SurfIP <ul><li>SurfIP is a special project by the Intellectual Property Office of Singapore (IPOS). As an IP portal that offers a comprehensive suite of services supporting both the layman as well as the professional user, you can: </li></ul><ul><li>Research IP Information </li></ul><ul><li>Search for Prior Art </li></ul><ul><li>Gather Business Intelligence </li></ul><ul><li>Monitor Technology </li></ul><ul><li>License Your IP </li></ul>
  11. 11. Merits & Demerits of Outsourcing <ul><li>Efficiency </li></ul><ul><ul><li>There is somebody around the world who can do this job more efficiently than I myself do </li></ul></ul><ul><li>Risk Distribution </li></ul><ul><ul><li>Vendor is better in dealing with concerned risks </li></ul></ul>Merits Demerits <ul><li>- Complex legal Issues, especially in IP matters </li></ul><ul><li>Disclosure of important information to vendor </li></ul><ul><li>I am the best in the world in solving my own problem </li></ul>
  12. 12. Risk Management of Outsourcing <ul><li>Vendor as a young tiger </li></ul><ul><ul><li>future competitor in the core business </li></ul></ul><ul><li>Vendor as a trouble maker </li></ul><ul><ul><li>liability for the torts caused by vendor </li></ul></ul><ul><ul><li>important information leaks outside </li></ul></ul><ul><li>Vendor with different understanding </li></ul><ul><ul><li>in cultural and legal matters </li></ul></ul><ul><li>Very complex legal issues </li></ul><ul><ul><li>many areas of law </li></ul></ul><ul><ul><li>even laws of 2 countries in offshoring </li></ul></ul>
  13. 13. Outsourcing to/from SMEs Outsourcing being common to SMSs Outsourcing more imperative for SMEs - globalization due to the Internet - indispensable IT network - endless effort to reduce cost in all aspects - great opportunities to expand markets - limited human resources and experiences - no expertise accumulated as a multi-player
  14. 14. An offshore vendor must show: <ul><li>- government support - infrastructure </li></ul><ul><li>communications - location </li></ul><ul><li>labor pool features - country law </li></ul><ul><li>English proficiency - company history </li></ul><ul><li>cultural compatibility - managers profiles </li></ul><ul><li>labor cost advantage - etc. </li></ul><ul><li>quality control system </li></ul><ul><li>tech. capabilities </li></ul><ul><li>business capabilities Reliability!! </li></ul>
  15. 15. Due Diligence in Offshoring <ul><li>Limited sources of information about the other party in a foreign country </li></ul><ul><ul><li>use, if necessary, informal investigation service </li></ul></ul><ul><ul><li>confirm that vendor actually has the staff and facilities necessary or it may subcontract </li></ul></ul><ul><ul><li>employee background check necessary </li></ul></ul>
  16. 16. Due Diligence in Offshoring <ul><li>Among polled 5,231 Executives across North America & Europe: </li></ul><ul><ul><li>45% as success </li></ul></ul><ul><ul><li>36% as failure </li></ul></ul><ul><ul><li>“ Offshore 2005 Research: Preliminary Findings and Conclusions” (Ventoro, October 2004) </li></ul></ul>Estimate on the Success of Offshoring
  17. 17. IP Issues in Outsourcing <ul><li>Timing </li></ul><ul><ul><li>at the very first contact with the other party </li></ul></ul><ul><li>Subject Matter </li></ul><ul><ul><li>all information from one to the other party </li></ul></ul><ul><ul><li>patent applications, trade secrets, etc. </li></ul></ul><ul><li>Duration </li></ul><ul><ul><li>for at least 3 – 10 years unless written permission to disclose it sooner </li></ul></ul><ul><li>Exclusion </li></ul><ul><ul><li>the information disclosed to the public without a fault of the vendor </li></ul></ul><ul><ul><li>the information already beheld by vendor </li></ul></ul>Non-disclosure agreement
  18. 18. IP Issues in Outsourcing <ul><li>fragment work among several vendors so that no single vendor has a complete picture of it </li></ul><ul><li>demand vendor to do “reasonable effort” to protect your trade secret </li></ul><ul><ul><li>due classification of confidential information </li></ul></ul><ul><ul><li>restricted access </li></ul></ul><ul><ul><li>education & awareness </li></ul></ul><ul><ul><li>the same rule applies to downstream 3 rd party </li></ul></ul><ul><li>establish monitoring mechanism </li></ul>Practical Protective Measures
  19. 19. IP Issues in Outsourcing <ul><li>Issue </li></ul><ul><ul><li>who owns the IP developed during agreement? </li></ul></ul><ul><li>IP that vendor develops to provide services </li></ul><ul><ul><li>vendor typically claims ownership </li></ul></ul><ul><ul><li>customer may receive a “use” license </li></ul></ul><ul><ul><ul><li>continued license after termination? </li></ul></ul></ul><ul><ul><li>there is any 3 rd party involved? </li></ul></ul><ul><li>IP that vendor develops at customer’s request </li></ul><ul><ul><li>customer typically claims ownership </li></ul></ul><ul><ul><ul><li>or at least strong license to use it </li></ul></ul></ul><ul><ul><li>vendor may insist on “license-back” grant </li></ul></ul>Ownership of IP Developed During Outsourcing
  20. 20. IP Issues in Outsourcing <ul><li>Government approval required for assignment of patent rights to foreign entity </li></ul><ul><li>Assignment must be recorded with the State Intellectual Property Bureau </li></ul><ul><ul><li>Recording with foreign trade bureau may also be required </li></ul></ul><ul><li>Basically, any technology contract with a Chinese vendor is subject to the relevant regulations governing approval and/or registration of technology import and export </li></ul>Ownership of IP Developed During Outsourcing Unique Requirements in China
  21. 21. IP Issues in Outsourcing <ul><li>Contract cannot demand a Chinese vendor: </li></ul><ul><ul><li>tie-in (purchase of unnecessary item) </li></ul></ul><ul><ul><li>payment of royalty for expired or invalidated patent </li></ul></ul><ul><ul><li>no improvement of imported technology </li></ul></ul><ul><ul><li>no obtaining of similar technology from other sources </li></ul></ul><ul><ul><li>unreasonable restriction in choosing channels for purchasing necessary items </li></ul></ul><ul><ul><li>unreasonable restriction of production volume, sale prices, production types, etc. </li></ul></ul>Prevention of Unfair Competition in China
  22. 22. IP Issues in Outsourcing <ul><li>Payment of Royalty for Expired/Invalidated Patent & Disclosed Trade Secret? </li></ul><ul><ul><li>no need to pay royalty for expired patent </li></ul></ul><ul><ul><ul><li>if there are 2 or more patents concerned, royalty must decrease after a patent’s expiration/invalidation </li></ul></ul></ul><ul><ul><li>no established rule for disclosed trade secret </li></ul></ul><ul><ul><ul><li>it may depend on the contract </li></ul></ul></ul><ul><ul><ul><li>you need to clarify that you don’t have to pay royalty even during contract term if the trade secret is disclosed without your fault </li></ul></ul></ul>Prevention of Unfair Competition in China
  23. 23. IP Issues in Outsourcing <ul><li>No golden rule </li></ul><ul><ul><li>vary greatly depending on the scope of the services provided and the size of the deal </li></ul></ul><ul><li>Typically </li></ul><ul><ul><li>one party wants the other party to defend and indemnify against claims that arise out of the other party’s activity </li></ul></ul><ul><ul><li>reasonable allocation of risks and responsibilities is important </li></ul></ul>Infringement of a 3 rd Party IP Right: Indemnification
  24. 24. Termination Provisions Think of Divorce before Marriage - Anything under the sun made by man is perishable. - Divorce is more expensive than marriage if there is no agreement prepared beforehand. <ul><li>the grounds for termination </li></ul><ul><li>the recovery procedure to avoid termination </li></ul><ul><li>the kind & period of notice required for termination </li></ul><ul><li>provisions which will be effective after termination </li></ul><ul><ul><li>warranties, indemnification, confidentiality, etc. </li></ul></ul><ul><li>non-competition clause </li></ul>
  25. 25. Non-competition Clause <ul><li>Possible Scenario </li></ul><ul><ul><li>A key employee of a Vendor who knows some important information of yours or even your trade secret goes to work for a competitor of your company </li></ul></ul><ul><li>Non-competition clause </li></ul><ul><ul><li>for a reasonable period (2-3 years) </li></ul></ul><ul><ul><li>must be effective under the applicable law </li></ul></ul><ul><ul><ul><li>there is non-competition compensation? </li></ul></ul></ul>
  26. 26. Conclusion <ul><li>Very complex issues today and tomorrow </li></ul><ul><li>The unavoidable uncertainty makes drafting a good outsourcing contract almost impossible for even seasoned attorneys </li></ul><ul><li>“ Certainty is generally illusion, and repose is not the destiny of man.” Oliver W. Holmes, The Path of the Law , 10 Harvard Law Review 457 (1897). </li></ul>Importance of Good Agreement Re-emphasized Outsource outsourcing-related decisions! - Do not waste your energy for the outsourcing matters
  27. 27. Thank you! any question/comment to Chaho JUNG at [email_address]