How to Avoid Procuring IP Problems When Procuring IT

1. IP Outsourcing
Problems
William A. Tanenbaum
Chair, IP, Technology and Outsourcing Group
Chair, GreenTech and Sustainability Group
Kaye Scholer LLP
New York and Palo Alto Offices
Copyright © 2012 by William A. Tanenbaum. All Rights Reserved

2. Simultaneous IP Protection
• Different types of IP can apply to different aspects of a single
product or process simultaneously
• Example: for software:
– patent protects the algorithm or process, even if public
– trade secrets protect secret methods
– copyright protects the code and similar versions of it
– trademarks and service marks protect the name, and maybe domain
name
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3. Business Framework for IP Issues
• Two kinds of IT and outsourcing objectives
– Set and Forget = stable, backroom approach
– Competitive advantage = leverage IP as competitive tool
• Choosing one of the objectives leads to different result for
same IP issues
• Cloud Computing changes the analysis, because of “the
Stack”
• Summary: Updating company’s IT Ecosystem
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4. When Do IP Issues Arise?
• Updating IT ecosystem
• Big Bang or incremental improvements
• Using Cloud as Test Bed
• Anticipating Greece – decentralizing an international IT
infrastructure
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5. Problem No. 1: Work Made for Hire
• Is a Work for Hire really a Work for Hire?
• Limitations of the Work Made for Hire Rule
– Copyright “prongs”
– Other IP regimes
• Why getting an assignment is often best
• Providers’ risk
• Due diligence with small providers and Cloud providers
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6. Assignments Generally
• What should the contract say?
• Why should there also be a schedule, and what form should it
take?
• Practical effects of a schedule
• Role in collaborative improvements and joint works
• Due diligence by Customer
• Need to police Task Orders
• Application to the Cloud
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7. Problem No. 2: Chain of Assignment
• Risk: IP “Chain of Assignment” infected by the “virus” of
subcontractors and affiliates who create work product and fail
to convey IP to Provider
– Compounded by offshore work
• Risk: Provider is too small to provide indemnity protection
• Solutions
– Require Customer approval of subcontractors
– Require form and approval of IP assignment from subcontractor to
Provider
– Customer audit rights
– Alternative: direct assignment from subcontractor to Customer
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8. Problem No. 3: Custom Developments
• Pre-existing vs. new IP
• Ownership vs. license rights depend upon overall business
objectives
• When should Provider retain ownership?
– Layered on pre-existing
– What incentives does Customer’s ownership create?
– Impact on price
– Impact on indemnification
– Customer audit rights?
– What license rights protect Customer?
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9. Custom Developments (2)
• When should Customer retain ownership?
– Improvements to pre-existing rights
– Business objective is to leverage IP for competitive advantage
– What requests will Customer’s ownership rights trigger from Provider?
– What IP rights should Customer obtain to protect itself?
• Who can make Derivative Works?
• Use of MSA and Contract documents to allocate IP rights
• Potential problems in Cloud Computing caused by “the Stack”
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10. Problem No. 4: Joint Ownership
• Collaborative improvements
– Common and will increase
• Joint ownership: superficial appeal; hidden problems
– Will your competitor use your technology against you?
– Ownership in what?
– Can trump Customer’s ownership of customizations
– Inventorship vs. authorship vs. trade secrets
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11. Joint Ownership (2)
• Impact of new America Invents Act
– In March 2012 changed from first-to-invent to first-to-file system
• Practical IP patent prosecution problems
• Who controls patent and copyright prosecution?
• Disclosure of trade secrets
• What will you own after patent prosecution?
• Who owns patentable improvements to original collaborative
invention?
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12. Problem No. 5: Required Use of IP by
Customer
• Advantages to Customer:
– Beneficial technology
– IP risks known
– Used across business units
– Used by other Providers in Provider Portfolio
• Risks to Provider
– Risk of infringement
– Interferes with continuous improvement and resell model
• Prediction: will arise in sustainability and supply chain
management outsourcing transactions
– Will move from unusual to common
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13. Required Use of IP by Customer (2)
• Enable Provider to conduct IP due diligence
• Should the Customer indemnify the Provider?
– If so, what limitations on scope should Customer require?
• Should be a license from Customer to provider
– What are important terms?
– What about Provider’s subcontractors?
• If Customer is a sublicensor, risk is that its license will be put
at risk if Provider violates license
• Customer should merge IP license with confidentiality
obligations
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14. Problem No. 6: Scope of License Grant
• Direct vs. indirect Customer needs
• Is it broad enough to cover:
– Relevant parties and business units?
– Relevant territories?
– Relevant emergencies?
• Will it cover future IP?
• Why create a definition of “Use”?”
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15. Problem No. 7: IP Indemnities
• Separate buckets for breach of regular reps and warranties
and for breach of IP and confidentiality reps and warranties
– How to set dollar amount
– Additional bucket for breach during termination assistance phase
• Dollar cap = allocation of risk of IP infringement
• Indemnity cap can be a license to infringe
• Increase caps as scope of services increase
• Provider will want to reduce if scope is reduced
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16. IP Indemnities (2)
• Fact Pattern: Provider has right to terminate entire agreement
if it cannot cure or avoid allegation of IP infringement
• Risk: Termination right is a bridge too far
• Issue: Provider’s system infringes a patent, but underlying
technology standing alone does not
• Solution: Reduce scope of termination right to allow
Customer to use underlying technology apart from system; to
procure license from IP owner; to operate outside of U.S., etc.
• Summary: Infringement “remedies” should preserve not
preclude Customer options
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17. IP Indemnities (3)
• Risk: IP infringement suits threaten Provider ability to provide
services
• Solutions
– Require timely notice of claims, including pre-lawsuit
– Notice given as part of governance meetings to structure a remedy
– Breach of contract in addition to indemnification obligation
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18. IP Indemnities (4)
• Fact Pattern: Customer requires Provider to use specific
technology or IP licensed from third party. Provider wants
indemnifications.
• Solution
– Have Provider seek indemnity from IP owner, not Customer
– Who will retain control of litigation?
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19. IP Indemnities (5)
• Risk presented by minimum threshold requirements for
indemnification obligations
• Minimum threshold favored by indemnitees because
• Eliminates immaterial losses
• Eliminates administrative overhead of addressing numerous small
claims
– Issue is whether each claim must exceed a threshold or whether basket
is satisfied on an aggregate basis
– Note: often different baskets apply to “losses” and to “litigation
expenses”
• Reasons why IP should be exempted from minimum threshold
requirement
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20. IP Indemnities (6)
• Providers sometimes seek to carve out certain patents
– Named specific patents
– Class of business method patents
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21. Indemnities (7)
• Indemnification exception combinations
• Solutions
– Limit exclusions (identify covered combinations, especially when multiple
providers)
– If cannot limit exclusion for combination, then indemnified Party requires
all information from indemnifying party necessary to defend IP
infringement suit
• Access to documents and employees
• Waiver of trade secret and other protections
• Control of litigation
• What is the practical result?
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22. IP Infringement vs. Breach of Contract
• Test = license conditions vs. contractual commitments
• Breach of license condition = IP infringement
– Need to be a breach of right provided by IP license
• Breach of contractual commitment = action for contract breach
only (e.g., breach of covenant)
• Why does it matter?
– Remedy for infringement vs. breach of contract
– Cannot sue for infringement if alleged wrongful act is breach of
contractual commitment rather than violation of IP license
– Otherwise, IP licensor could claim infringement for any violation of
agreement, even violations of non-IP contractual limitations
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23. Problem No. 7: Covenants Not to Sue
• When they are needed
• How to document them
• Cover patent improvements and copyright derivative works
• Should it survive termination of outsourcing agreement?
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24. Problem No. 8: Software Escrow
• Do you need software escrow?
• What goes in escrow?
• What does Cloud Computing change?
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25. Problem No. 9: Data Licenses
• License to use data
– Databases vs. data elements
– Derivative Works
• Algorithms and software to perform Big Data predictive
analytics
• Big Data dashboards and data displays
• IP vs. confidentiality
• U.S. vs. Europe re database protection
• Liability for database breaches
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26. Problem No. 10: Protecting Customer
Information
• Risk: Make RFPs and Provider assessments disclose
company secrets
• Risk: Outsourcing/supply chain enable competitive
intelligence
– Even subcontractors
– Even Facilities Management and government filing of building plans
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27. Protecting Customer Information (2)
• Solution:
– Combine Confidentiality and IP approaches
– IP notices and labels
– Modify public domain exceptions in standard NDA’s
– Contract confidentiality and trade secret provisions
– Need to know
– Background checks (and smart phone camera rules)
– Indemnification for breach
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28. Licensing and New Developments
• Cloud + Big Data + Social Media + Mobile Computing =
Social Business
• “Cloud of Clouds”
• New outsourcing
• Sustainability in mainstream companies and in supply chains
will be IT-enabled and make use of Cloud
• Cloud vs. IT Outsourcing
• Mobile Computing
• BYOD (bring your own device)
• Security as a service
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29. Cloud, Big Data, Mobile, and Licensing
• Cloud vs. IT Outsourcing
– enables Big Data
– Cloud data centers too expensive for even large companies to do
through artisanal IT outsourcing
• Big Data – the three “V’s”
– Volume
– Velocity
– Variety
• Unstructured as well as structured data
• User-provided information
• Green/sustainability
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30. Hypothetical to Illustrate Key Issues
• Property management outsourcing hypothetical
• Underlying city map
• Building locations overlay
• Building interior/mechanicals overlay
• Maintenance records
• Mobile-to-Cloud
• Cloud to legacy records and vice versa
• Tenant PII
– Lease vs. service agreement
– Consent
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31. Data Licensing
• Customer wants historical data to analyze
performance, staffing, price, etc.
• Provider wants historical data to analyze cost, SLAs, etc.
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32. Problem No. 11: Remanufacturing and
the Patent Exhaustion Doctrine
• What is “remanufacturing?”
• Patent exhaustion doctrine
• Permissible repair vs. prohibited reconstruction
• Over-the-horizon issue in cleantech and sustainability:
– Products will be designed to be upgraded with unknown future
improvements (e.g., computer chips not yet invented).
– Will such improvements be remanufacturing of base product, and will
they constitute repairs or reconstructions?
• Solution: contract around repair/reconstruction to support
argument that patentee intended that purchases would
replace or repair base product because of its shorter useful
life
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33. Carbon and Water Rights
• Address water rights, especially in supply chain contracts and
offshore outsourcing arrangements
• Carbon rights are assets and can be monetized
• Allocate carbon rights in contracts now
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34. Questions and Answers
William A. Tanenbaum
Chair, IP, Technology and Outsourcing Group
Chair, GreenTech and Sustainability Group
Kaye Scholer LLP, New York and Palo Alto (not admitted in
California)
wtanenbaum@kayescholer.com
212-836-7661
LinkedIn: http://www.linkedin.com/in/williamtanenbaum
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35. William A. Tanenbaum, Kaye Scholer LLP
wtanenbaum@kayescholer.com
William A. Tanenbaum is the international chair of Kaye Scholer LLP’s
Technology, Intellectual Property & Outsourcing Group and its GreenTech & Sustainability
Group and works in the firm’s New York and Palo Alto offices (not admitted in California).
He was named “Lawyer of the Year 2013” for Information Technology Law in New York.
He was elected by his peers in research conducted by U.S. News & World Report and Best
Lawyers in America. Legal researcher Chambers ranked him in Band One in New York.
Chambers in its survey of clients and peers and found that he “built one of New York City’s
most outstanding transactional IT practices;” that he “brings extreme integrity, a deep
intellect, fearlessness and a practical, world-wide mindset to every problem;” that he is
“efficient, solution driven and makes excellent judgment calls” and that he is “an
acknowledged expert on the convergence of mainstream business with cleantech..”
Legal500 says he is a “high-tech specialist” and “an outstanding attorney with a deep
knowledge and understanding of technology.” IAM Patent 1000 found he is “recognized as
a thought leader across the spectrum of IT and IP transactions.” He is Past President of
the International Technology Law Association, and currently a Vice President of the Metro
NYSIM, the Society for Information Management, which is an association for CIOs, CTOs
and senior IT executives. He chairs or co-chairs legal conferences on Outsourcing, Cloud
Computing, Big Data and Sustainability.
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