How to Protect IP Rights when Outsourcing

Outsourcing is a well-established phenomenon in today’s global economy. Although initially associated with large, multinational companies, today outsourcing is growing among small-to-medium businesses as well. The key motivations for outsourcing include cutting costs, solving capacity issues and maintaining a clear focus on the core business. On the other hand, outsourcing raises a very critical question: How do I protect my intellectual property rights (IPR) – both for existing IP as well as any new IP that may be created? In this blog, we take a closer look at how to manage potential IPR risks without losing out on the benefits that outsourcing can bring to your company and bottom line.

Determine your IP strategy

Before jumping onto the outsourcing bandwagon, you should do an inventory of the IP that will likely be exposed. If you have third-party licensing agreements, make sure you are free to share the required IP with your outsourcing vendor. Where relevant, strengthen your IP portfolio by registering and filing patents, trademarks and copyrights – not only in your own country, but also in the countries where the outsourcing would take place.

You should also consider defining an initial outsourcing scope of work that does not expose your core IP. After you have established a good working relationship with an outsourcing vendor, you can extend the scope with greater confidence that your business-critical patents will be safe.

Make IP part of your due diligence

Finding the right outsourcing vendor is a long and arduous process. Be sure to make IP an important part of your due diligence, at several levels.

Start with the target countries themselves. Respect for IP rights varies from country to country and you should consider avoiding outsourcing to countries where IP laws are weak or poorly enforced. Two websites where you can gather relevant information are the International IP Index and Country IPR Toolkits, both of which are maintained by the US Chamber of Commerce.

Regarding the vendors, you should ensure that they have well-established procedures and a security infrastructure for protecting sensitive data. Make sure that they do thorough background checks on their employees and properly train them on IPR. While checking out their references, explore their track record of respecting and protecting intellectual property. Verify that they have insurance that will cover them for any damage you may suffer if your IP (including your trade secrets) are compromised.

Key IP issues for outsourcing agreements

When it comes to drafting the outsourcing agreement, there are a number of IP-related issues that should receive special attention. For example, the agreement should contain comprehensive, enforceable non-disclosure and non-compete sections. These issues are particularly important when your IP includes trade secrets.

The ownership of IP is also a critical issue. Not only should the ownership of existing IP be crystal-clear, but it should also be clear who owns any new IP that may be created during the outsourcing. Newly created IP is typically defined as “works for hire” that belong to the company paying for the work. But it is not unusual for outsourcing agreements to include options for mutual licensing of new IP. That’s all well and good, as long as it is clearly spelled out and understood the same way by both parties.

Tip: Organize and file every contract and agreement related to IP for easy future reference, just in case IP conflicts arise.

Establish clear communications

Poor communication is the #1 reason for the failure of an outsourcing project. Language barriers and cross-cultural misunderstandings can undermine the development of trust that is essential for a fruitful working relationship in general and for the protection of IPR in particular. All efforts invested in establishing strong communications in a multilingual, multi-cultural working relationship will go a long way to ensure successful outcomes.