Chemistry & Life Sciences

Protecting the Crown Jewels

Minimizing IP Risks when Outsourcing

18.05.2010 -

No Risk - Whether you are outsourcing product development or manufacture, it is crucial to ensure that you have a clear understanding of all intellectual property aspects of the transaction, and that you put in place a well-drafted contract that protects your intellectual property (IP) and ensures adequate rights in relation to any new IP generated. A failure to do so can have many consequences, but at its worst it will mean that you won't own new IP that you had expected to own, and your confidential information could have found its way into the public domain.

This article looks at some of the main IP risks associated with outsourcing product development and manufacture, and sets out some guidance on how a company looking to outsource may seek to minimize those risks. Service providers wishing to position themselves as the "partner of choice" should consider how best to prepare appropriate due diligence materials for a potential customer, and how best to work with their customer to address the IP risks.

What Are The Key IP Risks?

In brief, the key IP risks that you should consider in relation to every product outsourcing project are:

Confidential information risks
• Failing to ensure a suitable (NDA) is in place before you disclose proprietary information to a prospective service provider.
• Disclosing more confidential information than you need to.

New IP risks
• Failing to secure ownership of, or at least a freedom to operate licence under, any new IP created during the course of the outsourcing.

Local IP law risks
• Failing to check your IP position in your service provider's jurisdiction. Intellectual property rights are territorial in nature, so you may not have the relevant rights in your service provider's jurisdiction.

Infringement of third party IP rights
• Failing to assess the risks of your service provider's performance of the contract amounting to an infringement of a third party's IP rights.

Know Your Service Provider

There is no substitute for carrying out thorough due diligence on your service provider. Not only does it inform your decision as to whether or not to use a particular service provider: it is also an essential pre-requisite for preparing a well drafted contract to protect your commercial interests. For example, you should consider:

• the reputation of the service provider;
• who else they work for;
• how robust their internal procedures are;
• what IP of theirs will they use in the provision of services; and
• what rights you may need in the future in relation to their IP.

New IP - The Pitfalls

One of the tasks that can be most difficult when negotiating an outsourcing contract is to agree how ownership of new IP should be allocated. For example, a customer will, very reasonably, want to own all new IP generated that relates to the relevant product. A service provider will want to ensure that it owns all new IP that is generated in relation to, for example, its proprietary process used in the manufacture of the product. This distinction needs to be set out clearly in the outsourcing contract.

It is a common misconception that simply paying your service provider for the services they provide will mean that you own any new IP generated in the provision of the services. In most jurisdictions this is not the case.

It is therefore crucial for a customer to ensure that you set out in the contract which party will own new IP generated in the provision of the services (or how it will be divided between the parties); and that the contract contains an express written assignment of such new IP to the customer. Without such an assignment, the legal ownership of the new IP will remain with the service provider.
Where the parties run into difficulties agreeing how ownership of new IP generated should be allocated, one compromise that may at first seem attractive is joint ownership. While this is perfectly possible from a legal perspective, there are a number of potential difficulties with joint ownership that should be given careful consideration.

Joint Ownership Of IP

One of the biggest potential pitfalls in relation to joint ownership is that the rules that govern it vary from jurisdiction to jurisdiction. While in one jurisdiction a joint owner may be able grant a licence under its share of the IP to a third party without the other joint owner's consent, this will not be possible in another jurisdiction without such consent.

For example, the default statutory regime in England is that, unless all joint owners agree otherwise, a joint owner may not license, assign or mortgage its share of the joint IP without the consent of the other joint owner(s). In Germany, consent of the joint owners is required for licensing and assigning of the joint IP but not for the assignment of the share of the co-owner. This means, for example, that a joint owner cannot prevent the other co-owner from selling its share to a competitor.

The simplest solution is for the joint owners to agree in advance what their rights are in relation to the joint IP. Such an agreement between joint owners should cover a number of important points, including:

• each joint owner's ability to license, assign or grant security over their share of the joint IP; and
• which joint owner should be responsible for the filing, prosecution, maintenance and enforcement of the joint IP, and how the related costs should be divided between the joint owners.

Freedom to Operate - Make Sure You Always Preserve Yours

One of the most important points to cover in any product outsourcing arrangement is your freedom to operate. You don't want to find that, if the relationship with the service provider doesn't work out, you are left unable to exploit your IP because you are blocked by some of your service provider's IP over which you have no rights. As a minimum, ensure that you have:

• a non-exclusive licence of any improvements made as part of the provision of the services and which you are not otherwise entitled to own pursuant to the outsourcing contract; and
• a non-exclusive licence of any of the service provider's IP that you reasonably need in order to use and otherwise exploit the product developed or made pursuant to the outsourcing contract.

Confidential Information

Proprietary rights in confidential information are even more vulnerable than registered IP rights. In many countries, know-how theft is not legislated for, whether by criminal or by civil statute. This means that there are no statutory remedies once control over confidential information has been lost. In these countries contractual sanctions and physical security measures are the only means to protect confidential information and secret know-how.

Before disclosing any secret know-how or confidential information a cooperation agreement or at least an NDA should be in place that is carefully drafted and includes at least the following provisions:

• Clear and controllable obligations to ensure and protect confidentiality
• Clear and enforceable sanctions for any breach of confidentiality
• Right to audit regularly to confirm compliance

Even a perfectly drafted agreement, however, cannot prevent the loss of secret know-how, but only provide for remedies and sanctions. Furthermore, in many countries the enforceability of contractual provisions is still unpredictable, slow and costly. It is therefore crucial to supplement the contractual protection of the confidential information with practical security measures. Control of the confidential information is key. You should, for example,

• check the reliability and track of cooperation partner and clearly identify employees that have access to confidential information;
• limit disclosure to the confidential information what the partner needs to know and keep essential know-how in-house;
• clearly identify and record all know-how disclosed; and
• protect the confidential information by technical means (e.g. security check, access control to documents, copy protection, monitoring of the work site by electronic devices).


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