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Topic XIP Issues in Outsourcing & Exports: The Challenges

Chaho JUNGChaho JUNGProfessor of Law (Patent Law)Professor of Law (Patent Law)Chungnam National UniversityChungnam National UniversityDaejeon, Republic of KoreaDaejeon, Republic of Korea

1. What & Why is Outsourcing?2. Merits & Demerits of Outsourcing3. Risk Management of Outsourcing 4. Outsourcing to/from SMEs5. IP Issues in Outsourcing6. Termination Provisions7. Conclusion

Contents

What is Outsourcing?

VendorVendor(Outsourcee)(Outsourcee)

A company’s retaining a 3rd party to perform some function that was or would be performed by the company itself

CustomerCustomer(Outsourcer)(Outsourcer)

Transferring a company’s non-core functions to another service providing company so that it can focus on its core business

Why is Outsourcing Necessary?

VendorVendor(Outsourcee)(Outsourcee)

CustomerCustomer(Outsourcer)(Outsourcer)

Logical ReasonLogical Reason- efficiency -- efficiency -

Empirical EvidenceEmpirical Evidence- boom -- boom -

- The same reason why international trade is more efficient than local self-supply

- Somebody can do the same job more efficiently or with lower cost

Why is Outsourcing Necessary?

Logical Reason

- Up to 80% of leading enterprises will include outsourcing in their biz. by 2005

- The US IT industry will save $390 billion by 2010 through offshore outsourcing software development

- In the USA alone, $100 billion revenue in 2000 and up to $200 billion by 2005

Why is Outsourcing Necessary?

Empirical Evidence

- IT Industry has led outsourcing boom- the easiest & most profitable field

- Proliferates deeper & wider- offshore outsourcing being common- outsourcing common to SMEs- even in the biz. of the Patent Offices

Why is Outsourcing Necessary?

Areas of Outsourcing

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

Outsourcing: IP Office of Singapore

Even Core Business

- Outsourcing patent examinations to other big Offices which are more efficient in examinations

- Without substantive examination, recognizing examination results of some reliable Offices

- Focusing on the area where it can be more efficient than other Offices

Outsourcing: IP Office of Singapore

SurfIP

SurfIP is a special project by the Intellectual Property OfSurfIP is a special project by the Intellectual Property Office of Singapore (IPOS). As an IP portal that offers a cofice of Singapore (IPOS). As an IP portal that offers a comprehensive suite of services supporting both the laymmprehensive suite of services supporting both the layman as well as the professional user, you can: an as well as the professional user, you can:

• Research IP Information Research IP Information • Search for Prior Art Search for Prior Art • Gather Business Intelligence Gather Business Intelligence • Monitor Technology Monitor Technology • License Your IP License Your IP

Merits & Demerits of Outsourcing

- Efficiency- There is somebody around the world who can do this

job more efficiently than I myself do

- Risk Distribution- Vendor is better in dealing with concerned risks

Merits

Demerits

- Complex legal Issues, especially in IP matters

- Disclosure of important information to vendor

- I am the best in the world in solving my own problem

- Vendor as a young tiger- future competitor in the core business

- Vendor as a trouble maker- liability for the torts caused by vendor- important information leaks outside

- Vendor with different understanding- in cultural and legal matters

- Very complex legal issues- many areas of law- even laws of 2 countries in offshoring

Risk Management of Outsourcing

Outsourcing to/from SMEs

Outsourcing being common to SMSs

Outsourcing more imperative for SMEs

- - globalization due to the Internetglobalization due to the Internet - indispensable IT network- indispensable IT network - endless effort to reduce cost in all aspects- endless effort to reduce cost in all aspects - great opportunities to expand markets- great opportunities to expand markets

- - limited human resources and experienceslimited human resources and experiences - no expertise accumulated as a multi-player- no expertise accumulated as a multi-player

- government support - infrastructure- communications - location- labor pool features - country law- English proficiency - company history- cultural compatibility - managers profiles- labor cost advantage - etc.- quality control system- tech. capabilities- business capabilities Reliability!!

An offshore vendor must show:

- Limited sources of information about the other party in a foreign country

- use, if necessary, informal investigation service

- confirm that vendor actually has the staff and facilities necessary or it may subcontract

- employee background check necessary

Due Diligence in Offshoring

- Among polled 5,231 Executives across North America & Europe:

- 45% as success- 36% as failure

“Offshore 2005 Research: Preliminary Findings and Conclusions” (Ventoro, October 2004)

Due Diligence in Offshoring

Estimate on the Success of OffshoringEstimate on the Success of Offshoring

- Timing- at the very first contact with the other party

- Subject Matter- all information from one to the other party- patent applications, trade secrets, etc.

- Duration- for at least 3 – 10 years unless written

permission to disclose it sooner- Exclusion

- the information disclosed to the public without a fault of the vendor

- the information already beheld by vendor

IP Issues in Outsourcing

Non-disclosure agreementNon-disclosure agreement

- fragment work among several vendors so that no single vendor has a complete picture of it

- demand vendor to do “reasonable effort” to protect your trade secret

- due classification of confidential information- restricted access- education & awareness- the same rule applies to downstream 3rd party

- establish monitoring mechanism

IP Issues in Outsourcing

Practical Protective MeasuresPractical Protective Measures

- Issue- who owns the IP developed during agreement?

- IP that vendor develops to provide services- vendor typically claims ownership- customer may receive a “use” license

- continued license after termination?- there is any 3rd party involved?

- IP that vendor develops at customer’s request- customer typically claims ownership

- or at least strong license to use it- vendor may insist on “license-back” grant

IP Issues in Outsourcing

Ownership of IP Developed During OutsourcingOwnership of IP Developed During Outsourcing

- Government approval required for assignment of patent rights to foreign entity

- Assignment must be recorded with the State

Intellectual Property Bureau- Recording with foreign trade bureau may also be

required

- Basically, any technology contract with a Chinese vendor is subject to the relevant regulations governing approval and/or registration of technology import and export

IP Issues in Outsourcing

Ownership of IP Developed During OutsourcingOwnership of IP Developed During Outsourcing

Unique Requirements in China

- Contract cannot demand a Chinese vendor:

- tie-in (purchase of unnecessary item)- payment of royalty for expired or invalidated patent- no improvement of imported technology- no obtaining of similar technology from other

sources- unreasonable restriction in choosing channels for

purchasing necessary items- unreasonable restriction of production volume, sale

prices, production types, etc.

IP Issues in Outsourcing

Prevention of Unfair Competition in ChinaPrevention of Unfair Competition in China

- Payment of Royalty for Expired/Invalidated Patent & Disclosed Trade Secret?

- no need to pay royalty for expired patent- if there are 2 or more patents concerned,

royalty must decrease after a patent’s expiration/invalidation

- no established rule for disclosed trade secret- it may depend on the contract- 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

IP Issues in Outsourcing

Prevention of Unfair Competition in ChinaPrevention of Unfair Competition in China

- No golden rule- vary greatly depending on the scope of the services

provided and the size of the deal

- Typically

- one party wants the other party to defend and indemnify against claims that arise out of the other party’s activity

- reasonable allocation of risks and responsibilities is important

IP Issues in Outsourcing

Infringement of a 3Infringement of a 3rdrd Party IP Right: Party IP Right: IndemnificationIndemnification

Termination Provisions

Think of Divorce before Marriage

- - Anything under the sun made by man is Anything under the sun made by man is perishable.perishable.

- Divorce is more expensive than marriage if - Divorce is more expensive than marriage if there is no agreement prepared beforehand.there is no agreement prepared beforehand.

- the grounds for termination- the recovery procedure to avoid termination- the kind & period of notice required for termination- provisions which will be effective after termination

-warranties, indemnification, confidentiality, etc.- non-competition clause

- Possible Scenario- 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

- Non-competition clause- for a reasonable period (2-3 years)- must be effective under the applicable law

- there is non-competition compensation?

Non-competition Clause

Conclusion

- Very complex issues today and tomorrow- The unavoidable uncertainty makes drafting a good

outsourcing contract almost impossible for even seasoned attorneys

- “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).

Importance of Good Agreement Re-emphasized

Outsource outsourcing-related decisions!

- Do not waste your energy for the outsourcing matters

Thank you!

any question/comment toany question/comment toChaho JUNG atChaho JUNG at

chahoj@cnu.ac.krchahoj@cnu.ac.kr