Intellectual Property (IP) Protection

Among intangible issues, intellectual property (IP) protection is one of the most important aspects to be considered when outsourcing to foreign countries, because loss of control over IP poses an extremely high risk to involved companies (Ramanujan / Sandhya 2006, p. 52). Intellectual property rights include concepts like patents, copyright, and trade secrets (Ramanujan / Sandhya 2006, p. 53), which will be examined in greater detail below. Due to exceedingly different rules for dealing with the ownership of intellectual property, issuing from the different legislative systems in each country, the fear of theft of IP is a serious concern for every company planning to outsource parts of their operations. The latter is especially severe, when outsourcing to Asian countries. While most companies are very used to the rules of IP protection within their home country, similar rules might not even exist in foreign countries where development work is done, and even if they do, they are very likely to be very different from what one is used to (Ramanujan / Sandhya 2006, p. 53). As a first step towards the protection of your companies’ intellectual property in foreign countries, it is inevitable to design a contract clarifying the “ownership of intellectual property in materials generated during an outsourcing engagement.” (Ramanujan / Sandhya 2006, p. 53) However, enforcement of this pre-designed contract might not always be possible in an adequate way, as will be pointed out in the following, along with some specific legal problems arising in the outsourcing business.

Consider, for example, an employee leaving a project or company. Clearly, his experience and knowledge will be lost. While for example in the United States, legal agreements between the employer and the employee protect the company from losing their intellectual property into the claws of competitors; this might be not the case in foreign countries. Indeed, IP protection in such cases is quite difficult (Desouza et al. 2004, p. 35). Desouza et al. (2004, p. 35) states that “even in countries where the government feels that it is in their own long-term interest to protect the IP of a foreign investor, this is often not easily done due to legal, cultural, or political issues and/or business practices.” Therefore, companies that have trade secrets should be encouraged to protect them. “Agreements that typically address trade secrets should include clauses relating to non-disclosure of trade secrets, [and] non-disclosure of proprietary information that doesn’t have trade secret status.” (Ramanujan / Sandhya 2006, p. 54) These kinds of agreements become especially important in foreign countries, since general agreements to protect trade secrets, like the Economic Espionage Act (EEA) in the U.S., often do not exist in foreign countries. The EEA of 1996 “makes the misappropriation of trade secrets a criminal offense, and is the first federal law that purports to both broadly define and severely punish such misappropriation and theft.” (Ramanujan / Sandhya 2006, p. 54)

Especially in international software outsourcing the loss of ownership and control over existing intellectual property is a central legal concern. It is important to ensure that the outsourcing company “gains appropriate interests in new software and any other new work product to be created” (Phillips 2002, p. 13) in a foreign country. On the other hand, however, outsourcing vendors will have concerns about the protection of their own IP and moreover “will have an interest in being able to reuse code and other materials on other projects to save time and costs.” (Phillips 2002, p. 13) For this reason, the customer might disclose some of its internal intellectual property to the vendor for specific and limited purposes. This might include the source code for basic software needed for further developments. In the specific case of software outsourcing, it is very important for the customer to retain ownership and control over the existing software provided to the vendor (Phillips 2002, p. 13). Furthermore, the customer needs to “retain ownership of its functional specifications, including any business methods or workflow embodied or reflected in them.” (Phillips 2002, p. 13) On the other hand, the vendor will also at least insist on retaining the ownership of tools and libraries, as well as possible technical specifications developed by the vendor in the course of the project. Therefore, managers should be advised to document all of these terms within a legal agreement. For outsourcing customers it is especially important to require full and exclusive ownership over the developed software or the produced product at the end of a project. This might either be because of the customer being the architect of the software or the software involving sensitive customer data. Another reason may be that the customer wants to sell or license out the software to third parties after production (Phillips 2002, p. 13f)

In the field of intellectual property (IP) protection, the term “territoriality” is a very important one, not only in software outsourcing. U.S. IP laws for patents, copyrights and trademarks are subject to this term, which implies that these laws do often not directly apply beyond U.S. borders (Phillips 2002, p. 14). This in turn implies that the definition, protection, and enforcement of IP rights are, apart from some international agreements, largely within the control of foreign jurisdiction, i.e. the countries in which “the rights are asserted and infringement occurs.” (Phillips 2002, p. 14) Therefore it is extremely important to “examine the legal environment of the country in which outsourced tasks will be performed and determine how that country’s law defines and protects intellectual property rights that are important to the customer.” (Phillips 2002, p. 14) Moreover, effects of foreign law on the customer’s intellectual property ownership within the U.S. have to be considered, too (Phillips 2002, p. 14)

“A patent is essentially an agreement between an inventor and the government. In exchange for full disclosure of the invention, the government grants the inventor the right to exclude others from making, using, selling, offering to sell and importing the patented invention.” (Ramanujan / Sandhya 2006, p. 54) If for example, a patent of a U.S. software outsourcing company is infringed in another country, the owner of the patent can try to enforce it in this specific foreign country, which will of course already by itself lead to “significant cost, effort, and uncertainty.” (Phillips 2002, p. 14) However, the biggest problem in this respect is the fact that IP in foreign countries might not be protected in the same way as outsourcing companies are used to in the U.S. or Europe. Even if in theory the same extent of legislative protection to IP is present, it still might not be the case in practice (Phillips 2002, p. 14). Theory in this respect means, that many countries in major outsourcing locations, like China, have meanwhile signed WTO-administered international treaties aimed at reducing formalities within international patent issues, like the Patent Cooperation Treaty (PCT) and/or the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). In reality, though, enforcement of IP rights remains very difficult, often leading only to small fines and other minor consequences for infringers, as the example of China shows (Rubin 2009, p. 10).

As one of today’s major outsourcing destinations, India illustrates both kinds of legal concerns. Software piracy in India, for example, leads to trade losses of U.S. software companies in the range of several hundred million U.S. dollars per year. The sources of this piracy have often been found to be endemic to the company, which means, that software is stolen mostly by the company’s own employees. Although India has enacted a very modern copyright law already in 1995, enforcement of this law seems to remain low (Phillips 2002, p. 14). Phillips (2002, p. 14) finds that according to the International Intellectual Property Alliance (IIPA) the problem results from the fact that in India these cases can take up to 12 years to be completed, because of its very bureaucratic judicial system. Furthermore, some loopholes still seem to exist in India’s copyright law, because of ambiguous possibilities for interpretation (Phillips 2002, p. 14f).

Besides copyright problems in a foreign country, another potential problem might be relating to “ownership of copyright for purposes of U.S. law.” (Phillips 2002, p. 15) Other than patents, which are subject to the principle of “territoriality” and must always be sought in the country in which infringement happens, copyright is protected equally in any Berne Convention country, to which also India is a member (Phillips 2002, p. 14f). “Regardless of the Berne country in which a work is created, the work is automatically protected against infringement in every other Berne country.” (Phillips 2002, p. 15) However, while many mangers spuriously believe that as soon as for example software programmed in a foreign country for a U.S. customer reaches the U.S., U.S. law will also govern in all respects, in reality, this is not always the case. In some cases, even if infringement of products produced outside the U.S. for a U.S. customer happens in the U.S., ownership of this copyright will still often be determined by the law of the country of production, which can be very different. This is because the product was produced and first published by nationals of that foreign country and thus foreign law applies in some cases (Phillips 2002, p. 15). “Standard ownership clauses in software development agreements typically assume that the US Copyright Act applies to creation and transfer of copyright ownership.” (Phillips 2002, p. 15) The latter is called the work-for-hire doctrine. But because one can only become copyright owner by either being the author or being assigned the copyright, foreign law represents a crucial factor for enforcement (Phillips 2002, p. 16). For example, “under Indian law, a work-for-hire clause in a software outsourcing contract based on an independent contracting model may be ineffectual to cause copyright ownership to vest in the customer, even for purposes of a US infringement action.” (Phillips 2002, p. 16) Therefore, assignment of copyright might become important for U.S. customers, which is however also very complicated under the Copyright Act of India, as it has many requirements and ambiguous possibilities for interpretation (Phillips 2002, p. 16).

To give another example, in the Czech Republic, which is a major IT outsourcing destination nowadays, transfer of copyright is even more difficult. “It appears that Czech law precludes transfer of ownership of copyright in outsourced software to the customer, either as a work for hire or by assignment.” (Phillips 2002, p. 16f) Customers can only get a license for the product but not exclusive rights. This can be a significant problem in the U.S., where one has to be either the owner or the exclusive licensee of the copyright, in order to be able to sue for copyright infringement. Thus, if a customer does not become adjudged one of these two statuses by a foreign countries’ law, the company will not be able to protect its intellectual property from copyright infringement through third parties in the U.S. (Phillips 2002, p.  17).

In conclusion, one can say, that the whole issue of IP protection in foreign countries is so extremely complex that it takes very much time and effort combined with a very good knowledge of international law to cope with all threats for IP during outsourcing projects. Therefore, this composition shall only serve as an overview over some important problem fields and create awareness on certain IP risks in order to encourage people to invest time and effort in getting to know the specific details of foreign law that might apply to their own outsourcing project.