Topic X IP Issues in Outsourcing & Exports: The Challenges

1. Topic XIP Issues in Outsourcing & Exports: The Challenges Chaho JUNG Professor of Law (Patent Law) Chungnam National University Daejeon, Republic of Korea

2. 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

3. What is Outsourcing? Customer (Outsourcer) A company’s retaining a 3rd party to perform some function that was or would be performed by the company itself Transferring a company’s non-core functions to another service providing company so that it can focus on its core business Vendor (Outsourcee)

4. Why is Outsourcing Necessary? Customer (Outsourcer) Logical Reason - efficiency - Empirical Evidence - boom - Vendor (Outsourcee)

5. Why is Outsourcing Necessary? Logical Reason - 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

6. Why is Outsourcing Necessary? Empirical Evidence • 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

7. Why is Outsourcing Necessary? Areas of Outsourcing • 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

8. Outsourcing: KIPO’s Experiences 1st Step: Non-core jobs (cleaning, security) - from the 1980s 2nd Step: Information Technology (KIPOnet) - from the 1990s 3rd Step: Even semi-core function(searching) - from the New Millennium

9. 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

10. Outsourcing: IP Office of Singapore • SurfIP is a special project by the Intellectual Property Office of Singapore (IPOS). As an IP portal that offers a comprehensive suite of services supporting both the layman as well as the professional user, you can: • Research IP Information • Search for Prior Art • Gather Business Intelligence • Monitor Technology • License Your IP SurfIP

11. Merits & Demerits of Outsourcing Merits • 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 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

12. Risk Management of Outsourcing • 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

13. - globalization due to the Internet - indispensable IT network - endless effort to reduce cost in all aspects - great opportunities to expand markets Outsourcing to/from SMEs Outsourcing being common to SMSs - limited human resources and experiences - no expertise accumulated as a multi-player Outsourcing more imperative for SMEs

14. An offshore vendor must show: • - 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!!

15. Due Diligence in Offshoring • 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

16. Estimate on the Success of Offshoring 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)

17. Non-disclosure agreement IP Issues in Outsourcing • 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

18. Practical Protective Measures IP Issues in Outsourcing • 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

19. Ownership of IP Developed During Outsourcing IP Issues in Outsourcing • 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

20. Ownership of IP Developed During Outsourcing IP Issues in Outsourcing Unique Requirements in China • 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

21. Prevention of Unfair Competition in China IP Issues in Outsourcing • 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.

22. Prevention of Unfair Competition in China IP Issues in Outsourcing • 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

23. Infringement of a 3rd Party IP Right: Indemnification IP Issues in Outsourcing • 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

24. - Anything under the sun made by man is perishable. - Divorce is more expensive than marriage if there is no agreement prepared beforehand. Termination Provisions Think of Divorce before Marriage • 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

25. 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?

26. Conclusion Importance of Good Agreement Re-emphasized • 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). Outsource outsourcing-related decisions! - Do not waste your energy for the outsourcing matters

27. any question/comment to Chaho JUNG at chahoj@cnu.ac.kr Thank you!