IP Considerations in Outsourcing Agreements

Transcription

1 IP Considerations in Outsourcing Agreements Speakers: Moderator: Diana Mansour, Associate, Gardner Roberts LLP Mathew Snell, GTS Canada Senior Counsel, IBM Canada Ildiko Mehes, VP and General Counsel, Teva Canada Carol Hitchman, Partner, Gardiner Roberts LLP Date: April 16, 2013 Note: The views expressed are those of the various authors and presenters and do not necessarily represent the views of their respective organizations.

2 Consider and anticipate who, what, where, when, why and how questions 2

3 Agenda 1) Introduction 2) Types of IP 3) Due Diligence 4) Ownership of IP 5) Confidentiality 6) Contract Terms 3

4 Outsourcing can be generally defined as a means of marrying efficiency with innovation, which requires managers to consider the following: time-cycle and cost reduction, levering scale and scope, reduction of resources, partners as role models for change, and reduction of risk. Prahalad,C.K. and Ramaswamy, Venkatram (November 2001). The Collaboration Continuum. 4

5 Outsourcing Any task, operation, job or process that is contracted out to a third party Functions that are performed by the third party can be performed on-site or off-site Domestic or offshore Fairly complex to very complex 5

6 Examples of Different Types of Outsourcing Technology Services, which include information technologies (applications hosting, telecommunications (voice and data), logistics, etc.); electronics (semiconductor chips; high-value microprocessors); electronic commerce, etc. Business Process Outsourcing, which deals with differentiated activities, such as finance and accounting, procurement and supply, customer contact (customer relations management), human resources, security, etc. Research and Development drug and product development in the pharmaceutical and biotechnology industries (e.g., clinical trials) Patent application drafting and prosecution Legal services 6

7 Donna Ghelfi: The Outsourcing Offshore Conundrum: An intellectual Property Perspective, See 7

8 Benefits of Outsourcing Gain access to specialized skills and technologies Higher quality through access to the most quality providers Maintenance of cutting edge technology Knowledge acquisition and utilization Creation of strategic partnerships and alliances Possible faster time to market Faster response to changing market needs Pay for skills only when and where needed May be less expensive 8

9 Benefits of Outsourcing Focus of resources on core business (third party on non-core functions) Improve service quality and efficiency, while reducing overall costs Flexibility regarding personnel and other resources Improved productivity and services Gain control over difficult functions reducing uneven workloads, insufficient or unskilled resources Expand and contract resources quickly and easily Share investments and risks with third party Business may have a shortage of manpower Enhancement of operational efficiency Improved financial results through cost management, access to resources, expertise and technologies not available internally 9

10 Risks of Outsourcing Disclosure of trade secrets, know-how and associated technologies and business methods Loss of protection of IP Loss of ownership in IP Loss of control of outsourced function Compliance with international laws and regulations Enforcement of rights Cost savings may only be realized over time Cultural incompatibilities with the service provider 10

11 Types of IP in Outsourcing The particular business function being outsourced will determine what kinds of intellectual property are significant 11

12 Patent Examples If outsource function is R&D patent protection for possible inventions, know-how, developments, improvements If outsource function is Product Design and Development - patent protection possible for actual product developed and methods used in its design/development/manufacture If outsource function is Software Development patent protection possible for software (e.g., business method) 12

13 Trade Secret Examples If outsource function relates to inventions, designs and assembly related know-how, marketing and financial information, etc. If outsource function is to develop software If outsource function is to provide customer service functions such as marketing, customer service call centers, accounts receivables and collections, order fulfillment or warranty service, etc. If outsource function is to provide support services or assume performance of key internal operational functions such as IT management, payroll, human resources management, supply chain management, and accounting, etc. 13

14 Trade Mark Examples If outsource function requires outsource provider to interface with consumers using customer s trademark(s) If outsource function requires outsource provider to sell developed and manufactured products to consumers using customer s trademark(s) 14

15 Copyright Examples If the outsource function involves the creation and/or reproduction of graphics, work product, training materials and other creative works If the outsource function involves the development of software applications 15

16 Confidential Information and Trade Secrets Outsourcing requires the sharing of a wide array of proprietary knowledge Outsource provider may disclose confidential information and trade secrets Value of a trade secret rests in the company s ability to keep relevant information confidential. Once a trade secret is made public, it will be lost permanently and, in most instances, so will the competitive advantage linked to it 16

17 IP Due Diligence Inquiry (non-exhaustive) 1. What is it? Identify and document type of IP: trade secrets, patent(s), industrial design(s), trademark(s), copyright, and related right(s) file IP protection where necessary 17

18 IP Due Diligence Inquiry (non-exhaustive) 2. Who owns it? Identify inventor(s), creator(s), or author(s) of the IP Identify ownership rights in the identified IP 18

19 IP Due Diligence Inquiry (non-exhaustive) 3. Do any Agreements cover it? Identify contracts or other agreements associated with the IP (e.g., technology transfer or licensing agreements; confidentiality and non-compete agreements) Identify assigned or licensed IP (e.g., ascertain the rights granted to each party, any restrictions on use, and detect existing and potential sub-contracting issues) 19

20 Business Due Diligence Inquiry (non-exhaustive) Gain a comprehensive understanding of the current state of the business Identify business objectives, risks and criteria for success (e.g., R&D, cost reduction, cost certainty, etc.) Strategic considerations (e.g., start up, strategic milestones) Agreement structure (master agreement with added agreements or one holistic agreement) 20

21 Once Internal Due Diligence completed Begin process of finding and selecting outsource provider (conduct external due diligence inquiry of potential outsource provider) Consider legal, economic and political environment of potential outsource provider s country (if not considering domestic partner) Recognize enforcement of IP rights varies between jurisdictions 21

22 In Negotiating Outsourcing Agreement consider: Ownership of IP Pre-existing IP Improved IP Newly Created IP Confidential Information Disclosure and Protection 22

23 Ownership of IP Clearly Define all IP Clearly Identify Ownership Rights in all IP, for example, Pre-existing IP Improved IP Newly created IP Consider know-how, confidential information, etc. 23

24 Pre-existing IP of Outsourcer Outsourcer s IP existed before the Outsourcing Agreement IP previously developed and owned by the outsourcer and used to perform the outsourced function. IP previously licensed to the outsourcer by a third party and used to perform the outsourced function. 24

25 Pre-existing IP of Customer Customer s IP existed before the Outsourcing Agreement IP developed and owned by the customer that the outsourcer needs to use. IP licensed to the customer by a third party that the outsourcer needs to use. New or add-on IP developed by the customer during the term of the agreement and provided to the outsourcer to perform the outsourced function. New, upgraded or add-on IP licensed by the customer during the term and provided to the outsourcer for use to perform the outsourced function. 25

26 Ownership of Pre-existing IP typically, will continue to be owned by the party who created it or owns it at time enter into outsourcing agreement a license to use pre-existing IP should contain appropriate field of use limitations and may be exclusive or non-exclusive, etc. 26

27 IP Developed During Outsourcing Agreement (Improved or Newly Created IP) New or add-on IP developed by the outsourcer specifically for the customer s account and paid for by the customer. New or add-on IP developed by the outsourcer primarily for use in the outsourced business but that may have applications for other customers of the outsourcer. New, upgraded or add-on IP licensed by the outsourcer specifically for use in the customer s business and/or to perform the outsourced function. 27

28 Ownership of Improved or Newly Created IP will the IP created by a party vest in that party, will the IP be owned by the customer who contracted for the services, will the IP be jointly owned, or will the parties agree to allocate ownership of the IP in some other manner? 28

29 Ownership of Improved or Newly Created IP Options: One party owns all intellectual property; other party can use it through a negotiated license agreement Joint ownership Negotiate ownership of different assets based on each parties current and future business needs and geographic location(s) 29

30 Issues with Jointly Owned IP Important to review and understand the rights and obligations of joint owners under applicable national laws. For example, Rights of Patent Joint Owners (co-owners) Canada: each co-owner may independently make use of the patent rights themselves or assign the entirety of its patent rights to a third party; however, they cannot dilute the patent rights of other co-owners by licensing only some of the rights to a third party without the consent of any other co-owner. United States: each co-owner may fully exploit the patent rights without permission of or accounting to the other co-owners. Through the exercise of these rights a patent co-owner may dilute the patent rights of all other owners, for example through multiple licensing agreements. 30

31 Issues with Jointly Owned IP Default rules regarding joint ownership of different intellectual property Overseeing application, registration and maintenance of jointly owned IP Enforcement of jointly owned IP Examples: What if one party wishes to apply for a patent in a jurisdiction where the other joint owner does not see the value of obtaining patent protection? What if one joint owner wants to sue a third party (who happens to be the other joint owner s best customer) for infringement, but the rules of the jurisdiction where the action is to be brought require all joint owners to join as parties to the infringement claim? 31

32 Confidential Information Confidential information, including trade secrets, owned by the customer or belonging to a third party and in the control of the customer. This could also include personal information in the custody of the customer that relates to its own customers or employees and that may be subject to federal or provincial privacy legislation. 32

33 Three Types of Confidentiality Obligations: 1. General confidentiality Restricted to using and disclosing on a need-to-know basis Confidential information only to be used for the purposes of the contract Liability for unauthorized disclosure 2. Personal Information 3. Data Security Avoid inadvertent or accidental disclosure Review the integrated security and/or internal protection program of the outsourcing partner 33

34 Issues to Address in Outsourcing Agreement re: Confidential Information Definition of Confidential Information Restrictions on the disclosure and use of Confidential Information Third Party recipients of Confidential Information Return or destruction of Confidential Information on expiration or termination Personal Information 34

35 Issues to Address in Outsourcing Agreement re: the Confidentiality Obligations for the parties respective confidential information for any third party confidential information in the customer s control that will have to be shared with the outsourcer and vice versa for personal information, determine whether it can be disclosed to the outsourcer at all without the necessity of the customer obtaining new consents and decide whether the disclosure of the information to the outsourcer fits with the customer s privacy policy cont d 35

36 Issues to Address in Outsourcing Agreement re: the Confidentiality Obligations cont d for personal information in the control of the customer that will be accessed and used by the outsourcer. Keep in mind that the various statutes for the protection of personal information will usually provide that the customer remains liable for the protection of that information even if it is in the hands of an outside contractor. Obtain assurances from the outsourcer that it will comply with the customer s privacy policies and the relevant legislation and address liability and remedies for any failure of the outsourcer to execute its obligations which may include special treatment beyond general contractual breach determine whether a prior head s up to the relevant privacy commissioner would be advisable 36

37 Issues to Address in Outsourcing Agreement re: the Confidentiality Obligations cont d Outsourcing can lead to a blurring of the line between true duties of confidence (i.e. an obligation not to misappropriate the other parties confidential information) and duties to secure and care for information which is being used/processed as part of the service The duty of confidence (not to misuse or misappropriate information) should be absolute and remedies should not be limited contractually for this type of conduct. 37

38 Issues to Address in Outsourcing Agreement re: the Confidentiality Obligations cont d Duties of care around information, including agreed to data security obligations, are more in the nature of performance obligations and should be subject to usual agreed to liability limitations under negotiated contract although there may be the need to create some stretch obligations given the sensitive nature of the information Critical in this is the need for the Vendor and Client to work together to establish the protocols and security, particularly those needed by the client to support their regulatory (including privacy) obligations as they can t, and should not, outsource accountability for those 38

39 To Minimize Confidentiality Risks Enter into a confidentiality/non-disclosure agreement at the negotiation stage prior to disclosure of confidential information Review data security and IP protection practices of potential outsourcing partner and processes to protect confidential information Provide outsource provider with only the minimum proprietary technology or data needed to carry out function Include the ability of the customer to audit the security measures taken by the outsourcer to protect the customer s IP, Confidential Information and Personal Information. 39

40 Dispute Resolution and Enforcement of IP Rights The effectiveness of and time and resources needed for using the legal and administrative mechanisms for dispute resolution and enforcement of IP rights vary depending on the country and the type of IP asset involved. Consider how disputes will be resolved and enforced. For example, Governing law of the contract Jurisdiction where disputes will be adjudicated Dispute resolution mechanisms - mediation, arbitration, litigation Enforceability - realistic assessment of the challenges of enforcing IP rights depending on jurisdiction of outsource provider 40

41 Representations & Warranties Representations and warranties play an important part in licensing intellectual property pursuant to an outsource relationship. Examples include, representations and warranties that: the subject IP is valid and in force no exclusive right, privilege or license has been granted to a third party with respect to the use of the subject IP. any know-how and trade secrets will be safeguarded from disclosure using the highest degree of care the Licensor owns and has a right to use the IP and that the use does not infringe or conflict with the rights of others (see next slide for alternative rep & warranty) 41

42 Representations & Warranties Alternatively, instead of non-infringement rep and warranty, the vendor may offer an infringement indemnity which: Defends the client from any claims. Permits the vendor to solve the issue by obtaining a right to use or replace/modify the infringing article/process so as to render in noninfringing and if that is not commercially reasonable cease the impacted service with an appropriate reduction in price Excludes from these rights/remedies infringement based on combinations by the client that are not authorized/agreed to 42

43 Indemnification There is a risk that the activities and conduct of an outsource partner may result in liability to third parties. For example, third party liability arising out of misuse of products or services in connection with trademarks licensed by the customer and liability or losses sustained by one party as a result of the other infringing the intellectual property rights of a third party. Determine the respective responsibility of the parties for infringement actions (claims or defences) relating to their own IP and their respective liability relating to third party IP used in the outsourcing arrangement An indemnification and hold harmless provision in the outsource agreement would allow the innocent party to recover from the wrongdoing party for any losses suffered from claims made by third parties 43

44 International Law Issues In international outsourcing, the parties must consider the various laws and regulations which may be applicable to intellectual property rights and their use. Many countries regulate foreign inbound investments and transfers of technology. If goods or technology are to be exported, then export control laws must be considered as well as any import controls such as tariffs and quotas. 44

45 Termination Decide what use the customer and outsourcer can make of the existing, improved, and new IP after termination The outsourcer may agree that the customer can obtain a license from the outsourcer for future use of the outsourcer s IP, but may strenuously object to the customer providing that IP to a new outsourcer. Decide to what extent the outsourcer can use the customer s existing IP with outsourcer s other customers Decide return/destruction of confidential information 45

46 Success of an outsourcing relationship depends upon an integrated, clear, precise, detailed and comprehensive contract that outlines expectations, allocates risk, and anticipates potential issues and on mutual trust and commitment between the parties. 46