article
Protecting IP rights throughout an outsourcing project
23 March 2009
Imagine for a moment you’ve been outsourcing product manufacture
(or research and development, or some other vital service) for a
number of years and are now reaching the end of the contract term.
Rather than renew the agreement, you would prefer to switch to an
alternative supplier, or at least explore the market.
How will you ensure that the next supplier is able to use the
Intellectual Property (“IP”) rights built up over the last few
years whilst the project has been running? How do you make sure
that you continue to own the IP in the project? What about
inventions or know-how contributed by the supplier? What rights do
you have in respect of these? Can you really afford to lose these
rights if you switch supplier?
If these issues are not considered at the start of the contract,
any uncertainty plays into the hands of the incumbent supplier who
could be reluctant to licence rights to a competitor and could
exploit any ambiguity in the drafting to make it more difficult
(and expensive) for a competitor to bid for the next contract
term.
This article will look at the types of arrangement where IP is
shared and what provisions should be made to protect this IP and
the businesses that run them.
Why (not) outsource?
Outsourcing manufacturing has become widespread in recent years
and the benefits are often obvious. A company choosing to outsource
can reduce capital expenditure on plant and machinery, can reduce
fixed costs, and can concentrate on its core business. In the
current economic climate, the cost benefits have meant that many
companies who have for a long time resisted moving production
offshore are now being pushed to transfer manufacturing to
countries with cheaper manufacturing costs.
Clearly, outsourcing comes with its own risks however and there
may be situations where it is arguably never a good idea to
outsource. In the pharmaceutical sector for instance, outsourcing
production of drugs that are soon to come off-patent could simply
give suppliers a head start when it comes to creating a generic
form of the drug. Where research and development is core to the
business and innovation is highly valued the loss of a part of the
business (including potentially a transfer of staff, as a result of
the Transfer of Undertakings (Protection of Employment) (“TUPE”)
Regulations can be very damaging. For all the cost saving benefits,
it is unlikely that an outsourced provider will be as motivated to
innovate and improve technology as a valued in-house team.
Preparing to outsource
The risks of an outsourcing going wrong, particularly where
valuable IP is at stake means that the due diligence exercise
before the agreement is signed is vital, not just for the usual
reasons you would need to carry out such an exercise (e.g. to work
out what the services and services levels are, to obtain relevant
consents, assign necessary contracts or work out to what extent the
TUPE Regulations will apply) but also from an IP perspective to
work out what IP rights and protectable processes and technology
you may be passing to the service provider.
An outsourcing which involves patented processes, technology or
other IP will need to be approached carefully to adequately protect
the rights that need to be licensed, to cater for any IP which may
be created over the course of the contract, to provide remedies if
things do not go to plan, and to allow the contract to wind down
smoothly at the end of its term.
Background IP Rights
Before entering into an outsourcing agreement, it is important
to identify and protect the rights you will be bringing to the
outsourcing and to identify what protectable rights already exist
in your technology that you might need to give access to
(“Background IP Rights”). Having no doubt made a substantial
investment in the development of these rights, you would not want a
competitor to get access to them or for the service provider to
continue to use – or improve upon them post-contract. You may be
able to list the rights in a schedule of registered rights or
applications for rights, or by reference to types of services or
technology. It is also a good idea to keep a record of what you
provide or disclose to the other parties and copies of this
correspondence.
There should be clear provisions in the outsourcing agreement
that reserve ownership in the Background IP Rights to the party
providing them. If the other party or parties to the arrangement
need to use your Background IP Rights in the development,
implementation or supply of the products then they should be
required to obtain the requisite formal user licences under the
agreement. Such licences are typically non-exclusive, royalty free,
and limited to the purposes of the development, implementation
and/or supply of the products and to the duration of the
outsourcing arrangement. It is also worth considering whether any
third party IP will be used; if this is the case, the necessary
licences should be procured.
If the process to be outsourced is such that products cannot be
obtained easily from another supplier, you may need to include
‘step in’ rights that allow you to take over the process in the
event of the Supplier’s failure or are facing financial problems,
particularly if the products are components in a larger
manufacturing process. In order to exercise these step in rights
you may need licences over the Supplier’s Background IP rights.
These issues must be addressed at the outset of any outsourcing
arrangement and not at the end of the relationship when you may
have little or no bargaining power and may be trying to seek
consent from a supplier who may not be minded to co-operate with an
incoming Competitor. There are also a number of practical steps
that can be followed to help protect your position with respect to
the IP rights arising in connection the services being
provided.
Confidentiality and NDAs
Not all information and materials that you have to disclose to
the supplier will attract IP protection but it may be possible to
rely on the law of confidentiality to protect important information
and know-how. Indeed, confidentiality obligations in respect of
background and foreground rights can be another way of helping to
prevent suppliers from providing the same services to your
competitors.
Whether or not a confidentiality agreement is entered into, you
should ensure that confidentiality obligations are included in the
agreement itself, and that you do not disclose any confidential
information until the agreement is signed. You should also be
careful only to disclose information that is necessary for the
development and supply of the product and only to those who need to
see it.
Before disclosing information (even under the terms of a
confidentiality agreement), it is worth taking time to consider
whether you need to actually disclose it at all. Clearly there is
likely to need to be a certain amount of due diligence by the
supplier, who may need access to confidential records. However,
this does not mean that the whole business is fair game, and it is
worth separating data and methods of working that a supplier is
likely to need to know (numbers of staff, service levels etc) and
those that it doesn’t or shouldn’t be aware of (such as sensitive
personal data about employees, input costs or future pricing
strategies).
Where it is likely a supplier may be creating patentable
products, confidentiality is all the more crucial. There may be
little practical benefit in obtaining an assignment of rights in
patentable technology if the service provider is free to disclose
details of this technology and potentially jeopardise a patent
application.
Foreground IP Rights:
Over time, manufacturing processes will be refined and improved,
and the supplier may create improvements, refinements and new
applications and before the agreement is signed, the parties will
need to consider who will own the rights in any improvements and
any rights in new applications or processes developed (“Foreground
IP Rights”). The parties may decide that the ownership of a
Foreground IP Right will depend on who generates or pays for the
improvement, and it could depend on the type of right or type of
technology that is being created.
Practically speaking, you may want to motivate the supplier to
create improvements over the course of its provision of the
service. Unlike employees, an outsourcing provider cannot claim
compensation under s40 Patents Act but without some sort of
incentive is not likely to proactively innovate. This might be a
reward by way of cash payment or right to exploit the foreground IP
rights in other, non-competing areas.
Joint ownership of Foreground IP Rights is generally best
avoided, as it can be complex and inhibiting, and often leads to
problems where there is a dispute between the parties. If the
parties do want to own rights jointly then they must set out
clearly in the agreement their user and exploitation rights
together with how decisions will be made about the rights concerned
and what will happen on termination or expiry of the agreement.
There are clear advantages of taking ownership of the Foreground
IP Rights (in particular having ultimate control of the rights) but
ownership should be distinguished from the right to use those
rights. Just because you may not own the foreground rights does not
mean that you cannot have robust and extensive user rights. Often
hard-fought and emotionally charged positions over ownership can be
undermined by granting wide licences to the other party. You may
need to be creative in looking at licensing of foreground IP
rights, for example, in the pharmaceutical sector – what should
happen if the service provider, over the course of providing the
services finds a new use for your patented drug?
Whether you are the owner of the Foreground IP Rights or not,
what you need to ensure is that you have the right to use the
Foreground IP Rights for the purposes of manufacturing and selling
the products, both during the outsourcing arrangement and when the
agreement ends.
The supplier may try to place restrictions in the agreement on
your use of the foreground rights after the end of the arrangement.
You will need to consider carefully whether any such restrictions
would or could prevent you from receiving the services in the
future other than from that particular supplier and what types of
foreground rights are essential to allow another supplier to pick
up seamlessly where the previous supplier ended the service.
Finally, if you are not taking ownership of Foreground IP Rights
you should still consider what level of involvement you need in the
management of those rights. For example, you would want to be
notified of any potential infringement of the rights or any
allegation that the rights infringe any third party rights. You may
also want the right to join in any proceedings relating to the
rights or to bring proceedings where the owner does not wish to.
Before agreeing to a licence of foreground rights, it is also worth
checking the relevant jurisdictions in which those rights are
likely to be held to see what rights you might have as a licensee
to enforce licensed patents against third parties, as not all
jurisdictions are equal upon this point and these rights differ
even within the European Union.
When it’s over
The parties must consider at the outset who will control the IP
rights when the outsourcing agreement expires or terminates.
As a customer, you will no doubt want to ensure that you have
the right to manufacture the product in-house, or to outsource this
to another supplier. You will also want the right to use or
sub-contract the relevant foreground rights for such purpose and
the requirement that you might have to use background rights owned
by other parties and upon which the foreground rights depend.
Typically, third party licences will be more limited in nature,
but it is important to secure at the outset ‘post agreement
licences’ for the foreground and background rights. If you find
yourself having to negotiate such licences at the end the
arrangement you will not have a lot of bargaining strength. You
could be faced with the dilemma of either paying a small fortune
for the right to use IP rights for something for which you have
already paid or having to set up your manufacturing process again
from scratch. Of course, the discussion that you have with the
potential supplier at the outset might also reveal whether or not
there are issues that you will need to deal with later on and
whether in fact the supplier you have chosen is the right one for
the project.
Depending on the type of products involved, you may either want
to restrict the supplier from using your Foreground IP Rights
entirely or may be prepared to permit the supplier to use the
Foreground IP Rights on the proviso that they do not licence to
direct competitors or in the same field of activity. If this
approach is adopted then you must try to define within the
agreement who will qualify as a competitor so that there is some
degree of certainty for the parties.
As with most issues on outsourcing projects, preparation is
everything and the best time to get the detail right is at the
beginning of a project, when the supplier is keen to win the work,
competition is at its fiercest and you still have the ability to
choose another supplier if you had to. Getting it right in the
early stages can prevent many costly battles later on and mean that
you are not asking yourself awkward questions when looking for the
next supplier.
This article was first published in Patent
World
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