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

1. What & Why is Outsourcing? 2. Merits & Demerits of Outsourcing 3. Risk Management of Outsourcing 4. Outsourcing to/from SMEs 5. IP Issues in Outsourcing 6. Termination Provisions 7. Conclusion Contents

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

Why is Outsourcing Necessary? Vendor(Outsourcee) Customer(Outsourcer) Logical Reason - efficiency - Empirical Evidence - 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 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: KIPOs 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 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 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 Internet - globalization 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 experiences - limited 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 Offshoring Estimate 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 agreement Non-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 3 rd party -establish monitoring mechanism IP Issues in Outsourcing Practical Protective Measures Practical 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 3 rd party involved? -IP that vendor develops at customers 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 Outsourcing Ownership 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 Outsourcing Ownership 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 China Prevention 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 patents expiration/invalidation -no established rule for disclosed trade secret -it may depend on the contract -you need to clarify that you dont 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 China Prevention 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 partys activity -reasonable allocation of risks and responsibilities is important IP Issues in Outsourcing Infringement of a 3 rd Party IP Right: Indemnification Infringement of a 3 rd Party IP Right: Indemnification

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