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Can Intellectual Property Survive an Outsourcing deal?

The end of an outsourcing relationship, when the customer wishes to resume control of the relevant services or transfer them to another supplier highlights the importance of ownership …

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The end of an outsourcing relationship, when the customer wishes to resume control of the relevant services or transfer them to another supplier highlights the importance of ownership of, or right to use, relevant and necessary intellectual property, in particular where the relevant services are technology-intensive.

Very often neither of the parties will want to address this position at the beginning of the negotiations when both parties are positive and sure that everything will go well. This is the wrong approach. The parties must address and negotiate what happens at the end of an outsourcing deal, as part of the outsourcing deal and must agree on how and who will own the intellectual property rights that will be created during the outsourcing period so that this can be addressed in the contract. In order to be able to achieve this, it is recommended that, the relevant IP is distinguished in various types and dealt with accordingly.

Typically, the agreement will need to address the following:

  1. New IP: could be contained in software and other IP-rich deliverables, such as documentation or training materials, developed by the supplier specifically for the customer, in order to provide the outsourced services; contracts often refer to such software and IP as “bespoke” or “project-specific”.The supplier may wish to own such IP, if the materials are simply “incidental” to the services. The supplier may also argue that, its ability to provide the best possible services at competitive prices to its customers depends in large part on it being able to develop and enhance its knowledge base, tools and methodologies and that this is best achieved by ensuring that it retains the ownership rights in any new IP, so that this can be freely used on future client engagements.The customer will, in contrast, point out that, it is paying for the supplier to develop the new IP and note that, were it to continue to provide the services in-house, it would own the new IP resulting from them and that the outsourcing relationship should not be any different. The new IP may be specific to its business operations or give the customer a competitive edge and so, be concerned about the supplier immediately applying the benefit of any new developments to the customer’s competitors.The customer will often succeed in negotiating terms under which all new IP “specifically and exclusively” created for the customer immediately vests in the customer. Practically, it is very important to agree how such new IP will be identified and that a contract management process is set up and followed.
  2. Background or Embedded IP: is the pre-existing IP in software components and other materials, which are embedded in (or integral to) the new materials or products developed for the customer.Rather than ownership, the customer is granted a continuing, royalty-free licence to use the embedded IP, even though limited to use within the specific deliverables or products, in which it is embedded. Please note the difference between perpetual and irrevocable licence! A perpetual licence may mean without an end time, but does not mean that is forever!
  3. Third Party IP: Third Party IP is often found in off-the-shelf software or identifiable products licensed separately from the supplier, which are fairly standalone and are likely to be easily replaceable.Things that must be considered and addressed in the contract are:
    • who is responsible for obtaining third party licences;
    • how is the cost of third party licences passed on to customer ; and
    • is the licence to continue after the contract term has expired in sufficiently broad terms so to keep the customer’s option open, regarding the IT services.
  4. Associated IP: is software and other IP items developed by the supplier to enable the customer to receive the services or use deliverables provided to it.The parties will need to determine whether continued use of the supplier’s IP here is essential or simply desirable.Although not typically IP, confidentiality and data protection provisions play an equally important part in an outsourcing arrangement and must be carefully considered. In fact a great number of knowledge will be developed and may only be protectable through a strict non disclosure agreement. The supplier is likely to be required to strip out all customer confidential information, which is not absolutely essential for use of the materials in question and anything in the materials, which expressly identifies the customer.The same principles apply in reverse. While the general rule would be a prohibition on the customer re-using that, information outside the outsourcing context, circumstances do arise, where such continued use is necessary, especially in the event the services are transferred to a third party.

So, the answer to our initial question is that outsourcing could be the end of intellectual property, but this can be avoided if the necessary steps and provisions are taken!