Originally published in Patent Strategy & Management, October 2006

In today's global marketplace, an increasing number of technology driven companies include R&D outsourcing as part of their business practice. Some industry sectors even consider the viability of technology outsourcing as a prerequisite to any high-impact business plan.

Many technology outsource providers base themselves in Southeast Asia and, more specifically, India. In fact, according to a recent Newsweek publication, more than 125 of the Fortune 500 companies now possess R&D bases in India, and far more share technology-outsourcing relationships with Indian companies. This phenomenon may be attributed, at least in part, to India's thriving economy and its highly talented (and more affordable) English-speaking workforce. Regardless of the rationale, these outsourcing relationships, based as they are on innovation, implicate a host of intellectual property concerns related to patents.

Any R&D outsourcing relationship with an Indian provider therefore necessitates the need for competent and experienced patent counsel, from early contract deliberations to later patent filing strategies. The success or failure of an outsourcing relationship may, in fact, depend on a practice of identifying and addressing relevant considerations early on in the business process. Though by no means exhaustive, the points discussed below should be considered in any business plan.

Contract Considerations

Ownership of Future Patents

Ownership inherently depends on the relationship shared between the delegating company and the outsource provider - eg, captive firm versus developmental partner.

In the captive-firm model, the delegating company generally assumes greater control, and with that, ownership of any future patent rights. Because tax considerations often play an important role in determining actual ownership of patents a delegating company may exercise ownership indirectly. Alternatively, in the developmental-partner model, the participating companies remain separate entities, with decisions on ownership varying based on the particulars of the outsourcing relationship. For instance, ownership may still reside with the delegating company, or it may be divided or jointly shared between the companies.

Examples of divided ownership include divisions based on inventing entity (inventor-owned) or subject matter (subject matter-owned). In their simplest forms, these alternatives provide basic guidelines for determining ownership. Issues, however, may arise when innovations evolve from joint efforts or transcend a variety of identified subject matters. These joint efforts or shared subject matter may lead to joint ownership, which introduces additional complexities and considerations. For example, in the context of joint ownership of patents, the participating companies should determine: 1) responsibility for deciding which innovations will lead to the filing of applications and in which countries these applications will be filed; 2) responsibility for obtaining any applicable foreign-filing licenses (eg, joint inventors in the United States and India) and prosecuting the applications; and 3) responsibility for the maintenance and potential enforcement and licensing of any issued patents.

Licenses to Background and Foreground Patents

Because the outsourcing relationship centers on R&D, licenses to background and foreground intellectual property should be considered and explicitly addressed. Background intellectual property includes those rights already obtained by the participating companies before entry in the relationship, while foreground intellectual property addresses future rights that may later result from the outsourced task.

Irrespective of the technology sector, some background intellectual property will likely come into play, whether owned by the delegating company or the outsource provider. Taking the example of background patents owned by the delegating company, the Indian provider may require access to this intellectual property to perform the outsourced task. To avoid conflict or confusion, the delegating company should delineate this background intellectual property through licensing provisions addressing, at a minimum, scope, term, and limitations on use.

Shifting focus to the delegating company's future use of the developed technology, should the outsource provider retain ownership to any relevant patents — eg, background or foreground — the delegating company should address future access to this intellectual property when it stands as a prerequisite to continued use of the developed technology. And this grant of future access should extend beyond the temporal limits of the outsourcing relationship itself (see discussion below).

Termination Transition Plan

Termination of the outsourcing relationship is inevitable, whether through successful completion of the outsourced task or through premature termination based on irreconcilable differences. Regardless of the scenario, the outsourcing contract should consider future use of technology, and more importantly, continued access to any background or foreground patents, especially in the event of an unforeseen change in outsource providers. For example, an agreed-upon transition plan, including transfer or knowledge to the new outsourcing provider, may prove critical in avoiding prolonged operational interruptions. Additionally, to avert delays in any pending patent applications, the outsourcing participants should address the post-termination involvement of the original provider in the patenting process (eg, signing of papers, assignments, etc.)

Patent Considerations

Patent-Filing Strategies

India's current law requires that for any innovations originating in India or involving an Indian resident inventor, applications for patents must first be filed in India, absent a preliminary grant of a foreign filing license. Unfortunately, patent prosecution at the Indian Patent Office and patent enforcement in the Indian courts remain slow.

With these considerations, any initial filing in India should presume a more global approach. This may include later patent filings in the delegating company's home country and other international markets of commercialization, whether through manufacture or distribution of the patented technology.

U.S. Standards of Patentability

Assuming a subsequent U.S. filing, the initial Indian application meet standards of patentability provided by U.S. patent law, to ensure priority. For example, the as-filed Indian application should satisfy U.S. standards of written description, enablement, and best mode.

Also, the later-filed U.S. application must satisfy the duty of disclosure owed to the U.S. Patent Office. Given that the Indian provider may not recognize this duty, the delegating company should explain it, with processes provided in the outsourcing contract to ensure conformance. And since this duty of disclosure continues throughout the U.S. prosecution, the partnering companies should proactively review any corresponding applications for relevant prior art.

U.S. Interference Practice

In contrast with India's first-to-file system, the U.S. remains a first-to-invent system, providing for detailed interference proceedings to determine priority of invention, once contested. Through these proceedings, even though an applicant may have filed the application after another, the applicant may still obtain patent rights through proof of earlier conception and diligent reduction to practice. These proofs typically come in the form of documents adhering to strict evidentiary standards. Notably, these documents need not be prepared in the United States, as priority of invention may be shown through activities abroad, provided they occur in a WTO country, such as India. Since such documents have little relevance to India's patent system, the Indian outsource provider likely will not appreciate them. Again, the delegating company should educate the Indian provider, possibly including procedures in the outsourcing contract for maintaining documentation of innovations that satisfy the dictates of U.S. interference practice, so as to prevent the unnecessary loss of any U.S. patent rights.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.