[6] Outsourcing_IT_Outsourcing_and_Intellect.docx

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   Outsourcing, IT Outsourcing and Intellectual Property Rights issues. By Christiana Aristidou, DEMOCRITOS ARISTIDOU & CO LAW FIRM   -INTRODUCTION  –   OUTSOURCING -INTELLECTUAL PROPERTY  –   INTELLECTUAL CAPITAL -INTELLECUAL PROPERTY CREATED  –   INTELLECTUAL PROPERTY TO BE IMPROVED AND/OR TO BE CREATED -NEGOTIATING THE OUTSOURCING AGREEMENT  –   ISSUES AND CONCERNS  –   INTELLECTUAL PROPERTY DUE DILIGENCE  –   INTELLECTUAL PROPERTY AUDIT -IT OUTSOURCING AND INTELLECTUAL PROPERTY RIGHTS -SOFTWARE OWNED BY CUSTOMER  –   ISSUES AND CONCERNS SPECIAL CONCERNS REGARDING THE INTELLECTUAL PROPERTY THAT IS IMPROVED OR CREATED/INVENTED DURING THE OUTSOURCING AGREEMENT -CONCLUSION INTRODUCTION  –   OUTSOURCING During an outsourcing agreement the customer will provide its proprietary information and intellectual property to the outsourcing provider in order for the outsourcing provider to prepare for or deliver services to the customer. However, while the outsourcing provider has access to use the enterprise customer’s data  which are generally entitled to copyright protection or to use techniques and processes that have been patented, the outsourcing provider’s service delivery platform will contain software and technological processes that are works of authorship and thus entitled to copyright or techniques and processes that may be patentable. In addition, in most of the outsourcing transactions the outsourcing provider’s employees and the enterprises  personnel work under the same trademark which may be proved damaging if, for example, the outsourcing provider fails to perform as required. INTELLECTUAL PROPERTY  –   INTELLECTUAL CAPITAL Intellectual Property is not just copyrights, patents and trademarks it is also processes and techniques, methodology and talent described by many experts as intellectual capital. This intellectual capital, these intellectual property assets in other words, will need to be shared between the customer and the outsourcing provider. Sharing involves risks such as challenges in monitoring and/or dealing effectively with various types of breaches of contract clauses, theft or misappropriation of trade secrets, as above mentioned, misuse or loss of other types of intellectual property rights, poor or inconsistent quality of goods and services and enforcement of  intellectual property rights. [F1] Therefore, the customer and the outsourcing provider must discuss these issues or it can be very damaging to both sides. INTELLECUAL PROPERTY CREATED  –   INTELLECTUAL PROPERTY TO BE IMPROVED AND/OR TO BE CREATED There are two kinds of intellectual property that a company has to consider; on the one hand, is the intellectual property that one company created and the other side has no rights to it. These are intellectual property assets that come into the relationship  prior to concluding the agreement. On the other hand, during the outsourcing relationship both sides will cooperatively improve or create intellectual property. In this case, since both sides work together to create new patents or know-how, this is going to be protected by trade secrets. The right to this type of intellectual property is different and the two companies must decide how these rights are distributed. NEGOTIATING THE OUTSOURCING AGREEMENT  –   ISSUES AND CONCERNS  –   INTELLECTUAL PROPERTY DUE DILIGENCE  –   INTELLECTUAL PROPERTY AUDIT The outsourcing agreement therefore, will need to deal with these issues and specify ownership of intellectual property rights. Ownership of intellectual property may be a sticking point. Both parties must exercise great caution. They must properly administer their intellectual property in order to mitigate intellectual property-related risks, and improve the competitiveness of the product or service offered by the enterprise. Therefore, an intellectual property due diligence enquiry and an intellectual property audit should be undertaken before the final outsourcing plan is communicated by the customer to the potential outsourcing providers. The intellectual  property rights must be identified and documented, the inventors, creators or authors of the intellectual property must be identified and the owners of those intellectual  property rights be specified. Contracts or other agreements such as licensing agreements associated with the intellectual property must be identified. Any assigned or licensed intellectual property used by the interested organisation and any intellectual property rights of third parties or of employees must be identified and ascertained. Furthermore it is important to identify any existing or alleged breaches and or infringements of such assignments or licenses. It is also important not to omit to determine jurisdiction and enforcement of intellectual property rights in case of any dispute that will arise and will need to be resolved. Termination of the outsourcing agreement and relevant exit clauses must always be considered by the parties and whether any indemnity against infringement will be provided for. IT OUTSOURCING AND INTELLECTUAL PROPERTY RIGHTS Intellectual property rights are absolutely critical in IT/IS outsourcing. An IT outsourcing inevitably involves the taking over of the service from the customer’s IT in -house function by the service provider which actually means the taking over of the know-how, software and hardware that currently provide those  services. “Knowledge economy” and intellectual property economy are very closely related, if not the same. [F2] Knowledge in the intellectual property industry has a  particularly significant value. Therefore, all that knowledge, computing operating systems, software, information and data they process (customer data, training materials, tools and other technology, customer guidelines and procedures, processes and methodologies used by the customer and any improvements on those that the customer or provider make) are protected by intellectual property rights which must  be safeguarded. It is usual that some of these intellectual property rights belong to third parties. Furthermore, it is important to consider whether different intellectual  property rights apply simultaneously to one “ product” such as software. Therefore, specifying ownership is vital. [F3] SOFTWARE OWNED BY CUSTOMER  –   ISSUES AND CONCERNS Regarding software that is owned by the customer, it must be pointed out that, if the customer is the owner of the intellectual property rights in the bespoke software then it will have to decide whether those rights should and can be transferred to the service  provider. In case those rights are transferred, the customer will require a license to use t he service provider’s software. At a minimum the customer may need to use a client - side version of the provider’s software on its own computers to receive the services.[F4] If software is to belong to the customer, however, questions arise as to whether such intellectual property asset is been properly transferred or assigned to the company. If the software was produced by a third party, or by contractors rather than employees, ownership will only reside in the customer if the relevant contacts so provide. It is therefore important for the customer to conduct a due diligence enquiry to determine who owns the relevant intellectual property rights and keep proper records. Where the customer possesses rights to use software, an important question is whether the license permits its transfer to the service provider. Unless the customer had agreed with third party software licensors specific rights for the customer to transfer that software to the service provider or allow the provider to use that software as a sub-licensee, the customer cannot transfer, or sub-license the use of the software as this would amount to an infringement of the licensor’s intellectual property rights.  Most third party software licenses are subject to many restrictions and are often non-transferable. Usually, they include standard terms which prohibit the transfer of the software, either in object or source code to anyone outside the licensee’s organisat ion, restrict the use of the software to the customer’s internal business purposes, expressly  prohibit the customer’s use of the software to provide data processing or outsourced services to third parties, impose confidentiality obligations on the customer so as to  prevent the customer disclosing the software to third parties. [F5] Therefore, the customer must have the licensor’s consent in order to legally transfer the software to the outsourcing provider. If the customer transfers the licensor’s software to the outsourcing provider without the licensor’s consent, will most probably be in breach of the licensor’s license terms. Consequently this will affect the outsourcing agreement negatively or kill it; the licensor may successfully manage to obtain an order by the court to prevent the transfer of the software from the customer/licensee to  the outsourcing provider or even prevent the use of the software by the outsourcing  provider. In addition the licensor may successfully claim damages from the customer/licensee for breaches of the terms of the software license and/or claim damages from the customer/licensee and the outsourcing provider for the infringement of its intellectual property right. Furthermore, the licensor may choose to terminate the software license which will prove to be catastrophic for the outsourcing customer/licensee. For the above reasons, the customer must approach third party software licensors as early as possible to secure their consent to assigning the software to the service  provider or to allow the service provider to use it. The same will apply with regard to any third party data as software licenses very often restrict the licensee from using the software to process third party data. Normally this involves the customer/licensee  paying additional license fees to the licensor/software owner and that is one of the main reasons that any attempt to secure third parties’ consent must take place at an early stage even prior to the official beginning of the negotiations. As indicated above, the most effective way of identifying third party intellectual  property issues and specify third party intellectual property rights is, to initiate a full due diligence procedure as early as possible. A question arises as to how the existing software licenses will transfer to the outsourcing service provider. It is argued that the most effective form of transfer is novation. The software license agreement between the customer licensee and the software licensor terminates and a new software license agreement starts between the software licensor and the outsourcing provider on the same terms. In such cases the question of who is to be held liable for historic liabilities in relation to the novated agreement is critical and must be agreed before the agreement is novated. Transfer by novation of the software license may involve also some other extra payments required  by the third party software licensor and therefore the parties need to agree on whether and how these payments will be shared between them. Furthermore the outsourcing customer, on the one hand, will probably be asked to warrant that it has fulfilled all obligations and liabilities up to the date of novation and will demand to be assured that the outsourcing service provider will be responsible for any problem that may arise after that date. The service provider may require indemnities from the customer to cover any breaches of copyright or infringement of any license terms prior to the transfer. [6] In any case, if the parties fail to get the third  party software licensor’s consent before the commencement date of the outsourcing then they may agree to postpone the commencement date of the outsourcing agreement or not to transfer the relevant software licenses. Another available option to the parties would be to agree to defer the transfer of the particular software licenses. Any such option, however, should be  provided for in the outsourcing contract. SPECIAL CONCERNS REGARDING THE INTELLECTUAL PROPERTY THAT IS IMPROVED OR CREATED/INVENTED DURING THE OUTSOURCING AGREEMENT The other kind of intellectual property that a company has to consider is the intellectual property that is improved or created/invented, during the outsourcing
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