There has been an outsourcing revolution in recent years involving many large and medium sized companies. This trend is expected to continue with firms turning over responsibility for internal business functions to outside service providers. These outsourcing relationships often contemplate and involve the use, creation and licensing of intellectual property rights such as patents, copyrights, trademarks, trade secrets and know-how. This paper discusses the legal and practical issues of the use and licensing of intellectual property owned by the parties upon formation of the outsource relationship, the allocation of rights to intellectual property created during the relationship and the rights to intellectual property and obligations of the parties once the relationship has ended.


There has been an outsourcing revolution in recent years. Major players have been companies such as American Express announcing a four billion dollar arrangement with IBM, Bank of America entering into a 4.5 billion dollar outsourcing relationship with EDS, Fiat paying IBM 6.2 Million dollars to manage the companys IT infrastructure and Merrill Lynch retaining Thomson Financial in a billion dollar deal to develop and manage Merrill Lynchs wealth management technology platform. The market is expected to reach $700 billion in 2005 with many smaller companies becoming involved because of competitive considerations./1/

Outsourcing occurs when a firm (the Client) turns over responsibility for an internal business function to an outside service provider (the Supplier). Potential targets for outsourcing include IT , business processes, manufacturing, data center management, application management, human resources and/or selected human resource functions and customer service/call centers. The outsource supplier may be domestic or offshore, eg. where call centers in India support companies in the United States or the United Kingdom.

The potential benefits of outsourcing include improved financial results through cost management, access to resources, expertise and technologies not available internally, enhancement of operational efficiency, flexibility regarding personnel and other resources, maintenance of cutting edge technology, focus of resources on core business, improved productivity and services, higher quality through access to the most quality providers, knowledge acquisition and utilization and the creation of strategic partnerships and alliances./2/ At the same time there are potential risks with outsourcing. There will be loss of control of the outsourced function and cost savings maybe realized only in the long term. With such a long term relationship there may be unanticipated shifts in the technology base. The supplier may not develop the capabilities that the customer will need in the future and it may be difficult to move to a new supplier. Certain technology necessary for the outsourcing relationship may be owned by third parties and is being utilized by the Client under a license. Use of this technology by the supplier will require third party Licensor consent which may be difficult to obtain and require a substantial fee./3/

Other risks include cultural incompatibilities with the supplier, compliance with international laws and regulations, control over subcontractors of the suppliers, the supplier working with a competitor or the supplier becoming a potential competitor, costs and difficulties associated with the transition into and out of the outsource relationship and disclosure to and the use by the supplier of customers trade secrets, know-how and associated technologies and business methods.

Therefore it is important in properly structuring the terms and conditions of the outsource transaction for the parties to have an understanding of the details of the outsourced subject matter as well as the relationship between the parties. This paper discusses the significant role intellectual property related provisions can play in accomplishing the business objectives and minimizing the risks in an outsourced relationship./4/

Intellectual property issues that are likely to arise in an outsourcing transaction will include the use and licensing of intellectual property owned by the parties upon formation of the relationship, rights to intellectual property created during the relationship, and rights to intellectual property and obligations of the parties upon termination of the outsourced relationship.


In negotiating the terms and conditions of the outsource agreement, it is important to consider what items of intellectual property will play a key role in the relationship. The particular business function being outsourced will determine what kinds of intellectual property are significant. For example, if the outsource function is to develop software applications, copyright can be used to protect the source code. It can also be protected as a trade if the source code can be kept confidential. If the software embodies a novel or non obvious business method, then patent protection is available. If the supplier is to provide support services or assumes performance of key internal operational functions such as IT management, payroll, human resources management, supply chain management, and accounting, trade secrets can be very important in protecting confidential business processes, personnel data and financial data disclosed to the supplier as well as confidential information and know how developed during the outsourced relationship. Where creation and/or reproduction of creative works, graphics, training materials and other documents are involved, copyright protection is available. Where the supplier is to provide customer services functions such as marketing, customer service call centers, accounts receivables and collections, order fulfillment or warranty service, trade secret protection is important because sensitive marketing, business processes, customer information and financial information may be disclosed by the client and generated by the supplier. Trademarks could be important where the supplier interfaces with consumers using clients trademarks. Copyrights are again relevant if creation and reproduction of graphics, work product and training materials and other creative works are involved./5/

If the supplier is to manufacture products and assist in product design and development, patent protection is possible as to the actual product developed and methods used in their manufacture. Trade secrets protection is available to cover inventions, designs and assembly related know-how, marketing and financial information concerning the product. If the supplier will be selling developed and manufactured products to the public, trademark protection would be relevant.


Prior to entering into the outsourcing relationship one or both parties may possess intellectual property relevant to the transaction, i.e. preexisting or background intellectual property. A company that will be outsourcing a business function will often have intellectual property rights in inventions, designs, know-how, specifications, business information, to be utilized by the supplier in accomplishing the goals of the outsource venture. Likewise the supplier may also have background intellectual property that it has developed within its particular area of expertise that will come into play in the outsource undertaking. These items should be clearly identified and properly licensed to the other party within the scope of the relationship.

Typically the preexisting intellectual property will continue to be owned by the party who created it. The license would contain appropriate field of use limitations and may be exclusive or non exclusive. If the outsourcing relationship is to create a joint venture between the parties, then another possibility is to assign the intellectual property to the venture. Particularly problematic are trade secrets and know-how that are to be shared between the parties. They should be addressed within confidentiality provisions that provide that the parties may not use or disclose the confidential information received beyond the scope of the venture. Restrictions should be placed on the other party on how the proprietary information should be used and limits on who will have access i.e. on a need to know basis. It should also be made clear as to what is considered to be a trade secret, for example, customer lists, product specifications, statements of work, customer service protocols, financial information etc.

If trademarks of the client are to be used by the supplier, then it is important to ensure that there is continuity and quality controls provided for in the license agreement with proper supervision by the client. Otherwise the trademark owners reputation and good will can be negatively affected with the possible loss of the trademark. There should be a specific license provisions as to use, placement and review and audit of the trademark to provide quality assurance management.

Where the client is seeking to enhance a preexisting system or application, then the license of preexisting copyrights might be applicable. Also if the supplier is to perform customer interfacing or internal operation functions, then preexisting copyrighted materials for training, distribution to customers and other uses in the performance of the undertaking would be licensed.

IV. Intellectual Property Created during the Outsource Relationship

Usually new intellectual property will be created by one or both of the parties during the outsource relationship. If a separate entity based joint venture is used, ownership of newly created intellectual property will typically vest in the entity. In the usual contractual outsourcing relationship the issues that need to be addressed concerning new intellectual property created during the undertaking are: will the intellectual property created by a party vest in that party, will it be jointly owned or will the parties agree to allocate ownership in some other manner.

Both of the parties may have an interest in retaining rights to new intellectual property rights developed in the course of the relationship. The supplier may be involved in the generation of improvements in the products or services involved. Significant intellectual property interests will arise when the basic purpose of the outsourcing is software development by the supplier. For example, the suppliers position is that they created it and should retain ownership and that they want to re-use the intellectual property for other client projects. The clients position may be that they are paying to have the work done and therefore should own the resulting work and that they need ownership so that they can continue to run their network after the relationship with supplier ends. Therefore it is important for The parties to determine in advance how they intend to share (if at all) the intellectual property rights created.

Ordinarily intellectual property would vest in the party creating it or would be treated as a work for hire in which case ownership would belong to the employer and not the party who created it. In any event the owner would typically grant a license to the other party to utilize the intellectual property.

  1. Joint Ownership of New Intellectual PropertyIn many cases both parties may be involved in the creation of the intellectual property which would initially vest in the parties as joint owners. As more significant functions are being outsourced, increasingly more outsource partners seek some form of shared intellectual property allocation especially when it is intended to avoid joint ownership.

    To understand the pitfalls of jointly owned intellectual property it is important to review and understand how joint ownership arises and what are the rights and obligations of the joint owners under national law.

    1. Creation and rights in Jointly owned Intellectual Property
      1. Copyrights – under United States law a joint work occurs when multiple authors make contributions that are inseparable or interdependent and who had an intention to create a joint work. There is no need for the joint authors to have worked together physically or at the same time. Joint ownership can also arise from an assignment of an undivided interest in the work to another party similar to a tenancy in common. Each joint owner can exploit the work without the permission of the other joint owner but there is a duty of accounting to the other joint owner (i.e. must share any royalties). This right to exploit includes the right to license third parties./6/
      2. Patents – Each joint owner of a patent can fully exploit the patent without permission of or accounting to the other joint owners. Joint ownership occurs where both parties directly or individually collaborate as inventors. The inventors need not have worked physically together at the same time and place nor contributed the same type of or amount of contribution nor have each contributed to every claim that defines the patented item. A contributor to any claim owns a prorata an undivided interest in the entire patent. This assumes the co inventors agreed to cooperate in the process. Therefore even a 5% contributor can be a joint owner of patent. Like copyright, joint ownership in the patent can also occur by an assignment of an undivided interest to another./7/

        Problems can occur when jointly owned software contains both patent and copyright rights. Both allow free exploitation i.e. either joint owner can license third parties, so in effect a licensee can try to get the best terms from either joint owner. The question then becomes how does the joint owner granting the license allocate royalties between the patent related part that requires no sharing and the copyright related part that requires sharing of royalties, especially since software is indivisible. Also a joint owner may directly compete with co-owner or deal with third party competitors of the co-owner./8/

        If the outsourcing involves a foreign party the rules with regard to joint owners rights in intellectual property issued or registered by foreign countries will depend on the laws of those countries, for example, in the UK a joint owner of a patent or copyright needs the permission of the other co-owners to exploit the intellectual property, eg. grant licenses to third parties./9/ This is similar to the law in Japan although permission may not be unreasonably withheld./10/ Therefore joint owners will be confronted with operating under different rules covering the same intellectual property asset.

    2. Enforcement of Jointly Owned Intellectual Property Enforcement of a jointly owned patent requires each joint owner to join in the lawsuit whereas such mandatory joinder is not required to enforce a copyright infringement by a third party. Therefore, a joint owner of a patent can refuse to join a lawsuit begun by a co-owner. This potential enforcement issue can be minimized by granting a joint owner the right to sue unilaterally. However a non-suing joint owner can eliminate anothers right to sue unilaterally by granting an exclusive license to a third party who then has within his own right standing to sue under a patent.

      Given that the rights and obligations of the parties as joint owners of intellectual property under US and foreign law can vary substantially and not be in the best interest of both parties, the parties should consider a written agreement altering or modifying these rights and obligations to accomplish their business objectives.

      One possibility would be for one of the joint owners to assign its interest in all new intellectual property to the other joint owner who would then grant back some form of license to the non-owner. To avoid potential disputes it would be better to have this arrangement negotiated in advance before the outsource activity begins. Usually this form of allocation occurs where one party has substantial leverage, where there are three or more joint owners or where the relationship will be long term involving many product development terms and life cycles. In this situation the non-owner should expect to obtain a license for its field of use.

      Alternatively, the allocation of ownership can be applied to each individual item of intellectual property, for example, where a particular item of new intellectual property is primarily related to one partys preexisting intellectual property or to its field of use. This allocation is particularly well suited where the parties businesses are distinct and the development process clearly indicates who did what, when and how. Under this scenario the non-owner would be granted back a license for its field of use.

      As another option, the new intellectual property can be assigned to a separate joint venture entity which is formed for the sole purpose of holding the intellectual property. This entity would be owned and managed by the outsource partners. The entity can grant any licenses required by the parties.

      A related issue involves what happens to the intellectual property held by the joint venture entity when some or all of the owners decide to dissolve the entity. The possibilities include merger with or acquisition acquired by a third party or one of the owners or dissolution of the entity where the intellectual property is assigned back to the entity owners as joint owners or assigning the intellectual property back to one of the owners with grant back licenses to the others.

      The criteria for the allocation of new intellectual property created during the outsource relationship are varied depending on the leverage possessed by the parties, the particular business functions being outsourced, market dynamics and the various forms of intellectual property likely to be developed. The terms and conditions of the outsource agreement relating to newly generated intellectual property should contain the criteria of how to allocate the intellectual property, i.e. as jointly owned or independently owned.

  2. Licensing and Intellectual Property AllocationsInvariably in any allocation one or both parties may feel they compromised away certain rights with regard to new intellectual property rights transferred. Grant back licenses can be used to offset to some degree these imbalances. However the restrictions and rights under such licenses of new intellectual property must be tailored to the business interests that each party wishes to supplement in light of the chosen allocation plan.

    Some of the key issues in drafting licenses are the scope of the intellectual property rights to be licensed (for example, the right to make, use or sell the patented invention or just the right to make and use, or a copyright owner can choose to license the right to copy but not to distribute), whether the license is exclusive, the term of the license (will it be shorter or longer than the outsource relationship?) and whether there will be a geographic limitation.

    If the intellectual property will be jointly owned then there is the risk that one of the owners may decide to exploit the rights independently to the detriment of the other. For example, license the intellectual property rights to a competitor. The outsource agreement can impose competitive restrictions prohibiting a joint owner from assigning or licensing the intellectual property to any third party in competition with a joint owner. Care must be taken that such restrictions do not violate antitrust or unfair competition laws.


  1. Warranties & RepresentationsRepresentations and warranties play an important part in licensing intellectual property pursuant to an outsource relationship. Examples include a representation that the Licensor owns and has a right to use the technology and that the use does not infringe or conflict with the rights of others and a warranty that no right, privilege or license has been granted to a third party with respect to the use of the subject technology. If the intellectual property consists of know-how and trade secrets, a representation that all documents with regard to each material trade secret is accurate and sufficient to permit its continued usage and development and a representation as to any violations or infringement of intellectual property rights of the party by a third party and the plans to be taken to protect these rights.

    If the transaction involves the transfer and use of intellectual property rights from a foreign party, then additional representations come into play. For example, that the transferring party certify that all foreign and domestic patents, copyrights and trademarks are valid and in full force and effect and not subject to any taxes or fees, a representation that an invention will perform a certain function or produce a specified result and that all necessary governmental procedures have been completed under the countrys technology transfer laws.

  2. IndemnificationThere is the risk that the activities and conduct of an outsource partner may result in liability to third parties. e.g. third party liability arising out of misuse of products or services in connection with trademarks licensed by the client and liability or losses sustained by one party as a result of the other infringing the intellectual property rights of a third party. An indemnification and hold harmless provision in the outsource agreement would allow the innocent party to recover from the wrong doing party for any losses suffered from claims made by third parties.
  3. International Law IssuesIn international outsourcing the parties must consider the various laws and regulations which may be applicable to the licensor transfer of intellectual property rights and their use. Many countries regulate foreign inbound investments and transfers of technology. If goods or technology are to be exported, then export control laws must be considered as well as any import controls such as tariffs and quotas.

    Other legal issues involve currency controls, health, safety and environmental laws, labor and employment laws of developing countries and formulation of dispute resolution procedures such as choice of law, forum and the use of arbitration and/or mediation. Bringing in an international partner into the outsource relationship adds a whole new dimension and presents many other risks that need to be addressed in the outsourcing agreement.


As can be seen from the above discussion, substantial intellectual property rights may be involved in the outsourcing relationship. There may be pre-existing intellectual property rights owned by one of the parties that will be needed by the other to accomplish the outsource function. Newly created intellectual property may occur during the relationship. Joint ownership of these intellectual property rights may not be in the best interest of the parties. Therefore the parties must carefully consider the preservation of the ownership of pre-existing intellectual property and their proper use, whether newly created intellectual property will be jointly owned or some other form of allocation will be made and what will be the disposition of all the intellectual property upon termination. Appropriate licenses must also be given to the non-owner of the intellectual property. Proper planning for these intellectual property issues before entering into the outsource venture will minimize the risk of misunderstandings and any legal disputes between the parties.


/1/ Delany, John, (2003) Intellectual Property & Licensing Issues in Complex Technology Transactions, in the Outsourcing Revolution 2003, Practicing Law Institute Handbook p 187-211

/2/ Gutterman, A., Strategic Alliances, Vol 1, pp 2.001-2.211, Business Laws Inc. (Pub) 2004

/3/ Blageff, L. (2004) Legal Issues of International Outsourcing in International Sourcing, Business Laws Inc. (Pub) pp 101.001-101.043

/4/ Yang, Joseph (2004) Intellectual Property Counseling for Collaborative Transactions in Advanced Licensing Agreements 2004, Practicing Law Institute Handbook, pp 89-128

/5/ Copyright Act of 1976. 17 U.S.C. Section 101 et seq

/6/ Richmond v. Weiner, 353 F2d 41, 46 (9th Cir. 1963) Joint Owner of copyright can exploit without permission but must account to the owner.

/7/ Ethicon v U.S. Surgical, 135 F.3d 1456 (Fed Cir 1998) contributor has pro rata undivided interest in the entire patent.

/8/ Brown, J., Allocation of Ownership of Inventions in Joint Development Agreements The U.K. Perspective, Les Nouvelles (Journal of the Licensing Executive Society) Dec 2000, pp 173-175

/9/ U.S. Patent Law, 35 USC Section 101-176 as to prerequisites of patentability and joint ownership of patents

/10/ Nakano, K. (2000) Patent Rights of Co-Owners in Japan, Les Nouvelles (Journal of Licensing Executive Society) pp 48-53

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