Editors Note: Caroline Horton Rockafellow is a member of the law firm of Daniels Daniels & Verdonik, P.A.The outsourcing of technology jobs is an emotional and political issue that invokes strong reactions. When a company moves segments of its workforce to territories outside of the United States, the loss of U.S. jobs and the related costs savings are the two most common considerations.

Unfortunately, the potentially critical impact on intellectual property rights related to the outsourcing of technology development is too often overlooked. A company’s ability to protect key intellectual property assets can be ompromised if appropriate protective steps are not taken prior to outsourcing technology development.

This article outlines some of the critical intellectual property issues that all technology companies should consider prior to outsourcing any technology development.

Ownership

Regardless of whether development work is being sent down the street or across the ocean, it is critical that the company doing the outsourcing maintain the necessary ownership and title to its assets. It is not uncommon in this country, for example, for a company to engage a consultant to develop materials or information, and then fail to secure the proper transfer of ownership rights from the consultant to the company.

This is often the case when computer programmers are engaged to write portions of code. If the engaging company fails to secure the programmer’s assignment of the underlying copyright and other intellectual property rights, the programmer will retain ownership rights in the developed code. Even if the programmer has been paid in full for the services performed, the underlying intellectual property rights will not transfer unless properly documented. While this is a common problem for works developed within our borders, it takes on an even greater complexity when work is performed outside of the United States.

Not only is it necessary to maintain the same level of ownership controls and assignments that would be required for work performed within the United States, but it is also necessary to ensure compliance with regional laws. Accordingly, it is essential for any outsourcing company to work closely with both its U.S. and foreign counsel to ensure that all legal requirements related to the assignment and transfer of title have been met so that the company retains full control of its intellectual property assets.

A failure to properly document transfer of title from the developer to the direct employer and then ultimately to the U.S. entity will result in a forfeiture of technology rights for the U.S. entity.

Control of trade secrets

The value of a trade secret will always rest in the ability to keep the relevant information confidential. Once trade secrets are disclosed, it becomes difficult, if not impossible, to regulate further disclosure. Ultimately, the inability to control the disclosure of trade secret information will diminish or completely negate the commercial value of the information. Unfortunately, not all countries have trade secret protections equivalent to those of the United States.

The definition of a trade secret varies from jurisdiction to jurisdiction. In fact, there is some dispute in the international community as to whether trade secrets should even be included in the definition of intellectual property rights. For countries that have adopted the World Trade Organization’s Agreement on Trade-related Aspects of Intellectual Property Rights (“TRIPS”), Article 39 of TRIPS does include some protection for undisclosed information with commercial value. Unfortunately, Article 39 does not go so far as to include trade secrets within the bundle of generally recognized intellectual property rights. Regardless, of whether a trade secret is viewed as an intellectual property right, or is even subject to protection under a foreign jurisdiction, it only retains its full economic value if it is kept secret.

In the United States, if an employee wrongfully takes trade secret information from his or her employer, the employer may sue that employee for trade secret misappropriation, regardless of the contractual arrangement between the parties. Unfortunately, the same recourse does not currently exist in many of the countries where outsourcing is popular. For example, India does not have any law that specifically protects the disclosure of trade secrets, other than the standard breach of contract recourse. Unless other nations begin to recognize and protect trade secrets in the same manner as is done in the United States, companies that take technology overseas must be extremely diligent to protect the confidentiality of corporate trade secret information, and they must also recognize that the ability to seek damages or other recourse for misappropriation may be severely limited.

Logistical controls

One essential aspect of protecting intellectual property is ensuring that the appropriate security measures are in place to prevent third-party access to confidential materials. Adequate controls should also be in place to regulate employee and consultant access to such information. Often it is advisable (and sometimes necessary) to restrict access to only those employees and consultants with a “need to know” such information. In some cases, if the materials belong to a third party, this restriction may in fact be contractually required. Accordingly, the ability to periodically inspect the foreign premises to ensure that appropriate security measures are in place is critical. Likewise, the oversight and educational process that takes place in the United States to educate employees and consultants on the use and application of corporate proprietary information should be transferred to outsourced locations. A failure to monitor and regulate activities outside of the United States, much in the same way that such activities would be monitored and regulated inside the United States, will only serve to increase the likelihood that confidential and proprietary information will be misappropriated.

Moral rights in copyrighted materials

Under the copyright law of many foreign countries, the creator of the copyrighted material has certain “moral rights,” including the right to be acknowledged as the author of the work and the right to object to any distortion, mutilation or other modification of the copyrighted work that might be prejudicial to the creator’s honor or reputation. This is true even if the work was created by an employee or by a consultant, and even when the work is subject to an effective assignment of rights.

With a few exceptions, the United States has not adopted the broad interpretation of moral rights. Accordingly, these rights and related issues are rarely a concern in the United States. However, moral rights are a significant issue in much of the rest of the world. Although the precise application of the rights will vary from country to country, in many cases moral rights cannot be assigned or waived. For this reason it is critical to understand the respective rights that may be acquired by the creator of the materials in each outsourced country, to know what rights the creator of the materials may have to control future development and use of that material, and secure all available waivers and authorizations.

Foreign copyright in software

It is generally accepted in the United States that source code, object code and certain elements of the “look and feel” of a software program are subject to copyright protection. The scope of such protection for software within the United States is generally considered to be broader than the copyright protection provided to software outside of the United States. Although issues related to the extent of copyright protection for software is relevant not only when outsourcing technology, but also to licensing software in these territories, it is particularly relevant when analyzing rights related to the creation of the materials and the possibly implications on the future development by the United States entity.

These rights and the scope of protection for software will vary from country to country, but the extent of protection available to software development companies developing code outside of the United States should be carefully considered in view of the local laws of the applicable country.

Outsourcing technology development to territories outside of the United States creates many potential pitfalls in the protection of intellectual property assets. Companies should carefully assess all of the relevant logistics and local laws prior to moving any valuable technology overseas. A failure to take the appropriate steps to protect outsourced intellectual property assets may result in an irretrievable loss of those valuable assets.

Daniels Daniels & Verdonik, P.A. has been serving the legal needs of entrepreneurial and high technology clients for more than 20 years. Caroline Horton Rockafellow is a licensed patent attorney who works primarily in the areas of technology deals and licensing. Questions or Comments can be sent to crockafellow@d2vlaw.com