IP Issues in Outsourcing Transactions Dallas Bar Association – IP Section

IP Issues in Outsourcing Transactions
Dallas Bar Association – IP Section
Friday, March 30, 2012
Jason D. Krieser
1717 Main Street
Suite 2800
Dallas, Texas 75201
214.939.5423
jason.krieser@klgates.com
Copyright © 2011 by K&L Gates LLP. All rights reserved.
Shawn C. Helms
1717 Main Street
Suite 2800
Dallas, Texas 75201
214.939.5599
shawn.helms@klgates.com
Jason Krieser – Partner, Outsourcing Practice
 Advises clients on all aspects of outsourcing matters, technology transactions,
telecommunications and other complex commercial contracts. He is an internationally
recognized advisor on business process and information technology outsourcing
matters, including offshore outsourcing.
 Cited by Chambers USA (2004-2012) and Chambers Global (2010-2012) as a leading
individual in outsourcing, and by Chambers USA (2004-2012) as a leading individual in
technology & IT outsourcing in Texas. Recognized in The Legal 500 (2010-2011) and
listed among those named as Texas Super Lawyers (2010-2011). Recognized by D
Magazine as a “Top Dallas Lawyer Under 40.”
Shawn Helms – Partner, Outsourcing Practice
 Represents clients in business process and information technology outsourcing,
information technology and biotechnology licensing, clouding computing and software
as a services (SaaS) arrangements, technology maintenance and services, technology
development/customization, strategic alliances, electronic commerce, distribution,
confidentiality, strategic sourcing, and data privacy. He also advises clients on due
diligence matters relating to the acquisition or licensing of technology and intellectual
property.
 Cited by Chambers USA (2010-2012) as a leader in technology and outsourcing.
Recognized by Texas Super Lawyers Rising Stars Edition (2010-2012) in the area of
information technology and outsourcing.
1
Agenda
Overview of Outsourcing
Typical IP Issues in Outsourcing Transactions
 IP Ownership in Outsourcing Deals
 Right to Use Third Party IP (scope of licenses and consents)
 Typical Licenses Granted
 Intellectual Property Warranty and Indemnities
Special Issues Related to Source Code
Covenants Not to Sue in Outsourcing Transactions
IP Issues in Cloud Computing Arrangements
Brief Commercial
2
Outsourcing Defined
 When an organization transfers the performance of a
major business function to a third-party provider
 Typically complex, integrated business processes and
services (IT, HR, F&A, R&D)
 Not simple product offerings (web hosting or
janitorial) or manufacturing (think “Made in China”)
 Two broad flavors:
 Information Technology (IT) Outsourcing
 Business Process Outsourcing (BPO)
3
Outsourcing Market Size
How much is spent on outsourcing, globally, on an annual basis?
A.
B.
C.
D.
$800 Million
$10 Billion
$300 Billion
$1 Trillion
4
Outsourcing Market
 Big (over $1 trillion) and growing (projected to be $3
trillion)
 Internet has enabled outsourcing - a revolution in
labor
 Outsourcing is not “off-shoring”
 United States is the world leader in outsourcing
 Over half of money spent in outsourcing market goes to
US- based companies
5
Why Companies Outsource
 Reduce Costs
 Improve Focus on Core Business
 Lack of Internal Resources / Specialized Skills
 Gain Access to Best in Class Capabilities
 Reduce Risk
 Innovate
 Turn Fixed Costs into Variable Costs
 Free up Capital
6
What Companies Outsource
Information Technology
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Software Development and Maintenance
Network Management
IT Help Desk
Desktop Support
Infrastructure (servers/mainframe)
Business Process Outsourcing
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Finance and Accounting
Call Centers
Human Resources
Research and Development
Facilities Management
7
Outsourcing Process
 Identification of Scope
 RFI/RFP Process
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Preparation of RFP (terms and conditions often included)
Oral presentations
References
Diligence of potential providers
Down-select (1 or more)
 Contract Negotiations (typically 3-6 months)
 Operational Transition
 Governance / Contract Management
8
Outsourcing Transaction
 10% - One-time transaction (like M&A deal)
 Transfer of operations
 Transfer of employees / assets
 90% - Ongoing, long-term services transaction
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Detailed scope of service
Complex demand-based pricing
Service levels
Relationship governance
Operational and contractual exit strategy
Change management
9
Typical IP Issues in Outsourcing Transactions
 IP Ownership in Outsourcing Deals
 Right to Use Third Party IP (scope of licenses and
consents)
 Typical License Granted
 Intellectual Property Warranty and Indemnities
10
Allocation of IP Ownership Rights in Outsourcing Deals
 Can be one of the most difficult issues to resolve
 Widespread use of software and other technology
make IP issues important in many deals
 Existing IP - Customers often conduct IP audit at
beginning of deal
 What IP will be transferred to provider
 What IP will be used by provider (more to come on this)
 What IP is otherwise involved
11
Allocation of IP Ownership Rights in Outsourcing
Relationships (Cont’d)
 Ownership of New Developments
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Individually developed by one party
Jointly developed
Failure to address likely favors Provider
Customers argue new IP is paid for development
Provider believes new IP is logical extension of expertise
Challenge in resolving is not knowing what new IP may
be created
 Challenges Implementing Agreed Ownership Structure
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Right to Use Third Party IP
 Customer often has third party software and other
technology that is “in-scope”
 Does Provider have the right to use?
 Scope of License Grant (agents / contractors)
 Confidentiality
 Other Restrictions (hardware, number, location,
competitor)
 License and Contract Assignment Provisions
 Obtaining Consents
13
Typical Licenses Granted
 By Customer
 Customer-owned software or other IP
 Existing
 Newly created
 IP licensed by customer from third parties
 By Provider
 Broad During Term
 Can customer affiliates use? Other service providers
that customer uses? JVs involving customer?
 Post termination (transition or “tail” license)
 data or reporting formats
 workflows
14
Intellectual Property Warranty and Indemnities
 Treated much like a typical technology license (with
some exceptions)
 Outsourcing deals typically include both IP warranties
and indemnities
 Indemnities typically cover all types of IP and are not
limited in geography
 Beware of the “typical” carve outs (e.g., combination,
compliance with specifications)
 Almost always outside the limitation of liability
 Remedies for infringement - should not include
termination
15
Covenants Not to Sue in Outsourcing Transactions
 Commitment to not file a patent infringement claim
during or after the term (like a patent license)
 Relatively new “ask” by outsourcing Customers
 Came out of deals from major electronics providers
(Intel and Apple)
 Often limited to the technology or processes “in
scope”
 Popular in telecom and other high revenue/low
margin businesses
 Not yet standard in the outsourcing industry
16
Special Issues Related to Source Code
 Source Code Access in Outsourcing Deals
 ADM Deals – Customers always gets source code
 Other Outsourcing Deals – Customers sometimes demand source
code escrow
 Less Important Now Than 20 Years Ago
 Problems with Escrow
 Only a Small Percentage of Escrows Is Ever Released (over a 10
year period, Iron Mountain averaged a release of 9 per year)
 Most Escrowed Source Code Is Defective (over 97% according to
Iron Mountain)
 Customers Lack Expertise to Use the Released Source Code
 Significant Delays and Legal Battles Often Accompany a Release
 Utilizing an Escrow Can Be Expensive
17
IP Issues in Cloud Computing Arrangements
 Few Custom Developments
 Generally “Data” Related Issues
 Data Security Protections
 Restrictions on Data (disclosure, movement and
provider use)
 Data Breach Obligations
 Data Restoration and Retention
 Transition Obligations
 Escrow Almost Never Works / Step-in Rights
 Intellectual Property Indemnity
18
K&L Gates Overview
Scope: Approximately 2,000 lawyers
worldwide; 41 offices on four continents
Nationally Ranked: The National Law Journal
ranked K&L Gates No. 8 in its 2011 list of the
250 largest law firms
Strategic Locations: Positioned at strategic
intersections in the global economy, with
strong local presence in key capital cities and
world commercial and financial centers
19
20
Outsourcing Practice Overview
 Unmatched Experience: K&L Gates is the only law firm that consistently
has been doing outsourcing deals for more than 35 years
 Recognized Industry Leader: Practice recognized by Chambers (Global
and USA), U.S. News and World Report, Best Lawyers in America, Lawdragon,
Legal 500, Best Lawyers and The Black Book of Outsourcing
 Dual Practice: Represent both customers and providers
 Collaborative Approach: Seek to be collaborative and quickly reach
“market” positions
 Strong Dallas-Based Team:
 Outsourcing industry started in Dallas and Dallas continues to be the
industry epicenter
 10 outsourcing lawyers in K&L Gates’ Dallas office working on global
deals
21
Outsourcing: Law and Business
 Jason Krieser and Shawn Helms are co-authors
 Published by Law Journal Press in November 2011 Updated 2 times a year
 Covers all material business and legal issues in
outsourcing deals
 Only comprehensive source – more than 820 pages
 Modern / Streamlined Approach
22
Q&A
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