As globalization continues its explosive growth, companies from across industry sectors continue to adopt a globalized strategy of sourcing products, services, and domain expertise from lower-cost countries such as India and China. (1) Sourcing now expands well beyond traditional information technology and business process outsourcing models that improve cost advantages relative to home markets to include knowledge-based sourcing. This knowledge-based sourcing not only arbitrages cost differentials but also leverages deep pools of educated and skilled workers who make up an eager knowledge class and who can provide competitive, judgment-based qualitative expertise and value. Today, communications technology and greatly improved infrastructure and logistics networks allow companies to move data and tangibles across borders seamlessly, quickly, and inexpensively. (2) Advances in technology combined with increasingly stable foreign political climates and reduced trade barriers make it more compelling than ever for companies to aspire to leverage the cost savings and knowledge class of workers available in offshore locations. A well executed global sourcing strategy can reduce costs, increase efficiencies and improve time to market without sacrificing, and perhaps even enhancing, quality of service, making such a strategy an essential consideration, and potentially key element, in virtually every enterprise-size company's business plan.
Global sourcing typically involves the sourcing customer either creating an international network of its own operations through affiliated entities or enlisting by contract a broad base of foreign suppliers in offshore locations. In either case, these sourcing models offer the combined benefit of a skilled or trainable workforce, available at wages significantly lower than those demanded by their U.S. or European counterparts. But in either case, along with the great potential reward of substantial economic benefits and competitive flexibility, comes the proverbial heightened operational and legal risks inherent in a global sourcing transaction. Potential global sourcing customers accordingly face serious, business-affecting decisions involving security, quality assurance, intellectual property ("IP") protection, operational support, regulatory compliance, dispute resolution, and realization risk as to predicted cost savings.
This Article highlights and analyzes one of the major components of risk a global sourcing customer faces as a result of the transfer overseas of proprietary information that qualifies as the customer's IP under applicable law. IP assets are mission critical in today's knowledge-based economy; the risks and challenges associated with their ownership and protection are significantly compounded in a global sourcing transaction in which a customer's IP must be shared or created in or among foreign jurisdictions. Indeed, IP ownership and protection against infringement are two of the most critical concerns in every global sourcing transaction. The increased risks inherent in transferring and protecting existing, and to-be-developed, customer IP demand a complex, robust, and vigilant risk assessment and management plan. This plan absolutely must be developed upfront in any and every global sourcing deal and then executed effectively so as to maximize the benefits of global sourcing.
This Article delineates the specific IP transfer routes in a global sourcing transaction, analyzes critical IP issues for consideration from a sourcing customer's perspective, and recommends strategies to bound and mitigate IP risk in global sourcing transactions.
HEIGHTENED RISKS TO IP IN GLOBAL SOURCING
As global sourcing penetrates more core business functionalities, companies increasingly source more "high value" products and services involving IP and proprietary technology. (3) In a global sourcing arrangement, a customer must almost always necessarily make its IP--which can range from proprietary designs to business processes to chemical formulae--available to the offshore service provider so that the sourced functions can be performed effectively. New IP might also be created by the offshore service provider on behalf of the customer. The offshore provider may be a third party vendor, a business partner, or local workforce at a corporate affiliate. Regardless of the sourcing structure, the sharing and creation of IP across multiple jurisdictions creates, for the sourcing customer, very real potential vulnerabilities because of the "territorial" or "national" legal nature of IP rights and the vast differences in IP regimes that exist worldwide. (4)
Globalization poses a strong challenge to the traditional notions of IP. In a global market, the incentives are compelling for companies to secure IP protection for their assets in multiple jurisdictions rather than just domestically. Due to the lack of IP harmonization worldwide, however, there is no single "universal" or "global" grant of an IP right that can be obtained. Instead, a company must piece together a collage of territorial IP rights created under the respective IP laws of different countries. (5) Not only does this make for an unpredictable legal environment for IP owners to adequately protect and effectively enforce their IP rights in the global market, but it also imposes a significant impediment to global trade. A number of multilateral international IP conventions have been promulgated to date in an effort to provide some predictability with respect to IP rights worldwide. (6) But the role of these conventions has been generally limited to establishing minimum standards for IP protection and enforcement in member countries, rather than requiring uniformity of IP laws in those countries. (7)
Further complicating this issue, because of the vagaries of offshore jurisdictions' property laws, including IP, the IP laws of the sourcing customer's home country cannot, and should not, be assumed to apply in the offshore jurisdiction regarding IP ownership disputes, even if the operative contract between the customer and the offshore service provider has an unambiguous governing law provision calling for the customer's home country IP laws to govern. Indeed, it is also the case that a court in the customer's home country, even the U.S., may not apply that home country's IP laws, but rather might apply the foreign IP law to decide issues involving the ownership of IP created abroad, notwithstanding the operative contract's governing law and venue provisions.
For example, in 1998, in Itar-Tass Russian News Agency v. Russian Kurier, Inc., (8) a case involving copyrighted work created in Russia, the U.S. Court of Appeals for the Second Circuit applied the "work made for hire" doctrine under Russian law to determine the initial ownership of the copyright of the works in suit. The court based its analysis in determining the question of ownership on the standard Second Restatement rule regarding conflicts of laws that the interests of the parties in property are determined by the law of the state with "the most significant relationship" to the property and the parties. (9) The court concluded that Russia had the most significant relationship with the copyrighted works in suit because the works had been created and first published in Russia. (10) Since that decision, three additional federal decisions within the Second Circuit have followed the Itar-Tass approach. (11) These decisions have significant implications for a U.S. company contemplating a global sourcing transaction involving the creation of IP in an offshore location; the Second Circuit's Itar-Tass analysis might suggest the IP law of an offshore jurisdiction could determine the ownership in a disputed copyright work created in the offshore location, notwithstanding the operative contract's adoption of U.S.-based governing law.
IP protection and enforcement mechanisms for IP rights are not harmonized around the world; they differ in material respects on a country-by-country basis. This can affect a customer's expectations in a global sourcing arrangement and can, in the absence of appropriate contractual safeguards, potentially jeopardize a customer's rights to its own IP or critical third party technology. Therefore, in any global sourcing transaction a customer must (i) thoroughly and carefully perform legal due diligence on national and local IP laws and customs; (ii) assess the possible impact of those laws and customs on the contemplated global sourcing transaction; and (iii) structure the global sourcing transaction in a way that will adequately protect against the potential risk of losing control of valuable IP. (12)
THE STRUCTURE Or THE GLOBAL SOURCING TRANSACTION
When it comes to the structure of a global sourcing transaction, one size does not fit all. There are three key structures: (i) sourcing through affiliated legal entities (wholly-owned or majority ownership) in offshore locations, which can be thought of as "captive sourcing," (ii) contracting with unaffiliated offshore suppliers, or "third party sourcing," and (iii) partnering with local entities to share control of local operations used for delivery of sourced products or services, or "joint venture sourcing." (13)
Captive sourcing involves a "do-it-yourself" approach where a sourcing customer builds or acquires its own operations offshore. (14) This sourcing strategy involves longer time to implement, greater involvement in the legal and regulatory environment of the local jurisdiction, and higher startup costs through upfront investment in infrastructure and human resources. On the other hand, this strategy offers a customer greater control over all aspects of its day-to-day operations, including quality, transparency, timeliness, and security, greater control over IP underlying the service or product in question, and cost efficiencies and savings in the long run. (15)...
Intellectual property in global sourcing: the art of the transfer.
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COPYRIGHT GALE, Cengage Learning. All rights reserved.
COPYRIGHT GALE, Cengage Learning. All rights reserved.