Companies are outsourcing engineering and design work more and more often. What was once done in-house is now spread among multiple consultants and service providers. While outsourcing can leverage time and cost efficiencies, there are numerous patent implications. Below we discuss some of these patent implications and tips to manage the outsourcing experience so as not to compromise patent rights.
Inventorship & Ownership Issues
Everyone who contributes to the conception of an invention claimed in a patent is legally defined as an inventor of that patent. The "invention" is defined by the claims of the patent. Although a patent may have many claims, a person need only make an inventive contribution to a single claim to be a co-inventor.
Absent an agreement to the contrary, each inventor has equal ownership rights in the patent, regardless of the extent of their actual contribution. For example, each inventor/owner of a U.S. patent has the ability to commercialize the invention, or license others to do so without consent of the other inventors/owners. Yet no single owner/inventor can enforce the patent against infringers without joining the other inventors/owners. This combination of factors can result in a lack of exclusivity and ability to effectively enforce the patent that can destroy its value.
An inventor's patent rights may be transferred to another person or organization. It is common for a company's employment agreement to include terms requiring employees to assign their rights to the company for inventions made within the scope of their employment. In such cases, the company becomes the sole owner of the patent.
When a company outsources, ownership issues arise if a person not under an obligation to assign patent rights to the company makes an inventive contribution. For example, consider Company A with a team of four working on a new product that becomes the subject of a patent application containing twenty claims. The four employees are inventors and assign their patent rights to Company A. If Company A outsourced work to Company B, and a Company B employee made an inventive contribution to one claim of the patent, then Company A is not the sole owner of the patent rights. It may be surprising to learn that because the Company B employee is a co-inventor, the Company B employee has an equal share of ownership rights in the patent (not a 1/5 share as one of five inventors or a 1/20 share as contributing to one of twenty claims). If this employee was obligated to assign rights to Company B, then Company B is an equal owner with Company A. As co-owner, Company B is free to make or sell the new product, or license others to do so without consent from Company A and with no obligation to share proceeds.
Avoiding Inventorship & Ownership Issues
To avoid such an outcome, it is critical to have an agreement in place with your outsourcing partners that clearly defines the ownership rights and obligations of each partner to facilitate exclusivity, enforcement and accountability (this is often referred to as an IP provision.) Ideally, such agreement states that your partners are under an obligation to assign any patent rights that result from their work to you. Such agreements should be in place before any work begins -- it is typically much more difficult to negotiate a favorable agreement when valuable patent right are already on the table, and other post-facto options, such as deleting or amending claims to remove an unwanted inventor's contribution, may not be possible or may surrender valuable patentable subject matter and/or have harmful effects on the business relationship with the outsourcing partner.
Public Disclosures and On-Sale Issues
Under U.S. law, no valid patent can be granted if the invention was publicly disclosed, sold or offered for sale in the U.S. more than one year prior to filing a patent application. Most other countries have an absolute novelty standard, where there is no one year grace period and any public disclosure occurring prior to filing a patent application destroys patentability. Thus, to preserve your ability to obtain patent protection outside of the U.S., a patent application must be filed before any non-confidential disclosure.
When outsourcing, it is often necessary to initiate discussions with potential partners regarding product design before any patent application has been filed. If precautions are not taken to preserve the confidentiality of communications, they could be considered a public disclosure. Furthermore, if the outsourcing partner builds a prototype for you, that could be considered a sale (even though it is a sale to you) that may create a bar to patentability.
One way to avoid patentability bars for the purposes of the U.S. is to make sure you file your patent application less than one year after sharing information disclosing any potential inventions with any outsourcing partner. This will not, however, be effective to preserve patentability in countries where absolute novelty is the standard. To prevent information sharing from constituting a patent barring public disclosure more generally, it is critical to have a non-disclosure agreement (NDA) in place with your outsourcing partner before disclosing any confidential technical information.
Conclusion
Outsourcing engineering and design work can create a successful business strategy, but it also has patent implications. It is critical to consider inventorship and ownership issues as well as public disclosure and on-sale issues to ensure that patent protection is not compromised by the outsourcing relationship.
Further issues arise when working with outsourcing partners outside of the U.S. Many countries require government approval prior to filing a patent application on a domestically made invention in another country. For example, for inventions made by an outsourcing partner in China, in order for the outsourcing partner to comply with Chinese law, government permission is required before patent ownership rights and the right to apply for a patent can be assigned by the Chinese partner to a non-Chinese entity. It is best to consult qualified patent counsel to outline an outsourcing strategy that aligns with your business and patent needs.
Michael J. Pomianek is a shareholder and Shannon Vittengl is an associate at intellectual property law firm of Wolf Greenfield in Boston, Mass. www.wolfgreenfield.com
