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      Software Development and Maintenance Network Management IT Help Desk Desktop Support Infrastructure (servers/mainframe) Business Process Outsourcing      Finance and Accounting Call Centers Human Resources Research and Development Facilities Management 7 Outsourcing Process  Identification of Scope  RFI/RFP Process      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       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       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 12 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 23