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September 19, 2014

Controlling Intellectual Property When Outsourcing

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Bangkok Post, Corporate Counsellor Column

Outsourcing is not a novel way of doing business. No matter the industry, a company is likely to be involved in outsourcing in some way. When hiring a third party to assist in a part of your business, the main factors influencing management’s choice of vendor are expertise, quality of outcome and budget.

If your company business is driven mainly by innovation, then intellectual property (IP) issues are likely to be a significant part of your consideration when choosing an outsourcing vendor. In this article, we will elaborate on how you can control your company’s IP when outsourcing.

Assessing your IP

The first step to take is to assess your IP. If you are sure the transaction will result in the vendor being involved with your IP rights, then your company should be very cautious in sharing IP-related information.

For instance, when a printing company is hired to print product labels, steps must be taken to ensure the vendor does not produce more of the merchandise than was originally agreed on. Otherwise, this could lead to counterfeiting and trademark infringement.

When the situation is not clear-cut — e.g., a company engages a headhunting firm to help fill positions due to business expansion — bear in mind that any information given to vendors is valuable and can amount to IP.

Be aware that trade information and business strategies including but not limited to formulas, methods, techniques or processes discovered in the course of research may be entitled to protection as trade secrets.

Similar to other types of IP laws, the Trade Secret Act grants the trade secret owner the right to exclude others from the act of disclosure, deprivation or use of the trade secret.

In order to be eligible for legal protection in Thailand as a trade secret, the company information must not be publicly known or accessible by persons who are normally connected with the information; the information must be economically valuable due to its secrecy; and the controller of the information must have taken appropriate measures to maintain secrecy.

The actions that constitute “appropriate measures” depend on the nature of the secret. Use of nondisclosure agreements and confidentiality clauses in contracts and other agreements is generally advised as a cautionary measure.

Investigating potential vendors

The next step is to investigate potential vendors. To gather valuable information about vendors to help your company exercise good judgement, you should first check a vendor’s entity registration and financial records. Basic information such as registered capital, length of establishment and annual balance sheet should be among the first things to look for, and this information is publicly available at the Commerce Ministry.

If the vendor’s basic information arouses any suspicion, you may have to investigate further to see whether it has any previous history of IP infringement or has past regulatory violations. If the records show anything negative, you may want to consider using another vendor.

Key terms in the contract

Contracts are important tools that can help you control your company’s IP. Essential terms to consider incorporating into the engagement contract are:

  • audit rights during the contract term and after termination;
  • prohibition on subcontracting without prior approval;
  • disposal of damaged and unauthorised goods; and
  • handover of IP after termination including manuals or important information.

Not only do audit rights help a company to control how a vendor uses the company’s IP or information, they also give the company the opportunity to control the quality of the product or service the vendor is engaged to deliver. Companies should require that vendors not subcontract to third parties without the company’s prior consent.

The opportunity can also be taken to audit damaged and unauthorised goods or shoddy services, which can eventually lead to refurbishing or destruction of those goods or performing the services again.

It is important to remember there is a higher chance for your valuable information and IP rights to be misappropriated or infringed if many people have access to your company’s IP or information. Also, when a vendor concludes service, you should take possession of all product specifications, manuals, data, moulds or information relating to your product or company — if left unattended or recklessly discarded, these can often be reused and cause information to be leaked.

In sum, when an innovation-driven company engages external vendors, protecting the company’s IP should be a prime consideration. In doing so, we suggest starting with knowing your IP assets and identifying the IP that will be exposed to the vendor. Then, investigate potential vendors to examine their legitimacy and past history.

Finally, in addition to using routine contract language, consider adding clauses that help your company control its IP and leakage of information. This way, you will lower your chances of encountering IP infringement.

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