Outsourcing American Patent Work to Foreign Nations
by Anthony J. DeJohn
In recent years, the forces that govern the United States legal economy have been shifting dramatically in response to something of an Intellectual Property Revolution (perhaps Evolution is more appropriate). Never before have so many Fortune 1,000 companies relied so heavily on IP assets and protected them with such vigor. Today, the importance of IP reaches far beyond traditionally technical industries for several reasons. First, as computer breakthroughs and the in-house development capabilities of major corporations continue to grow, the concept of static industry placement becomes less applicable. Second, as technology continues to blossom into the mainstream of the younger generations, the American workforce becomes increasingly more sophisticated. Third, recent trends at the United States Patent and Trademark Office (USPTO) have allowed patent grants to questionable subject matter not considered patentable by past standards. As a result, the line between “patent” and “science” is getting increasingly blurred, and more and more corporations are looking to the patent system as a source of revenue and financial security.
While not a new concept by any stretch (the first U.S. patent was issued in 1790), adequate patent protection has exploded to become one of the single most important responsibilities facing American corporations. With this change in emphasis has also come the demand for more efficient and cost-effective legal representation for IP related services. Many law firms that used to autonomously dictate precisely how much an inventor or corporation would pay for their services are now finding themselves in a bidding war for the privilege of representing high-dollar clients. Additionally, many corporations have expanded their in-house legal departments to employ full-time IP attorneys and support staff, thereby eliminating the traditional law firm markup. Yet even with these aggressive cost-cutting tactics, U.S. corporations are still looking to economize expensive IP activity in any way possible.
To some organizations, namely global corporations like Microsoft and General Electric, supplementing patent operations with foreign labor is a logical step. After all, many of the biggest and best U.S. companies have maintained a successful foreign presence in countries like India, China, and the Phillipines for years. These companies are already comfortable dealing with the difficulties of offshore operation, and have incredible infrastructures currently in place to support the implementation of new processes. To most organizations (including law firms), however, sending patent work abroad is a radical departure from what is considered acceptable practice. The apprehension of these organizations is undeniable and their concerns are perfectly well-founded; however, the barriers are not insurmountable and should be properly understood before any final decisions are made.
Ethical ConsiderationsThe most obtrusive barrier preventing universal acceptance of patent outsourcing is grounded in ethical considerations. While not always purely “legal” in nature, patent related work should always be considered legal because at the most fundamental level, patents are in fact legal instruments. Arguably, all activity related to the preparation, prosecution, maintenance, and litigation of patents is legal activity in some capacity, because such activity will ultimately affect the applicant’s intellectual property rights. As such, attorneys who are involved with outsourcing patent work must be diligent in ensuring ethical obligations are maintained at all times.
Ethical concerns related to patent outsourcing boil down to two categories: confidentiality (secrecy) and competence. Interestingly, neither of these of concerns are strangers to patent attorneys. For years, patent attorneys in the U.S. have farmed-out analysis projects, prior art searches, and even preliminary application drafting to domestic companies that employ a primarily non-attorney workforce consisting of patent agents, engineers, scientists, and even trained individuals with little or no qualified academic background. In sending out projects to these domestic companies, attorneys risk a breach of secrecy and a drop in quality that is equivalent to the risks associated with outsourcing to an offshore provider.
The most effective ways to mitigate the risks of outsourcing patent work apply to both domestic and offshore arrangements. First, it is imperative to know the details of the outsourcing company’s operations. Insist on a reputable company that is incorporated in the United States, and make inquiries into the offshore personnel that will be privy to sensitive information. Before committing to a working relationship, develop a strong rapport with the company’s executives. This does more than just ease the nerves of the parties involved, it also dramatically increases the level of accountability felt by the service provider. The more accountability that exists, the more carefully the parties will operate to ensure secrecy of sensitive information. Second, expect to receive imperfect work-product and budget time to revise accordingly. No conscientious attorney would blindly sign-off on work-product created by anyone other than himself; thus, all attorneys should expect to spend a reasonable amount of time revising work-product received from an outsourcing company. Any attorney contemplating outsourcing needs to understand that the true test of gainful outsourcing is not finding the cheapest labor or receiving the best work-product, but realizing the most value per dollar.
United States Export ControlsA lesser-known barrier preventing full acceptance of patent outsourcing is federal export regulations restricting international dissemination of certain technologies. These restrictions apply to enabling technical disclosures and are not limited to tangible goods. There are two regulatory agencies that enforce the U.S. export laws: the Directorate of Defense Trade Controls (DTC) and the Bureau of Industry and Security (BIS). The primary purpose of the DTC is to control the import and export of munitions and weapon technology by enforcing the International Traffic in Arms Regulations (ITAR).
[1] Conversely, the BIS is responsible for enforcing and implementing the Export Administration Regulations (EAR), and has regulatory control over a vast array of technologies ranging from “dual-use” items to purely commercial goods.
[2] Items subject to EAR are enumerated on the Commerce Control List (CCL), but the applicability of the CCL varies depending on what foreign nation is in question.
[3]Adhering to the BIS and DTC regulatory frameworks is absolutely essential for any organization interested in outsourcing patent work to a foreign country. Failure to comply with federal export regulations can result in severe fines and even imprisonment. Additionally, technology that could warrant a secrecy order issued by the USPTO may lose future patent rights as a result of premature foreign disclosure.
[4] The first step to ensuring compliance is accurate classification of the technology in question. Invention classification should be a joint effort between the inventor and his attorney, with the service provider acting as a final safety net. The following must be determined before any invention disclosure leaves American soil:
(a) Does the invention employ technology similar to what is identified on the United States Munitions List?
[5](b) What categories of technology are restricted from the country where the outsourcing vendor’s employees are located?
(c) Does the invention employ technology similar to what is identified on the CCL for any restricted categories determined in (b)?
If the answer to either (a) or (c) is affirmative, no attorney should submit the invention disclosure to an offshore provider without proper government authorization in the form of an export license. In this situation, the risk-to-benefit ratio is simply too high to gamble on foreign outsourcing. Even if the invention passes this internal screening test, it is good practice to contact a BIS counselor if uncertainty exists.
[6]There are several compelling reasons, however, that should prevent organizations from becoming overly discouraged with the consequences of potential export violations. First, only information that is unpublished (not in the public domain) is restricted by U.S. export controls.
[7] This means that many patent services can be freely outsourced, even if the invention in question falls within the scope of the ITAR or EAR. In practice, only patent application drafting and early-stage prosecution matters are limited by export controls, because only these services require a full enabling disclosure to be sent abroad. Second, the vast majority of inventions that enter the patent system are entirely unrelated to the sensitive technologies protected by the export laws. In FY 2007, only 128 secrecy orders were issued out of 362,227 applications examined that year.
[8] Additional research shows that the majority of patents granted each year fall into classifications that do not relate to the restricted items in the CCL or U.S. Munitions List.
[9] Therefore, while the general concept of patent outsourcing may not sit well with every U.S. attorney, it is hard to argue that the practice of doing so is an unacceptable risk in light of U.S. export controls.
ConclusionThe United States legal system and the economic forces that drive it are institutions that will last for centuries to come. The recent growth in IP activity has only strengthened the bond between attorneys and corporations, but the balance of power is shifting in favor of a free-market approach to legal services. In today’s global economy, opportunities exist to maximize operational efficiency that the world has never seen. Many of these opportunities are wonderful and profitable endeavors, while others are ill-advised risks capable of devastating an organization. Certainly, diving head-first into uncharted waters is a foolish mistake with regard to patent services. However, with a patient and educated approach, patent outsourcing can be a highly rewarding decision for everyone involved. Offering more than just cost-savings, effective outsourcing can translate into better work environments, happier clients, shorter hours, and more efficient use of company time.
Anthony J. DeJohn, Esq. is the Director of Operations and Vice President of Intellectual Property at LawScribe, Inc. He wishes to thank Joe Conate of the Beraeu of Industry and Security and Donald Hajec of the United States Patent and Trademark Office for their thoughtful discussions. Anthony can be contacted by email at
adejohn@law-scribe.com.
[1] The consolidated version of the ITAR can be found at http://www.pmddtc.state.gov/consolidated_itar.htm.
[2] Dual-use items have both commercial and military or proliferation applications.
[3] The CCL can be found in 15 C.F.R. 774.
[4] 35 C.F.R. 5.2(a)
[5] The United States Munitions List specifies all technology regulated by the DTC and ITAR
[6] Ask a BIS counselor online at https://www.bis.doc.gov/forms/askacounselor.html
[7] 15 C.F.R. 734 (EAR) and 22 C.F.R. 120.11 (ITAR)
[8] USPTO Performance and Accountability Report, FY 2007
[9] USPTO Patent Report – Breakout by Technology Class (http://www1.uspto.gov/go/taf/clsstc/usa_stc.htm)
