One of the great economic phenomena of our day is the outsourcing of the U.S. economy's service and information-technology work overseas. It is estimated that by the end of this year, more than 80 percent of the world's largest 2,000 corporations will have established significant outsourcing operations. This fundamental change in the world's economy is evidenced by the expectation that Indian accounting firms will prepare approximately 400,000 American tax returns this year and more U.S. hospitals will have CAT scans read by Indian and Australian radiologists.

For most Americans, outsourcing evokes an image of a faraway call center or factory, but outsourcing is rapidly moving into a new realm—the law. According to a recent study, eight percent of all U.S. legal work, including patent prosecution, will be outsourced overseas by 2015. In the past, outsourcing patent work meant using a less expensive firm in the Midwest. Now it often means sending work to India instead of Indiana. The reason is simple—cost. Fees may average as little as $2,000 per application for an outsourced patent, versus U.S. law firm fees of $8,000 to $12,000 for the same application. While cost reduction may be a primary motivation for sending patent prosecution work overseas, some potentially non-obvious factors need to be considered before deciding whether to outsource patent prosecution work.

Typical Outsourcing Arrangement for Patent Prosecution Work

Before looking at some of the hidden risks in outsourcing patent prosecution work, a brief overview of how a typical patent prosecution outsourcing arrangement works is in order. In a typical arrangement, the portions of a patent application that describe how to make and use an invention (known as the specification and drawings) are prepared by either an offshore technical writer or a foreign patent attorney/agent. Sometimes the offshore writer will also draft some initial claims to indicate what he or she believes are the pertinent inventive features. The application is then sent to a U.S. patent attorney to edit the specification, prepare the claims of the application and submit the patent application to the U.S. Patent and Trademark Office (USPTO). The U.S. patent attorney is also usually responsible for prosecuting the application in the USPTO until the patent issues.

Hidden Risks in Outsourcing Patent Prosecution Work

(a)  Litigating Outsourced Patents         

Numerous issues arise if the outsourced patent is the subject of litigation, whether for offensive or defensive purposes. For example, the attorney-client privilege only protects "legal work" from discovery.[1] In the context of patent applications, courts examine whether the overall tenor of the communication indicates that it is a request for legal advice or services.[2] If the communication is a request for legal advice or services, it is protected from disclosure by the attorney-client privilege. But the communication is not shielded from disclosure if it is merely conveying factual information without legal advice. While legal advice may still be privileged if it includes "factual" information, such as technical information and prior art necessary to prepare the patent application, courts will likely have an easier time segregating the "non-legal" work performed overseas from the "legal" work performed by the U.S. practitioner. As a result, courts might be more willing to allow discovery of documents and information exchanged with non-attorneys overseas. At a minimum, U.S.-based counsel will have to create additional privilege logs describing the overseas communications. Circulating otherwise confidential information to non-attorneys outside the organization could also provide ammunition for opposing counsel to argue that the attorney-client privilege does not apply based on waiver through disclosure to the overseas drafter.

Outsourcing creates a potentially discoverable paper trail, electronic or otherwise, through additional overseas communications. E-mail is the easiest method for communicating when the work is outsourced to a location several time zones away. This is especially true if the overseas contractors are more effective at written than oral communications. The use of e-mail to communicate overseas becomes even more significant because e-mails are typically saved or archived, making them available for discovery long after they are sent or received.

Litigating an outsourced patent may also involve additional costs. Taking discovery on the patent's history will reveal a trail overseas, potentially resulting in increased costs, logistical headaches and tactical problems. For example, depositions and discovery may have to be conducted overseas. It is not uncommon in patent lawsuits to take the deposition of the patent agent or attorney involved in the drafting and prosecution of the patent. Allegations of inequitable conduct make such depositions critical. In this context, opposing counsel would probably want to depose the U.S. practitioner and the overseas drafters involved in the patent application. U.S. courts may require the outsourcing contractors to travel here for depositions or U.S.-based counsel may have to coordinate overseas depositions. One overseas flight may cancel out any savings achieved by outsourcing the work in the first place. If the matter goes to trial, additional witnesses may have to be flown to the United States. Moreover, identifying who was actually involved in drafting the patent application may also be difficult if the work is outsourced to an overseas firm. It is therefore extremely important to identify all of the individuals who worked on the patent application overseas so that they can be identified and contacted if the patent is litigated.

An obvious, but potentially overlooked practical point is that outsourcing is generally unpopular among the American public. A recent study estimates that 3.4 million U.S. jobs will move overseas by 2015—a statistic that has prompted heated debates in the 2004 election. In light of anti-outsourcing sentiment, Congress has recently introduced legislation proposing to cut federal funding from companies that lay off workers at higher rates in the United States than abroad. This legislation would also require companies that apply for federal grants and loans to declare the salaries of employees in the United States and abroad. The negative public perception of outsourcing could adversely affect patent litigation. Against the backdrop of cutbacks blamed on outsourcing and job security worries, a patent owner may have a hard time persuading a jury that drafting the patent overseas protects American ingenuity.

(b)  Inequitable Conduct

Another issue that may arise is that outsourcing a patent application could create additional risks of challenges to the patent's validity based on allegations of inequitable conduct.

Only patent attorneys and agents registered with the USPTO can file a patent application in the United States.[3] In signing the patent application, a U.S.-based patent attorney or registered agent bears the responsibility of ensuring that everything submitted is factually and legally proper.[4] Moreover, the knowledge and actions of the U.S. practitioner are chargeable to the patent applicant. Related to this obligation is the court-developed doctrine of inequitable conduct. Under this doctrine, courts have refused to enforce patents when it is shown that the patentee acted inequitably in procuring the patent. More specifically, courts may refuse to enforce an otherwise valid patent upon a showing that the patentee knowingly failed to disclose information material to the patentability of the invention during the patent application procedure with the intent to mislead the USPTO.[5]

The outsourcing of patent work may create additional burdens on the attorney or agent involved in prosecuting the patent that could blow the door wide open for mistakes leading to charges of inequitable conduct. For example, the person responsible for drafting the patent may be unfamiliar with U.S. patent law. Miscommunications between the overseas contractor and the U.S. practitioner during the application drafting process may occur. As mentioned, the U.S. practitioner has the responsibility to ensure that everything in the application submitted to the USPTO is factually legal and proper, but this duty may be difficult to fulfill when the work is outsourced far from the supervision of a U.S. practitioner. At a minimum, the U.S. practitioner should exercise particular caution in ensuring that the end product is appropriate and that any material considered overseas—i.e., prior art—is brought to the attention of the USPTO.

(c)  U.S. Export Regulations

Outsourcing may also create an extra layer of work because information sent abroad must comply with the myriad laws that regulate the exportation of technology from the United States. Violating these laws can result in unenforceability of a later-obtained U.S. patent, denial of future export licenses, fines and even imprisonment.

Various departments and agencies within the federal government have enacted export regulations. For example, the U.S. Department of State's Directorate of Defense Trade Controls regulates technology relating to military applications in accordance with the Arms Export Control Act and the International Traffic in Arms Regulations. In terms of non-military exports, the U.S. Department of Commerce restricts or bars certain exports to certain countries through the Bureau of Industry and Security (BIS).[6] Any item sent from the Unites States to a foreign destination is an export. "Items" include obvious commodities, such as clothing, building materials and circuit boards, along with intangible goods such as computer software and technical information. How an item is transferred outside of the country does not matter in determining export license requirements. An item therefore qualifies as an export regardless of whether it is transferred in a container ship, downloaded from an Internet site overseas or transferred by e-mail.

Export license requirements are dependent upon an item's technical characteristics, the destination, the end-user and the end-use. First, the Export Control Classification Number (ECCN) for the item must be found to determine if it is included in the Commerce Control List. Controlled items include obvious categories like items related to nuclear technology, but also less obvious technologies such as encryption software or global positioning systems. Second, the ECCN must be cross-referenced with the country of ultimate destination to determine the export controls on that item particular to the destination country. Third, certain individuals and organizations are barred from receiving U.S. exports and others may only receive goods if they have been licensed. Accordingly, the following BIS databases need to be reviewed: (1) the Entity List, (2) the Treasury Department Specially Designated Nationals and Blocked Persons List, (3) the Unverified List, and (4) Denied Persons List. Finally, some end-uses may be prohibited while others may require a license. Although U.S. export regulations are not an insurmountable barrier to outsourcing patent applications, it is extremely important to conduct a thorough review of these regulations and the technology described in the invention before outsourcing patent work.

(d)  Protecting Your Technology

Another concern is protecting your technology. Countries such as India have less stringent laws for protecting intellectual property rights than the United States. For example, India's data protection laws are still under debate. It does not have any criminal trade theft laws. A recent incident involving the theft of source code illustrates what can go wrong. Shekhar Verma, an employee of an Indian outsourcing contractor, attempted to sell the source code for SolidWorks' computer-aided design package to one of SolidWorks' competitors. Verma was arrested in August 2002 after a joint sting operation between Indian police and the FBI. His arrest led to the first prosecutorial filing for outsourcing-related intellectual property theft in India. Verma, however, was charged under a civil theft law, because India does not have criminal laws prohibiting trade secret theft. A criminal charge of breach of trust was also filed against Verma's employer, the Indian outsourcing company. Verma was released on bail and his case has yet to go to trial. While India is at least attempting to introduce laws protecting intellectual property rights, other countries vying for outsourcing dollars offer even less protection for intellectual property rights. Of course, the same thing can (and does) happen in the United States, but at least a well-developed body of law exists to protect such rights.

Situations could also arise in which the same outsourcing company is handling applications for competitors with similar technology, heightening the risk of the disclosure of important technology to a rival entity. U.S. attorneys are not allowed to take clients if the representation of that client is directly adverse to another client. The outsourcing contractor, however, would not be under any obligation to prevent such conflicts. It would have no incentive to avoid handling patent applications by multiple competitors for similar technology. Outside counsel or the organization should thus ensure that such conflicts do not arise within the outsourcing company.

(e)  Cost Savings?

A recent study by the Gartner Group, a leading consulting firm, indicates that outsourced operations are on average 30 percent more expensive than in-house customer service operations. Gartner also reported that 80 percent of organizations that outsource customer management operations purely to cut costs will fail to do so, while 60 percent of those who outsource parts of the customer service process will have to deal with customer defections and hidden costs that outweigh any potential savings offered by outsourcing. While this study was not in the context of outsourcing legal work, the hidden costs discussed in this article may also cause potential savings from outsourcing patent work to evaporate.

Conclusion

Although the potential consequences are serious, your organization should not be frightened away from considering outsourcing patent application work. Given the right set of circumstances, outsourcing can offer benefits — for instance, with relatively simple patent applications or initial prior art investigations — if the work is diligently supervised. The key is to carefully consider the myriad issues beyond the bottom line that outsourced patent work raises.