As globalization continues its explosive growth, companies from across industry sectors continue to adopt a globalized strategy of sourcing products, services, and domain expertise from lower-cost countries such as India and China. (1) Sourcing now expands well beyond traditional information technology and business process outsourcing models that improve cost advantages relative to home markets to include knowledge-based sourcing. This knowledge-based sourcing not only arbitrages cost differentials but also leverages deep pools of educated and skilled workers who make up an eager knowledge class and who can provide competitive, judgment-based qualitative expertise and value. Today, communications technology and greatly improved infrastructure and logistics networks allow companies to move data and tangibles across borders seamlessly, quickly, and inexpensively. (2) Advances in technology combined with increasingly stable foreign political climates and reduced trade barriers make it more compelling than ever for companies to aspire to leverage the cost savings and knowledge class of workers available in offshore locations. A well executed global sourcing strategy can reduce costs, increase efficiencies and improve time to market without sacrificing, and perhaps even enhancing, quality of service, making such a strategy an essential consideration, and potentially key element, in virtually every enterprise-size company's business plan.
Global sourcing typically involves the sourcing customer either creating an international network of its own operations through affiliated entities or enlisting by contract a broad base of foreign suppliers in offshore locations. In either case, these sourcing models offer the combined benefit of a skilled or trainable workforce, available at wages significantly lower than those demanded by their U.S. or European counterparts. But in either case, along with the great potential reward of substantial economic benefits and competitive flexibility, comes the proverbial heightened operational and legal risks inherent in a global sourcing transaction. Potential global sourcing customers accordingly face serious, business-affecting decisions involving security, quality assurance, intellectual property ("IP") protection, operational support, regulatory compliance, dispute resolution, and realization risk as to predicted cost savings.
This Article highlights and analyzes one of the major components of risk a global sourcing customer faces as a result of the transfer overseas of proprietary information that qualifies as the customer's IP under applicable law. IP assets are mission critical in today's knowledge-based economy; the risks and challenges associated with their ownership and protection are significantly compounded in a global sourcing transaction in which a customer's IP must be shared or created in or among foreign jurisdictions. Indeed, IP ownership and protection against infringement are two of the most critical concerns in every global sourcing transaction. The increased risks inherent in transferring and protecting existing, and to-be-developed, customer IP demand a complex, robust, and vigilant risk assessment and management plan. This plan absolutely must be developed upfront in any and every global sourcing deal and then executed effectively so as to maximize the benefits of global sourcing.
This Article delineates the specific IP transfer routes in a global sourcing transaction, analyzes critical IP issues for consideration from a sourcing customer's perspective, and recommends strategies to bound and mitigate IP risk in global sourcing transactions.
II. HEIGHTENED RISKS TO IP IN GLOBAL SOURCING
As global sourcing penetrates more core business functionalities, companies increasingly source more "high value" products and services involving IP and proprietary technology. (3) In a global sourcing arrangement, a customer must almost always necessarily make its IP--which can range from proprietary designs to business processes to chemical formulae--available to the offshore service provider so that the sourced functions can be performed effectively. …