Intellectual Property Rights When Outsourcing Software Development

Companies in need of software development services are often skeptical about outsourcing, mainly out of concern about their intellectual property (IP) rights. Rightfully so: intellectual property is one of the most valuable assets of any company. It can cover anything from know-how through copyright to source code, so there is a lot at stake when parties sit down to discuss a new software product.

Intellectual property rights – what you should know?

It is the customer’s responsibility to ensure their intellectual property rights are protected, but they aren’t alone in this endeavor. There are a lot of legal mechanisms and measures that help protect intellectual property. Read this article to find out:

• what are intellectual property rights,
• what are the different types of intellectual property,
• what risks arise if you don’t protect your IP,
• the legal mechanisms that apply to protecting IP,
• what you should do to ensure your IP is protected.

For the final point, we also include a free checklist that could help you prepare for a discussion with your potential software development partner.

What are intellectual property rights?

Intellectual property rights entail the legal regulations that protect original products, innovations, industrial design, artistic works, trade secrets, and any other goods and services created by the human mind. The rights grant their creators exclusive rights to use them.

Types of intellectual property rights

A company’s intellectual property may include data, software, business processes, inventions, trade secrets, employee matters – any knowledge of information that is deemed confidential. Let’s take a look at the main types of intellectual property rights that protect this knowledge.

• Patents

A patent grants exclusive rights to make, use and sell a qualifying creation or invention for 20 years. To obtain this right, creators must apply to the relevant Patent Office, which, upon granting the patent status, makes the knowledge available to the public and, at the same time, grants the creators with legal monopoly. Patents always cover one product or service.

The patent right can be extremely powerful from an economic perspective. Patents can cover ideas, systems, methods, algorithms, and functions embodied in a software product, which will extend to user-interface features, menu arrangements, operating system techniques, etc.

• Registered Trademark

A trademark is a distinctive sign that differentiates a specific product from others on the market, allowing consumers to identify that product with a specific brand or provider. Apple Inc.’s bitten apple or the Facebook logo are familiar examples. Registered trademarks can cover multiple goods or services.

• Copyright

Copyright extends protection to the specific means of expression of a novel idea. Under copyright law, the owner of creative work has the exclusive right to publish, copy and distribute it, usually for a limited period of time. In most countries, copyright protection lasts during the lifetime of the creator and for further 50 years (in Canada, copyright protection lasts a lifetime + 70 years). Software and computer programs are generally protected by copyright law, which extends to source code and object code.

• Trade secrets

A trade secret is a knowledge that gives its owner a competitive advantage when it is kept secret. It can be a formula, a pattern, a mechanism, or a tool that is not known in the public domain. The best example of a trade secret is the formula of Coca-Cola.

• Industrial design right

The concept of industrial design refers to the aesthetic side of the design process of products and handicrafts. It’s what increases the aesthetic value of products that otherwise would be purely utilitarian. It can cover e.g. the shape, configuration, pattern, surface, colors, and other visual features of the product. A great example of popular industrial designs is a KitchenAid appliance and an iPhone. To obtain industrial design protection, designers must create a new or original design that is non-functional – features of an article are not protected by this right but can be protected by a patent.

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The intellectual property is associated with risks

Undoubtedly, it is one of the most valuable assets of any business and it’s the owner’s responsibility to protect it – especially in the case of startups and SMEs where the intellectual property may be the only tangible asset.

Outsourcing software development means you will be transferring your intellectual property – the idea, know-how, source code (if it exists), hardware, and any information necessary to build a new software tool to a potential external partner, which creates risks. An original idea may always be appropriated by malicious entities and that can happen both on the part of the contractor or thieves who capture data from them. Should that happen, you would have to be prepared for the following:

• the costs of losing the value of your idea – you will lose the exclusive right of ownership of this asset or it will become invalid,
• the legal costs of defending an intellectual property infringement case, should you decide to file one, as well as the potential settlement costs,
• loss of trust from your existing clients,
• cuts in revenue or share prices if you lose the case.

Worth remembering

As a customer of an outsourcing partner, you need to be aware of this risk and implement all measures necessary to avoid damages that may result from the potential violations of intellectual property rights when offshoring software development. Otherwise, you may one day be surprised by the fact that a competitor you haven’t even heard of is already implementing your idea, products or services, while you haven’t even started.

Mechanisms protecting intellectual property rights when outsourcing software development

The legal measures protecting intellectual property across the globe are generally extensive, but they vary from country to country. Make sure you review those measures before you start negotiations with an outsourcing partner – the World Intellectual Property Organization (WIPO) offers access to legal IP information from around the world. You can also consult the U.S. Chamber International IP Index, which evaluates the intellectual property ecosystem in most global markets against 50 unique indicators and allows you to easily compare scores.

• Regional laws

European intellectual property rights

Legal protection of intellectual property on the continent is extensive. The countries of the European Union are obliged to follow EU regulations on intellectual property, especially the Directive on the Enforcement of the Intellectual Property Rights, adopted in 2004. It stipulates that every EU country must apply effective, dissuasive, and proportionate remedies and penalties against those engaged in counterfeiting and piracy – as described in the article by the European Commission here. A software development company based in Poland or any other EU country is obliged to implement relevant measures to follow this directive. If you’re unsure whether a country is part of the EU, you can check it on this website.

General Data Protection Regulation

Every EU country must also comply with the General Data Protection Regulation (GDPR) adopted in 2018, which requires companies registered in the EU to protect their user’s privacy rights and safeguard their data. Failure to comply with this regulation can cost up to 20 mln EUR or 4% of annual global turnover, whichever is greater, so businesses ensure extensive data protection by default. 

Although GDPR covers the EU only, in practice it extends to anyone doing business in the EU. According to Recital 14 of the GDPR, the protection afforded by this Regulation should apply to natural persons, whatever their nationality or place of residence, in relation to the processing of their personal data. Effectively, GDPR forced all EU entities to better safeguard the access, portability, and storage of personal data.  

Finally, all EU countries must follow the EU Directive 2004/48/EC on the enforcement of intellectual property rights. Thus, the intellectual property of anyone interested in doing business in Poland and other EU countries is extensively protected by law. This means that both American and Canadian intellectual property will be legally protected by default.

Canadian intellectual property rights

Intellectual property rights in Canada are regulated by the Canadian Intellectual Property Office (CIPO) which is the principal institution responsible for processing registration applications for patents, trademarks, copyright, and industrial designs and administers the relevant acts.

U.S. intellectual property rights

The U.S. federal intellectual property rights are granted by the Constitution for copyright and patents. Patents and trademarks are regulated by the United States Patent and Trademark Office (USPTO) and the copyright is administered by the United States Copyright Office. They will inform you how to handle potential IP infringements. Each type of intellectual property has different criteria for protection, so seek legal counsel when looking to outsource in the U.S. – it may increase the costs but will buy you greater intellectual property security.

• Non-Disclosure Agreement (NDA)/Confidentiality Agreement (CA)

A trustworthy contractor will offer to sign this contract before you sit down to discuss your new idea. This agreement is the basic measure of protecting intellectual property, as it ensures full confidentiality of all IP assets, trade secrets, and information you need to share with the software development partner for estimation purposes, effectively binding the company from speaking about, sharing, or disclosing it to third parties without permission.

• Master Service Agreement

While the contract should be tailored specifically to your project needs, there are certain elements that must be entailed in any software development agreement. These include the confidentiality clause (an NDA/CA is usually an integral part of this contract), the terms of service delivery, payment terms, data security mechanisms, general liabilities of the parties, transfer of documentation and materials related to the software development process and ownership rights of the code as well as the transfer of rights to the customer. The ownership is particularly important from the customer’s perspective, as contractors often want to retain ownership of the code to use it in future projects. Take your time and keep an eye on that when you review the contract before signing it.

Intellectual property – how to protect it better?

Even though the law is usually on the side of the owner of intellectual property, they should always take action when it comes to protecting their rights and work. Unsurprisingly, this fact often causes additional stress to customers, when it shouldn’t be the case. Customers can do a lot to ensure their intellectual property rights are protected before they commission a project to a nearshore or offshore software development company. Here is what you can do in addition to obtaining relevant IP protection status and reviewing the legal measures applicable in a given country to feel safer about your intellectual property:

• Specify ownership

While ownership rights of the final product and source code shall be defined in the Master Service Agreement, this aspect of the cooperation is too important to not have it discussed directly with the contractor. You will get a better understanding of how the software development company approaches your cooperation and the resulting software product. Additionally, it will help you avoid the situation in which you start working with a company that wants to develop its own goods and services at your expense. The contract must clearly document the relevant intellectual property rights and specify the owners as well as authors or creators. When commissioning a project with CSHARK, you become the owner of our work and the source code and will be considered its author in as much as is legally allowed.

• Understand how your data will be physically protected

You need to find out whether the custom software development company has the resources and capacity necessary to protect your intellectual property against unauthorized use, loss or theft. The contractor should ensure secure connections, two-factor authentication where possible, a strong password policy and password changes policy, a VPN tunnel, firewalls and disc encryption at a minimum. Clarify also whether they secure home routers for remote work, what antivirus they use, and how often they monitor for system updates. If you have any specific protection and security requirements, ask for them.    

• Investigate their website

Don’t forget to do your own research about the potential software development partner before you start discussing the terms of cooperation. Check if the company has case studies on their website. We recommend you to read our article “Web Application Development – Case Study” about our cooperation with the HTP-J1 company to understand why building a trustworthy and professional team can be a good decision made for years.

• Investigate the business to business reviews portals

Reviews on portals like clutch.co can reveal a lot about the potential partner, helping you understand whether they would be capable of protecting your IP rights. For example, in the news section on our blog, we described why CSHARK was rated by Clutch as one of the Top Software Developers in Poland for 2020.

• Think about an exit strategy

In addition, it may be handy to think about an exit strategy in case the outsourcing agreement fails. Identify the relevant intellectual property office that you can contact in case you suspect a violation of your IP rights. Be prepared to protect your business, trademark, goods or services in every unexpected situation.

The importance of intellectual property rights

Intellectual property rights are extremely important for economic development as well as the creation of new jobs and industries and raising the quality of life. Humanity won’t be able to progress without the ability to create – both in the cultural and technological spheres. The legal protection of innovations granted by national laws further encourages new creations by formally regulating the interests of innovators and the public in a way that helps creativity and innovation to flourish. All of this directly impacts our well-being and the quality of our lives.

Software products are generally protected by copyright law, but some of their functions and designs can also be patented. There are a number of legal mechanisms as well as frameworks that help protect your intellectual property – the law is on your side, but you also need to do your homework when it comes to protecting your invention. Be aware that national legislation protecting IP differs from country to country.