How to Protect IP Rights and Source Code Ownership While Outsourcing?

We are a software development company working in the outsourcing sector, and we often have to deal with our customers’ concerns about their intellectual property and ownership rights when they outsource their software development. We decided to share our vision of this issue, as it seems to be one of the matters that many companies find critical.

The practices we outline in this post are the ones we adhere to in our work, as we always do our best to protect the software ownership rights of our clients.

Software development outsourcing is rather common nowadays as it has some obvious advantages for the customer – lower costs, access to professional brainpower regardless of their location, shorter development time due to your getting a full team immediately. At the same time, when outsourcing your project development, you are going to reveal your ideas and innovations to your partner. Naturally, you may be worried about their protection.

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There are a number of things you can do to strengthen the safety of your property rights. However, the first and foremost is choosing the right partner. Do always check the reputation of the development company you are planning to contract. Read the reviews, browse the portfolio, look at the projects the company has completed. This research can help you decide whether the company deserves your trust.

At the same time, even with a good faith partner, there are still some measures you should take to protect IP when outsourcing work to an app development company. We have put together a short checklist that you can use when planning the strategy of protecting your intellectual property.

Define and establish your intellectual property

In the IP matters, you need to be extremely precise as to what you consider to be representing your intellectual property. Before signing an agreement with a development company or a freelance professional, make an inventory of your IP and check that everything that needs documenting is documented.

What can be your intellectual property? Quite a number of things:

  • Patents representing your innovational ideas and methods
  • Trademarks serving as a unique identification of your company and its products
  • Copyright protecting your work from use by others

Make sure you obtain legal documentation of all your intellectual property and that the documents contain a proper description of your IP.

Before starting your cooperation with an outsourcing company, decide which IP you are going to disclose. With this done, it will be easier to draw agreements with your service provider. If you are using anything that is the IP of any third party, always check your agreements with the IP holders to see whether they allow further disclosure.

If you are going to outsource your project to another country, check the IP laws of that country too. At the same time, verify that your IP patents or copyrights apply to your partner’s jurisdiction or are global.

In short, do your due diligence in respect of your intellectual property. If you are not too competent in these matters, get a legal counsel. Yes, lawyers are expensive, however, your losses in the event of an IP dispute may be much higher. In the famous Apple vs. Samsung lawsuit over the smartphone design that has dragged on for eight years so far, the damage amounts fluctuate between $1 billion and $400 million, and yet the case is still not closed.

Sign an NDA

NDAs, or Non-Disclosure Agreements, are usually signed whenever new partners come into the relationship where intellectual property is concerned. If you are working with several outsourcing providers, sign an NDA with each of them.

Typically, an NDA should define the following points:

  • The parties that agree to non-disclosure of confidential information. The agreement must clearly refer to both your company and the outsourcing service provider. Also, NDAs can be mutual or unilateral. With mutual NDAs, both parties expect to disclose confidential information to each other, while with unilateral ones only one party (typically the customer) discloses the information that is considered to be confidential.
  • The information that is classified as confidential. Both parties signing the agreement must know what information is not to be disclosed. Thus, whenever any conflict arises, the agreement will serve as the basis for its resolution.
  • The scope of obligations. A non-disclosure agreement should explicitly state what actions it prohibits – copying, duplicating, reverse engineering, distribution, and so on. By including all possible means of information disclosure, you will ensure the strongest protection.
  • The exclusions from the obligations. Most NDAs contain a clause saying that both parties will be released from the liability if they disclose the confidential information if it was received from other public sources or before the agreement was signed.
  • The duration of the agreement and the obligations. Usually, NDAs are valid for several years (including the total time of the project development plus more). In any case, make sure that when the agreement term expires - you will only drop the non-disclosure obligations while your IP rights remain.

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Most IT development companies, both working on their own product and especially those doing outsourced projects, sign individual NDAs with each of their employees having access to the project data. This is a very good practice, as it strengthens the protection of your intellectual property. Ask your partners whether they have such policy within their company before starting the project together.

Sign a software development contract

If you’ve contacted the development agency only for a consultation or estimation, the NDA may be enough to cover this case. If, however, you decide to go on with this company to develop your product, you also need the software development contract.

Of course, the contract, as the basis of your cooperation with the IT outsourcing company, should cover all aspects of such cooperation, such as the scope of work, the payment terms, the liability of both parties. However, it should in all cases contain the intellectual property provisions.

What are the main IP-related provisions that you should think of including in the contract? There may be a number of them, all intended to protect your software development intellectual property rights:

  • The contract should explicitly provide for your ownership of any intellectual property that is created during the execution of the contract. Make sure to also include the source code ownership agreement under which you will own all source code of your product. In such relationships, a software developer acts as a service provider, thus should not own any IP they create. For you, as the client, holding the full rights of ownership means that you are free to do anything with the code you receive for your money. You can change it, sell it to somebody else or provide it to another IT engineering team who may continue working on your product.
  • Include the provision saying that whenever the contract is terminated by either party for whatever reason, you will have immediate access to any intellectual property that has been created so far.
  • The contract should contain the requirement for your partner to return or destroy all designs, wireframes, plans, and other materials used or created during the production.
  • Mention the requirements to sensitive data management by your partner. For example, it is not enough to erase the data that is not needed anymore to make it irrecoverable - you should write it over. Make sure the contract imposes this obligation on your partner.
  • In the “Governing Law” section, state the law of your jurisdiction as the governing law of the contract. This way, any violation of the agreement will be resolved under your laws.

Check employee agreements

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IT outsource companies consider it good practice to make individual agreements with each of their employees on the assignment of all rights to the intellectual property that the employee creates for the company. If your partner has such agreements with their employees, it will give you additional protection, as you can be sure that the developers will not be able to claim ownership of the IP that they’ve built.

Insist on a system of permissions

It is never necessary for each and every employee of the web or mobile app development company to have full access to all data of the project. Agree on a hierarchy of permissions giving different levels of access to people of different positions with only a few people having unrestricted access.

Usually, software development firms have their own permission system that may need to be slightly adjusted for your project. When employees have different levels of access to the data, the safety of sensitive information increases significantly.

Your IP protection is in your hands

Intellectual property protection is a whole separate aspect of your cooperation with an application development company. Although it requires quite a lot of effort and substantial costs, it should never be ignored. We are not going to say that it is easy, as IP protection involves a whole package of measures – including due diligence, preparation of NDAs and software development agreements, timely registration of your IP components. However, all these efforts always pay off, as intellectual property is, probably, the most valuable asset of a business. Moreover, properly prepared and signed IP agreements will protect your business from legal risks that may occur in the relationships between you and your partners.

We always respect the intellectual property of our clients and take proactive measures for its protection. If you are looking for web and mobile application development services and are concerned about how to protect intellectual property when outsourcing, contact us for a detailed consultation. We will always be happy to share our practices with you and suggest the best procedures in your case.

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