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The risk of leakage of intellectual property and confidential information for SMEs when developing and outsourcing

Published in: Intellectual Property
by Arlo Canella
Home > The risk of leakage of intellectual property and confidential information for SMEs when developing and outsourcing

We assist entrepreneurs and SMEs with contractual development and outsourcing projects, and with this article we address the legal and tax challenges related to the protection of intellectual property and confidential information. Specifically:

What is meant by development and outsourcing?

Development and outsourcing are two key business practices in today’s business landscape. The former refers to the process of growing and improving a company’s operations by implementing new strategies, products or services. A technology company, for example, might choose to develop new software to meet changing market needs and maintain a competitive advantage.

On the other hand, outsourcing is a business strategy of externalizing specific operational functions or processes to third parties, allowing the company to focus on its core competencies. A manufacturing company, for instance, might decide to outsource its customer service operations to a specialized supplier. This allows the company to save resources and focus on its core business: the production of goods.

These two concepts, development and outsourcing, are often mutually interconnected. Companies may develop new products or services entirely in-house, but they may also choose to outsource certain stages of the development process to external specialists. In either case, effective management of intellectual property and confidential information is critical to ensuring the success of the enterprise.

What should I consider when transferring my property (movable and real estate) in an outsourcing contract?

Transferring property, both movable and real estate, in an outsourcing contract involves careful consideration of a number of legal, procedural and tax aspects. The procedure for transferring movable property, such as a company’s equipment, can be relatively straightforward, since in many cases it does not require special formalities and can even be done verbally. However, for registered assets such as automobiles, the transfer must be documented in writing.

By contrast, for real estate as buildings, the procedure is more complex and requires a written contract executed before a notary public. Such a contract must then be transcribed at the appropriate offices, such as land registries, to ensure the effectiveness of the transfer against third parties.

Concurrent with these considerations, it is crucial to take into account the tax aspects of the transfer. For instance, the transfer of ownership may have implications on VAT or any transaction taxes. While not the main topic of this discussion, it is worth noting that careful tax planning can help minimize possible negative implications and optimize the tax efficiency of the outsourcing process.

How to protect my intellectual property in outsourcing contracts?

The protection of intellectual property in an outsourcing contract is a crucial node and requires special attention. One must clearly define what intellectual property rights are involved and properly negotiate their ownership or licensing. This includes the full range of intellectual property, from patents to trademarks, from copyrights to trade secrets.

A typical tension point involves managing the confidentiality associated with documentation that reveals key details, such as those for patent implementation or design construction details. The outsourcing provider may have access to this information to do his or her work, but this knowledge sharing will need to be meticulously regulated so as to avoid the loss or reckless disclosure of such trade secrets.

Another critical area concerns the guidelines for trademark exploitation and the limits of trademark licensing. If an outsourcing provider uses the company’s trademark, it must follow the guidelines for trademark use and may be subject to restrictions on trademark use outside the context of the outsourcing contract. It is therefore important to clearly and unambiguously set out these rules in the outsourcing contract.

How can I ensure that confidential information remains protected in development and outsourcing contracts?

Protection of confidential information is a crucial piece of development and outsourcing contracts. It is essential to include well-articulated nondisclosure clauses in the contract that clarify how confidential information is identified and managed between the parties. This may cover limited access to confidential information, with usability granted only to a small number of employees who have a direct need for it.

If these confidentiality provisions are not followed, the legal consequences can be severe. They can range from contract termination to damages, and in some cases can result in criminal penalties. For example, if an outsourcing provider misuses confidential information for competitive advantage, the company could take legal action to obtain compensation.

It is therefore critical that the parties involved fully understand the confidentiality provisions and the possible consequences of not complying with them. The contract should be explicit on these points, and it may be helpful to engage legal counsel to ensure the correct wording and interpretation of these clauses.

What happens to my intellectual property and confidential information after an outsourcing contract is concluded?

At the end of an outsourcing contract, special attention should be paid to the fate of intellectual property and confidential information. Contractual provisions should specifically address the consequences of ending the partnership, dealing with issues such as the return or destruction of materials, the right to continue to use intellectual property, and the protection of intellectual property.

The legal and financial implications of a contract termination can be significant. For example, in the absence of specific provisions, the outsourcing provider may retain the right to use confidential know-how or intellectual property, potentially adversely affecting the company’s competitiveness. In addition, if confidential information is not adequately protected at the end of the contract, compliance issues may arise, with possible penalties and damage to the company’s image.

From a financial perspective, the end of an outsourcing contract could result in costs associated with transitioning functions in-house or to a new vendor, as well as potential claims for damages or compensation if contractual provisions have not been met. Thus, it is critical to ensure that issues related to termination are adequately addressed in the contract or, even more appropriately, during negotiation.

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Publication date: 7 August 2023
Last update: 7 September 2023
Avv. Arlo Cannela

Avvocato Arlo Canella

Managing Partner of Canella Camaiora Law Firm, member of the Milan Bar Association, passionate about Branding, Communication and Design.
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