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Morris Manning & Martin, LLP

IP Newsflash September 2008 : Perils and Pitfalls of Technology Outsourcing: Patent Application Outsourcing Has Significant Risk


Outsourcing has become a popular way for many technology-based industries to lower costs. There are many underemployed, highly skilled and capable technical personnel in China, Russia, and India who are willing to work at low wages relative to those in the U.S. Certain aspects of software development, product design, and manufacturing can be done cheaply and efficiently in these and other countries.

Lately, some technology businesses and research institutions have considered outsourcing patent application writing. By some estimates, the market for outsourced patent services such as patent writing and searching is as much as $2.2 billion. The Indian patent services offshoring industry is estimated at $46 million for 2007 and could rise to over $200 million by 2012. India Emerges As Hub For Patent Offshoring, The Times of India, July 8, 2008.

However, there are grave risks with technology outsourcing. One recent example at the University of Tennessee (UT) illustrates the nature of these risks, by something as seemingly innocuous as employing foreign students as research assistants. A prominent UT professor was recently convicted in federal court on eighteen (18) counts for employing foreign nationals in a research venture he founded, and as of this writing is awaiting sentencing. Companies and others such as universities that utilize foreign nationals in certain kinds of research, which can include patent application writing, need to be particularly cautious about their activities that involve foreign outsourcing or foreign nationals.

In mid-August, Atmospheric Glow Technologies (“AGT”), a Knoxville-based company that commercializes technology developed at UT pleaded guilty to 10 counts of violating U.S. export control laws and faces up to $10 million in fines. In early September, a federal jury found J. Reece Roth, Ph.D., a UT Professor Emeritus and founder of AGT, guilty on 18 charges (including 2 charges for conspiracy) related to illegally exporting military technical information related to plasma technology for use in drones operating as weapons or surveillance systems. Roth faces up to 10 years in prison for each charge (5 years for each conspiracy charge) and fines of up to $1 million for each charge.

While performing work under Air Force contracts, Roth and AGT provided export-controlled information to a Chinese graduate student at UT, who was participating in the project. Roth also traveled to China carrying a laptop that included export-controlled reports. Note that the violations involved (1) carrying export-controlled materials to China, and (2) providing export-controlled materials to a foreign national within the United States.

Though UT was not implicated in any wrongdoing, universities involved in commercializing developed technologies should be aware of U.S. export control regulations and should have specific policies in place for compliance. Similarly, companies that plan to file patent applications overseas and/or employ foreign nationals for research or patent application writing should also consider implementing compliance policies.

There are several sources of law on export restrictions:

  1. The U.S. patent laws provide for abandonment and forfeiture of inventions that might affect national security that are published or disclosed or filed in a foreign country without consent of the United States Patent and Trademark Office (“USPTO”) (35 U.S.C. § 181, 182). A foreign filing license is required to file a patent application in another country (35 U.S.C. § 184). Sending information about an invention to a foreign country for purposes of preparing a patent application can run afoul of these laws.
  2. Those seeking outsourcing of patents or other work should also take care not to run afoul of U.S. export controls, including the Export Administration Regulations (“EAR”) enforced by the Bureau of Industry and Security (“BIS”) and the International Traffic in Arms Regulations (“ITAR”) enforced by the Directorate of Defense Trade Controls (“DDTC”). Failure to comply with export control regulations can lead to significant fines that dwarf any savings that are achieved. See Paul F. McQuade and Natalia W. Geren, How to Ensure That Your Off-Shore Preparation of US Patent Applications Does Not Run Afoul of US Export Controls, Intellectual Property & Technology Law Journal, March 2006.
  3. To address the increasing amount of foreign outsourcing for patent work, the USPTO recently issued a notice addressing foreign filing licenses for exporting subject matter abroad. A notice entitled “Scope of Foreign Filing Licenses” (“Notice”) was published in the Federal Register on July 23, 2008.

In this Notice, the USPTO reminded applicants and registered patent practitioners that “the export of subject matter abroad pursuant to a license from the USPTO, such as a foreign filing license, is limited to purposes related to the filing of foreign patent applications.” The Notice further advises that applicants considering exporting subject matter abroad for patent application preparation should contact the BIS for appropriate clearances.

The Notice also states that for an invention “made in the United States, technical data in the form of a patent application, or in any form, can only be exported for purposes related to the preparation, filing or possible filing and prosecution of a foreign patent application, after compliance with the EAR or following the appropriate USPTO foreign filing license procedure.” The foreign filing license relates to preparing and filing foreign patent applications and does not authorizeexporting the subject matter for preparing patent applications that will be filed in the United States. Exporting subject matter for any purpose other than preparing, filing or possible filing and prosecution of a foreign patent applicationcomes under the purview of the EAR and the ITAR. International business

The EAR rules govern the export of dual-use commodities, software, and technology, including technical data, and are sufficiently broad to control most high-tech items. Similarly, the ITAR rules apply for munitions and other technologies related to national security. These export controls are subject to the jurisdiction of the DDTC, but the USPTO has jurisdiction under both EAR and ITAR for subject matter exported for the limited purpose of filing or possible filing and prosecution of foreign patent applications.

Finally, the Notice advises that foreign filing licenses “do not authorize the export of any technology that is not specifically submitted to the USPTO as part of a U.S. patent application or a petition for a foreign filing license.” The subject matter may or may not be subject to export controls, and may or may not require clearance from the BIS, but (1) if the materials are not part of a patent application or (2) part of a petition for a foreign filing license, then export of the subject matter is not authorized under a foreign filing license.

The policy behind the laws and regulations is to restrict controlled products, software, and technologies from being shipped or made available to specific countries, individuals, or other prohibited entities. If the subject matter is export-controlled and a foreign filing license has not been obtained, then it may be a criminal violation to export the materials for any purpose or to provide the materials to a foreign national without first obtaining the appropriate clearances under the EAR (or ITAR). As the UT/AGT case illustrates, the risks are significant.

As an aside, one common perception regarding off-shore patent preparation is that EAR (or ITAR) does not apply if the subject matter of the patent application will eventually be published anyway. Such an idea would defeat the policy of restricting access to controlled products, software, and technologies. The USPTO, working in conjunction with the BIS, the DDTC, and the Department of Defense, has screening processes to identify technologies that the U.S. government does not want to be the subject of a foreign patent filing, or even a secrecy order.

The detailed requirements for compliance with export control laws and regulations can be complex and are beyond the scope of this article. Outsourcing patent preparation only adds to the complexity. Any company or university considering the outsourcing of technology development including patent preparation should have policies in place to ensure compliance with export controls.

If you have questions about outsourcing of technology or patent application writing, foreign filing license issues, or other issues involved in patent application filing, prosecution, validity, or enforceability, please contact any of the following attorneys:

Dennis W. Jones, Author ([email protected])
John R. Harris, Editor ([email protected])

NOTE: This article represents the views of the author and does not necessarily represent the views or positions of the firm or of any of its clients. The information contained herein is of a general nature and is not intended to provide legal advice to or address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that this information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on this information without appropriate professional advice after a thorough examination of the particular situation.