NY Startup Law

A businesslaw blog for New York entrepreneurs by Marc Law Associates PLLC

ow to Protect Your Intellectual Property When Outsourcing to Freelancers

Businesses of all sizesand industries outsource work to non-employees or independent contractors at various points of  their life cycle. A mature enterprise may outsource cthe customer service  chowever often use outsourcing to build a minimum viable product to test he tartrtup’s chances of success before an official product launch. all cente rjob function overseas to to take advantage of  a willing job force that will perform work formerly done inhouse at much lower wages.Startups,  thinkof outsourcing as a means of lowering overhead and increasing profit. Outsourcing to entities or contractors in foreign countries is known as “Offshoring”.    Startups and mature business using outsourcing to their advantage is hardly a new phenomenon. technological advances and the freelancers working as independent contractors in the sharing economy have that increased the use of outsourcing domestically and abroad.  Outsourcing and offshoring is one of the reasons that the cost of starting a company has decreased in the last 20 years. Startups outsource everything from building apps  sand websites to marketing and public relatuons. However , there are precautionary measures that startups should take to protecting their intellectual property when outsourcing.

TRADE SECRETS

Whether you outsource your work to Nebraska or India, you will need to prevent the independent contractor from disclosing or using your trade secrets.  Trade secrets are basically the information that gives your company a competitive advantage, which would be compromised if shared with anyone. A company must make every effort not to disclose trade secrets to any third party in general, but this may be a difficult task, and sometimes impossible when outsourcing. You may ask, then how do you I protect myself? A contract governing the outsourcing relationship with a tight confidentiality clause, or a separate confidentiality agreement, is a must. You must also consider creating multiple versions of this agreement for each jurisdiction you outsource to. Trade secret laws vary from state to state, and even more In various foreign countries.  Locally, many states adhere to the Uniform Trade Secrets Act (“UTS A”), the closest you’ll get to legal uniformity internationally is the Trade Related Aspects of Intellectual Property Rights Agreement (“TRIPS”).  Do your homework on the laws of the place you want to outsource your work to.  If your trade secrets are extremely valuable avoid outsourcing work to places whereyou may have trouble enforcing your rights.  Secrecy is paramount in protecting trade secrets, so avoid disclosing any trade secrets as much as possible during the outsourcing relationship regardless of the likelihood of enforcement.

Your written agreement with the freelancer should include a representation from the independent contractor that she isn’t infringing on anyone else’s trade secrets by working on your project.  You may also want to include a representation that the freelancer isn’t violating any non-compete provision from a former employer. Neither provision or any of the many other provisions you should include may stop the freelancer’s  former employer  fromtrying to sueyour ompany  This is why the agreement must also include an indemnification provision. Indemnification is the legal way of saying if anyone sues me because of xyz condition, then you’re agreei ng to pay me the money I spend defending myself.  Even after taking all of these precautions, you may still fall victim to violations. Why? Because many countries don’t enforce contracts or treat IP w  ith the same vigor as America does.

COPYRIGHTS

Copyrights, defined as afixed mediums of expression, don’t need to be registered in other countriesto gain protection This is because the copyrights gain automatic  protection through the Berne Convention,  an international intellectual property treaty.  The treaty guarantees all of its signatories automatic copyright protection in all member countries that signed the treaty. provided that the work is worthy of protection in the country of its creator. If I were advising a company, I would not rely on the Berne Convention; especially since software code, one of the most outsourced items.is protected by copyright.   Instead of relying on an international treaty, it’s better to register copyrights in every country that you will outsource to, and at the very least register your copyright domestically and include the copyright notice to make everyone aware that you have secured this protection.

PATENTS AND TRADEMARKS

Unlike copyrights, international recognition of US patents and trademarks are country specific, and therefore registration of your patents and trademarks in each country that you plan to outsource in is a must. All companies should also protect any IP that is newly  created by the independent contractor as a result of the outsourcing relationship. Companies that outsource should negotiate for the independent contractor to assign any newly created trade secrets or intellectual property created during the relationship by use of what’s commonly known as an  Invention Assignment Agreement.   Work for hire agreements also achieve the same result, but transfer the ownership of the IP outright as if the independent contractor never created it.

DATA SECURITY

While data privacy and security isn’t necessarily intellectual property, the protection of your startup’s trade secrets depends on a secure network. Also worth noting is that customer lists are considered trade secrets. This is why you must limit  the vendors you outsource elements of your network to those that will agree to will use the same, if not stronger technical, physical and administrative safeguards that you do to protect the privacy of your clients. This requirement may be magnified depending on your company’s client base. There are privacy concerns in the B2B and the B2C markets. Sensitive B2C segments include businesses targeting children under the age of 13 under the Childrens Online Privacy Protecton Act (“COPPA”).

The importance of protecting a company’s customer list is magnified when a New York startup or company  markets to customers in the European Union.  Why? Because European Union countries treat privacy as a fundamental right, much like we do free speech. Moreover, EU data protection laws forbid the transfer of the private information of EU citizens outside the EU, unless the receiving party is located in a country that provides  “adequate privacy protections” .   EU members do not consider the US as country providing adequate protection. Another concern is that the EU Data Protection laws also protect employee data.  Therefore, you don’t only have to worry about having your vendors protect customer data, but also employee data if you have employees or indedent contractors that live in the EU.

GET IT IN WRITING

May small businesses that outsource fail to execute contracts with the independent parties they engage to work for them.  This is a huge mistake, especially when outsourcing to India, because India does not have any laws protecting trade secrets.  Therefore, the only way for a company to protect itself in this situation is contractually.  Spend the extra money to protect yourself. Some key provisions are:

  • The independent contractor should Represent and Warrant that it is knowledgeable and capable of performing the work.
  • Require disclosure and approval by the independent contractor prior to engaging any subcontractors or non-signatories to perform the work.
  • Include an Inventory of your existing IP as an Exhibit to the contract to prevent the freelancer from pleading ignorance later on.
  • Assignment and Work for Hire language as previously indicated.
  • Negotiate a provision indicating that the contract was negotiated in New York.
  • Include an arbitration clause in the agreement. (This will vary depending on the circumstances)
  • The conditions of termination should be spelled out. In other words, who owns what, who has to return what to whom
  • Get a buy in from the independent contractor that it will facilitate the transfer of the IP back to your company or to the new independent contractor that you engage to replace him if the relationship doesn’t pan out..
  • Include a Data Privacy and Security Agreement, especially if your startup collects private information from users and operates in the healthcare or financial sectors.

 

AVOID MISCLASSIFICATION ISSUES.

Another important measure of protection for your startup when outsourcing,which has nothing to do with intellectual proprerty, is to avoid treating the freelancer like an employee. This mistake can subject your startup to unnecessary litigation or fines for failure to pay unemployment insurance or worker’s  compensation.This will usually happen if the freelancer decides to report you to the Department of Labor  or its state equivalent agency.

Your agreement should include a provision stating that the freelancer is doing the project as an independent contractor, but this may not be enough.  Courts will normally look beyond the agreement to determine the employment relationship.  Courts will focus on factors relating to the degree of control that your company exerts over the freelancer. Some examples are whether you control the time the contractor performs the work or location, especially if you require the work done on your company premises.  It’s always better to work with an independent contractor that’s organized as a corporation or LLC  for this reason. This creates the presumption that the freelancer does similar work for others instead of being dedicated to your company as an employee.

 

CONCLUSION

 

Because of the ease of disclosing intellectual property to independent contractors it is very important to proceed with caution and memorialize the relationship in writing. One important thing to mention is that you are paying the contractor for a specific  service or outcome. Therefore, you need to be in control of the relationship. Your payment should guarantee that your startup or company ends up owning any intellectual property at he end of the relationship.Many freelancers have tried to present my clients with contracts that they’ve drafted. I don’t even allow my clients to negotiate these agreements, and I am formally advising you to take the same stance.  The freelancer’s agreement will often be a one or two page document that the freelancer found on the internet yhat   is skewed in the favor of the freelancer, ‘ive even seen some of these agreements  where the freelancertrie to claim ownership in any intellectual property that.s created after vthe project is done. What are you paying this person or company for? Think about it for one second. The contractors usually complain when my client refuses and presents them with my agreement. Howver, they never walk away,and eventually end up signing.  One thing all startups control the relationship.need to realize is that in most situations the freeelancer needs the startup more than the startup nneeds the freelancer. Without startups to outsource work the freelancer cant make a living. Use this leverage yo your advantage and make sureyou control the relationship.

Patrick MarcEsq.

Share this article

Leave a Reply

Your email address will not be published. Required fields are marked *

Human Verification *