Best Practices in Offshoring of Intellectual Property Services

Evalueserve
By Dr. Alok Aggarwal,

Given the extreme sensitivities and emotions that arise whenever the concepts of Intellectual Property and Offshore are mentioned in the same conversation, it is helpful to distill the topic in a fact-based overview that will hopefully help those who are considering the advantages and/or implications of this trend. This article also will relieve some the hype on this subject.

First let us start with the two primary reasons for considering the offshoring of Intellectual Property services:

1. The number of patent and trademark applications being filed with the United States Patent and Trademark Office (USPTO) and in other developed countries has been rising substantially, whereas the increase in the number of registered patent agents in these jurisdictions has not been keeping pace. As can be expected, this mismatch is leading to substantial increases in costs.

For example, the total number of patent applications (including utility, design, plant and reissue applications) filed with USPTO was 236,679 in FY 1995 (i.e., April 1, 1995 - March 31, 1996), as compared to 409,532 in FY 2005. Similarly, the total number of trademark applications (including new registrations and renewals) filed with the USPTO grew from 182,653 in FY 1995 to 364,855 for FY 2005. Hence, the annual growth rate for patent and trademark applications has been approximately 6% and 7% respectively. In contrast, as of July 2006, 25,024 active attorneys and 7,823 active agents were registered with USPTO and this number has grown by only 3.5% annually during the last decade.

To contain costs, many IP divisions of large, medium and small organizations, as well as many IP law-firms, are already outsourcing some of their work (e.g., drafting of figures, literature searches, prior art searches, and invalidation studies) to third parties within the United States and other countries. However, since both the price of, and the demand for IP services has been increasing substantially and since the corresponding budgets (for IP creation and maintenance) are only growing at the rate of inflation (if even that!), more and more companies and many law firms are now beginning to look offshore to contain costs without jeopardizing quality.

The USPTO filing trend vis-�-vis active attorneys and agents from the year 1995 to 2010 is represented in FIG.1.

2. Because more and more research and development is happening in emerging countries like India and China, the number of foreign filings with the USPTO and EPO (European Patent Office) is increasing rapidly. For example, the number of patent applications filed where at least one inventor was based in India has been doubling every two years with 2,600 such applications filed with the USPTO in FY 2005. Since multi-national companies (e.g., Texas Instruments, Motorola, General Electric) are doing much of this research, and since the U.S. is currently the largest single market in the world, we expect this trend to continue. We conservatively forecast that more than 10,000 patent applications will be filed with USPTO in FY 2010, which will have at least one of the inventors based in India. Furthermore, since emerging countries like India and China have little history with respect to drafting effective patent applications, such countries will need to cultivate a total of 1,000 to 1,200 professionals who can draft patent applications that are compliant with USPTO and EPO rules. Finally, when a patent application originally drafted for one jurisdiction needs to be filed in another jurisdiction, it often requires substantial modifications, and hence there is added pressure to modify these at reduced costs.

Intellectual Property Services that are Currently Being Offshored

In spite of all of the hype surrounding the "offshoring of legal and IP services" and forecasts about how many billions of dollars this is going to generate for Indian offshoring companies, research conducted by Evalueserve actually shows that as of July 31, 2006, only 1,750 professionals were providing offshored legal services from India, and this number is expected to grow to approximately 6,500 by December 2010. Furthermore, the Indian companies and the subsidiaries of large multi-nationals are likely to generate approximately $69 million from such work during FY 2006 and $300 million during FY 2010. Of the total of 1,750 professionals, only 610 IP professionals are providing offshored IP services from India, and this number is expected to grow to approximately 2,000 by December 2010. Furthermore, the revenue generated by these Indian companies from providing offshored IP services is likely to be approximately $26 million in FY 2006 and approximately $96 million in FY 2010. Finally, although there are reportedly more than 40 organizations (including third party vendors and subsidiaries of multinational companies) providing IP services, only 5 have more than 15 IP professionals, with Evalueserve being the largest with 195 IP professionals and General Electric having the largest captive subsidiary with approximately 55 IP professionals.

Within Intellectual Property, the services that are being offshored include:

Literature Searches and Prior Art Searches: These include conducting prior art searches while drafting a patent application and conducting freedom to operate studies, patentability searches and patent invalidity searches. Our estimates show that out of 610 IP professionals currently providing offshore IP services from India, 190 are involved in such work and the corresponding vendors are charging between $30 and $50 per hour (depending upon the skill-level and domain expertise of these professionals).

Patent Portfolio Analysis and Landscaping Services: These services also include overlap analysis and the creation of claim charts, valuation modeling and competitive intelligence. These services are primarily required by licensing, strategy and business development departments of medium and large organizations, as well as by IP consultants and IP brokers who are involved in mining and licensing patent portfolios. Typically, these services require deeper domain expertise than the prior art searching services mentioned above. Only 80 IP professionals in India are currently providing such services with vendors charging between $50 and $60 per hour.

Patent Proof Reading and Docketing Services: These are fairly standard paralegal services and 130 IP professionals are currently providing these services from India. The rates for these services vary between $20 and $25 per hour.

Trademark, Copyright and Related IP Services: Currently, 25 IP professionals in India are providing services that are related to trademarks and copyright issues although during the next 6 to 8 years, we expect that these services would contribute 10% to 15% towards the total IP offshored services' revenue. The few Indian vendors who are providing these services are charging between $25 and $30 per hour.

Technical Disclosure Drafting, Patent Application Drafting and Help with Prosecution: Currently, about 185 IP professionals in India are providing these services. In addition to writing a preliminary draft of a patent application - or a portion of it - and helping the US patent attorneys with drafting amendments, about one fourth of these professionals are helping organizations draft complete technical disclosures so US attorneys can convert these quickly into USPTO compliant patent applications. The drafting of complete technical disclosures seems to be an area that is growing rapidly, especially with respect to the inventions coming out of India-based organizations because the US attorneys are unable to "interview the inventors" efficiently given the time zones and cultural challenges. The rates for such services vary between $40 and $60 per hour. Since these services have been offshored or outsourced by law-firms and internal IP divisions of organizations only during the last five years, we discuss these services in greater detail in the next section.

Table 1. below represents the various types of IP services currently being offshored to India, the number of skilled professionals involved and the corresponding hourly rates.

S. No.	Type of IP Services	Estimated No. of Skilled Professionals in India	Rate (per hour)
1	Literature searches and prior art searches	190	$30-$50
2	Patent portfolio analysis and landscaping services	80	$50-$60
3	Patent proof reading and docketing services	130	$20-$25
4	Trademark, copyright and related IP services	25	$25-$30
5	Technical disclosure drafting, patent application drafting and help with prosecution	185	$40-$60

Finally, it is worth mentioning that most Indian vendors can provide substantial discounts for large volumes and would provide up to 25% discount if the client agrees to staff a dedicated vendor team and keeping this team appropriately utilized.

Drafting of Technical Disclosures, Patent Applications and Amendments

A patent application typically consists of the following activities: (a) prior art searching, (b) conducting interviews with inventors, (c) drafting background, (d) drafting specifications, (e) drafting claims, (f) drafting summary, (g) preparing drawings, and (h) a final review, modifications and filing. Although the final step must always be performed by a USPTO registered attorney or agent, other activities can be either completed by IP professionals in the US or in a remote location.

Currently, several very large companies are experimenting with three models of patent application drafting in India:

1. The IP professionals in either a "captive subsidiary" or a third party firm draft the complete application (including drawing USPTO compliant figures) whereas the internal US-based IP attorneys review and modify the draft and then file it with the USPTO. Our experience shows that in this model, a typical internal attorney spends between 7 and 11 hours in performing some - or all - of the following tasks:

0.5 hours to review the initial technical disclosure that was sent by the inventors.
1.5 hours to interview the inventors typically in the presence of the offshore IP professionals who join this interview in a teleconference.
2.5 hours to review the initial draft of claims.
3 hours to review the initial draft of the remaining patent application.
2 hours to review the second draft.
1.5 hours for a final review and filing.

In our view, this model is the most robust and if 100 or more applications are written in this model annually, then the total cost for drafting and filing an application (including the cost of internal attorneys and that of the offshore vendor) can be reduced to $3,500 to $4,000 per patent application.

2. Offshore, third party IP professionals draft the complete application (including drawing USPTO compliant figures) while the IP attorneys from the client's external law-firm who are based in the US modify the drafts and then file the application with the USPTO. Our experience shows that in this model too, a typical external attorney spends between 7 and 11 hours in performing some - or all - of the tasks mentioned earlier, and ultimately these attorneys become the "attorneys of record" with the USPTO.

In our experience, this model works quite well also but requires an "internal champion" within the client's organization whose focus is to make the process efficient, cost-effective and ultimately successful. In our experience, if 100 or more applications are written in this model annually, then the total cost for drafting and filing an application (including the cost of internal attorneys and that of the offshore vendor) can be reduced to $4,500 to $5,500 per application.

3. A third variation has the third-party IP professionals drafting the complete application (including drawing USPTO compliant figures) that they send to the IP attorneys of an external law-firm who modify the draft, and in turn, send it to an internal attorney within the client's organization for a final review, modification and filing. In our view, this model does not work because all of the cost advantages are lost with two different US attorneys reviewing these drafts.

Besides helping the US patent attorneys in drafting patent applications - in part or in its entirety - many offshore firms can also provide a technical assessment of the prior art cited by the patent examiner during the prosecution process. Furthermore, depending upon the requirements of the US patent attorneys, these firms can span from providing the basic material for drafting the response to the corresponding professionals drafting the complete response to the examiner's objections themselves (which is then reviewed, modified and filed by the US patent attorney).

Finally, as mentioned earlier, since a lot of research and advanced development is beginning to occur in India, the drafting of complete technical disclosures seems to be a rapidly growing area, especially with respect to the inventions coming out of India-based organizations (because, as mentioned earlier, the US attorneys find it extremely difficult to "interview the inventors" given the time zone difference and cultural complexities).

Leading Offshoring Models for Providing Patent-Related Services

With respect to offshoring of patent-related services, the following four models seem to be emerging:

1. Captive Centers Formed by US and India-based Law Firms: Currently, Indian law does not allow "foreign" (i.e., non-Indian) law-firms to practice in India. Hence, some law-firms in the US and India are setting up subsidiaries so that they do not practice law in India but provide such IP services for export purposes only. For example, about four years ago, Schwegman Lundberg Woessner and Kluth, P.A. - a law firm headquartered in Minneapolis - set up captive centers in Delhi-Gurgaon and Bangalore for one of its subsidiaries, Intellevate India, which currently has approximately 165 professionals, who are mainly involved in patent docketing and patent proofreading. Besides Intellevate, IPPRO and Metrix Services (PatentMetrix) are some more examples of Indian subsidiaries of law-firms but these are much smaller. Interestingly, about a year ago, Computer Patent Annuities acquired a majority stake in Intellevate and hence it is unclear whether this model of US based law-firms opening subsidiaries in India for export purposes will actually work. This is also partly because the "hierarchy of professions" in India is substantially different from that in the US. Whereas in the US, the legal profession is one of the highly regarded professions, in India law is much lower in the hierarchy, with the top five professions being medical doctor, engineer, certified accountant, MBA and teacher/professor.

2. Joint Ventures between US Law Firms and Indian Law Firms: Rather than opening their own captive centers, a few US-based law firms have started joint ventures with their counterpart law-firms in India. A good example is Cantor-Colbourn Esq. that has joined hands with Lall and Sethi, Esq. in India. However, since most joint ventures do not succeed - especially in India - one needs be cautious while treading this path. Furthermore, Indian lawyers practicing Intellectual Property don't generally have an undergraduate degree in science or engineering and hence may not necessarily have a good grasp of technology, which in turn, often leads to a "culture clash" between the two firms forming the joint venture.

3. Captive Centers of Large Technology Companies: A good example of this model is General Electric that has approximately 55 IP professionals within its GE Research and Development center in Bangalore. These professionals seem to be providing many of the services described earlier. Evalueserve research shows that at least 15 other multi-national companies are currently pursuing this model, but we strongly believe that this model is unlikely to succeed unless the corresponding center has at least 100 professionals because if it does not have the critical mass to provide good career opportunities to its professionals. Our research also shows that many of these captives are thus paying 20% or more in compensation and are still having more than 50% annual attrition because the job market in India is extremely "hot" at this time. On the other hand, undoubtedly, some important advantages such as confidentiality, conflict of interest, work-product privilege and discoverability issues are easier to handle for captive organizations.

4. Third Party Vendors Providing Services to Law-Firms: Third party vendors include companies that are providing research and analytics in general, such as Evalueserve, or those that are set up by US based attorneys and are domain specific and providing only legal and IP services. Such companies would almost always hire engineers and scientists in India and train them to become proficient in USPTO, PCT and WIPO rules and regulations so that they can provide all the patent-related services mentioned above.

Table 2. lists the various types of offshoring models, names of the corresponding companies and the advantages and/or disadvantages of the various types of offshoring models.

S. No.	Type of Offshoring Models	Example Company Name	Advantage(s)/disadvantage(s)
1	Captive centers formed by US and India-based law firms	Intellevate India (Subsidiary of Schwegaman Lundberg Woessner and Kluth P.A.)	• Ability to provide IP services without practicing in India • Substantial difference in the �hierarchy of professions� in India and US
2	Joint ventures between US law Firms and Indian law Firms	Cantor-Colbourn Esq. and Lall and Sethi Esq.	• Low success rate of joint ventures • Lack of requisite technical knowledge in Indian lawyers practicing Intellectual Property
3	Captive centers of large technology companies	GE Research and Development center	• Better management of confidentiality, conflict of interest, discoverability issues and work-product privilege • Lack of career opportunities for professionals • High attrition rate and inflated pay package
4	Third party vendors providing services to law-firms	Evalueserve	• Ability to provide all patent related services by domain specific engineers and scientists proficient in USPTO, PCT and WIPO rules

General Best Practices with respect to Offshoring of IP Services

Since Evalueserve was a pioneer in providing offshored IP services and has been working with 18 Global 2000 companies, 120 venture-backed startups, 13 US-based IP law-firms, and 39 other medium and large companies since December 2000, the best practices mentioned in this article are a result of the experience we have accumulated from drafting over 950 patent applications, doing over 1,600 prior art searches, and over 240 patent landscaping studies. We believe that the following issues need to be investigated thoroughly by any US-based organization before it decides to take advantage of IP services provided by offshore locations:

Confidentiality and Liability: In addition to signing the Non-Disclosure Agreements (NDAs) and ensuring legal jurisdiction is in the US, the US-based organization would need to understand the processes that the offshore organization follows in order to maintain confidentiality. This includes signing appropriate documents with its employees as well as taking appropriate technical measures to minimize leakage of confidential information (e.g., eliminating writing capabilities on individual PCs). Finally, if the work is being offshored to a third party then it is important to understand the liabilities carried by each party and whether the third party vendor has a sufficient amount of "Professional Errors and Omissions" insurance coverage.

Conflict of Interest: This is an important issue to investigate especially for patent application drafting and invalidation searching. The US-based organization must clearly understand the policies, if any, followed by the offshore organization as well as the processes used by this organization to manage Conflict of Interest issues.

Work-Product Privilege: Some US attorneys believe that if the offshore organization is interacting with a US attorney then the work-product privilege automatically extends to all this work whereas there are others who feel that to ensure work-product privilege, all interactions should go through a law firm.

US Export Control: Prior to exporting information outside the United States, either to an independent third party or to a part of a domestic organization located in a foreign country, a company must ensure that the export of such information or items is not in violation of United States export laws. This issue comes under the authority of the Bureau of Industry and Security (formerly known as the Bureau of Export Administration, referred to herein as the "Bureau"), which is part of the United States Department of Commerce. The Bureau is responsible for implementing and enforcing the Export Administration Regulations ("EAR"), which regulate the export and re-export of most commercial items. Most large companies have an internal department that deals with export controls and related issues and would be able to help such companies in handling this issue effectively.

Ensuring Good Processes at Both Ends: Our experience shows that for obtaining good results, both the US-based organization and the offshore organization need to have extremely good processes. This includes people in the US-based organization providing timely and detailed feedback to the offshore organization (so that the professionals in the offshore organization can improve their work-product going forward) and the inventors and others responding quickly to the questions and issues raised by the offshore organization. Finally, there should be a clear understanding regarding the following: (a) clear, written, project specifications, (b) well defined expectations with respect to the work-in-progress and final deliverables, (c) weekly conference calls and progress reports, and (d) a written end-to-end schedule.

Training and Staying Current with US Case Law: Before providing work to an offshore organization, the US-based organization should understand the training being provided by the offshore organization to its professionals. Furthermore, to obtain the maximum benefit from this relationship, it is worthwhile for the US-based organization to provide ongoing training on its own to the offshore professionals to stay current with US Case Law. Finally, if the offshore organization is based in India, the proficiency in written English of the IP professionals may not be up to the US standards. Since the entire area of Intellectual Property in India is only 7-8 years old, most of these professionals have up to three years of experience, and therefore it is important for the US-based organization to understand that these IP professionals are at best at the same level as an associate with 1-2 years of "typical US law firm experience".

Getting Samples and Doing Small Pilots Before Diving Deeper: The US-based organization should try and get samples of the work done by the offshore organization (e.g., granted patents, published applications and "sanitized" versions of prior art searches or IP landscapes) and if satisfied, then start with doing small ad-hoc and on-demand projects (in the form of "pilots") before embarking on a full-fledged offshore IP program that may involve a dedicated team. If possible, the US-based organization should also ask the offshore organization for references, although our experience shows that most large companies who are doing this well do not want to provide references because (a) their program is still in early stages, (b) they do not want to risk negative publicity that might arise from offshoring, or (c) they would like to protect their competitive edge.

Although the best practices mentioned above also apply to drafting of patent applications, the following issues should also be investigated thoroughly if the US-based organization is planning on also offshoring patent drafting work to India:

Export Control: If the US-based organization is planning on getting patent applications drafted in India then the export of corresponding technical information still comes within the purview of the Bureau mentioned earlier and not within the purview of USPTO. Consequently, within large organizations, this issue should be discussed with the "Exports Control Department" and others should seek advice from external firms that advise in matters related to export controls.

Obtaining Foreign Filing Permits from the Indian Patent Office: If at least one of the inventors is "domiciled in India" (i.e., broadly speaking, "a resident of India"), then Indian law requires that either the patent application be first filed with the Indian Patent Office (IPO) or a Foreign Filing Permit be obtained from the IPO. Since the penalties of not doing so are rather excessive (and can imply imprisonment for the inventors who reside in India), the US-based organization should ensure that the offshore organization providing such IP services is completely aligned with its strategy to ensure compliance with this Indian law.

Dr. Alok Aggarwal earned his Ph.D. in Electrical Engineering and Computer Science from Johns Hopkins University in 1984, and "founded" IBM's Research Laboratory in New Delhi, India during his 16 years at the IBM Thomas J. Watson Research Center. Dr. Aggarwal is the Chairman and Founder of Evalueserve, a professional services firm (www.evalueserve.com) with 1,260 employees providing a variety of research and analytics services.

Disclaimer: the information contained in this article has been obtained from sources believed to be reliable but the author disclaims all warranties as to the accuracy, completeness or adequacy of such information and the author shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof.

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