While some blame the newly emerging economies such as China and India for the failure of these talks, others have pointed fingers at the “developed” bloc. With elections around the corner and the Congress already being accused of getting too cosy with the US on the “nuclear” issue, it was a foregone conclusion that the suave Kamal Nath was not going to budge. It certainly paid off for him–for he returned a “hero” to the millions of farmers in India. And earned accolades from even the Left Parties!
All this leaves one with the very perplexing question: what kind of impact will the growth of countries such as China and India have on the future of world trade? Particularly, when their clout seems to be increasing exponentially, making them less susceptible to the pressure tactics from the developed bloc.
Will we see less trade liberalization in future? Is this the end of the WTO? Will there be more nationalization and less internationalisation? More bilaterals and less multilaterals? Only time will tell.
But, I digress here. The purpose of this post is not to predict the future of the world trading system. But to rather highlight the fact that paradoxically, as countries speak the language of free trade at various multilateral fora, domestically, they find new ways to erect trade barriers.
The latest in this regard is a USPTO notice that many suspect will eat into the profits of the rapidly growing LPO (legal process outsourcing) industry in India. Some even predict that it will “kill” the industry altogether! Much like IT outsourcing, legal process outsourcing leverages the “cost” advantage. Illustratively, an LPO unit can help cut costs for a client by as much as 60-70%. If IBM pays a US law firm USD 10,000 to prepare a complete patent specification, and Indian LPO could do this for as little as USD 3000. That the industry is slated to boom in the future is evident from this Times of India report which notes:
“A study by ValueNotes, a Pune-based research firm shows, revenues from the Indian patent services offshoring industry are estimated at $46 million for 2007. It’s expected to reach $206 million by end 2012. The study reveals the current addressable value of the patent services offshoring market is estimated at $2.2 billion.
“We believe that the Indian patent offshoring industry will grow 35% per annum over the next four years. As for the number of employees, our estimate is that about 6,950 people will be employed by the end of 2012,” says Subha Kalathur, senior analyst with ValueNotes.
…Last year, there were about 50 vendors offering patent services from India. As of now, US accounts for 60% of the work.”
Anyway, back to the notorious USPTO notice which has already been highlighted by Kruttika in this post here. The gist of this notice is explained quite succinctly in this note from iplaw (you need to be a registered subscriber to access this):
In a notice published in the Federal Register Thursday, the USPTO said inventors that want to get their U.S. patent applications prepared overseas need to get appropriate clearances from the Bureau of Industry and Security at the Department of Commerce before exporting subject matter abroad. “
With the U.S. economy faltering, companies are increasingly looking to drive down costs by outsourcing legal work to foreign law firms or legal service providers that charge cut-rate prices. Legal outsourcing firms now take on everything from document review to brief and motion writing. But when it comes to patent drafting, firms must be diligent about making sure they don’t run afoul of export laws, the USPTO said. “
The USPTO Notice also states unequivocally that a foreign filing license from the USPTO does not authorize exporting of subject matter abroad for the preparation of patent applications to be filed in the United States.
Of course, the USPTO hasn’t laid down any new law here, but merely clarified the import of already existing Export Administration Regulations (EAR) drafted by the Bureau of Industry and Security (BIS) at the Department of Commerce. These regulations govern the export of certain kinds of “technical data”. Needless to state, patent applications and invention disclosure statements that are shipped overseas might contain some of this regulated “technical data”.
The first question that springs to mind is: what is the likely impact of such regulations? To what extent would it impact LPO’s in India? In this regard, it bears noting that these regulations are not outright prohibitions on the outsourcing of legal work, but usher in a kind of “licence raj” governing the “export” of patent related “data”. At least one commentator opines that since the regulations hit at all possible patent outsourcing activities (patent searches, patent drafting etc), the EAR sounds the death knell for LPO’s!
Yet another patent outsourcing unit in the US (with operations in India), LawScribe Inc makes light of this notice and states that their clients have anyway been complying with these requirements and the licenses are relatively easy to procure.
Given that the above commentators represent two opposite camps, the truth may lie somewhere in between. At this stage, one is not certain as to how narrowly or widely the regulations are likely to be interpreted. What kind of “technical data” would be covered? Would the regulations catch most forms of patent outsourcing or just a minor portion of it? The chief patent counsel of a major American corporation that a friend of mine spoke with suggests that only 10% of the applications outsourced are likely to be hit by these new licensing requirements.
And if licenses are required to be taken, how much time and money would this inovlve? In other words, if LPO’s now deliver a cost advantage of 60-70%, would they sustain this in the face of increased costs from procuring licenses (my guess is that unlike LawScribe Inc, quoted above, a great majority of the Indian law firms may not have been aware of the EAR till the notice recently issued by the USPTO).
Most importantly perhaps, we need to ask: what kind of “liability” do companies incur by transgressing these rules. Let’s assume that a Pfizer patent covering a major drug was drafted in India without taking the requisite Bureau of Industry and Security (BIS) clearance/license. Upon being sued by Pfizer for violating its patent, can Ranbaxy argue that the patent is not enforceable, since BIS permission hadn’t been procured prior to shipping out patent data to India? If so, do these regulations that add on one more layer of patentability criteria (in a very loose way of course) implicate TRIPS? Will they implicate GATS commitments that the US has undertaken? And most importantly, do they sit well within the current US constitutional framework? I’m sure that US experts will offer us answers to these perplexing issues in the days to come.
Notwithstanding our inability to predict the amount of damage that such regulations are likely to unleash on the LPO industry in India, one cannot help but feel that these regulations embody some level of “trade protectionism” aimed at keeping patent drafting work within the US. The USPTO may have been pushed to issue this clarification in the face of intense lobbying by conservative law firms that have been opposed to the word “outsourcing” from the word go. Incidentally I consulted for a couple of Indian LPO’s in the past (see this interview here) and found that the patent bar was heavily opposed to any kind of outsourcing of patent drafting work. It was mainly the corporations that were pushing this, as they were interested in keeping their costs down.
A US commentator who is clearly hostile to patent outsourcing (not least because it makes significant inroads into his bread and butter) notes:
“I believe there is more US protectionism in this new stance on export regulations than anything else. With this being an election year and the economy being such a big issue and with outsourcing taking more and more jobs away from the US, I suspect this surfacing now is not a coincidence. This new stance will certainly kill all patent outsourcing, but likely will also kill a lot of technical development outsourcing as well, which will bring jobs back to the US. Thus, I don’t expect that there will be any loosening of the regulations in the near future. It is about time that our government does something about all the jobs that are going overseas, particularly when many of these jobs have left the US in clear violation of already existing export regulations!”
How then should India react to such regulations (assuming that they are interpreted very broadly to impact a number of patent outsourcing transactions)?
India may be at a loss to take any principled objection to such rules, given that it resorts to protectionist measures frequently–most noteably in its patent regime (a compulsory license can issue if the patent is not worked in India!). However, some suggestions below:
i) Perhaps India ought to resort to the age old “tit for tat” remedy that is now wired into the very fabric of the WTO (the WTO permits trade ‘retaliation” against scofflaw states that fail to abide by WTO rulings, an aspect that we covered in a previous post here). India could therefore come up with its own set of export regulations (EAR’s) aimed at catching every “Indian” application that is drafted in the US. But then, given the relatively low numbers of such applications (when compared with the amount of US applications drafted in India), this may not seem an attractive proposition.
Interestingly, India already has a set of rules that impact the export of patent applications to the US. A government notification under the Foreign Trade (Development and Regulation) Act, 1992 lists out certain technology items that cannot be exported without a license. Some patent applications are likely to fall within this notification, popularly referred to as SCOMET (Special Chemicals, Organisms, Materials, Equipment and Technologies).
Apparently, another legislation interestingly titled the “Weapons of Mass Destruction and their Delivery Systems and (Prohibition of unlawful activities) Act” 2005 (and here I thought that this term was exclusive to the US!) might also cover some patent applications that are exported out to the US. In particular, Section 13 of the WMD Act provides for controls on export, transfer and retransfer as well as transit of any technology notified under this act.
The above regulations however capture only certain kinds of “technology” and patent applications: for an effective “retaliation”, the government ought to expand the licensing scheme to include every kind of “Indian” patent application drafted in the US.
I have to admit however that I’m not a great fan of such trade retaliatory measures. Given the number of US companies that offshore R&D to India, we may end up shooting ourselves in the foot by instituting excessively bureaucratic licensing regimes.
ii) The second option for India, and one which appears far more sensible is this:
The existence of US regulations that operate as trade barriers could be used by India as a bargaining chip during trade negotiations with the US. It could also be leveraged strategically in the face of increasing pressure to have India’s legal sector opened up to US firms.
ps: I wish to express my sincere gratitude to Raj Dave (Managing Partner, Darby and Darby), Rahul Das (Townsend and Townsend), Swati Sukumar and Archana Shanker (Anand and Anand) for valuable discussions that threw more light on this knotty issue. Needless to state, none of them are to be held liable for any views contained herein.
1 thought on “US Guidelines on Patent Outsourcing: Sounding the Death Knell for Indian LPO’s?”
I came across the following exchange between Mr Queen and some Indian LPO bloggers named IndoGenic:
Export Control Issues and Patent Process Outsourcing
Every other client we talk to us asks us this question: Is Export Control an issue when filing patent applications for US applicants outside the US? – see Linkedin.
Here’s our answer:“These are the steps to avoid infringement of Export Control Regulations in considering outsourcing patent preparation to India: • Perform an export-classification assessment in order to determine if the commodity, service or technology about to be exported, i.e., outsourced outside US soil for patent preparation, is controlled for export purposes. • This determination is done in three steps; 1. Determine if the commodity, service or technology is subject to EAR ( Export Administration Regulation) of the BIS ( Bureau of Industry and Security), the enforcement arm of the DOC( Department of Commerce), either by self-assessment of the CCL (Commerce Control List) , or preferably, by filing a CCR ( Commodity Classification request ) with the BIS. 2. Determine if the commodity, service or technology is subject to ITAR ( International Traffic in Arms Regulations) of the DOS-DTC ( Department of State –Directorate of Defense Trade Control ), either by self-assessment of the USML (United States Munitions List) , or preferably, by filing a CJ ( Commodity Justification) with DTC. 3. Screen any parties to the export transaction against the list of US Government’s Prohibited persons, like, the DOC Denied Persons list, the DOC Denied Entity list, the DOC Unverified list, the DOT-SDIE list, and the DOS Debarred Person’s List. • If the patent is export-classified, obtain an export license from BIS or DTC, whichever is relevant. Note that this is not the equivalent of the Foreign-filing license of the USPTO as of now. For bulk-patents, preferably obtain a blanket export license. Most patents do not fall under these regulations, and an inventor can easily determine if an invention clearly does not fall under export-regulations. Yet, in cases of doubt, it is advisable to go through the additional effort to determine exportability; this is what we always advise our own clients. Even with all that, we keep getting them, because outsourcing is still much cheaper.
Let me get this straight. Export control becomes an issue only in very small numbers of very specialized cases; cases which will probably never be outsourced to India anyway.
why, then, is there such a hullabullo about it?
similarly in client confidentiality measures: the san diego bar opinion on this issue was given because, apparently, an indian lpo put some sensitive client material on the net because said client refused to pay up for services rendered.
that could very well have been done by an US attorney.
so why is the indian lpo industry being chosen as the main threat to US client confidentiality? what can I really do by disclosing the name of some defendant in some case somewhere in the ninth circuit? how can i gain from it? why should i bother?
is this another example of a paranoia whose roots can be traced to an anti-globalisation group?
what arrant hypocrisy!
Gene Quinn Says:
July 30th, 2008 at 5:33 pm
Implying or stating that US export regulations apply only to a small number of inventions is simply wrong. If actually enforced as written and as the United States Patent Office has recently informed US patent practitioners, outsourcing of patent related preparation to India or any other country has come to an end. You simply cannot export proprietary technology outside the US without a proper license or exception.
Dear Mr Quinn,
Thank you for your comment. I had the opportunity to go through the article that you have recently posted on your website. I also had a look at the BIS website and the EAR, and here are my thoughts:
1. Not all patents that have been filed become “publicly available.” There are classified patents, which, due to various security reasons, or otherwise, can never become public knowledge.
2. But most patents, once filed, become public knowledge and their documentations can be sent outside the US. see http://www.bis.doc.gov/deemedexports/deemedexportsfaqs.html#14
3. Therefore there exists a certain difference between patent information that is kept secret and patent information that becomes public knowledge. This difference is in their dual-use capabilities, or lack thereof, or possible defense uses, or lack thereof, or their relation to prohibited exports like encryption technology, high-performance computers etc, or lack thereof.
4. This difference is determined at an individual level, and there are very precise methods of performing that determination. see http://www.bis.doc.gov/licensing/exportingbasics.htm
5. BIS does not regulate the process of this determination, but has an enforcement and compliance wing in case what an exporting entity determines turns out to be incorrect.
6. There is nothing the present author could discover in the entire legislative literature which prohibits export of information pertaining to patent application where said patent would not, once granted, fall under the various export regulations.
7. This makes sense too. It is the prerogative of the inventor to determine, as an honest US citizen, if exporting his invention information will harm his country’s security interests. If, after careful determination, following existing methodology, an inventor determines that the new method of producing macaroni, or disclosure of the new health food made out of south east Asian fiber extracts, does not harm his country’s security interests if exported, why would he not consider saving money by outsourcing part of the patent process? If some American lawyers are loosing jobs through outsourcing, some American inventors are saving a few hard-earned dollars, too. And it is hard to throw macaroni and bring down a building.
8. As to the comment about India’s poor work-product in re US patent work, I have only to say that if all the Indian scientists, professors, managers, software experts, professionals, governors, senators, businessmen, writers, and even grocery store owners left the US shores this fine evening, the US would be a much poorer country indeed with regard to its intellectual assets.
9. Lets not, therefore, make hasty comments about a nation’s intellectual acumen by looking at a few baser instances. If a large number of US citizens are being benefited through LPO/PPO, a very contrary note in a register will probably not be able to stop that industry. Free market is a very realistic concept, and mindless entrenchment paranoia will perhaps not find much of a foothold against the onslaught of such reality.
10. Finally, I appreciate the moderator’s publishing comments which are admittedly un-supportive of the industry. That is how free speech works, and a free market is not an altogether different concept.
July 31st, 2008 at 12:52 am
U.S. export control regulations are complex. There are some inventions which probably would not require an export license (e.g. basic mechanical inventions), but this really depends on the invention and the applicable export control classification number (ECCN) ifound in the EAR. Or if your invention falls into the defense area then you may have to comply with the ITAR.