Patent Baristas

There was another article in the Washington Times about law firms outsourcing some of the work on their cases to other countries. One firm, Venable LLP, was quoted as saying “Clients are entitled to get these things done in an efficient way.” *

This is a phenomenon that needs to be seriously considered. More than 3 million U.S. jobs have been outsourced to other countries in the past four years with a projected 13 million forecast to move offshore in the next 10 years. However, for patent legal work, the potential cost savings are more than a little murky. One article states that legal work that is done in the U.S. only costs one-tenth or one-twelfth the amount in India. I think they need to do their homework.

Offshore, we are told, you can get highly qualified people for a fraction of the cost in the U.S. Of course, for those of you who slept through math class, 99/100ths is a “fraction of the cost”. In my own research, I have found that getting qualified people to help with some of the patent work takes an hourly rate of at least $60 and as much as $100. This does sound good initially compared with the $350 hourly rate charged by some large firms for even low-level associates – although hardly one-twelfth.

In a typical arrangement, the specification and drawings are prepared offshore and the application is then sent to a U.S. patent attorney to edit the specification, prepare the claims of the application and submit the patent application to the U.S. Patent and Trademark Office (USPTO). The U.S. patent attorney is also usually responsible for prosecuting the application in the USPTO until the patent issues.

The problem here is that the U.S. attorney must still get up to speed on the invention and review all the work product. This leads to quite a bit of duplication of work (all at the standard rates) and that “cheap” application ends up coming in closer and closer to the amount one would have paid anyway. One report showed that the “final” draft of the patent application has to be reviewed, modified and filed by an appropriate US patent attorney or agent, who usually ends up spending 10 to 20 hours or more (per application). This effectively “takes back” most or all of the supposed savings.

Moreover, the cost savings may be illusory. A recent study by the Gartner Group, a consulting firm, indicates that outsourced operations are on average 30 percent more expensive than in-house customer service operations. Gartner also reported that 80 percent of organizations that outsource customer management operations purely to cut costs will fail to do so, while 60 percent of those who outsource parts of the customer service process will have to deal with customer defections and hidden costs that outweigh any potential savings offered by outsourcing.

Additionally, the cost for qualified people in developing countries is rising rapidly. Earlier, one could hire five engineers in India for the cost of on engineer in the U.S. That number is now less that three and is continuing to drop as costs increase in due to higher demands and standards of living.

There are other problems that arise if the outsourced patent is the subject of litigation. For example, the attorney-client privilege only protects “legal work” from discovery. Opponents could argue that the attorney-client privilege does not apply based on waiver through disclosure to the overseas drafter. In addition, the negative public perception of outsourcing could adversely affect patent litigation in front of a jury. Litigating will also be expensive given that discovery on the patent’s history will lead overseas, resulting in increased costs logistical problems. There could also be challenges to the patent’s validity based on allegations of inequitable conduct. How will the U.S. attorney ensure that that any prior art considered overseas is brought to the attention of the USPTO?

One particular concern that must be addressed with outsourcing is that any information sent abroad must comply with U.S. Export laws and violating these can result in unenforceability of the patent, denial of future export licenses, fines and even imprisonment. One would need to comply with the Arms Export Control Act and the International Traffic in Arms Regulations in addition to the U.S. Department of Commerce restrictions on certain exports to certain countries through the Bureau of Industry and Security (BIS). Regulated items include software encryption technology**, certain lasers, computers, and nuclear technology related items.

Another concern is protecting confidential information. Many countries have less stringent laws for protecting intellectual property rights than the United States and often do not have any criminal trade theft laws. There could also be problems where the same outsourcing company is handling applications for competitors with similar technology since they would not be bound to avoid conflicts of interest.

Bottom Line

I fear that this may often be another example of corporations treating patent applications as a commodity when the reality is that patents can make-or-break the entire company. A patent is often the most important link in the corporate organization. A penny-wise, pound-foolish approach is seen over and over with companies that try to squeeze the patent drafting and prosecution costs down and then can’t seem to see the connection whenever they spend $2 million on litigation over a poorly drafted patent.

If you are at corporation interested is reducing your patent expenses, then you should call me to discuss strategies for reducing your costs. What we’ve found is that similar or better cost savings can be achieved by outsourcing patent work not offshore but away from the high-priced coasts. We work with many companies that have found the same work can be performed in the Midwest (we’re in Cincinnati) — but at far lower billing rates. When I had some work done at a Boston firm a few years ago, I was shocked to discover that a third-year associate was billing at a higher rate than our top partners. And he wasn’t even knowledgeable!

Outsourcing to the Midwest may just be the answer to your needs.

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*Correction: September 30, 2005. The Washington Times in Monday’s editions mischaracterized the type of patent work Washington law firm Venable outsources to Indian companies. The firm has outsourced document coding work for patent litigation cases.

**Update: Scott Gearity over at the Export Control Blog brought to light an earlier error in my post. I incorrectly indicated that encruption software is classified as a munition. While this was true at one time, the rule has changed — although, as Gearity points out, “the ‘ITAR makes crypto a munition’ meme is utterly unkillable.”

On December 30, 1996, the Bureau of Export Administration of the Department of Commerce (“BEA”) published an interim rule that reflects the transfer of dual-use encryption items from the United States Munitions List (“Munitions List”) to the Commerce Control List (“CCL”). See, 61 FR 68572. Among other significant changes, the interim rule provided for a relaxation of export controls on 56-bit key length digital encryption standard (“DES”) or equivalent non-recovery encryption products where the manufacturer makes certain commitments to developing and/or marketing key recovery and key escrow encryption items. Prior to the issuance of BEA’s interim rule, strong dual-use encryption products had been included on the Munitions List, subject to strict scrutiny by the Department of State’s Office of Defense Trade Controls (“ODTC”), and were rarely accorded an export license for use abroad other than in the financial industry or by U.S.-owned subsidiaries.

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