Intellectual property issues within the supply chain

Intellectual property rights (IPR) are of paramount importance in today’s capital markets. They not only provide protection for innovations that have been developed, but now offer revenue-generating opportunities for proactive companies looking to license or sell their products in new markets.

Unfortunately, there is an overlooked aspect of DPI. This is the impact on a company’s supply chain. Specifically, what happens if a third party hits you with an infringement claim for technology that is in a component supplied by a vendor? Or what happens if a supplier closes or decides to abandon a line of business that makes a key part for your product? Will your business be affected by someone else’s decision?

Let’s examine how to mitigate the risks associated with those scenarios so you can keep selling your products.

Build to Spec Vs. build to print

First, some definitions you should already know, but are worth refreshing. “Build to spec” is when a company literally instructs a supplier to build something to a certain size and with specific operating parameters. The degree to which the component is specified may vary, but ultimately the supplier is free to use their own design experience and manufacturing expertise to produce the parts they supply to you. The benefit is that the supplier retains responsibility for the design and quality of the part, which can reduce your overhead, as you are not required to maintain in-house expertise in a subject area that is not a core competency for your business. . . The ultimate drawback is that the vendor owns the intellectual property rights to that part, which may be a key component of their product. More on the impact of this later.

“Build to Print” is when a company not only specifies the functional requirements of the part, but produces assembly drawings, work instructions, and mentions specific manufacturing practices to be used in the production of the parts. This method requires more work and development cost on the part of the company, but the advantage lies in maintaining control of the intellectual property rights and having the ability to select any suitable supplier to produce parts for you. This approach is more expensive as you are likely to be responsible for quality and design liability issues. However, if you have the expertise, it is always better, from an IPR perspective, to design “in-house”. This approach also makes it easier to later vertically integrate your business.

Clearance Search / Non-Infringement Assessment

When introducing a new product, seeking patent clearance is an essential part of mitigating business risk. A clear path to non-infringement of existing patents and applications provides confidence to launch your new ideas.

While most companies work with their legal advisors to ensure their own IP position is secured and they are free to operate, most do not consider risk mitigation needs within their supplier base.

All companies must work with their suppliers to ensure that there is a clear path to non-infringement. Otherwise, the company may be subject to a claim of direct or contributory violation as a result of a problem with a component supplied by the supplier.

These claims can damage the brand and reputation of the company and could even result in monetary damages to others, even if the infringement was on the part of the supplier.

There is a way to mitigate this risk, but there is more to it than simply requesting compensation. Protocols, such as patent clearance search and non-infringement analysis by your suppliers, should be mandated as part of the qualification process.

Beware of someone telling you that they have researched the intellectual property rights of others and that it “doesn’t matter” or “will not be a problem” without sufficient supporting material.

Compensation Clauses in Supply Contracts

Beyond requiring that a patent clearance search be completed for supplier-supplied parts, as a purchaser/licensee, you should require explicit language in supply agreements to cover compensation for third-party infringement claims.

“The use of [product] by [the buyer/licensee] will not infringe or violate in any other way the industrial or intellectual property rights of any third party of which [the seller/licensor] has knowledge If any third party asserts that [the buyer’s/licensee’s] practice of the Rights Licensed under [the Supply Agreement]either resulting from explicit knowledge [the buyer/licensee] had or should have had with reasonable due diligence, constitutes an infringement or misappropriation of the industrial or intellectual property rights of that party, [the seller/licensor] shall, in accordance with this article, defend, indemnify and retain [the buyer/licensee] harmless against any and all such claims.”

A request for the licensor to take out insurance in this matter may also be inserted into the supply contract, depending on how much bargaining power the buyer holds. Additionally, most supply agreements provide a license to use to the purchaser, which is typically transferable to the end user in the case of OEMs and system integrators. Therefore, your customers should be assured that they will not be subject to a “stop use” court order as a result of purchasing your product.

However, this compensation requires the additional work of patent clearance. The language used above requires that you have explicit knowledge or should have known about third party patents. At a minimum, the above language helps mitigate any claims of gross negligence, but if a patent clearance effort is not pursued, your business may still be subject to misconduct and damages. This misconduct would not be covered by compensation, so mitigating this risk requires appropriate steps in the vendor qualification process.

It should be the seller’s responsibility to convince you that the product they offer for sale does not infringe the intellectual property rights of a third party. In addition, he may be aware of certain patents as a result of his own product approval seeking or landscaping endeavors. You should ensure that you maintain a catalog or “watch list” of patents that refer to sub-component items that are sourced from vendors. This watch list should be communicated to the provider during the qualification process to give them the opportunity to address these issues if they have not already done so.

When conducting the patent clearance search, the provider should have legal opinions from their attorney if necessary to demonstrate a non-infringement position or a reasonably comprehensive approach to invalidation. Like your own efforts, those opinions must address 1) literal infringement, 2) infringement through the doctrine of equivalents, 3) prosecution history and/or the impediment of the file wrapper, 4) conduct unfair and 5) the means for invalidation (if necessary).

Second source: another possible impediment of intellectual property rights

For manufacturers that have “built to spec” rather than “built to print” parts, another issue arises when it comes to second source and replacement parts.

Imagine a scenario where one of your suppliers supplies you with a key component of your product, but then discovers a quality issue that leads to a massive recall of that part. The financial and PR cost of a lengthy warranty claim can put them out of business, but it can also hurt your business if you’ve sold numerous units of your own product and there’s no way to repair/replace supplier-supplied parts.

If you have something built to specification, then you should have a clause in your supply agreements that refers to your ability to take the supplier’s drawings, manuals and manufacturing know-how to a second source in the event that they are unable or unwilling to do so. does not provide you with a sufficient supply of parts for use or replacement in your product(s).

Also, the more you specify the parts to be supplied, the more control you have over supply scenarios. If you have more than one supplier of a part and these parts are not “interchangeable”, then you must ask yourself the question of risk exposure in the event that one of those suppliers is unable or unwilling to supply you for whatever reason.

Taking precautions to protect your business when it comes to counterparty intellectual property rights is not just a good idea…it’s a must!