Raj Judge is a very busy guy. As a partner with Palo Alto, Calif.-based law firm Wilson Sonsini Goodrich & Rosati, Mr. Judge is in charge of the firm’s India practice, specializing in setting up new operations for tech startups abroad.
Over the last 12 to 18 months, as Silicon Valley melts around him, Mr. Judge has been running hard, creating at least one new operation in India every other week. In fact, the volume of companies incorporating in the US but employing the majority of their tech development teams in India is so high, Mr. Judge has created a standardized set of books to streamline the process. “Honestly, I don’t see any of the tech startups or existing technology companies not doing it,” says Judge.
So massive is the shift – one that goes far beyond merely outsourcing software code abroad that venture capitalists and entrepreneurs must now envision creating a company’s entire back-end operations from scratch while protecting its precious intellectual property (IP) from nearly half a world away. “The subcontracting model was somewhat scary because you lost too much control over your IP,” says Bob Kondamori, venture partner with Palo Alto, Calif.-based venture capital firm Charter Venture Capital. “Yet, by putting even more of the company and developing more of your core IP abroad, protecting IP has become more critical now than it’s ever been.”
Given the utter collapse of capital spending on technology in the US, Silicon Valley’s largest tech companies, startups and venture capital backers have had no choice but to seek cheaper ways to build their companies and markets where capital spending may still be on the rise. Currently, Asia and India offer both.
Charter Venture Capital estimates capital spending in India will reach $100 billion over the next five years, and in China perhaps even more. These are markets where engineering talent is cheap, plentiful and talented, and where backend operations of US-based technology corporations can be built for a fraction of the cost of setting them up domestically: $2 million to $3 million for a first round startup in Bangalore versus $10 million to $15 million in funding for a startup in the US, says Kondamori.
Yet, as corporations and investors find new comfort levels with going abroad they must find new comfort levels with developing more of their IP away from home as well. Says Carl Amdahl, technology partner with venture capital firm Doll Capital Management in Menlo Park, Calif., “Patents and copyrights, while they may work in the US, may not work in other countries. As a result, we need to have non-disclosure contracts that are workable in countries these operations are in.”
It’s an area of the technology industry, and of patent law, that is being shaped by the day. The problem of maintaining control over a company’s IP is actually only half the problem. The other half that of enforcement is still to be tested. “What we tell our clients is that all intellectual property must be assigned from India to the US so that it is governed by US law and is enforceable by US law. Has this been tested yet in the courts? Not really, but it will,” says Judge.
The real issue, says Judge and others, is if control over any infringed IP falls under Indian or Chinese law those laws don’t necessarily honor the same level of robust patent protection found in the US. Though China and India’s accession to the World Trade Organization (WTO) has at least drawn those countries more in line with accepting international standards relating to patent, trademark or copyright infringement, neither has yet to reach the far more rigorous standards applied in US courts and enforced under US law.
“From an investor’s perspective, it all boils down to if the company fails, what happens if all of the IP resides in a foreign country?” says Judge. Interesting question, particularly when more and more companies such as July Systems, a wireless startup developing software for mobile operators headquartered in Santa Clara, Calif., employs nearly all of its 50 employees in Bangalore, India, where the firm maintains its Asia office and Global Technology Center. It’s as if the company is based in the US in name only.
Laying Down The Law
Market pros say the issue of IP protection must be addressed on the ground and at the international treaty level. To satisfy WTO standards and address international criticism, China amended its patent laws in July 2001 so that even offers to sell pirated products (as opposed to their actual sales) constitute acts of infringement. India, too, is taking similar steps at the international level.
But what looks good on paper must actually translate into a new willingness to protect IP rights on the ground. According to a Report of the United States Trade Representative’s Intergovernmental Policy Advisory Committee, inadequate international enforcement of existing IP laws is estimated to cost U.S. industry up to $80 billion per year.
Needless to say, tech industry players should heed the advice of legal counsel when they say one can’t be too careful in setting up cross-border operations. “Agreements with employees assigning IP rights must be signed and companies must be pushed to do the paperwork,” says Judge. Companies might also wish to limit access to critical IP on a need to know’ basis, suggests Amdahl, setting up corporate networks with that process in mind.
Ultimately, technology entrepreneurs must recognize they now face a tradeoff. In exchange for seeking new markets and more attractive cost structures they will have to give far more thought and effort into protecting the most critical element of their business the intellectual property they call their own.
And investors and entrepreneurs should be critically aware of not only where their intellectual property resides, but where ultimately, it can be expected to be protected.