Guarding against IP theft when outsourcing engineering

20 October 2020
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Guarding against IP theft when outsourcing engineering

For every business, sensitive data is a prized asset. 

If this critical information – in particular, intellectual property (IP) – is lost or stolen, it can ruin a business overnight. 

Losing this IP could mean losing a competitive advantage in the market. 

How can you efficiently produce your IP without worrying that the company building it will commit IP theft?

Post summary:

  • What is IP theft?
  • What is a non-disclosure agreement?
  • Why you should use an NDA
  • What to include in an NDA


What is IP theft?

According to the Federal Bureau of Investigation, IP theft is:

“Intellectual property theft involves robbing people or companies of their ideas, inventions, and creative expressions—known as “intellectual property”—which can include everything from trade secrets and proprietary products and parts to movies, music and software.”

IP theft can cost millions. The annual estimated cost for the United States alone exceeds $225 billion in and could be as elevated as $600 billion.


How does IP theft occur?

Outsourcing and collaboration with other companies are standardised in today’s global economy.

Outsourcing production doesn’t require companies to expose too much of their prototype design IP. 

Outsourced prototype builders can produce products fast. They can produce cheaply and may not even contain the expertise to understand the IP designs. 

Outsourcing a product design or prototype concept is different. Companies that understand engineering design, if disreputable, could commit IP theft. 


Why would you ever outsource then?

Well, several reasons. Outsourcing the entire building of a product allows prototype manufacturers to: 

  • decrease labour and production costs 
  • reduce capital expenditure
  • benefit from a company’s expertise to not only produce a prototype but to make it even better. 

Yet, there is a caveat. 

As mentioned, a disreputable company implementing the prototype building is privy to a client’s IP and could leak to others. 

The producing company could claim the concept for itself. Gaining the same supposed advantages, it was to provide the client. 

Having produced the clients’ prototype, the producing company may decide either to: 

  • build its own product
  • sell the product to others
  • or forge its own relationships with retailers and distributors

Should this happen, a business will find itself facing a new competitor. 

To summarise, a client’s attempt to produce a new prototype has plunged their company into a situation where they have lost their original idea and now face competition. 

How can a client protect their IP? It is a question asked us here at Tech Group.

Our answering to protecting your IP is simple; we sign a Non-Disclosure Agreement with you.


What is a Non-Disclosure Agreement?

In the context of machine building and factory automation, a non-disclosure agreement (NDA) is: 

An agreement between an industrial designer and a client that legally prevents the design company from publicly revealing IP trade secrets or other sensitive information.

Using NDA’s in the industrial world protects the intellectual property (IP) of clients. NDA’s, ensure product designs are not given to a competitor. 

Should this happen, the IP loses its value, potentially costing significant business revenue.

By signing NDAs both by the client and the company and are legally recognised and enforceable by courts. Although note, there are varying interpretations between countries.

NDA’s must be tailored to specific prototype needs and the jurisdiction where it is being created.


Why should you use an NDA?

Using an NDA prevents the leaking of sensitive information to the public. If it is released, the value of that information and the product it was supposed to build becomes valueless. 

By asking a business to sign an NDA, a client can secure their IP. Doing this ensures that their privacy and sensitive information are not disclosed elsewhere. Furthermore, keeping the data within the confines of the two parties concerned.

Additionally, an NDA has an added purpose – forbidding the copying and further production of the said prototype or product. Something a business could still do as this is not leaking trade secrets to the public.

Lastly, signing an NDA needs to occur before any exchange of sensitive data, trade secrets or any IP takes place. 

Should it not, then any information exchanged before the signing of the NDA is not held liable as per the terms of the agreement.


What to consider in an NDA

If you have no previous knowledge of using an NDA, then it is wise to seek legal help when drafting an agreement. Below are some points you should consider including in an NDA.


Time frame

How long does the NDA remain in force? Most European companies insist on 7-10 years for the NDA to remain in effect, even post-collaboration. US companies typically aim for five years.

It could be that the NDA will never expire.


What is the confidential information?

This is where everything that you wish to be confidential and not shared, and should be as detailed as possible. Avoid writing in the broadest terms and the more ambiguity, the more likely that it could be legally contested.

Plus, the NDA should state what information can be shared or disclosed with others without prior approval.


Whom are the parties concerned

This should not only include the two businesses discussing the prototype but any other parties that are involved in producing a product. 

Maybe there is a need to use a third-party component builder to produce a specific part. Perhaps there is a partner who could better advise a potential client. All need to be included and sign the agreement.


Location and jurisdiction

Different countries have different jurisdictions. European and US businesses operate under a well-developed legal system where legal rights are highly enforceable. 

Other countries, including China, may not have legally binding mechanisms for IP originating in Europe. So tread carefully and ensure that the NDA can be enforced.



Should a machine building company produce the prototype and later machine for factory installation, under the terms of the NDA, they are not permitted to make their own versions unless paying for the use of the licence. 

Licencing stipulates that any version of the product that uses parts of the IP initially covered under the NDA must be paid for – to obtain a licence.

This includes whether the company wishes to use the IP to develop its own competing product.


Circumvention clause

Non-circumvention forbids companies receiving a clients IP from approaching other third parties. 

Meaning that, if a business is making a product for a third party (a small component producer for example), the machine building company is not able to go behind the client’s back and make a rival proposal to the third party.

Including terms of non-circumvention reassures our clients that we will not make any other agreements with other companies. 


How Tech Group protects you from IP theft

Tech Group is a trusted creator of machines in the world of machine building and factory automation. We always encourage the use of NDAs with its clients. 

Clients should be cautious when exchanging IP to businesses in remote production locations. As a company that serves clientele overseas, Tech Group takes steps to ensure confidence in our respect for your privacy.

We always insist on using an NDA for prospective clients, containing all essential stipulations to safeguarding your concept and later manufacturing.

So when you outsource to us, you can rest assured that you have guarded your privacy and intellectual property against IP theft.