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Liability of Service Provider for Customer’s Copyright Infringement

October 9, 2009 by Bierce & Kenerson, P.C.

Litigation involving providers of software or services for the peer-to-peer file sharing on the Internet highlights the risk for service providers under the theories of contributory infringement and vicarious infringement of copyright.  Napster, Aimster and Grokster file sharing systems and Gnutella software provide some analogies for Internet hosting services.

A review of these decisions suggests that the developers of software might be able to escape liability if they fail to have the capability of controlling the uses of the software.   But a service provider runs the risk of liability for its customer’s copyright infringement if the service provider uses software or systems that enable contribute to copyright infringement by a “customer.”   As a result, service providers need to clarify their roles and responsibilities in respect of copyright matters.

Privacy issues are also related/considered in a Verizon case involving a subpoena to a telecom service provider to disclose customer identities in a potential copyright infringement case.

Customer’s Infringing Activity.

In the famous Napster decision, Napster offered a service via the Internet allowing users (“customers”) to engage in sharing of files of music and other copyrighted works.  Napster controlled the access rights to the system, so it was found to be liable for contributory infringement.

Contributory Copyright Infringement.

Under the doctrine of contributory copyright infringement, a service provider is liable for contributory infringement of copyrighted works if, with knowledge of the infringing activity, he or she “induces, causes or materially contributes to the infringing conduct of another.”   A&M Records  Inc. v. Napster Inc., 239 F.3d 1014, 1019 (9th Cir. 2001).

But if a manufacturer’s systems could be used for “substantial non-infringing uses,” as the Sony video cassette recorder was found to offer, the manufacturer’s generalized knowledge that some users might use the systems for infringing purposes is not sufficient to warrant liability for contributory infringement.   Sony Corporation of America v. Universal City Studios Inc., 464 U.S. 217 (1984).  In that sense, the manufacturer only had “constructive knowledge” of the infringement.

Where the defendant has “actual knowledge” of the infringement and the defendant materially contributes to that infringement, then the defendant is liable for contributory infringement, according to a California court scrutinizing a peer-to-peer file sharing system.  If the defendant does nothing to facilitate the infringement, and is technologically powerless to stop it, the defendant is not liable for contributory infringement. Metro-Goldwyn-Mayer Studios v. Grokster Ltd., __ F.3d ___, C.D. Cal, No. CV 01-08541-SVW (C.D. Cal. Apr. 25, 2003); Metro-Goldwyn-Mayer Studios inc. v. Consumer Empowerment BV, __F.3d __, C.D. Cal. No. CV 01-09923-SVW (C.D. Cal. Apr. 25, 2003) (hereinafter, “Grokster Decision”).

Critical to “contributory infringement” is the defendant’s substantial knowing support for the infringement by its users (customers):

As an initial matter, the record indicates that Defendants have undertaken efforts to avoid assisting users who seek to use their software for improper purposes. More critically, technical assistance and other incidental services are not “material” to the alleged infringement. To be liable for contributory infringement, “[p]articipation in the infringement must be substantial. The authorization or assistance must bear a direct relationship to the infringing acts, and the contributory infringer must have acted in concert with the direct infringer.” Marvullo v. Gruner & Jahr, 105 F. Supp. 2d 225, 230 (S.D.N.Y. 2000) (citation omitted); accord Arista Records, Inc. v. MP3Board, Inc., 2002 U.S. Dist. LEXIS 16165, at *16 (S.D.N.Y. Aug. 28, 2002). Here, the technical assistance was rendered after the alleged infringement took place, was routine and non-specific in nature, and, in most cases, related to use of other companies’ software (e.g. third-party media player software).  [Emphasis in original text].   Grokster Decision, slip op., p. 25.

Vicarious Liability for Infringement.

Vicarious liability arises from the agency doctrine of respondeat superior under common law.  Under the legal theory of vicarious liability for copyright infringement, a defendant will be held liable for contributory infringement when it is found that the defendant both:

• “has a right and ability to supervise the infringing activity” and
• “has a direct financial interest in such activities.”   A&M Records Inc. v. Napster, 114 F.Supp. 2d 896 (N.D. Cal. 2000).   This could be satisfied even by a free “service” since financial interest could be shown where the increased traffic to the defendant’s website would generate financial gain, even if the actual supervision of the infringing activity did not.

“As opposed to contributory infringement, one can be liable for vicarious infringement without knowledge of the infringement.”  Grokster Decision, p. 27-28, citing Adobe Systems Inc. v. Canus Prods., Inc., 173 F. Supp. 2d 1044, 1049 (C.D. Cal. 2001) (“Lack of knowledge of the infringement is irrelevant.”).

In Napster, the “service provider” provided the central indices of files of copyrighted works being shared and exchanged.   Similarly in the Aimster decision, the defendant managed a peer-to-peer file sharing network in which the defendant had the ability to terminate users and control access to the system.  In re: Aimster Copyright Litig., 2002 U.S. Dist. LEXIS 17054, at *50-*51 (N.D. Ill. Sept. 4, 2002).

In contrast, in Grokster, the “service provider” merely issued software and started the chain reaction of granting access to some “starter files” that users could then disseminate without any control by the service provider.  The Grokster service provider lacked the ability to block infringers’ access to a particular computer environment for any reason.   The lack of control saved the Grokster service provider from vicarious liability for infringement.

Impact for Service Providers.

Taken together, the Napster and Grokster cases underscore the risk of contributory liability or vicarious liability for copyright infringement.

Statutory Protection – Copyright Infringement.
Certain statutes protect the service provider.  For example, the Digital Millennium  Copyright Act of 1998 has a procedure for allowing aggrieved copyright owners to seek to enjoin or stop an ongoing infringement.

Statutory Protection – Privacy.
Copyright is distinct from privacy law.   However, a similar concept exists in privacy legislation, for protection of the data processor from liability for wrongful disclosure by its customer of confidential information.  See, e.g., pending legislation (e.g., the “Consumer Privacy Protection Act of 2003, H.R. ____, 108th Cong., 2d Sess.) (proposed regulatory regime under Federal Trade Commission for mandatory privacy policies and securities policies and voluntary self-regulation programs.)   And, according to one court,

if an individual subscriber opens his computer to permit others, through peer-to-peer file-sharing, to download materials from that computer, it is hard to understand just what privacy he or she has after essentially opening the computer to the world.  In re: Verizon Internet Services, Inc., Civ. No. 03-MS-0040 (JDB), __F.3d __ (D. D.C. Apr. 24, 2003).

Thus, courts may hold the user liable and without protection from anonymity.

These cases highlight the importance of suitable intellectual property clauses in the outsourcing contract.

Code of Ethics for Auditors: Some Case Studies and Legal Principles in Auditing Standards

October 9, 2009 by Bierce & Kenerson, P.C.

Auditors have their own codes of ethics.   Where there is no code of ethics, or where the code of ethics permits a degree of conflict of intere+/st, the auditors tread at their own risk.  The following case study underscores the traditional common law obligations of auditors as fiduciaries, even before the adoption of the Sarbanes-Oxley Act of 2002.   This section covers some basic issues in auditing standards.

Case Study #1: Cap Gemini and Ernst & Young, Potential Self-Dealing

Responding to SEC criticism of ostensible conflicts of interest, some major accounting firms, such as KPMG and Arthur Andersen, have spun off their consulting arms as independently owned and managed entities. Ernst & Young LLP chose another route. The story of E&Y and its alliance with Cap Gemini leads from a regulatory no-action letter to a court case alleging breach of the accountant’s fiduciary duty. The tale leads to “lessons learned.”

Independence of Auditors: SEC No-Action Letter to Ernst & Young LLP on Alliance with Cap Gemini Ernst & Young LLC.
By no-action letter dated May 25, 2000, the SEC’s Chief Accountant advised Ernst & Young LLP that it would consider E&Y to maintain its independence even though Cap Gemini Ernst & Young were to provide IT services to E&Y audit clients. The no-action letter imposed a number of conditions that ” (1) limit at the outset and within five years end E&Y’s equity interest in Cap Gemini; (2) impose limitations on Cap Gemini’s use of the E&Y name; (3) require a strict separation of E&Y and Cap Gemini’s corporate governance; (4) forbid any revenue sharing between E&Y and Cap Gemini; (5) forbid any joint marketing agreements between E&Y and Cap Gemini; and (6) restrict any shared services between E&Y and Cap Gemini. Letter of Lynn E. Turner, Chief Accountant of SEC, to Kathryn A. Oberly, Esq., Ernst & Young, May 25, 2000. http://www.sec.gov/info/accountants/noaction/lteyltr.php

Litigation Alleging Breach of Accountant’s Fiduciary Duty; Liability for Systems Integrator’s Nonperformance.
Unfortunately, an SEC no-action letter is not a vaccine against client lawsuits. Accountants engaged in management consulting should pay careful attention to a ruling against Ernst & Young, LLP (“E&Y”) and its successor in interest (by sale of consulting business), Cap Gemini Ernst & Young, U.S. LLC (“CGEY”). This case is instructive to anyone in a licensed professional capacity engaged in ancillary or multidisciplinary consulting practice.

Pre-Trial Ruling.
In a pre-trial ruling in early January 2002 on a motion to dismiss, without deciding the final outcome, the court found that E&Y was potentially legally subject to claims of breach of fiduciary duty and punitive damages arising out of a failed software implementation by CGEY, a company in which apparently E&Y is a substantial owner. (The was no allegation or showing of a failure to exercise the skill and care of a reasonably diligent accountant, so the court noted that there were no claims of professional malpractice (whether relating to accounting or computer consulting).

Alleged Misrepresentations by Accountants.
The alleged facts of the case, if true, would be particularly egregious. The following reports are provided according to the court’s pre-trial decision. Whether the allegations will be proven remains to be seen.
In June 2000, E&Y recommended to a client, a medical and nutritional company, to retain CGEY as the vendor to implement a commercial off-the-shelf software package that the client had selected, based on E&Y’s recommendation, for its short and long-term business needs. E&Y made a number of representations to the client to induce the client to hire CGEY, and the court concluded that, without those representations, the client would probably have selected another IT service provider. E&Y reportedly represented that (1) CGEY was competent, experienced and qualified to implement the system selected by E&Y, and (2) CGEY’s performance of services had already been “coordinated” with E&Y.

Existence of Fiduciary Duty.
A fiduciary relationship existed between the accounting firm and its client for several reasons. First, the client had developed a relationship of trusting the accounting firm’s judgment based on prior professional services. Second, the accounting firm offered to provide additional consulting services. Third, the medical and nutritional company was less sophisticated than the accounting firm in the “specialty” for which the accounting firm and the services firm were hired.

Potential Breach of Accountant’s Fiduciary Duty.
Thus, “[w]hen a fiduciary fails to disclose personal interests preliminary to contract, and/or represents the existence of a questionable competence and experience critical to the contract and procures a benefit such as that alleged to E&Y and the newly formed CGEY, the risk of liability for the negligent misrepresentations and a question of fraud is properly alleged.”

Atkins Nutritionals, Inc. v. Ernst & Young, LLP,
NYLJ, Jan. 10, 2002. Accordingly, a fiduciary relationship arose and could have been breached if proven at trial.

Case Study #2: KPMG Canada: Lack of Independence.

In June 2005, the Securities and Exchange Commission entered into a settlement, in an enforcement action, with KPMG LLP (KPMG Canada), a Canadian audit firm, and two of its partners, Gary Bentham, the audit engagement partner, and John Gordon, the concurring and SEC reviewing partner. The SEC asserted that KPMG Canada, Bentham and Gordon lacked independence when they audited the 1999 through 2002 financial statements of Southwestern Water Exploration Co. (Southwestern), a now-bankrupt Colorado corporation.

The SEC claimed that KPMG Canada provided bookkeeping services to Southwestern and then audited its own work. Specifically, after KPMG Canada prepared certain of Southwestern’s basic accounting records and financial statements, it issued purportedly independent audit reports on those financial statements. KPMG Canada’s audit reports were included in Southwestern’s annual reports that were filed with the Commission.

The SEC found that KPMG Canada, Bentham and Gordon engaged in “improper professional conduct” within the meaning of Rule 102(e) of the SEC’s Rules of Practice by virtue of their violations of the auditor independence requirements imposed by the Commission’s rules and guidance and by generally accepted auditing standards in the United States.

Some Rules of Ethics for Auditors

The Sarbanes-Oxley Act sets new standards of independence for auditors.

Public Companies.
Such standards created such friction between public companies and their auditors that decisional gridlock set in.  On May 16, 2005, the Public Company Accounting Oversight Board (established under the Sarbanes-Oxley Act, to oversee the auditors of public companies in order to protect the interests of investors and further the public interest in the preparation of informative, fair, and independent audit reports) issued a policy statement on its Auditing Standard No. 2.  The PCAOB’s Policy Statement sought to give ensure some level of reasonableness and flexibility in the conduct of audits.  As it noted,

In particular, the staff questions and answers seek to correct the misimpression that certain provisions of Auditing Standard No. 2 need to be applied in a rigid manner that discourages auditors from exercising the judgment necessary to conduct an internal control audit in a manner that is both effective and cost-efficient. The Policy Statement expresses the Board’s view that, to properly plan and perform an effective audit under Auditing Standard No. 2, auditors should –

• integrate their audits of internal control with their audits of the client’s financial statements, so that evidence gathered and tests conducted in the context of either audit contribute to completion of both audits;
• exercise judgment to tailor their audit plans to the risks facing individual audit clients, instead of using standardized “checklists” that may not reflect an allocation of audit work weighted toward high-risk areas (and weighted against unnecessary audit focus in low-risk areas);
• use a top-down approach that begins with company-level controls, to identify for further testing only those accounts and processes that are, in fact, relevant to internal control over financial reporting, and use the risk assessment required by the standard to eliminate from further consideration those accounts that have only a remote likelihood of containing a material misstatement;
• take advantage of the significant flexibility that the standard allows to use the work of others; and
• engage in direct and timely communication with audit clients when those clients seek auditors’ views on accounting or internal control issues before those clients make their own decisions on such issues, implement internal control processes under consideration, or finalize financial reports.

Private Companies.
Where the audit client is a privately owned business (such as a private enterprise customer or a private service provider), auditor independence rules still apply.  Reviewing Case Studies #1 and 2, the auditors could probably have avoided the claims of breached fiduciary duty if they had made suitable disclosures and had remedied, or caused their consulting affiliate, to remedy a failed software installation.
In that case, the auditors should:

1. disclose their conflict of interest to the client and obtain waivers (similar to the waivers obtained from medical patients undergoing surgery);
2. remedy the flaws in the selection of off-the-shelf software, the systems integrator, and the systems integrator’s lack of skills to cure the defects impeding software performance; and
3. learn from similar client-relationship mistakes that had been subject to prior, unrelated litigation.

The court’s ruling is based under existing rules governing independence of auditors.

International Outsourcing: Legality of Xenophobia in Outsourcing

October 9, 2009 by Bierce & Kenerson, P.C.

Summary:

In the United States, layoffs during the downward economic cycle following the dot.com bubble and then the 9/11 attack have had a severe impact on the local economies.  In the resulting legislative debate over the impact of outsourcing, some state legislators have proposed a reversion to the “Buy American” principle that conflicts with international trade under the World Trade Organization.  This issue underlines an emerging internal public policy debate on the desirability of international outsourcing.

NOTE: Posted in 2003, this seminal article could be updated for more recent manifestations of xenophobia in outsourcing.

“Buy American” in State Government Contracting.

In March 2002, a New Jersey State Senator, Shirley Turner, introduced a bill that would impose a “Buy American” rule on all purchases in the state.

N.J. Sen. No. 1349, 210th Legislature, intro. Mar. 21, 2002, passed in the Senate (40-0), Dec. 16, 2002.

The bill was inspired by the fact that “Recent published reports have indicated that telephone inquiries by welfare and food stamp clients under New Jersey’s Families First Program were being handled by operators in Bombay, India after the contractor moved its operations outside of the United States as a cost-cutting measure.”  The bill was intended to ensure that State funds are used to employ people residing in the United States and to prevent the loss of jobs to foreign countries.

As a “mini-Buy-American” Act, this legislation does not provide any exception for:

• a determination that a domestic procurement is “not in the public interest,”
• a determination that the cost of a domestic procurement is “unreasonable,” or
• a determination that the particular goods or services being procured are not available in such commercially available quantities or quality as are available abroad.

All of these are exceptions under the federal “Buy American” act.

If enacted, such laws would apply only to government procurement.  But such legislation could have repercussions on the image of offshore outsourcing throughout the United States.

The bill does not address issues of cost, or availability of local American services in the particular procurement.

Legality for Governmental vs. Private Purchases of Foreign Services.

As a matter of law, “Buy American” (or “Buy Local”) laws are illegal under the World Trade Organization’s General Agreement on Trade in Services (“GATS”) when they relate to purchases by private buyers.  But for governmental buyers of services, the GATS allows such favoritism to local service providers.

Impact on International Outsourcing by Private Customers.

Legislation limiting government procurement to local service providers should not have any impact on the right of private companies, as customers, to hire any service provider worldwide to render any service.

• Freedom of Contract.
  In our view, nothing in the various laws of individual states in the United States that currently are in consideration could validly overcome such freedom of contract.
• War.
  In case of a war involving Iraq or other country, the United States federal government could validly adopt rules to safeguard its economy from foreign interests.   As discussed below, this raises risks for contracting parties, but such risks may be surmounted through customary technical means for security, business continuity planning, redundancy and disaster recovery.

Buy American – Revival of the Past.

The “Buy American” legislation was originally adopted by the Federal government as a means of promoting local business.  This legislation, at 41 U.S.C. 10a, is limited to the purchase of goods:

This law has been rendered largely moot by the Government Procurement Agreement adopted at the Uruguay Round of the General Agreement on Tariffs & Trade.  See Agreement Establishing World Trade Organization, Annex 4, Plurilateral Agreements, Government Procurement Agreement.

More recently, state legislatures in the United States have considered imposing some restrictions or prohibitions on the use of foreign service providers for contracts involving payment of  state or local funds.  In New Jersey, State Senator Shirley K. Turner introduced a bill that would prohibit any contracting or subcontracting to foreign service providers where the work could be done by American citizens or lawful permanent resident aliens.  Similar legislation is reportedly under consideration (as of February 2003) in Connecticut, Maryland, Missouri and Wisconsin.

Policy Debate: Validity vs. Wisdom of Xenophobia.

As a matter of public policy, we must distinguish between law and policy.  Would such legislation be lawful?  Under the World Trade Organization (WTO) General Agreement on Trade in Services (“GATS”), it would appear valid for government procurement of services.  As a “beggar-thy-neighbor” policy of keeping jobs at home, such legislation would help generate employment at a time of economic decline, reducing the costs of public welfare and other social costs.

Would such legislation be good public policy?  Such legislation would deprive local governments of purchasing services at the cheapest price.  It would hurt local taxpayers as consumers of government services.

World Trade Organization: No “Non-Tariff Barriers” for Private Trade.

Free trade under the World Trade Organization (formerly known as the General Agreement on Tariffs and Trade, or GATT) is based on certain fundamental principles:

• national treatment of foreign suppliers of goods and services, where each member state must “accord to services and service suppliers of any other Member, in respect of all measures affecting the supply of services, treatment no less favorable than that it accords to its own like services and service suppliers.”   General Agreement on Trade in Services, Art. XVII(1), MTN/FA II-A1B, p.19).
• transparency of the laws and regulations governing international trade (subject to the supervening principle that disclosure is not required where it “would impede law enforcement or otherwise be contrary to the local public interest or would prejudice the legitimate commercial interests of particular enterprises, public or private.”   See, e.g., Agreement on Trade-Related Investment Measures, Art. 6, MTN/FA II-A1A-7, p. 3.)
• non-discrimination.

Market Access to Foreign Services Providers under GATS.

The WTO’s General Agreement on Trade in Services embodies the principle that, in sectors where a member state undertakes to grant market access to service providers from another member state, that market access cannot be restricted either nationally or regionally.    Specifically, it is a violation of GATS for a member state to impose any restriction on market access in any of the following forms:

• Number of Service Providers: limitations on the number of service providers (such as in the form of numerical quotas, monopolies, exclusive services providers or the requirement of a “economic needs” test as a condition of market access).
• Value of Service Transactions: limitations on the total value of service transactions or assets (in the form of numerical quotas or the requirement of an “economic needs” test).
• Quantity of Services Provided or Service Operations: limitations on the total number of service operations or on the total number quantity of service output expressed in terms of designated numerical units, in the form of quotas or the requirement of an “economic needs” test.
• Number of Employees: limitations on the total number of natural persons who may be employed in a particular service sector or that a service provider may employ and who are necessary for, and directly related to, the supply of a specific service in the form of numerical quotas or the requirement of an economic needs test.
• Type of Legal Entity or Joint Venture: measures that restrict or require specific types of legal entity or joint venture through which a service supplier may supply a service.
• limitations on the participation of foreign capital in terms of maximum percentage limit on foreign shareholdings or the total value of individual or aggregate foreign investment.

General Agreement on Trade in Services, Art. XVI(2), MTN/FA II-A1B, p.18.

Exceptions to GATS Protections.

Several exceptions expressly permit a member state to disregard its obligations on trade in services.
Services Supplied in the Exercise of Governmental Authority.

By definition, the GATS does not apply to “services supplied in the exercise of governmental authority.”  General Agreement on Trade in Services, Art. I(3)(c), MTN/FA II-A1B, p.14). In some countries, “governmental authority” involves the performance of functions that are considered commercial or otherwise not “in the exercise of governmental authority.”

In the United States, for example, in November 2000, President George W. Bush’s administration adopted regulations requiring that all governmental functions be evaluated and classified as governmental or non-governmental, and non-governmental functions are to be contracted out to outsourcers (or possibly even privatized).

National Security.
National and international security considerations take precedence over trade in services under GATS. In particular, member states may take actions that they may deem necessary to protect “essential security interests” relating to services for provisioning military establishments, nuclear fuels or their materials, or any other action “taken in time of war or other emergency in international relation.”   As a procedural matter, the member state must notify the WTO’s Council for Trade in Services when such “security exceptions” have been adopted and when they have been terminated.  General Agreement on Trade in Services, Art. XIV bis, MTN/FA II-A1B, pp.16-17.

War.
As a “national security” measure, a member state might impose an embargo on trade in services with one or more other WTO member states during a time of war.  The exception applies “in time of war.”

This “war” exception leaves open a number of vital questions about the legality and viability of discrimination, trade embargos and other acts normally prohibited by GATS.  The “war” exception does not specify that the embargo must only apply to another member state that is at war with the buying member state.  But it is not clear whether the right to impose an embargo applies to a country that is perennially in a “state of emergency” or has never entered into a formal cessation of armed hostilities with a particular other member.

In a sense, this exception could arguably serve as the basis for a member state’s attempt to circumvent the WTO principles of free trade in services.  In our view, such an attempt could invite trade reprisals and dispute resolution before a WTO dispute tribunal.

Deceptive and Fraudulent Practices; Contract Default and Enforcement of Rights.
Under GATS, member states may adopt and enforce measures of a general, non-discriminatory nature relating to “the prevention of deceptive or fraudulent practices or to deal with the effects of a default on service contracts.   Accordingly, laws governing enforcement of rights and remedies under contract breach are not subject to GATS rules, so long as the laws are “not applied in a manner that would constitute a means of arbitrary or unjustifiable discrimination between countries where like conditions prevail, or a disguised restriction on trade in services.”   General Agreement on Trade in Services, Art. XIV(c)(i), MTN/FA II-A1B, p.15.

Data Protection.
Similarly, under GATS, member states may adopt and enforce non-discriminatory laws for “the protection of the privacy of individuals in relation to the processing and dissemination of personal data and the protection of the confidentiality of records and accounts.”  General Agreement on Trade in Services, Art. XIV(c)(ii), MTN/FA II-A1B, p.15).

Safety.
Laws governing safety are also generally exempt from the rules of GATS, except if they are discriminatory or disguised trade restrictions.  General Agreement on Trade in Services, Art. XIV(c)(iii), MTN/FA II-A1B, p.15.

Collection of Taxes.
Laws for the “equitable or effective imposition or collection of direct taxes,” or for the avoidance of double taxation under a tax treaty, may be somewhat discriminatory against foreign service providers.  General Agreement on Trade in Services, Art. XIV(d) and (e), MTN/FA II-A1B, p.15).

Government Procurement.
Exceptionally, under GATS, the WTO principles of most-favored-nation treatment, market access and national treatment do not apply for governmental procurement of services. General Agreement on Trade in Services, Art. XIII(1), MTN/FA II-A1B, p.14). (The other principles, such as the “transparency” duty to publish applicable laws and regulations, remain unaffected.)   The Government Procurement Code, adopted prior to the GATS, relates to trade in goods and does not require any treatment different from GATS.

Safeguard the Balance of Payments.
This exception allows a government to escape from GATS requirements to open its economy to free trade in services in order to safeguard the country’s balance of payments “in the event of serious balance-of-payments and external financial difficulties or threat thereof.”  General Agreement on Trade in Services, Art. XII(1), MTN/FA II-A1B, p.12). This exception is not directed at measuring bilateral trade imbalance between two countries that are trading partners.  Rather it focuses on multilateral trade and generalized imbalances in the balance of payments.

Conclusions for Outsourcing Services Providers.

If you are promoting the sale of your services from a foreign country, you should focus on the practical economic benefits of your service.  This may include:

• abundant labor supply.
• rapid deployment of a large pool of skilled workers for early completion of a complex project.
• high quality standards, such as the Software Engineering Institute Capability Maturity Models for both software and services.
• low cost to the taxpayers whose governments are acting as purchasing agents.
• local presence in the host country, and the role of the host country employee pool for the service provider.

Conclusions for Purchasers of Transborder Services.

There are undoubtedly substantial risks of force majeure in outsourcing.  But the WTO principles of national treatment for private-sector transactions and other fundamental protections of international trade in services are well established.  Legislation by state legislators is not likely to have any impact on your ability to procure services at low cost under a clear outsourcing contract. Despite the risks and problems, using technological methods as well as legal contracts, you can protect your investment in foreign services.

Conclusions for National Governments.

The opening of borders to “free trade” under WTO principles leaves everyone exposed to the risk of loss of value of their knowledge in a rapidly changing information economy.  Governments should focus on building a workforce that is skilled in knowledge tools.

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