Outsourcing Law & Business Journal™: January 2010

January 25, 2010 by Bierce & Kenerson, P.C.

OUTSOURCING LAW & BUSINESS JOURNAL (™) : Strategies and rules for adding value and improving legal and regulation compliance through business process management techniques in strategic alliances, joint ventures, shared services and cost-effective, durable and flexible sourcing of services. www.outsourcing-law.com. Visit our blog at http://blog.outsourcing-law.com for commentary on current events.

Insights by Bierce & Kenerson, P.C., Editors. www.biercekenerson.com

Editor’s Note: As we welcome 2010, we continue to develop our newly re-launched Outsourcing-Law.com™ website and e-newsletter! We invite your feedback on the new Beta site as well as your contributions of content on international jurisdictions or legal issues in governance, risk management and compliance. Please contact us.

Vol. 10, No. 1 (January, 2010)
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1. Cyber Security Threat Management in Outsourcing: The Coming National Security Regulation of ITO, BPO and KPO.

2. Social Security Tax Agreements: The Cost of Expatriate Workers.

3. Humor.

4. Conferences/Webinar.
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1. Cyber Security Threat Management in Outsourcing: The Coming National Security Regulation of ITO, BPO and KPO. Imminent national regulation of Internet-based services will impact all companies that use the Internet for project management, collaboration, and remote transaction processing. Google and China have precipitated a showdown that may cause the nationalization of Internet regulation, with many consequences on the freedom and costs of running a global business or servicing customers remotely. The showdown highlights the fact that cybersecurity threats come from many sources, including foreign nation states, domestic criminals and hackers and disgruntled employees….

Cybersecurity is a critical foundation for any country’s national security and economic security and, indirectly, global trade in IT-enabled services and in the global supply chain….In global sourcing, cyber security is an essential commitment by anyone business seeking to acquire and be a trusted custodian of personally identifiable information (“PII”). If enterprises (“data controllers” under the European Union Data Protection Directive) are going to gather PII and contract with service providers (“data processors”) to process it, the risk of cyber attacks frames the debate on risk allocation, roles, responsibilities, pricing and process integration.

For all participants in the outsourcing industry, it’s time to fresh look at legal structures and financial implications of cybersecurity. For the complete article, click here.

2. Social Security Tax Agreements: The Cost of Expatriate Workers. Whenever citizens of one country set up operations or perform services in another country, they face the challenge of dual taxation. Dual taxation can be particularly oppressive where two countries tax the same income, or require payments of some form of tax on the same business activities. To avoid such burdens, model income tax treaties and estate tax treaties have evolved under the aegis of the OECD. Other treaties may apply to allow workers from one country to avoid paying social security to the government of another country. This article addresses the question whether bilateral social security tax agreements have a material impact on mobility of technical service workers moving between a service delivery center (such as India) and a service recipient’s facilities (such as in the United States). Click here to see the entire article.

3. Humor.

Cybersecurity, n. (1) a locked door; (2) an open door with pass key; (3) trust; (4) hope.

4. Conferences/Webinar.

January 22, 2010, Webinar on How Can You Leverage An Economic Development Group In Your Global Sourcing Strategy? Presented by Global Sourcing Council. Eric Hochstein of the Ontario Ministry of Economic Development and Trade will discuss the pros and cons of near-shore sourcing and the socially responsible aspects of sourcing to Canadanderstanding how successful and growing partnerships between companies in the United States and Canada have strengthened businesses on both sides of the border and around the world. To register, please click here.

January, 24-26, 2010, IQPC Business Process Outsourcing and Shared Services Exchange 2010, San Diego, California. This is an invitation-only gathering for VP and C-Level senior Shared Services and Outsourcing executives made up of highly crafted, executive level conference sessions, interactive “Brain Weave” discussions, engaging networking opportunities and strategic one-on-one advisory meetings between solution providers and delegates. With a distinguished speaking faculty from McGraw-Hill, Ingram Micro and Pfizer, amongst others, the seats at the 2010 Exchange are limited and filling up quickly. We have limited complimentary invitations available for qualified delegates for a limited time. Please give us your reference ‘Outsourcing Law’ when inquiring. There are solution provider opportunities also available for companies who want to be represented. You can request your invitation at exchange@iqpc.com, call at 1866-296-4580 or visit their website.

February 15-17, IAOP’s 13th Annual 2010 Outsourcing World Summit, Lake Buena Vista, Florida. This event is designed for outsourcing executives from across the industry and around the world who are seeking the very latest insights and ideasand is themed as “Using Outsourcing to Emerge as a Leader in the New Global Economy”. Educational sessions deliver specific actionable solutions to current challenges faced by experienced professionals. Case studies feature actual experiences and the lessons learned, feature new ideas, approaches and opportunities. For more information, click here.

February 22-24, 2010, SSON and IQPC 8th Procure-to-Pay Summit, Miami, Florida focuses on “Fostering Smart Partnerships to Optimize Cash Flow and Deliver Positive Business Outcomes from End to End.” This Summit is all about making the most of your smart partnerships to increase cash flow and improve business outcomes as companies move away from a reactionary mode toward sustainable practices. While we may not yet be out of the woods, so to speak, it is clear that the economic landscape in 2009 has created opportunities for companies to create new synergies with their P2P partners to help promote growth for 2010 and beyond. For more information, click here.

February 24-25, 2010, IQPC’s 3rd E-Discovery for Financial Services Conference, New York, New York. Learn the Best Review, Retention and Destruction Procedures to Cut Costs and Response Time During a Financially Troubled Economy. This event examines, from the unique perspective of high-level financial executives, how the challenges of each financial sector intersect with e-discovery proceedings and processes. View the complete program agenda at www.ediscoveryevent.com/finance.

March 22-26, 2010, SSON presents the 14th Annual North American Shared Services & Outsourcing Week, Orlando, FL. This event includes speakers from top companies: Aramark, Arbys/Wendy’s, AstraZeneca, Chevron, Coca-Cola, Conagra Foods, General Motors, Kellogg, Kraft, Microsoft, Monster, NASA, Northrop Grumman, Oakley, Perdue Farms, Schering Plough, Warner Brothers and more. It will include new and enhanced features:

* G8: Global Sourcing Think Tank Eliminating the White Noise: The first ever neutral platform to help shape a common industry agenda in the US
* Under the C-Suite Spotlight with Rene Carayol, An Exclusive Onstage CXO Interview: Board-room revelations regarding shared service & sourcing model strategy
* New, Strong, Business Outcome-Focused Content: 8 content-intense tracks, from Planning & Launching and BPO Evolution to IACCM’s Contracting to Collaboration
* Enhanced Annual Features: Quick Wins Energizers, Speed Networking, Blue Sky Innovation Room for Mature SSO’s, and more.

Please contact Kim Vigilia directly at 1-212-885-2753 or at kim.vigilia@iqpc.com with your special code IUS_OSL_#1 to get a 20% discount off the all-access pass. You can also visit the website at www.sharedservicesweek.com.

March, 25-26, 2010, American Conference Institute’s 4th National Forum on Reducing Legal Costs, Dallas, Texas. This essential cross-industry benchmarking forum gathers together more than 30 senior corporate counsel and legal sourcing managers responsible for cost-reduction success stories, as well as leaders from law firms who are pioneers in the alternative fee world, to guide those in attendance on the complexities of keeping legal department costs in check. Now in its fourth installment, this event also offers unique networking opportunities with senior practitioners in the field, includingin-house counsel across a wide spectrum of companies and industries. For more information, visit their website.

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FEEDBACK: This newsletter addresses legal issues in sourcing of IT, HR, finance and accounting, procurement, logistics, manufacturing, customer relationship management including outsourcing, shared services, BOT and strategic acquisitions for sourcing. Send us your suggestions for article topics, or report a broken link at: webmaster@outsourcing-law.comThe information provided herein does not necessarily constitute the opinion of Bierce & Kenerson, P.C. or any author or its clients. This newsletter is not legal advice and does not create an attorney-client relationship. Reproductions must include our copyright notice. For reprint permission, please contact: publisher@outsourcing-law.com. Edited by Bierce & Kenerson, P.C. Copyright (c) 2010, Outsourcing Law Global LLC. All rights reserved. Editor in Chief: William Bierce of Bierce & Kenerson, P.C. located at 420 Lexington Avenue, Suite 2920, New York, NY 10170, 212-840-0080.

Filed under: Newsletter
Tagged: agreements, contracting, data protection, humor, legal, outsourcing, privacy, security, services, sourcing, US

Social Security Tax Agreements: The Cost of Expatriate Workers

January 21, 2010 by Bierce & Kenerson, P.C.

Whenever citizens of one country set up operations or perform services in another country, they face the challenge of dual taxation. Dual taxation can be particularly oppressive where two countries tax the same income, or require payments of some form of tax on the same business activities. To avoid such burdens, model income tax treaties and estate tax treaties have evolved under the aegis of the OECD. Other treaties may apply to allow workers from one country to avoid paying social security to the government of another country.

This article addresses the question whether bilateral social security tax agreements have a material impact on mobility of technical service workers moving between a service delivery center (such as India) and a service recipient’s facilities (such as in the United States).

Double tax treaties allocate the rights of the two countries to tax the same income or activities. In the case of income tax treaties, the key determinant is whether the activities form a “permanent establishment” that serves as a sufficient nexus for the host country to tax the income and the activities. In the case of workers visiting on work visas, social security treaties allocate both the social security charges deducted from local wages and the liability of each state for payment of the social benefits (such as medical care and retirement income) from the workers’ activities.

The Times of India reported on January 18, 2010, that India and the United States are negotiating a Bilateral Investment Promotion Agreement and a Social Security Treaty. Http://timesofindia.com/articleshow/5462979.cms. U.S.-visiting personnel of Indian outsourcers (and Indian service captives of U.S. companies) have been paying U.S. Social Security taxes from the first day of their secondment to the U.S. locations. Payments are due from both the employer and the employee at the rate of 7.65% for various combined federal social taxes. Their visas (typically H1-B) may permit work in the U.S. only for 6 years. However, under U.S. Social Security rules (applicable in the absence of a treaty), such personnel are not entitled to receive any U.S. social security benefits unless they remain in the U.S. for at least 10 years (40 quarters).

The U.S. Social Security Administration (“SSA”) has its own explanation of the various social security treaties:

Since the late 1970’s, the United States has established a network of bilateral Social Security agreements that coordinate the U.S. Social Security program with the comparable programs of other countries. This article gives a brief overview of the agreements and should be of particular interest to multinational companies and to people who work abroad during their careers.

International Social Security agreements, often called “Totalization agreements,” have two main purposes. First, they eliminate dual Social Security taxation, the situation that occurs when a worker from one country works in another country and is required to pay Social Security taxes to both countries on the same earnings. Second, the agreements help fill gaps in benefit protection for workers who have divided their careers between the United States and another country.

Agreements to coordinate Social Security protection across national boundaries have been common in Western Europe for decades. Following is a list of the agreements the United States has concluded and the date of the entry into force of each. Some of these agreements were subsequently revised; the date shown is the date the original agreement entered into force.

Country	Entry into Force
Italy	November 1, 1978
Germany	December 1, 1979
Switzerland	November 1, 1980
Belgium	July 1, 1984
Norway	July 1, 1984
Canada	August 1, 1984
United Kingdom	January 1, 1985
Sweden	January 1, 1987
Spain	April 1, 1988
France	July 1, 1988
Portugal	August 1, 1989
Netherlands	November 1, 1990
Austria	November 1, 1991
Finland	November 1, 1992
Ireland	September 1, 1993
Luxembourg	November 1, 1993
Greece	September 1, 1994
South Korea	April 1, 2001
Chile	December 1, 2001
Australia	October 1, 2002
Japan	October 1, 2005
Denmark	October 1, 2008
Czech Republic	January 1, 2009
Poland	March 1, 2009

Source: http://www.ssa.gov/international/agreements_overview.html

The list of such countries shows that the U.S. typically has a significant incentive to avoid the imposition of double social security taxes on U.S. citizens and residents who are expatriates abroad than for incoming foreign workers who come to the United States. U.S. expatriates are entitled to U.S. social security coverage, and must contribute, if they work for a foreign subsidiary of the U.S. employer that elects, by agreement with the Internal Revenue Service under section 3121(l) of the Internal Revenue Code, to pay Social Security taxes for U.S. citizens and residents employed by the affiliate.

U.S. Social Security Treaties. Aside from South Korea, Chile, Australia and Japan, virtually all such treaties are with European Union countries. A brief review of the most recent treaties (Czech Republic and Poland) shows that the dual social security taxes are waived based on residency for under 5 years, not the 10 years that applies to individuals from other countries (such as India) without a social security agreement. The requirement of some minimum residency before entitlement to local social security program participation serves public policy by not entitling foreign workers in the U.S., for example, to enjoyment of such programs without making substantial contributions. On the other hand, such minimum residency requirements conflict with the H1-B visa limitation of a six-year maximum stay. As a practical matter, H1-B visitors can convert their visa status to immigrants (after a long wait), so the minimum residency requirement promotes immigration of highly qualified managerial or skilled workers.

Indian Social Security Treaties. According to the Times of India, India has signed social security totalization agreements with Belgium, France and Germany, which are significant markets for Indian-based ITO and BPO service providers. The article did not specify any minimum residency period under such agreements.

Impact on Outsourcing and Foreign Captives. Social security totalization agreements serve to allocate between two national governments two separate cash flows: (i) income (contributions by local employer and the locally present expatriate employee) and (ii) expense (a future stream of social security benefits after satisfaction of the minimum residency requirements). Where the host country such as the U.S. charges social security deductions to the wages of foreign workers (e.g., Indians seconded to a U.S. customer or affiliate), the U.S. reaps a windfall if the minimum residency is never satisfied. The Times of India article claims that this windfall amounts to $1 billion per year. Where the minimum residency is satisfied, there is no windfall, and indeed the host country could suffer a loss if the expatriate acquires residency.

The Times of India article suggests that there is an additional burden on Indian workers who work in the USA under H1-B visas. This is questionable, since American employers (whether as affiliates of Indian captives or as enterprise customers of Indian service providers) will still pay their employer’s share of U.S. social security, regardless of the nationality or tax residency of the worker. The only impact is that the Indian workers do not get a discount, exemption or benefit unless they come to the U.S. for the minimum residency period. In short, it appears that the only party disadvantaged is the Indian Treasury, and the absence of a social security totalization agreement between the U.S. and India does not serve as an impediment for hiring of local workers in the U.S. It does, however, play a role in balance of payments in the long term.

In the scenario at hand, the lack of a social security agreement will also delay liberalization of American investment in India under a separate agreement on protection of investors. Thus, there could be some adverse impact on American companies seeking to invest in India if both agreements are not signed together, or unless one country blinks.

For related topics:

See Employment Law.

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Filed under: Newsletter Article
Tagged: contracting, dual taxation, framework agreement, immigration, India, outsourcing, social security, U.S. Social Security Administration

Outsourcing Law & Business Journal™: December 2009

December 23, 2009 by Bierce & Kenerson, P.C.

Insights by Bierce & Kenerson, P.C., Editors. www.biercekenerson.com

Season’s Readings (and Greetings) from Bierce & Kenerson, PC, Outsourcing-Law.com and our E-newsletter.
Holiday Greetings and welcome to this first edition of an exciting re-launched Outsourcing-Law.com™ website and e-newsletter! We want your feedback on the new Beta site as well as your contributions of content on international jurisdictions or legal issues in governance, risk management and compliance. Please contact us. See you in the New Year!

Vol. 9, No. 12 (December, 2009)

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1. E-Discovery and Legal Process Outsourcing: EDRM Process Design and Choices between Outsourcing vs. Insourcing

2. When is a Contractual Limitation of Liability Invalid and Unenforceable? American Public Policy Exceptions to Exculpatory Clauses in Telecommunications.

3. Humor.

4. Conferences.

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1. E-Discovery and Legal Process Outsourcing: EDRM Process Design and Choices between Outsourcing vs. Insourcing. State and federal rules of civil procedure and emerging common law of the discovery process impose significant costs on businesses that are engaged in litigation. Pre-trial “discovery” serves to narrow the issues in dispute by forcing the disclosure of records, including electronically stored information (“ESI”) for judicial economy, to narrow the scope of disputed issues for adjudication (such as through motions for partial summary judgment, admissions and prior inconsistent statements), and to speed the actual trial process. E-discovery has become a daily challenge for the General Counsel, the CIO, the COO and the Risk Management Department. They face a choice of policies, procedures and technologies for insourcing (such as by using forensic software and employed staff) or outsourcing for electronic records discovery management (“EDRM”) in e-discovery. This article explores some of the differences between insourcing and outsourcing in terms of records management / EDRM, legal requirements for protection and production of electronic records, project management in forensic record examination, litigation readiness, knowledge management, risk management, ethics and legal compliance. To see the complete article, please click here.

2. When is a Contractual Limitation of Liability Invalid and Unenforceable? American Public Policy Exceptions to Exculpatory Clauses in Telecommunications. An essential element of risk management in any commercial contract for the sale of services or goods is the clause limiting the vendor’s liability. In the sale of goods, the policy limitations are set forth in the Uniform Commercial Code, which invalidates clauses that deprive the customer of an “essential remedy” or the clause is part of an abuse of a consumer under a contract of adhesion, and under the federal Magnuson-Moss Warranty Act and similar state laws. In the sale of services, the policy limitations reflect common law, which may include a judicial analysis of regulations and the fundamental nature of the relationship between the service provider and the enterprise customer.

A decision by a New York State Supreme Court judge in November 2009 highlights the limits on exculpatory clauses under American jurisprudence under principles of gross negligence, willful misconduct, “special duty,” breach of the implied covenants of good faith and fair dealing and prima facie tort. In addition, other legal theories – such as fraud, intentional interference with business relationship, negligent misrepresentation, breach of the implied duty of good faith and fair dealing and prima facie tort – might not be available to enterprise customers for a simple failure by the service provider to deliver proper accounting information relating to its services. Click here for the complete article.

3. Humor.

Legal Process Outsourcing, n. (1) everything legal but not done by a lawyer; (2) everything done by a lawyer but not legal in your jurisdiction; (3) everything non-legal but legal because it’s paralegal.

Contract, n. (1) an enforceable expression of the meeting of the minds; (2) a meeting of the wallets

4. Conferences.

January 28-29, 2010, Global Services Conference, Jersey City, New Jersey. Through the entire episode of the global economic meltdown, the global outsourcing services industry has seen the rise of a group of suppliers who are redefining many traditional management practices; changing the long-standing model for contracting offshore services; collaborating with clients in new ways; and gaining more control over outsourcing strategies. This conference focuses on these changes in the global services model and the learning from this period. For more information, visit their website

February 22-24, 2010, SSON and IQPC 8th Procure-to-Pay Summit, Miami, Florida focuses on “Fostering Smart Partnerships to Optimize Cash Flow and Deliver Positive Business Outcomes from End to End.” This Summit is all about making the most of your smart partnerships to increase cash flow and improve business outcomes as companies move away from a reactionary mode toward sustainable practices. While we may not yet be out of the woods, so to speak, it is clear that the economic landscape in 2009 has created opportunities for companies to create new synergies with their P2P partners to help promote growth for 2010 and beyond. For more information, click here.

March 22-26, 2010, SSON presents the 14th Annual North American Shared Services & Outsourcing Week, Orlando , FL. Here’s a sneak peek of new and enhanced features, which include:

Speakers from Top Companies:Aramark, Arbys/Wendy’s, AstraZeneca, Chevron, Coca-Cola, Conagra Foods, General Motors, Kellogg, Kraft, Microsoft, Monster, NASA, Northrop Grumman, Oakley, Perdue Farms, Schering Plough, Warner Brothers and more
G8: Global Sourcing Think Tank Eliminating the White Noise: The first ever neutral platform to help shape a common industry agenda in the US
Under the C-Suite Spotlight with Rene Carayol, An Exclusive Onstage CXO Interview : Board-room revelations regarding shared service & sourcing model strategy
New, Strong, Business Outcome-Focused Content : 8 content-intense tracks, from Planning & Launching and BPO Evolution to IACCM’s Contracting to Collaboration
Enhanced Annual Features: Quick Wins Energizers, Speed Networking, Blue Sky Innovation Room for Mature SSO’s, and more.

March, 25-26, 2010, American Conference Institute’s 4th National Forum on Reducing Legal Costs, Dallas, Texas. This essential cross-industry benchmarking forum gathers together more than 30 senior corporate counsel and legal sourcing managers responsible for cost-reduction success stories, as well as leaders from law firms who are pioneers in the alternative fee world, to guide those in attendance on the complexities of keeping legal department costs in check. Now in its fourth installment, this event also offers unique networking opportunities with senior practitioners in the field, includingin-house counsel across a wide spectrum of companies and industries. For more information, visit their website.

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FEEDBACK: This newsletter addresses legal issues in sourcing of IT, HR, finance and accounting, procurement, logistics, manufacturing, customer relationship management including outsourcing, shared services, BOT and strategic acquisitions for sourcing. Send us your suggestions for article topics, or report a broken link at: webmaster@outsourcing-law.com The information provided herein does not necessarily constitute the opinion of Bierce & Kenerson, P.C. or any author or its clients. This newsletter is not legal advice and does not create an attorney-client relationship. Reproductions must include our copyright notice. For reprint permission, please contact: publisher@outsourcing-law.com . Edited by Bierce & Kenerson, P.C. Copyright (c) 2009, Outsourcing Law Global LLC. All rights reserved. Editor in Chief: William Bierce of Bierce & Kenerson, P.C. located at 420 Lexington Avenue, Suite 2920, New York, NY 10170, 212-840-0080.

Filed under: Newsletter
Tagged: contracting, Contracts, e-discovery, humor, Insourcing, Misrepresentation, outsourcing, risk management, sourcing

When is a Contractual Limitation of Liability Invalid and Unenforceable? American Public Policy Exceptions to Exculpatory Clauses in Telecommunications

December 21, 2009 by Bierce & Kenerson, P.C.

An essential element of risk management in any commercial contract for the sale of services or goods is the clause limiting the vendor’s liability.

In the sale of goods, the policy limitations are set forth in the Uniform Commercial Code, which invalidates clauses that deprive the customer of an “essential remedy” or the clause is part of an abuse of a consumer under a contract of adhesion, and under the federal Magnuson-Moss Warranty Act and similar state laws. In the sale of services, the policy limitations reflect common law, which may include a judicial analysis of regulations and the fundamental nature of the relationship between the service provider and the enterprise customer.

This court decision is a stark reminder that the autonomy of contracting parties is always limited by public policy. Enforceability of contracts thus must include contract planning and negotiation, express limitations on remedies and conformity to public policy exclusions that invalidate certain exculpatory clauses. This interplay sets the framework for risk allocation, contract pricing, performance standards, dispute resolution and competitive strategy for the enterprise customer and the service provider.

I. The “Special Relationship” among Telecom Carriers

The Duty of Connected Telecommunications Carriers to Each Other. In this case, Empire One Telecommunications Inc. v. Verizon New York Inc. (__ N.Y.S.3d ____, Nov. 2, 2009 NYLJ, p. 21, cols. 3-4), Justice Carolyn E. Demarest ruled that one service provider cannot rely upon its exculpatory clause when it has a special duty due to a special relationship with its customer. The decision goes beyond a simple analysis of claims that include gross negligence and willful misconduct, which have long been judicially viewed as exceptions to the normal rule that contractual limitations of liability are enforceable.

Historical Monopoly, Regulated for Competition. The Empire case reflects special character of telecommunications services as a regulated utility. In the Empire One case, Verizon and Empire One were competitors. By virtue of the historical breakup of the prior monopoly held by AT&T over a decade before, Verizon controlled the transmission equipment and lines that carried the telecommunications for Empire’s customers. Under the Telecommunications Act of 1996, 47 U.S.C. 151 et seq.), Verizon had a statutory duty to provide certain telecommunications services to competitors like Empire. Empire was a reseller of Verizon services. Empire was allowed by federal law to interconnect its own network (and other networks) with the Verizon network.

Implied Duties. Under the Telecommunications Act of 1996, Empire was entitled to control the business relationship with the ultimate consumer because Empire enrolled them as its customers and Empire’s own equipment delivered the final connection to the customer. Verizon was carrying calls that were originated with other carriers (such as but not limited to Verizon) that terminated using Empire equipment. Under the Telecommunications Act of 1996, as terminating carrier, Empire is entitled to bill the customer for the service and make a profit by charging the interconnecting carriers that originated the calls for using Empire equipment to deliver the “last mile” termination services. All calls are logged into the billing system of Verizon, since it acts as traffic controller. Verizon equipment, as the glue of the telecom system, is capable of providing information on date, time, origination and destination and the duration of calls as well as codes (LATA identifiers, a valid settlement code, a valid originating local routing number and other validation codes used in billing) that enables interconnecting carriers to bill each other for services.

Failure to Provide Billing Records. Empire complained that Verizon had manipulated the call records that it delivered to Empire by stripping essential information needed for Empire to bill other carriers. Empire alleged that Verizon rendered the call records “useless for the very purpose for which they are intended”. Empire complained that such omissions prevented Empire from determining the originating jurisdiction or the types of telephone calls (mobile, land-line), thus depriving Empire of the ability to charge the originating carrier for the termination services by Empire.

Damages. Empire alleged its losses from 2004 to 2008 were approximately $2,500,000 in lost revenue plus approximately $160,000 in payments to Verizon for unusable billing records covering over 15 million telephone calls. The Empire court provided a refresher course in the liability that a breaching party is deemed to assume. A breaching party “is liable for those risks foreseen or which should have been foreseen at the time the contract was made.” Ashland Mgt. v. Janien, 82 NY2d 395, 403 (1993), quoted at Empire, page 22, col. 1.

Elements of a “Special Relationship.” The decision focused on the conditions that established a “special relationship” between one telecom carrier to another that used its telecom transport facilities (the equipment and the lines) for a fee. The decision focused on the statutory structure regulating public utilities for the public benefit, which, the court held, supports a finding of a “special relationship” between the service provider with a monopoly over the billing records and the service provider that needed the billing records to bill other carriers. “Public policy as reflected in the regulatory structure would also mitigate against enforcement” of the exculpatory clause. The concept of “special relationship” has precedents under prior New York judicial decisions where a public utility fails to perform its duty to furnish reliable service.

Unequal Bargaining Power. Verizon argued that there is no “special relationship,” and therefore the exculpatory clause is valid, where the service contract was negotiated by two sophisticated parties who negotiated in a commercial setting. Rejecting this argument, the court ruled there was clearly an inequality in bargaining power between the two public utilities since, in this case, the terms were not actually negotiated. To promote the public interest under the Telecommunications Act of 1996, the court said, Empire as customer should be afforded the “protection generally due a consumer when dealing with a utility with monopolistic control of the desired service.”

Published Tariff Filing. The general public policy against exculpation of gross negligence and willful misconduct was also written into the particular tariff that Verizon had filed with the public utilities commission.

Service Provider’s Termination of Service following Unresolved Billing Dispute. Other precedents under New York law dealing with Verizon’s wrongful refusal to provision telecom services have ruled that Verizon is liable for consequential damages to a reseller of telephone services over lines provided by Verizon where (i) Verizon had billed and actually been paid for a telephone feature that it had not actually provided (a “billing error”), (ii) the customer stopped paying for the feature allegedly not provided, and (iii) Verizon cut off the reseller from its network for non-payment. The court allowed the reseller to pursue lost profits as consequential tort damages for gross negligence or willful misconduct.

II. Other Classic Causes of Action when the Service Provider Fails to Perform Proper Accounting Services for its Services Performed

Gross Negligence. Under New York precedents, “gross negligence” must “smack of intentional wrongdoing.” Kalisch-Jarcho, Inc. v. Cit of New York, 58 NY2d 77, 385 (NY 1983). Gross negligence evinces a “reckless indifference to the rights of others.”

Fraud. Fraud involves (i) a false misrepresentation as to a material fact, (ii) an intention by the defendant to deceive the plaintiff by such false misrepresentation, (iii) justifiable reliance by the plaintiff on the misrepresentation, and (iv) damages caused by plaintiff’s reliance. Empire claimed each of these elements but the court dismissed the fraud claim since fraud claims cannot be used to duplicate the same elements of a breach of contract, where the fraud claim was “collateral to the contract” and not based on the same facts alleged as to the breach of contract. A fraud claim is insufficient if it merely alleges that a misrepresentation of an intention to perform services under the contract.

Implied Duty of Good Faith and Fair Dealing. Under common law, there is an implied duty of good faith and fair dealing in the performance of contractual obligations. Here, Empire’s claim that Verizon breached this duty was dismissed since it was equivalent to a claim for breach of contract.

Tortious Interference with Business Relations. In the Empire case, Empire as CLEC customer claimed that Verizon as service provider had interfered with Empire’s business relations by its failure to provide the call data needed to enable Empire to bill its interconnect customers. This legal theory requires the injured party to allege and prove (i) the existence of the actual or prospective business relationship with a third party, (ii) the defendant, having actual knowledge of that relationship, intentionally interfered with it; and (iii) the defendant either acted with the sole purpose of harming the plaintiff or used means that were dishonest, unfair or improper, and (iv) the defendant’s conduct thus injured the plaintiff’s business relationship.

In the Empire case, this legal theory was unsupported. Empire was unable to validly claim that Verizon’s failure to provide interconnect customer billing information was directed to harm Empire’s customers, not merely to harm Empire. The court noted that Empire merely alleged that it was unable to invoice interconnect carriers for transiting its network due to the invalid and inadequate call records that Verizon sells to it. “Empire’s inability to bill these third–party carriers, however, would not induce these carriers not to do business with Empire.” Hence, Empire was unable to sustain a claim of intentional interference with business relationship.

Negligent Misrepresentation. Empire also claimed that Verizon was liable for consequential damages due to Verizon’s negligent misrepresentation. Such a claim depends on alleging and proving three requirements: (i) the existence of a special relationship or privity-like relationship that imposes a duty on the defendant to impart correct information to the plaintiff, (ii) the fact that the information was incorrect, and (iii) the plaintiff reasonably relied on the information to its detriment. It is a question of fact whether there exists a “special relationship” sufficient to justify plaintiff’s legitimate expectation that the information would be true and accurate. In this case, the tariff and the contract were worded in a manner that denied this type of special relationship to Empire.

Prima Facie Tort. Empire unsuccessfully alleged that Verizon was liable for “prima facie” tort, a unique common law tort theory under New York law. The requirements for alleging and proving such a cause of action include (i) the intentional infliction of harm, (ii) which causes special damages, (iii) without any excuse or justification, (iv) by an act or series of acts that would otherwise be lawful, and (v) that the disinterested malevolence was the sole motivator for the defendant’s harm-causing conduct. Empire failed to allege the last point, which it probably could not prove since reaping unfair profits is not an act of malevolence but rather an act of greed.

III. Lessons for Everyone

The Empire One decision was framed in the area of telecommunications and invoicing. Separate from the area of regulated public utilities, it offers nonetheless several practical lessons for structuring an outsourcing agreement:

Exculpation is Limited. Public policy exceptions for gross negligence and willful misconduct are implied in every contract, whether or not included contractually.
Mutually Agreed “Special Relationship.” A “special relationship” may exist, and the service provider’s exculpation might not be valid or enforceable, where the enterprise customer depends on the service provider to provision the service,
Mutually Agreed Consequences. As a contracting matter, the parties should identify the consequences if the service provider suspends service while there is a dispute over adequacy of its provisioning of services, over billing for past services and for the customer’s inability to obtain alternative services in the spot market without consequential damages.
F&A Services: Special Negotiating and Drafting Issues. Legal theories of fraud, intentional interference with business relationship, negligent misrepresentation, breach of the implied duty of good faith and fair dealing and prima facie tort do not give any remedy to the enterprise customer that loses revenue from an inability to use the service provider’s billing records to invoice its own interconnect customers. For “finance and accounting” outsourcing, this lesson means that inaccurate or insufficient accounting services need to be identified as a breach, and the quantum and conditions of “damages” for “direct damages”.

Filed under: Case Study, Newsletter Article
Tagged: contracting, Contracts, dispute resolution, enterprise customer, Gross Negligence, management, risk management, Special Relationship, telecommunications

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