Korea As a Service Delivery Center After US-Korea Free Trade Agreement (KORUS FTA)

December 5, 2011 by Bierce & Kenerson, P.C.

President Barack Obama signed the Korean-U.S. Foreign Trade Agreement (KORUS FTA) on October 21, 2011 and it was ratified by Korea’s National Assembly on November 22, 2011. It is now in force.

Separate from the generally applicable multilateral obligations of the two countries under WTO trade agreements, the KORUS FTA opens new doors for service providers in Korea to compete with India, Latin America, Canada and other locations for contracts to deliver data processing and BPO services to U.S. customers. While Korea’s wage levels are comparatively high relative to other destinations, Korea can be expected to compete effectively in niche areas such as banking, finance, insurance and manufacturing support services.

What’s new, beyond the multilateral free-trade framework under the WTO, NAFTA and the EU, compared to other U.S. bilateral free-trade agreements? The KORUS FTA offers a few embellishments on the concept of admitting individuals for specific FTA-qualified visa categories (as under NAFTA). The KORUS FTA adds specific protections for conducting services businesses generally, including professional services licensure (lawyers, doctors, engineers, like NAFTA’s list). The agreement covers the “electronic supply of services,” “digital products,” electronic authentication, e-signatures and e-documents as instruments of bilateral e-commerce. Most significantly, the KORUS FTA hints at a new paradigm for bilateral FTA’s since it includes the principle that privacy laws will not be used for protectionism.

The United States and the Republic of Korea signed the United States-Korea Free Trade Agreement (KORUS FTA) on June 30, 2007. On December 3, 2010, the United States and Korea concluded new agreements, reflected in letters signed on February 10, 2011, that provide new market access and level the playing field for U.S. auto manufacturers and workers. Once it enters into force, the Agreement will be the United States’ most commercially significant free trade agreement in more than 16 years. SOURCE: US Trade Representative.

New Model of FTA: Privacy Issues Are Within Scope of Bilateral Agreements. The KORUS FTA adopts a novel attitude towards the scope of bilateral FTA’s. It recognizes that privacy laws can be an impediment to trade, and it opens markets in offshore data processing on the basis that a privacy law of a sovereign can, by agreement, be modified to enable cross-border data flows. While this conclusion is not expressly stated in such bald terms, the documents advert to it.

I. Cross-Border Services.

Scope of “Cross-Border Trade in Services.” The KORUS FTA applies to “measures” (laws and regulations) adopted or maintained by either party affecting cross-border trade in services by service suppliers of the other party.

“Measures.” Any “measure” that “affects” the “production, distribution, marketing, sale” or “delivery” of a service is covered. The parties clearly contemplated remote transaction processing (BPO) by including “measures” affecting “the access to and use of distribution, transport or telecommunications networks and services in connection with the supply of a service.” KORUS, Art. 12.1(1).

“Cross-Border Supply of Services.” The KORUS FTA covers the supply of services based on the location of the provisioning (from the territory of one of the parties), the location of receipt (in the territory of one of the parties), or the nationality of a service provider while operating within the territory of a party. Art. 12(13).

Outsourcing of Financial Services to Non-Bank Service Providers. Financial services are not covered by the KORUS FTA. Exceptionally, the FTA does cover “financial service” supplied by a “covered investment” (FDI) that is not an investment in a “financial institution.” Art. 12(4). In short, financial transaction processing is covered if the processing is done by a service provider not engaged in the business of banking or insurance. Hence, ITO and BPO services to financial institutions are within the scope, so that each party will provide market access to the other party’s service providers.

Core Freedoms. Subject to a list of non-conforming “measures” identified on “Annex I” and specific sectors and activities in “Annex II,” the parties granted each other national treatment, MFN treatment, open market access and the right to perform all services remotely. Art. 12.

National Treatment. Under the KORUS FTA, “each party shall accord to services suppliers of the other Party treatment no less favorable than it accords, in like circumstances, to its own service suppliers.” Art. 12.2(2).

Most-Favored-Nation Treatment. “Each Party shall accord to service suppliers of the other party treatment no less favorable than it accords, in like circumstances, to service suppliers of a non-Party.” Art. 12.3.

Market Access. “Neither Party may adopt or maintain, either on the basis of a regional subdivision or on the basis of its entire territory, measures that impose limitations on” the number of service suppliers, the total value of service transactions or assets or the requirements of an economic needs test, the total number of service operations, or the number of natural persons performing such services. Art. 12.4. Of course, this does not grant any business visa rights, which are specifically excluded from the scope of the FTA. Art. 12(4).

No Local Presence. The KORUS FTA prohibits each party from requiring any service supplier of the other party to maintain a representative office or any form of enterprise, or to be resident, as a condition of furnishing “the cross-border supply of service.” Art. 12(5).

Conditions to Grant of Authorizations to Perform a Service. The KORUS FTA does not prevent either country from requiring foreign service providers to obtain licenses to peform the services, or to escape local regulation. Any such domestic regulation must be based on “objective and transparent criteria, such as competence and the ability to supply the service.” The licensing procedures themselves cannot be, in themselves, a restriction on the supply of the service. Art. 12(7).

Transparency. In the United States, the concept of “transparency” in government regulation flows from the Constitutional notion of “due process” and from the framework for administrative rulemaking under the federal Administrative Procedures Act. The KORUS FTA adopts similar assurances for public openness, or at least accountability in the absence of public openness, relating to the regulation of services providers. Art. 12(8).

No Third-Party Controlled Service Providers. As with most U.S. income tax treaties, the KORUS FTA treaty denies the benefits of the bilateral agreement to service suppliers of a party that are “owned or controlled by persons of a non-Party.” However, this exclusion only applies where the government denying such benefits to that service provider (i) “does not maintain normal economic relations with the non-Party” (such as North Korea) or (ii) has economic sanctions against that non-Party. Art. 12(11).

II. Regulation of Privacy in Cross-Border Information Flows.

A “Wish List.” The e-commerce provisions of the KORUS FTA do not establish guarantees of free cross-border flows of information. However, the agreement does recognize “the importance of the free flow of information in facilitating trade” and “the importance of protecting personal information.” So the parties agreed to “endeavor to refrain from imposing or maintaining unnecessary barriers to electronic information flows across borders.” Art. 15.8. This is scant legal assurance but offers hope that purely protectionist prohibitions on certain data flows will not be enacted by either party.

Korean Privacy Laws. South Korea has enacted several laws on the collection, use and disclosure of personal information in the private sector. These include:

the Medical Service Act(1973);
the Telecommunications Business Act(1991);
the Protection of Communications Secrets Act (1993);
the Use and Protection of Credit Information Act (1995);
the Real Name Financial Trade and Secrecy Act (initially 1997);
the Framework Act on Electronic Commerce(1999); and
the Digital Signatures Act (1999).

Although South Korea has privacy protection laws which in the past have hindered exportation of personal information, the KORUS FTA will open cross-border trade in financial data processing and related software.

III. E-Commerce, Digital Products and E-Signatures.

Chapter 15 of the KORUS FTA adds a new framework for avoiding barriers to trade in e-commerce.

Access and Use of the Internet for E-Commerce. The KORUS FTA does not set up a legal framework for protecting consumer choice in accessing and using services and digital products, or to run applications and services of their choice. The parties agree to “acknowledge” that consumers in their respective territories “should be able” to have such choices of services and digital products (unless prohibited by law) and choices of applications and services (subject to “the needs of law enforcement”). Art. 15.7.

ITO, BPO and other Remotely Performed or Remotel Provided Services. The KORUS FTA clarifies that “the supply of a service delivered or performed electronically” is subject to the other market-opening requirements governing investment, cross-border trade in services and financial services. However, any exceptions to open market access that apply to such other requirements will also apply to e-commerce and such electronically-delivered services. Art. 15.2.

Digital Products (not Services).

Definition and Context. Digital products are treated separately from electronically performed or electronically delivered services. ‘Digital products” are “computer programs, text, video, images, sound recordins, and other products that are digitally encoded and produced for commercial sale or distribution, regardless of whether they are fixed on a ‘carrier medium’ or transmitted electronically. Art. 15.9.

Market Opening. The KORUS FTA prohibits each party from imposing customs duties, fees or other charges on, or in connection with the importation or exportation of digital products, whether or not “fixed” on a “carrier medium” or transmitted electronically. Art. 15.3(1). However, this general prohibition does not apply to internal taxes or other internal charges on digital products, if “imposed in a manner consistent with this agreement.” In short, sales and use taxes by states and localities remain permitted.

This enables buyers, sellers, licensors and licensees of software to decide on physical delivery (on a CD-ROM, for example) instead of electronic delivery as a tool for avoiding customs duties. It supersedes current practices where sophisticated licensees often require an electronic delivery to avoid customs duties and sales taxes on the CD-ROM’s, but do so at the risk of an incomplete e-transmission. The KORUS FTA thus allows businesses to get both delivery and peace of mind. Further, e-delivery exposes the parties to the risk of deep-packet inspection of the software and thus governmental inspection and potential unauthorized examination and duplication.

MFN: Equal Treatment of Different Digital Products. The “most-favored” nation provisions not only prevent discrimination on trade in digital products from the standpoint of rights and procedures for third-country “digital products.” Art. 15.3(3). The KORUS FTA also prevents discrimination between different types of digital products. This new approach thus requires equal treatment of software, video, audio recordings, visual arts (“images”) and other digitally recorded “products, “ and thus treats e-transmissions (such as via cable, VOIP or satellite) equally with television and radio. Art. 15.3(2) and 15.3(3).

Exceptions. Exceptions are listed in other articles. Art. 15.4, citing Articles 11.12 (investment measures), 12.6 (cross-border trade in services) and 13. 9 (financial services) (collectively, “non-conforming measures”). Also, equal treatment between different digital products is not required where a Party subsidizes a service or service provider, such as by government-supported loans, guarantees or insurance, or services supplied in the exercise of governmental authority. Art. 15.5. Finally, a government can treat digital products with special rules if the e-content (digital product) is “scheduled by a content provider for aural and/or visual reception” and where the consumer cannot access such content on any other schedule. Art. 15.6.

MFN: Jurisdictional Nexus for Avoidance of Free-Riders. The MFN treatment of digial products requires one of two jurisdictional connections. First, the digital products must be “created, produced, stored, transmitted, contracted for, commissioned, or first made available on commercial terms” by anyone (whether or not the persons doing so are Korean or American) in either South Korea or the United States. Second, as a alternative, the individuals involved in the chain of conception and distribution of digital products must be “a person of the other Party.” To enjoy non-discriminatory treatment, such individuals must include one of the following: authors, performers, developers, distributors and owners of digital products must be treated. Art. 15.3(2).

E-Signatures. The KORUS FTA promotes e-authentication and e-signatures.

Definitions. “Electronic authentication” means “the process or act of establishing the identity of a party to an electronic communication or transaction or ensuring the integrity of an electronic communication.” E-signatures on documents cannot be valid without assurance that the parties intended to link the e-signature to the “e-communication” or “transaction.”

E-Authentication Legislation. The KORUS FTA prohibits each government from denying commercial parties the right to mutually determine an agreed appropriate authentication method for a transaction. Also, private parties will be assured access to judicial and administrative review for determination, in disputes, whether “their electronic transaction complies with any [such mutually contracted] requirements with respect to authentication.” Most importantly, neither government may deny the legal validity of a signature “solely” on the basis that it is in electronic form. Art. 15.4(1).

Exceptions. Each country’s government may still regulate by imposing performance standards or governmental certification requirements in respect of e-authentication for “a legitimate governmental objective” where the performance requirements are “substantially related to that objective.” Art. 15.4(2). Obviously, such regulations will apply to the exercise of a government’s regulation of a regulated industry, such as financial services, shipping, insurance, legal process outsourcing, finance and accounting, filing of tax returns and other official records.

Consumer Protection Online. The agreement preserves the right of each party to enact laws and regulations to protect consumers from fraudulent and deceptive commercial practices when consumers engage in e-commerce. The parties agree to cooperate in enforcement of their respective local laws “in appropriate cases of mutual concern.” Art. 15.5.

Paperless Trading. The two governments agreed to put online their “trade administration documents” to allow transparency in regulations under the KORUS FTA agreement. This is not a general e-government mandate. Art. 15.6.

IV. Conclusion. As intergovenmental agreements, FTAs paint the rules with a broad brush. Aside from opening the Korean markets to American automobiles and professional services forms, this FTA opens Korea’s ITO and BPO sector to foreign completition from the U.S.

Filed under: Newsletter Article
Tagged: Business Process Outsourcing, cross-border services, digital products, e signatures, e-comerce, electronic supply of services, emt. bilateral agreement, Korea US Free Trade Agreement, KORUS FTA, most favored nation treat, privacy laws, service providers

Outsourcing Law & Business Journal™: July 2010

July 30, 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

Vol. 10, No. 7 (July 2010)
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1. Dodd-Frank Financial Reform: New “Systemic Risks” for the BPO Industry.

2. Humor.

3. Conferences.

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1. Dodd-Frank Financial Reform: New “Systemic Risks” for the BPO Industry. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, H.R. 4173, signed by President Obama on July 21, 2010, invites a rethinking of the traditional outsourcing model in the financial services sector. The new law adopts new requirements to limit systemic financial risks. It calls for new regulations to delineate prohibited transactions and to implement new certain reporting and operational restrictions. The regulations apply to broker-dealers, banks dealing with hedge funds, commodity brokers, swap dealers and participants and credit rating agencies. It establishes a Bureau of Consumer Financial Protection to ensure compliance.

The traditional outsourcing model does not involve legal liability of service providers for legal wrongdoing by their enterprise customers. The Dodd-Frank law shifts the risk profile of service providers in the financial services sector. This could have a chilling effect on outsourcing for financial services companies and their external service providers. For more, click here.

2. Humor.

Whistleblower, n. (1) in sports, the umpire; (2) in law enforcement, the policeman; (3) in business process management, the employee who sees the emperor is wearing no clothes; (4) in false advertising in the tobacco industry, a retired researcher; (5) under Sarbanes-Oxley, a self-appointed member of a spy network; (6) under Dodd-Frank, a bounty-hunter.

Aiding and abetting, n. In LPO, a “regulatory process” transformation that automatically converts the back office transaction provider into a front-office crook.

3. Conferences.

September 13-15, 2010. 5th eDiscovery for Pharma, Biotech and Medical Device Industries, Philadelphia, Pennsylvania. Presented by IQPC, this event will bring together industry leaders from in-house eDiscovery teams, expert judges and outside counsel as they discuss:

How the new Pension Committee decision will effect eDiscovery professionals in the life science industries
The unique challenges biopharmaceutical and medical device companies face with respect to social media content
Preparing and responding to FDA inquiries, patent issues, and other types of pharmaceutical litigation
A progress report on the 7th circuit eDiscovery pilot program and its implications for Pharma and Biotech
Reducing patient privacy risks and unnecessary disclosures due to indiscriminate document retention
Discovering new technologies to reach your goal of gaining proactive control over all your data

To register and view the whole program, click here.

September 26-28, 2010. IQPC Shared Services Exchange™ Event, 2nd Annual, to be held in The Hague, Netherlands. Shared Service Centres have long been seen as the cost saving centre of HR, Finance & Accounting and IT processes, but with changing employment trends and global challenges facing organisations, how can SSC’s continually offer service value?

Unlike typical conferences, the Shared Services Exchange™, which will be co-located with the Corporate Finance Exchange™, focuses on networking, strategic conference sessions and one-on-one meetings with solution providers. The Exchange invites strategic decision makers to take a step back from their current operations, see what strategies and solutions others are adopting, develop new partnerships and make investment choices that deliver innovative solutions and benefits to their businesses.

To request your complimentary delegate invitation or for information on solution provider packages, please contact: exchangeinfo@iqpc.com, call +44 (0) 207 368 9709, or visit their website at http://www.sharedservicesexchange.co.uk/Event.aspx?id=263014

September 28-30, 2010, SSON presents Finance Transformation 2010, Chicago, Illinois. If you are facing challenges to meet your finance end-to-end and top quartile requirements, consider Finance Transformation 2010 – the most comprehensive event for anyone managing finance back office operations looking for end-to-end capability.

The main themes explore the strategic views of true transformation across the entire finance supply chain and highlight the roadmaps which will help you to achieve top quartile business outcomes you aspire to. Sessions will cover the key tenets that all of you in the industry – large and small, beginner and established, vendor and buyer, private and public – are required to confront. For more information and to register, visit Finance Transformation.

October 21-22, 2010, American Conference Institute’s 5th National Forum on Reducing Legal Costs, Philadelphia, Pennsylvania.

The essential cross-industry forum for corporate and outside counsel who are truly motivated to create value and reduce legal costs through innovative fee arrangements, enhanced relationships, and streamlined operations

Come join senior corporate counsel responsible for cost-reduction success stories, as well as leaders from law firms that have pioneered the use of alternative fee arrangements and other innovative cost-reduction initiatives, as they provide a roadmap for navigating the complexities of keeping legal department costs in check. Now in its fifth installment, this event offers unique networking opportunities with senior practitioners from around the nation, including in-house counsel from a wide range of companies and industries.

Reference discount code “outlaw” for the discounted rate of $1695! To get more information, visit www.americanconference.com/legalcosts

October 25-27, 2010, The 8th Annual HR Shared Services and Outsourcing Summit, Orlando, Florida. This will be a gathering for corporate HR & shared services executives from companies across North America to exchange ideas, develop new partnerships and discuss the latest tools, technologies and strategies being employed in the profession to enhance departmental efficiencies and propel corporate growth. The event will focus on the most current topics in the HR shared services industry including metrics, automation, outsourcing, globalization, compensation & rewards, benefits and an overall focus on the new strategic role of HR shared services. We will review how to tackle change management, analyze current and future projects and further develop the instrumental key areas within HR shared services. Outsourcing Law contacts can receive 20% off the standard all access price when they register with the code HRSS5. Register by calling 212-885-2738. View the program brochure for more details by clicking here.

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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: wbierce@biercekenerson.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: wbierce@biercekenerson.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: Aiders and Abettors, BPO, Consumer Financial Protection laws, Dodd-Frank, Financial Reform, Sarbanes Oxley, service providers, whistleblowers

Dodd-Frank Financial Reform: New “Systemic Risks” for the BPO Industry

July 30, 2010 by Bierce & Kenerson, P.C.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, H.R. 4173, signed by President Obama on July 21, 2010, invites a rethinking of the traditional outsourcing model in the financial services sector. The new law adopts new requirements to limit systemic financial risks. It calls for new regulations to delineate prohibited transactions and to implement new certain reporting and operational restrictions. The regulations apply to broker-dealers, banks dealing with hedge funds, commodity brokers, swap dealers and participants and credit rating agencies. It establishes a Bureau of Consumer Financial Protection to ensure compliance.

Vicarious Liability for Service Providers. The Dodd-Frank law raises the standards for external service providers who support any regulated financial services.

o   It imposes vicarious liability on any service provider processing consumer financial transactions as “aiders and abettors” for operational support in some cases.
o   It encourages employees of shared service centers and outsourcers to file claims of violation so that they can reap a bounty in an enforcement case.
o   It makes mere “recklessness” the equivalent of a “knowing” violation of:

o   the Securities and Exchange Act of 1934, Dodd-Frank, Sec. 929O, amending 15 USc 78t(e);
o    the Investment Company Act, Dodd-Frank, Sec. 929M, amending 15 USC 77o; and
o   the Investment Advisers Act of 1940, Dodd-Frank, Sec. 929N, amending 15 USC 80b-9.

o It extends the extraterritorial jurisdiction of U.S. courts in enforcement of U.S. securities laws.

Whistleblowers Beyond Sarbanes-Oxley. The Sarbanes-Oxley Act of 2002 protects the employment of “whistleblowers” who report to governmental authorities the employer’s violations of the SOX law. Section 922 of the Dodd-Frank law extends protection of “whistleblowers” by appointing them as bounty hunters against securities law violations by banks, financial services companies, insurance companies (BFSI) and by others including credit rating agencies, investment advisers, investment companies (mutual funds), commodities future dealers and others.

The bounty would be manditorily paid, where the Securities and Exchange Commission (SEC) brings any administrative or judicial proceeding that results in monetary sanctions exceeding $1.0 million. 15 USC 78a, Sec. 21F, per Dodd-Frank, Sec. 922. Under future SEC regulations to be adopted, bounties will be awarded to individuals for “original information” not known to the SEC from any other source in an aggregate amount of between 10% and 30% of the total amount collected from SEC-imposed monetary sanctions on the wrongdoer. In deciding how much to award, the SEC must consider the significance of the information to the success of the SEC, the degree of assistance by the whistleblower and his or her “legal representative” and the “programmatic interest” of the SEC in deterring future violations of the securities laws.

The new statute explicitly promotes anonymous whistleblowing by contemplating a scenario where the whistleblower is represented by legal counsel. However, identification of the whistleblower is required, but only “prior to payment of the award.”

The statute extends the usual prohibitions against retaliation for initiating, testifying in or assisting in any judicial or administrative proceeding. Specifically, “no employer may discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner, discriminate against a whistleblower” in terms of employment, by reason of the whistleblowing. The protection applies to any employer, even if the employer is not the violator of the Dodd-Frank law. This protection expires with a new statute of limitations of six years, but not more than ten years if the “materials facts” were not immediately discovered till later. The whistleblower is entitled to reinstatement of employment, 200% of back pay lost plus litigation costs including attorneys’ fees.

The bounty-hunting whistleblower is a new phenomenon. It invites anyone having insider knowledge, including those who process financial transactions under a confidentiality (non-disclosure) agreement, to breach the duty of confidentiality and pursue a bounty by reason of wrongdoing by the client enterprise.

This new law raises the risks for both outsourcers and captives that an employee might become embroiled in whistleblowing. It is not difficult to imagine that an outsourcer’s employee (or captive financial service center’s employee) might identify patterns of trading, and might indeed hear conversations in the course of transactions processing, that might provide evidence of breaches of the new Dodd-Frank restrictions and future SEC implementing regulations.

The bounty-hunting awards were payable for securities violations before the Dodd-Frank act became law. Dodd-Frank, Sec. 924(c).

Aiders and Abettors. The Dodd-Frank law also imposes penalties under the Investment Advisers Act of 1940 (IAA) for anyone who assists a securities violation by a registered investment adviser. Thus, anyone who “knowingly or recklessly has aided, abetted, counseled, commanded, induced or procured a violation of any provision” of the IAA shall be deemed in violation to the same extent as the direct violator. Dodd-Frank, Sec. 929N, amending 15 USC 80b-9, new Sect. 209.

Extraterritorial Jurisdiction of U.S. Courts. The Dodd-Frank law focused on international transactions that could result in violations of U.S. securities laws, even though the “bad acts” are conducted offshore. The new law clarifies and, some would say, extends, the statutory jurisdiction of U.S. federal District Courts to adjudicate any SEC enforcement proceeding alleging a violation of fraud to two international contexts that were somewhat controversial under existing judicial precedents:

o Conduct within the USA that constitutes significant steps in furtherance of the violation, even if the securities transactions occurs outside the USA and involves only foreign investors (i.e., domestic activities); and
o Conduct occurring outside the USA that has a foreseeable substantial effect within the USA (i.e., foreign activities).

In this case, the foreign activities of business intelligence, research, analytics, transaction processing and reporting, customer relationship management, and other tasks could have such a “foreseeable substantial effect.” Thus, foreign activities are thus subject to US judicial jurisdiction, and the foreign service providers engaged in supporting violations by US persons could be governed by US enforcement jurisdiction for direct wrongdoing, recklessness or “aiding and abetting.”

Shared Services Center or Outsourcer’s Risks under Consumer Financial Protection Laws. Outsourcing contracts allocate the risks and responsibilities for compliance with applicable laws. The Dodd-Frank law puts financial services outsourcing on the radar for possible direct enforcement action against the shared services center or outsourcer.

The Dodd-Frank law enumerates the consumer laws that are covered: These consist of:

(A) the Alternative Mortgage Transaction Parity Act of 1982 (12 U.S.C. 3801 et seq.);
(B) the Consumer Leasing Act of 1976 (15 U.S.C. 1667 et seq.);
(C) the Electronic Fund Transfer Act (15 U.S.C. 1693 et seq.), except with respect to section 920 of that Act;
(D) the Equal Credit Opportunity Act (15 U.S.C. 1691 et seq.);
(E) the Fair Credit Billing Act (15 U.S.C. 1666 et seq.);
(F) the Fair Credit Reporting Act (15 U.S.C. 1681 et seq.), except with respect to sections 615(e) and 628 of that Act (15 U.S.C. 1681m(e), 1681w);
(G) the Home Owners Protection Act of 1998 (12 U.S.C. 4901 et seq.);
(H) the Fair Debt Collection Practices Act (15 U.S.C. 1692 et seq.);
(I) subsections (b) through (f) of section 43 of the Federal Deposit Insurance Act (12 U.S.C. 1831t(c)-(f));
(J) sections 502 through 509 of the Gramm-Leach-Bliley Act (15 U.S.C. 6802-6809) except for section 505 as it applies to section 501(b);
(K) the Home Mortgage Disclosure Act of 1975 (12 U.S.C. 2801 et seq.);
(L) the Home Ownership and Equity Protection Act of 1994 (15 U.S.C. 1601 note);
(M) the Real Estate Settlement Procedures Act of 1974 (12 U.S.C. 2601 et seq.);
(N) the S.A.F.E. Mortgage Licensing Act of 2008 (12 U.S.C. 5101 et seq.);
(O) the Truth in Lending Act (15 U.S.C. 1601 et seq.);
(P) the Truth in Savings Act (12 U.S.C. 4301 et seq.);
(Q) section 626 of the Omnibus Appropriations Act, 2009 (Public Law 111-8); and
(R) the Interstate Land Sales Full Disclosure Act (15 U.S.C. 1701).

BFSI outsourcers and shared services centers will be deemed to be providing regulated “financial products or services” if they provide any one or more of the following functions. (There are some exceptions, but for general discussion, the key elements can be summarized here.)

(i) extending credit and servicing loans, including acquiring, purchasing, selling, brokering, or other extensions of credit;
(ii) extending or brokering leases of personal or real property that are the functional equivalent of purchase finance arrangements
(iii) providing real estate settlement services (other than appraisals);
(iv) engaging in deposit-taking activities, transmitting or exchanging funds, or otherwise acting as a custodian of funds or any financial instrument for use by or on behalf of a consumer;
(v) selling, providing, or issuing stored value or payment instruments
(vi) providing check cashing, check collection, or check guaranty services;
(vii) providing payments or other financial data processing products or services to a consumer by any technological means, including processing or storing financial or banking data for any payment instrument, or through any payments systems or network used for processing payments data;
(viii) providing financial advisory to consumers on individual financial matters or relating to proprietary financial products, including–

(I) providing credit counseling to any consumer; and
(II) providing services to assist a consumer with debt management or debt settlement, modifying the terms of any extension of credit, or avoiding foreclosure;

(ix) for others, collecting, analyzing, maintaining, or providing consumer report information or other account information, including information relating to the credit history of consumers, used or expected to be used in connection with any decision regarding the offering or provision of a consumer financial product or service.

Conclusion. The Dodd-Frank law requires further regulations, which could be retroactive.

1. Expanding Scope of Vicarious Liability. Service providers and shared service centers face new risks of direct and vicarious liability for performing certain covered financial service activities. As a matter of policy, the Dodd-Frank act raises the policy question whether, in future laws and regulations, service providers be exposed to more scenarios of vicarious liability.

2. Living in a Climate Protecting Whistleblowers. Whistleblower laws already protect persons who report violations of tax laws and securities laws. The Dodd-Frank act expands the concept of whistleblowers as tools for law enforcement.

o Employment Law. The Dodd-Frank law pushes the boundaries in the field of employer-employee relations. Every employer now has a duty to avoid discrimination against its employees who become whistleblowers as private spies for governmental enforcement of violations of law. Service providers cannot simply adopt a policy of prohibiting whistleblowing. Rather, they now have to define their policies, procedures and contractual risk management in cases where their customers are potentially violating the laws.

o Contractual Design and Risk Allocation. What should a service provider do if an employee poses questions about a financial service company’s operational compliance with Dodd-Frank? Should the service provider encourage the employee to be a whistleblower?

o Relationship Governance. Can the provider deal with the problem through the existing “relationship governance” framework? What are the possible outcomes and costs of dealing with a “whistleblowing” situation in business process management?

o Termination Management. Does the provider have any contractual rights or remedies to terminate the relationship? What process should be initiated before any such right becomes enforceable? Who pays for transition costs in case of termination for alleged breach by the customer of laws that could inveigle the service provider as an “aider and abettor”?

3. The Service Provider’s Price for Moving up the Value Chain. Today, service providers are moving up the value chain by providing end-to-end transaction processing across business functions that are increasingly regulated. Service providers’ business intelligence (BI), deductive and predictive analytics, knowledge-process outsourcing (KPO), legal process outsourcing (LPO) and core finance and accounting functions. In this context, service providers need to put “aiding and abetting” and whistleblower management on their radar for risk assessment, policy development and actions to mitigate risks. This will require investment in compliance analytics, workflow definition and contractual reallocation of risk.

4. Insurance. The increased risk profile for servicing the back-office needs of the BFSI market exposes service providers (and their directors and officers) to significant financial liability. Typically, insurance products are developed to spread risks to cover losses from the rare occasion of catastrophic liability. It is time for risk managers to discuss this issue with their legal counsel, insurance brokers and insurance carriers.

Accordingly, in the consumer financial services sector (and other consumer sectors), it is time for reassessment of the business models for outsourcing and shared services. Redesign of the business models will reflect these pinpoint areas of primary legal risks, identify possible avenues for eliminating or mitigating those risks, and redesign the services and contractual risk allocations.

For further discussion of this article, contact William Bierc e in New York.

Filed under: Contributor Post
Tagged: Aiders and Abettors, BPO, Consumer Financial Protection laws, Dodd-Frank, Financial Reform, financial services, Sarbanes Oxley, service providers, Whistlblowers

“ObamaCare”: Promotion of Automation, Offshore Outsourcing and Job Losses; Penalizing Foreign Companies Based in Tax Havens (and Other Non-Treaty Countries)

November 16, 2009 by Bierce & Kenerson, P.C.

If enacted, President Obama’s healthcare reform would probably hurt domestic employment and accelerate automation, outsourcing and offshoring. It would change the economic incentives for keeping service industries in America. And it would hurt foreign-owned businesses whose ultimate parent company is based in a tax haven or other country that has no U.S. income tax treaty.

On November 6, 2009, by a paper-thin margin of 220 votes to 215, the U.S. House of Representatives passed the “Affordable Health Care for America Act,” H.R. 3962, the 1,990-page health care reform law that has been frequently called “ObamaCare.” If substantially adopted by the Senate and passed into law, the bill would impose significant new burdens on employers and self-employed persons.

Automate, Outsource, Offshore. As a result of the new mandatory taxes and/or health costs, American employers would be encouraged to automate processes, outsource many business functions to external service providers for more automation, and offshore many business functions. At a time when the U.S. unemployment rate is over 10%, this health care bill could permanently kill re-hiring in many service jobs that have been lost. It would encourage further globalization of American enterprises to establish foreign shared-service captives.

Taxing American Employers Encourages Export of U.S. Jobs. This version of ObamaCare would require every American citizen and lawful permanent resident (but not illegal immigrants) to enroll in a “qualified plan.” §§ 202 and 224. Every plan must be identical in coverages, except only for differences in co-payments and deductibles. § 303. If your employer fails to pay 72.5% of the cost of the “qualified plan” for individual plans (or a 65% share for your family coverage), your employer must pay an 8% payroll tax. § 412(b)(1). If you are the employer, your cost of hiring a U.S. employee would increase by at least 8% of the employee compensation. This would not affect independent contractors and consultants.

Part-time employees would be affected too. For part-time employees, the employer contributions are required in proportion of the average weekly hours of employment to the minimum weekly hours specified by the health insurance Commissioner for an employee to be a full-time employee. § 412(b)(3).

Small Business. Small businesses (with payrolls from $500,000 to $750,000 including owner salaries) would pay a lower tax in 2% increments for payrolls of $585,000 or more. § 413. If the small business has affiliates doing different businesses, they are aggregated for determining whether they get “small business” treatment. While small business might not consider offshore outsourcing, the House ObamaCare bill would encourage small business to automate and use independent contractors, staffing companies and outsourcing service providers domestically.

Taxation of High-Income Americans. The House ObamaCare bill would impose an additional 5.4% personal income tax on citizens and resident aliens earning $1.0 million per year (for married persons filing jointly), or $500,000 for individuals filing singly. This could be enough to encourage some high-earners to re-consider their personal tax planning and expatriation or non-residency for high-income years.

Hardships to Be Studied. The ObamaCare bill acknowledges that employer responsibility requirements may pose significant hardships. Yet it failed to take into consideration any special provisions for any employers by industry, profit margin, length of time in business, size or economic conditions (such as the rate of increase in business costs, the availability of short-term credit lines, and ability to restructure debt). Instead, the bill contemplates a future study of such hardships. § 416. The “hardships” listed do not include the impact of the ObamaCare system on the use of automation, outsourcing or offshoring.

Classification of Workers as Employees or Independent Contractors. The ObamaCare bill contemplates new regulations (in addition to existing tax and labor regulations) for “recordkeeping requirements for employers to account for both employees of the employer and individuals whom the employer has not treated as employees of the employer but with whom the employer, in the course of its trade or business, has engaged for the performance of labor or services” to “ensure that employees who are not properly treated as such may be identified and properly treated.” § 423(a). Existing regulations of the Department of Labor, the Internal Revenue Service and other agencies already address this issue. It will become a pivotal issue and encourage unemployed persons to set up new personal service companies or to work through staffing companies in lieu of permanent employment.

Individuals Taxed if Not Adequately Insured. For individuals who fail to purchase (or be covered by their employer’s purchase of) “acceptable” health insurance, the House bill would impose a federal income tax equal to 2.5 percent of a slice of income as especially defined in section 6012(a)(1)). § 501. Exemptions would apply to non-resident aliens, non-resident U.S. citizens, residents of U.S. possessions and religious conscientious objectors.

Collateral Targets: Foreign Business with U.S. Subsidiaries. Foreigner-controlled businesses would help pay for ObamaCare unless the controlling parent is in a treaty with a U.S. income tax treaty. The ObamaCare health “reform” would thus significantly increase the cost of doing business for foreign businesses that are not based in a country that has an income tax treaty with the United States. Amending U.S. federal income tax law (and bundling a tax provision unrelated to healthcare), the ObamaCare bill would require the U.S. subsidiaries of foreign-controlled companies to apply the normal 30% withholding tax on all deductible income paid unless an income tax treaty applies to the foreign-controlled parent company. “In the case of any deductible related-party payment, any withholding tax … with respect to such payment may not be reduced under any treaty of the United States if such payment were made directly to the foreign parent corporation.” Payments subject to withholding consist of passive income such as dividends, interest, rents and royalties. § 561, adding a new §894(d) to the Internal Revenue Code of 1986. The bill would apply to U.S. subsidiaries that are part of a “foreign controlled group of entities” that have a common parent that is a foreign corporation.

The U.S. currently has income tax treaties with 67 countries, including Russia, India, China and the Philippines. For the entire list, see http://www.irs.gov/businesses/international/article/0,,id=96739,00.html.

Foreign-controlled companies established in low-tax jurisdictions are targeted, including Aruba, Barbados, Bermuda, the British Virgin Islands, the Channel Islands (Jersey and Guernsey), Hong Kong and Panama. Formerly U.S.-based companies that moved their situs of incorporation from the United States to tax havens, such as Accenture did, will be directly affected.

However, the draft healthcare legislation would also have an impact on foreign businesses established in other industrial and commercial countries that provide significant levels of business process and IT services to U.S. enterprise customers. These countries include Brazil, Columbia, Costa Rico, Malaysia, Mauritius, South Korea and Taiwan. Companies in such countries that provide call center services, customer care and other remote offshore services would find that the cost of doing business in the United States is increased.

Conclusions. ObamaCare will cost American employers and American taxpayers. These costs will give a new comparative cost advantage to foreign service providers, assuming their ultimate parent company is based in a country with a U.S. income tax treaty.

Filed under: Newsletter Article
Tagged: business process, enterprise customers, healthcare reform, IT services, ObamaCare, President Obama, risk management, service providers, US

Call Centers and Customer Relationship Management

October 16, 2009 by Bierce & Kenerson, P.C.

Thanks to Customer Relationship Management (“CRM”) software and low-cost, high-speed international telecommunications, a call center can be located anywhere in the world. While the legal issues in offshoring of any outsourced service can be complicated, the business issues are generally the same.

Who Should Outsource Call Center or CRM Functions?

Call centers connect your enterprise, its goodwill and operations, to your prospects and customers and, if you wish, even influencers of consumer behavior. Any high-volume consumer industry can benefit by outsourcing call center functions. These might include, for example:

health care
automotive
retailing
services to the household, such as oil and gas deliveries, electrical utilities and telecom providers
consumer electronics
wireless communications
financial services, including banking and brokerage
insurance
travel and hospitality
media

Scope of Services:

Since a call center can deliver any type of services that are capable of being done by telephone, enterprise customers need to classify the possible scope of services. This classification will suggest the key parameters for defining and achieving the intended goals of the call center. The following list is only an indication of some basic classes of outsourced call center services.

Customer Service and Support.
This type of service can be as simple as advising your customer about the information he needs from your data base, such as account balance, unpaid amounts, deadlines and credit balances. Or customer service can involve a complex decision tree involving a script that you prepare to determine your customer’s needs, complete an application or request for change of information, and execute your customer’s orders.

Technical Support / Warranty:
In helping your customers solve problems relating to your products or services, you want to be able to resolve all problems in the first call. Achieving high first-call resolution rates with lower per-call handle times can make a significant cost difference. To some degree, you remain responsible for success because of the way in which you plan the interaction based on manuals, scripts and decision trees. Technical support (or “telephone help desk”) can provide invaluable in retaining customer loyalty and avoiding costly product returns or service cancellations.

Sales, Bookings (travel reservations) and Customer Retention:
Your telesales department needs to convert inquiries into sales, and to retain customers upon expiration of subscriptions or upon other termination events in your customer relationship. Telesales are useful both at the beginning and the end of your customer relationship life cycle. As a tool for proactive outreach, customer retention programs can help sustain your bottom line.

Marketing Surveys and Research:
Outbound calling can identify potential customers, identify an existing customer’s interest in possible new products or services from your company and conduct inquiries about consumer preferences as to pricing and features of existing and new products. This can help your market positioning, promotional campaigns, product design, pricing and sales approaches. Outbound calling can also be used to clean up duplicates or stale information in your “old” data bases, validate existing information, for “data base scrubbing.”

We would welcome any suggestions to make our list more complete, and to identify any special needs that are suggested in the following list.

Ownership and Control Issues: Outsourcing vs. Captive (or “Shared Service Center”).

Call centers come in various shapes and types. You can outsource, or you can create your own foreign call center. Outsourcing is probably cheaper and faster to get started, but establishment of captive call centers can be achieved using external service providers to create the infrastructure, train the employees according to your requirements and help you manage the entire operation.

Criteria for Selecting a Call Center / CRM Service Provider.

Enterprise customers shopping for a call center or CRM service provider should identify key performance indicators (“KPI”) relevant to their industry. On a generic basis, enterprise customers should consider whether prospective CRM service providers offer any unique strategic insights that streamline operations, the strength of any IT-enabled data-driven relationships to your customers and, over time, the degree of continuous process improvement.

Countries.

Effective call centers are in Philippines, India, Ireland, Brazil, Mexico and Canada, are the typical suspects. Many foreign call centers will be integrated with domestic call centers for backup, problem escalation and culture-sensitive situations.

Legal Issues Affecting Enterprise Customers for Call Center Operations

Outbound Calls (from the Call Center to the Customer):
Outbound calls can be intrusive. For public policy reasons, such intrusions should be limited and targeted, as well as complying with applicable restrictions on calling. Legal issues in outbound calls include:

privacy of data and data protection
fair trade practices, including invasion of privacy, consumer protection and other local laws and regulations restricting access to the target customer or prospect
Force majeure, including terrorism, act of war and natural catastrophes
Currency exchange fluctuation
Termination conditions

Inbound Calls (from the Customer to the Call Center):

All Calls:
Any contact with a customer could build or harm your goodwill. Call centers needs to comply with the rules of etiquette as well as laws relating to abusive relationships.

International Outsourcing:
Offshore outsourcing contains a suite of unique risks. International risk management needs to be planned into the outsourcing contract and the methods of service delivery.

If you need any coaching, planning or legal advice, please let us know.

Filed under: White Paper
Tagged: call center, Customer Relationship Management, enterprise customers, outsourcing, risk management, service providers

International Trade Regulation of Outsourcing

October 16, 2009 by Bierce & Kenerson, P.C.

The Trade Act of 2002, signed by President Bush on July 27, 2002 , H.R. 3009, authorizes the President to negotiate trade agreements that will be approved, or disapproved, by Congress without any changes. The law identifies the same old American public policy objectives. In relation to trade in services and trade in intellectual property, the objectives stated for the Doha (Qatar) Round are essentially the same as set forth in existing WTO agreements under the Uruguay Round.

The principal negotiating objective of the United States regarding trade in services is to reduce or eliminate barriers to international trade in services, including regulatory and other barriers that deny national treatment and market access or unreasonably restrict the establishment or operations of service suppliers. [Section 2102(b)(2).]

For international outsourcing, this legislation may allow the extension of U.S. IT-enabled business services into foreign countries that presently restrict such services. This could provide benefits to U.S. IT and business process outsourcers, if they can find ways to leverage their systems. More likely, offshore service providers could enter the U.S. markets, but might be subject to certain restrictions that relate to foreign ownership of U.S. regulated industries. Currently, regulated industries generally manage the regulatory problems by supervising their services providers, rather than by declaring foreign service providers ineligible to work.

At that time, President Bush did not appears to contemplate any major changes in the existing Trade Agreement for Services, Trade Agreement on Intellectual Property or the Trade Agreement on Investment Measures. Neither of these agreements, which already grant substantial openness for trade in services and related intellectual property and direct investments, is as controversial as the Bush Administration’s use of anti-dumping rules against foreign steel.

Filed under: White Paper
Tagged: business process outsourcers, outsourcing, service providers, sourcing, trade agreement

Courts of India as an Inconvenient Forum: Impact of Long Delays in Access to Court Procedure

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

“Justice delayed is justice denied.” Enforcement of contract rights depends on a viable system that not only applies the rule of law, but does not delay the application of law to the aggrieved party’s petition for judicial redress. In one recent judicial decision in New York, the court addressed the question whether a possible ten year delay in adjudication in the courts of a foreign country was a sufficient balancing factor to justify retention of the case in New York rather than in the foreign forum. The foreign forum was India.

Forum Non Conveniens.

Under the basic principle of judicial jurisdiction, a court may exercise its competency to adjudicate disputes. Competency derives from the applicable constitutional delegation of authority to adjudicate, as well as the existence of a sufficient connection between the parties, the subject matter or the location of the events in dispute.

Under the common law system, courts have adopted the principle that they will not exercise their jurisdiction in all situations. They have adopted the principle of “forum non conveniens”, or “inconvenient forum,” to send the adjudication of the dispute to another forum that has a greater connection, a greater public interest or tighter connection with the subject matter and/or the parties.

Under New York law, the factors to be considered in a defendant’s motion to dismiss include:

the burden on the New York courts.

the potential hardship to the defendant.

the unavailability of an alternative forum in which the plaintiff may bring suit.

the fact that both parties are nonresidents of New York.

the fact that the transactions out of which the cause of action arose occurred primarily in foreign jurisdiction.

No one factor is decisive. Islamic Republic of Iran v. Pahlavi, 62 NY2d 474, 479 (cert. denied 469 U.S. 1108).

Delays in India as Basis for Denial of Motion to Dismiss.

In a dispute concerning the interpretation of a letter of credit, the New York Supreme Court, Appellate Division, ruled that a trial court must consider factors in addition to the fact that the courts of India are clogged for many years. The case involved a letter of credit issued in India to the Japanese seller of commercial goods.

The plaintiff, a Japanese corporation with principal offices in Japan, submitted an opinion of Bhupinder Nath Kirpal, a former Chief Justice of India, who expressed his conclusion that because of the huge backlog of existing cases, the fact that no preference is given to commercial cases or newly submitted cases and the shortage of judges in India, it would take the New Delhi High court at least ten years to decide this type of case.

In contrast, the defendant bank tendered an affidavit of Aziz Mushabber Ahmadi, another former Chief Justice of India, explaining that India provides an adequate alternative forum, and that the Indian Code of Civil Procedure had been amended in 1999 and 2002 in order to expedite the resolution of commercial matters. Former Justice Ahmadi expressed the view Indian courts could dispose of a commercial case within a year. Another reference suggests that the case could be disposed of within one to three years.

The trial court in New York relied on the delays in India and the fact that the Indian defendant has an office in New York. Consequently, the trial court retained jurisdiction, denying the Indian defendant’s motion to dismiss for inconvenient forum.

Other Factors.

On appeal, the Appellate Division overruled the lower court for not considering any other factors.

Interpretation of Foreign Law; Need for Expert Testimony.
The New York appellate court considered that the need to interpret foreign law outweighed the risk of a lengthy delay in the foreign court system.

…[The motion court failed to consider the burden of having to interpret Indian banking law. The applicability of foreign law is an important consideration in determining a forum non conveniens motion [citation] and weighs in favor of dismissal [citation], given that expert testimony is essential. NYLJ, May 24, 2004, p. 31, at cols. 3-4 (1st Dept. May 18, 2004).

Comity and Interest of Foreign Courts.
The New York appellate court also underscored the importance of the principle of judicial restraint in respect of the public interest of foreign courts and foreign legal systems. This principle of restraint, adopted early in U.S. judicial history with Marbury v. Madison, serves to enhance the respect of foreign courts for judicial decisions of New York courts reciprocally under the principle of comity. Thus, in considering a motion to dismiss for forum non conveniens, New York courts should:

defer to India’s interest in resolving its own affairs. New York courts have recognized that where a foreign forum has a substantial interest in adjudicating an action, such interest is a factor weighing in favor of dismissal. [Citation.] As the affidavit of former Chief Justice Ahmadi noted, Indian courts are keenly interested in governing the affairs of its financial institutions to insure uniformity and consistency in the processing of financial transactions and in the interpretation of Indian banking statutes and laws.

In conclusion, the appellate court ruled that the lower court erred in concluding that India was not an adequate forum because of the delays in its court system. The lower court had relied on an earlier decision finding that delays in Indian courts were from 15 to 20 years. That earlier decision had been decided before the Indian judicial procedure reforms in 1999 and 2002.

Lessons in Outsourcing.

This decision highlights the critical importance of properly drafting dispute resolution clauses in outsourcing contracts.

Foreign Governmental Interest.
While the dispute related to letters of credit, the appellate court noted the critical interest of Indian courts in adjudicating matters relating to “processing of financial transactions.” The same interest could be said to exist for virtually any IT-enabled transaction processing in India. This covers all business process outsourcing.
Choice of Law.
This decision relates to interpretation of foreign law. Parties to international commercial contracts in outsourcing should understand the applicable law and its role in the decision-making process under the principle of forum non conveniens.
Choice of Forum.
This case underscores the need for the parties to choose the relevant forum. The New York decision did not have any discussion of the terms of the Indian bank’s letter of credit. This litigation might have been avoided if the letter of credit had not only identified the mutually chosen applicable law, but also a mutually agreed exclusive forum for resolution of the disputes. Perhaps the issuing bank chose not to include that choice of forum in its letter of credit terms, possibly due to the pre-reform decisions that had adjudicated that Indian courts were not a viable solution to dispute resolution.
Guarantees.
A guarantee is a contractual obligation to pay money or perform certain acts under pre-defined conditions. In this situation, the dispute related to a bank guarantee in the form of a letter of credit. In outsourcing, enterprise customers should consider the availability and suitability of possible guarantees of performance. In view of the recent infamous bankruptcies of Enron and WorldCom, service providers may also take note of the possible value of guarantees of payment by the customer, or alternative contractual provisions assuring the service provider of its own rights of enforcement or alternatives to judicial enforcement.
Role of Arbitration.
An arbitration clause may overcome issues of forum non conveniens. But arbitration still retains the risk (albeit small) of non-enforcement under the rules governing recognition and enforcement of foreign arbitral awards.
Role of Offshore Judicial Reform in Offshore Outsourcing.
This case is a beacon and warning for foreign governments that have byzantine, poorly administered, politically influence or backlogged judicial systems. If your government wishes to promote exports of services, you should offer a judicial system that is accessible and viable as an alternative forum under the principle of forum non conveniens. In the absence of a credible judicial system, your service providers will be forced into courts such as those of New York, and the customary international financial and practical guarantee structures in offshore outsourcing transactions might serve as barriers to entry for new service providers. Development of a credible judicial system does not occur overnight, but failure to make steps in that direction may retard economic development.

Decision:

Shin-Etsu Chemical Co., Ltd. v. ICICI Bank Limited, __ N.Y.S.2d __, NYLJ May 24, 2004, p. 18, cols. 1-6, p. 31, cols. 1-6 (1st Dept. May 18, 2004), by Sullivan, J. (Docket No. 3033).

Published: May 26, 2004

Filed under: White Paper
Tagged: arbitration, dispute resolution, enterprise customers, foreign law, India, IT-enabled transaction, service providers

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.

Filed under: White Paper
Tagged: contract, contributory infringement, copyright, infringement, privacy, service provider, service providers

Trade Secrets in Outsourcing

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

Summary.

The ability to develop and protect trade secrets is an essential requirement for the development and maintenance of an enterprise’s competitive advantage. This commentary discusses some of the business, contractual and criminal issues involved in trade secrets in outsourcing. At a minimum, both users and providers of outsourced services should understand the nature and scope of trade secrets being used in the delivery of the services.

Business Issues.

Benefits to Service Provider.

Trade secrets give economic benefits to businesses by creating barriers to entry by competitors, facilitating and accelerating business processes that can be delivered to customers, and allowing the business’ employees, contractors and customers to collaborate efficiently. However, a trade secret loses its power if it becomes public. As a result, any business that has or uses trade secrets should take steps to protect and preserve them. Outsourcing service providers normally are keen to adopt and maintain appropriate measures to protect their trade secrets.

Risks to the Service Customer.

Trade secrets create risks for the customer. The service provider might not be willing to allow the customer to use the provider’s trade secrets after the service agreement expires. Well-advised customers adopt appropriate protections to ensure their ability to continue operations whether or not the same service provider continues to render the required services.

Contractual Issues.

Protection of trade secrets can be achieved by several methods:

non-disclosure agreements;
restrictions on access to persons within the business itself, such as preventing persons in one group from accessing confidential business processes in another group;
retention of the key information in a small group of senior managers.

Intellectual Property.

Most laymen believe that trade secrets are a form of intellectual property. Actually, they are not owned, but only kept confidential. Indeed, many businesses in the same industry might know and use the same trade secrets in delivering goods or services to customers. However, none of them owns the trade secret, since the others that know it have the lawful right to use it. This assumes each acquired the knowledge without wrongful access to another’s secrets.

Trade Secret is Not a Patent.
Parties to an outsourcing contract should understand the differences between patents and trademarks. In general, a patent is a governmentally-granted monopoly, for a statutorily defined limited period, to make, use or sell products or services using an idea or process. In general, a trade secret is not exclusive, is not made public and may be continued in use for an indefinite period. An example of a trade secret is the secret formula for making Coca-Cola®, but not the formula for making soap.

Misappropriation of Trade Secret under Common Law.
Misappropriation of a trade secret is a well-recognized tort under common law in England and other countries that adopt the common law system. Anyone who acquires knowledge of the trade secret by a disclosure that is not authorized can be held liable for “misappropriation” of the trade secret. Such misappropriation is a tort, or violation of a common law duty that causes damage that can be foreseen when the misappropriation occurs.

Statutory Protection of Trade Secrets.
Trade secrecy rights arise out of both common law and state and federal statutes, as well as foreign laws. In the United States, trade secrets are also protected by laws adopted by states.

WTO.
Article 39 of the Agreement on Trade-Related Intellectual Property under the GATT Uruguay Round likewise protects trade secrets in member countries of the World Trade Organization.

Trade Secret.
Fundamentally, a trade secret has three components.

The secret is some form of knowledge that is used in a business.

The owner derives economic or business benefit from the fact that such information is secret.

The owner has taken reasonable measures to keep such information secret.

Criminal Issues.

Criminal Abuse of Trade Secrets under the U.S. Economic Espionage Act of 1996.

The U.S. Economic Espionage Act of 1996 amended the federal criminal statutes to impose criminal penalties on persons who engage in misappropriation of trade secrets, whether for private gain or for a foreign government. Protection of private trade secrets is therefore a matter of public policy.

Definition of Trade Secret.
The Economic Espionage Act of 1996 defines trade secret consistently with the common law.  The owner must derive economic or business benefit from the secrecy. The owner must take reasonable protective measures. And the information that is the trade secret can be very broadly defined as:

all forms and types of financial, business, scientific, technical, economic or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled or memorialized physically, electronically, graphically, photographically, or in writing.”   18 U.S.C. 1839(3).

Economic Espionage.
In the case of espionage, the offense occurs when the misappropriation of trade secret is done “knowingly and without authorization,” while “intending or knowing that the offense will benefit any foreign government, foreign instrumentality or foreign agent.”   18 U.S.C. 1831(a).

“Economic espionage” occurs when such a person “steals, or without authorization, takes, carries away, or conceals, or by fraud, artifice, or deception, obtains a trade secret.” 18 U.S.C. 1831(a)(1). Receipt of a stolen trade secret, attempted theft or attempted receipt, and conspiracy to do so, are also “economic espionage.” 18 U.S.C. 1831(a)(2), (a)(3), (a)(4) and (a)(5).

Theft of Trade Secrets.
Under the same law, the offense of “theft of trade secrets” occurs, when the same acts are undertaken “with intent to convert a trade secret…to the economic benefit of anyone other than the owner thereof” and “intending or knowing that the offense will injure any owner of that trade secret.” 18 U.S.C. 1832(a).  Similarly, receipt, attempted theft, attempted receipt and conspiracy are all predicate offenses for “theft of trade secrets.”

Penalties.
The penalties for espionage are more severe than for simple theft of trade secrets.  For economic espionage, individuals are subject to penalties of $500,000 and 15 years’ imprisonment per offense, while any “organization” that commits an offense is subject to a fine up to $10 million.    For theft of trade secrets, individuals are subject to fines and imprisonment of up to 10 years, while organizations are subject to fines up to $5 million. 18 U.S.C. 1831(b) and 1832(b).

Inapplicability to Trade in Services.
The Economic Espionage Act of 1996 does not necessarily protect trade secrets when there is a delivery or performance of services that use trade secrets in only one state in the Untied States, or where there is no resulting sale of a product.

Thus, in the case of “theft of trade secrets,” the offense exists only where the conversion (theft) of the trade secret “is related to or included in a product that is produced for or placed in interstate commerce or foreign commerce” of the United States.  18 U.S.C. 1832(a). If the thief is in the business of providing services, then this statutory requirement would appear to fail. Thus, customers that are consultants, advisors, or providers of intangibles (such as license rights, banking services, financial advice, etc.) would appear not to fall under this statute.

Place where Offense is Committed.
The Economic Espionage Act of 1996 covers conduct occurring anywhere in the world. However, acts done outside the United States are only covered where either (1) the offender (a “natural person”) is a U.S. citizen or permanent resident alien or an “organization” organized under American law, or (2) an act in furtherance of the offense was committed in the United States.” 18 U.S.C. 1837.

Thus, economic espionage or theft of trade secrets could not occur if the act were done between non-resident aliens and there was no furthering act in the United States.

Criminal Abuse of Trade Secrets under the U.S. National Information Infrastructure Protection Act of 1996.

Similarly, the Economic Espionage Act of 1996 adopted a subtitle, the “National Information Infrastructure Protection Act of 1996,” that expands the scope of “protected” computers. 18 USC 1030. Under prior law, private industry computers used in government and financial institutions enjoyed protection from unauthorized access. The National Infrastructure Protection Act of 1996 expanded the scope of protection to include computers used in business. The new law criminalized the act of making any unauthorized communication to third parties, or the unauthorized retention, of “information from any protected computer if the conduct involved an interstate or foreign communication.” 18 U.S.C. (a)(2)(C). It is now illegal to attempt to extort “any money or thing of value” from any person, firm, governmental entity or other legal entity, by transmitting any communication (in interstate or foreign commerce of the United States) that contains a “threat to cause damage to a protected computer.” 18 U.S.C. 1830(a)(7).

Impact of Espionage Law on Outsourcing.
Outsourcing companies that manage “protected” computer networks for their clients must interpret this law.  Does it prevent an outsourcer from threatening to “damage” a computer in order to get paid the amount lawfully due under the contract?   The statute does not define “damage” to include consequential damage (where the client’s business is damaged but the client’s computers are not. Rather, “damage” is defined as “any impairment to the integrity or availability of data, a program, a system or information” that where the impairment causes any one of three types of loss: (1) any loss of $5,000 or more in value during any one-year period “to one or more individuals,” (2) any actual or potential modification or impairment to “the medical examination, diagnosis, treatment, or case of one or more individuals, (3) any physical injury to any person, or (4) any threat to public health or safety. 18 U.S.C. (e)(8).

As a result, the National Information Infrastructure Protection Act of 1996 does prevent outsourcers from shutting down, or threatening to shut down, facilities or services that are used in providing medical, emergency or public safety services.

Criminal Prosecutions under the Espionage Act.
As of January 2003, only about 35 prosecutions had been filed against people accused of abusing trade secrets or threatening protected computers.   According to a January 2003 article by The Associated Press, prosecutors charged a college student with theft of hundreds of secret documents from a large national law firm where the student had worked as a summer clerk.  The student allegedly stole documents from files that his job required him to examine for purposes of litigation for the law firm’s client. The student reportedly sent copies of such documents to three websites for posting, though he was not claimed to have done so in return for any money.  The trade secrets were owned by DirecTV, owned by Hughes Electronics Corp., which said that it had invested over $25 million in the development of its most recent “Period 4” anti-piracy access cards for viewer satellite TV signal descrambler boxes.   The recipient websites, none of which apparently solicited this particular set of secrets, reportedly were offering their readership information on how to obtain access to satellite television signals.

Lessons Learned from the Crimes of Others.
While this case focused on the prosecution of the allegedly rogue student, The Associated Press article did not discuss the vicarious liability of the national law firm that hired the student, or the liability of the national law firm for any negligence in the hiring or supervision of the student and the documents to which the student had access.

Service providers should adopt measures in the fields of document access, physical security of documentation and hiring and supervision of employees. Ultimately, however, even a well-designed system to prevent “insider” abuses will not stop someone from abusing a trust.  However, even the independent abuse of trust by a rogue employee might not shield the employer.

International Outsourcing.
This U.S. legislation governs activity conducted in the United States. It may cover foreign activity having an impact in the United States. But extension of criminal jurisdiction one country’s laws into another country generally is treated as an infringement on sovereignty, and lacking in “comity” between nations, if there is no treaty or convention authorizing such extension. Accordingly, contracting with foreign service providers does not involve the same legal enforcement rights as a purely domestic American contract.

Filed under: White Paper
Tagged: business processes, Espionage, intellectual property, International Outsourcing, Misappropriation, service providers, Statutory Protection, trade secrets, World Trade Organization

Limits on Exclusive Use of “Trade Secrets” in Deal Structuring: Investment Banker Cannot Claim Misappropriation of Trade Secret for Bowie Bonds

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

What right does an external advisor have to own the exclusive right to structure a business transaction? This question may become more interesting to consultants and outsourcing service providers who might wish to rely upon trade secrecy to develop a “new market” in a “new type of service” or “best practices.”

The bottom line appears to be that outsourcing consultants and outsourcing service providers must show a very high standard of secrecy in order to be allowed to exclude others from using an unpatented business process. The business process cannot merely be the simple application of business expertise to analysis of numbers by previously known techniques.

Music Royalty Securitization as Deal Structure.

David Pullman, an employee of an investment bank Gruntal & Co., introduced a concept for securitization of intellectual property royalties. He developed a plan to securitize the projected royalty stream from the music of an internationally renowned musical performer, David Bowie. Gruntal & Co. entered into a written engagement letter with Prudential Securities Corp. and affiliates in which Prudential agreed not to disclose Gruntal’s confidential information about the structure of the deal. (Mr. Pullman moved to Fahnestock & Co., another investment bank, which purchased Gruntal’s rights.) Prudential purchased $55 million allotment of bonds issued in a private placement in which David Bowie was paid a lump sum in cash for the right to receive royalty income from his music catalog for a 15-year period. The bonds were self-liquidating, meaning that the royalty stream was applied directly and paid to the bond holders to reduce principal and interest. Mr. Pullman claimed that he and his team “created formulae that were used in the financial analysis methodology model for the Bowie Transaction, and that using the formulae and applying it to a model, the user could predict cash flow, volatility, timing, currency risks and other factors required to analyze a proposed bond transaction.”

The Failed Joint Venture.
In June 1997, Mr. Pullman proposed that Prudential enter into a joint venture with his employer, Fahnestock, to form “Royalty Finance Co. of America.” Prudential would be the exclusive revolving warehouse lender and provider of subordinated debt on future bond issues secured by intellectual property royalties. Fahnestock was to act as exclusive agent for the placement of the loans and securitizations completed through the joint venture. Instead of completing this joint venture, Prudential allegedly used confidential information on the deal structure from Fahnestock and formed a joint venture with RZO, an entity that had had a joint venture with Fahnestock on music royalty securitization. The prestigious law firm of Willkie Farr & Gallagher represented both Fahnestock in the Bowie Bond transaction and later represented RZO in a transaction with Prudential that excluded Fahnestock and Mr. Pullman, and the absence to trade secret protection apparently justified the law firm’s representation of RZO in the Prudential relationship.

The Law firm’s Right to Represent Others.

The prestigious law firm of Willkie Farr & Gallagher represented both Fahnestock in the Bowie Bond transaction and later represented RZO in a transaction with Prudential that excluded Fahnestock and Mr. Pullman (and the absence to trade secret protection apparently justified the law firm’s representation of RZO in the Prudential relationship). The court noted: “The legal document prepared by WFG does not appear to differ materially from those of any other band transaction.” The court did not find any fault with the law firm’s actions.

Trade Secrets in Deal Structures.

The proponent of a trade secret must identify in detail the trade secrets and confidential information allegedly misappropriated by the defendant. Xerox Corp. v. Int’l Bus. Machines Corp. 64 F.R.D. 367 (S.D.N.Y. 1974). “If [the party claiming ownership of the trade secret] intends to rely upon a unique combination of previously known elements as the basis for its trade secret production [that discloses this to the court], it must specify what particular combination of components it has in mind and how these components operate in a unique combination.” Pullman Group LLC v. Prudential Ins. Co. of America, ___ NYS2d __, NYLJ (July 3, 2003), p. 24, cols. 1-6, p. 25, col. 1 (Supreme Ct. N.Y. Co. 2003), Judge Gammerman, at p. 24, col. 5. “The secret must be one which can be described with sufficient particularity to separate it from matters of general knowledge in the trade or the special knowledge of those persons skilled in the trade.” Imax Corp. v. Cinema Technologies, Inc., 152 F.3d 1161 (9th Cir. 1998).

Lessons for Outsourcing Customers.

Outsourcing contracts frequently contain provisions that allow the parties to continue to use information that is not trade secret. The wording of such provisions needs to be carefully reviewed. In the Pullman decision, the court identified several circumstances to support its conclusion that there is no claim against a service provider (or by a consultant against a customer) where the “trade secret” was “created” solely by applying “business expertise to the analysis of numbers by means of previously known techniques.” Pullman, supra, at p. 24, col. 6.

The disclosure of the “trade secret” to others as part of a marketing concept or new product idea, which makes the concept inherently incapable of trade secret protection, Boyle v. Stephens, 1997 WL 529006 (S.D.N.Y. 1997).
The fact that the concept was a “mere distillation of general knowledge which is common to a particular trade,” Laff v. John O. Butler Co., 64 Ill.
Once a trade secret has been made public, it loses its status as a protected trade secret.
The plaintiff failed to reveal the alleged formula.

As a result, a customer wishing to preserve its rights in trade secrets disclosed to its outsourcing service provider must treat those trade secrets with all the usual protections that are necessary to protect them from any other third party. In the context of joint development of business processes with an outsourcing service provider, the customer must carefully delineate the nature and scope of intellectual property protections.

Lessons for Outsourcing Vendors.

The mere claim that a customer’s operations are “trade secrets” might not mean that they are protected as such by applicable law. However, as a matter of marketing and credibility, the outsourcing service provider must show as much confidentiality concerning the processes as practicable. Maintaining confidentiality preserves both the customer’s goodwill, the service provider’s potential right to own internally developed ancillary or corollary processes, and avoids the unfavorable publicity of a dissatisfied customer’s claims of misappropriation.

Lessons for Outsourcing Consultants.

This decision raises a number of questions about an outsourcing consultant’s right of ownership of “trade secrets” that it uses in its consulting business. If the consultant did nothing but apply “business expertise” to the analysis of a business problem by the use of “previously known techniques,” the consultant might not have any ownership in the alleged trade secrets. If a consultant has been using essentially the same methodology for over a year then patent protection may be unavailing. Outsourcing customers selecting outsourcing consultants therefore may ask about the consultant’s claims to intellectual property as part of the process of selecting a consultant.

Filed under: White Paper
Tagged: bonds, business process, intellectual property, outsourcing consultants, service providers, trade secret

Who Should Outsource Call Center or CRM Functions?

Scope of Services:

Ownership and Control Issues: Outsourcing vs. Captive (or “Shared Service Center”).

Criteria for Selecting a Call Center / CRM Service Provider.

Countries.

Legal Issues Affecting Enterprise Customers for Call Center Operations

Forum Non Conveniens.

Delays in India as Basis for Denial of Motion to Dismiss.

Other Factors.

Lessons in Outsourcing.

Decision:

Customer’s Infringing Activity.

Contributory Copyright Infringement.

Vicarious Liability for Infringement.

Impact for Service Providers.

Summary.

Business Issues.

Benefits to Service Provider.

Risks to the Service Customer.

Contractual Issues.

Intellectual Property.

Criminal Issues.

Criminal Abuse of Trade Secrets under the U.S. Economic Espionage Act of 1996.

Criminal Abuse of Trade Secrets under the U.S. National Information Infrastructure Protection Act of 1996.

Music Royalty Securitization as Deal Structure.

The Law firm’s Right to Represent Others.

Trade Secrets in Deal Structures.

Lessons for Outsourcing Customers.

Lessons for Outsourcing Vendors.

Lessons for Outsourcing Consultants.

Publisher’s Blog