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U.S. Discrimination against Foreign Call Centers: Sen. Schumer’s Personal Trade War

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

Call center operations can be conducted anywhere in the world without U.S. regulation, unless the activities involve regulated business services such as mortgage banking, consumer credit and lending, broker-dealer securities brokerage, life insurance sales and the regulated professions such as public accounting, the practice of law, engineering and architecture. The Democrats and the Obama Administration appear to want to control call center operations more than the mere directive in the TARP program, which forbids the use of any federal funds by TARP stimulus recipients for foreign call centers. Now comes Sen. Charles Schumer (D., N.Y.) with a proposal to tax all foreign call center calls at $0.25 per call, but exempt all U.S. call center calls from this tax.

Schumer’s Discriminatory Foreign Call Center Bill. By Press Release dated June 2, 2010, Sen. Schumer unveiled a “bill to rein in outsourcing of call center jobs to foreign countries” and to “maintain thousands of jobs in New York and the U.S.” and “provide incentive for jobs to return” home. The bill would have two key features:

o Disclosure of Foreign Call Center Activity. Call center agents at the other end of the line would have to disclose to the caller what country they are from, as well as in which countries the confidential customer data of American customers is kept. The disclosure requirement also forces companies to annually certify to the Federal Trade Commission (FTC) that they are complying with this requirement. Companies that fail to certify they are fully disclosing call transfers would be subject to civil penalties that the Federal Trade Commission (FTC) would prescribe.

o Taxation of Foreign Call Centers. Companies that transfer domestic calls to foreign countries would have to pay a per-call excise tax. US companies would be required to disclose quarterly, and in their annual reports, how many customer service calls they received, and how many are sent overseas.

“If we want to put a stop to the outsourcing of American jobs, than we need to provide incentives for American companies to keep American jobs here,” said Schumer. “This bill will not only serve to maintain call center jobs currently in the United States, but also provide a reason for companies that have already outsourced jobs to bring them back.” He noted that exported call center activity is most prevalent in India, Indonesia, Ireland, Canada, the Philippines, and South Africa.

“This bill will go a long way toward keeping American jobs right here at home,” continued Schumer. “If we want to stop the exporting of American jobs than we need to make it less beneficial for companies to layoff American workers and send jobs overseas and we can do that by providing disclosure as to where calls are being routed and less financially more beneficial to send them abroad.”

Sen. Schumer’s press release omitted any statistics of the number of jobs affected, the proportion of call center agents that handle foreign local customers, the turnover (attrition) rates for domestic vs. foreign call centers, or the types of services rendered by domestic vs. foreign call centers. According to the Associated Press (May 30, 2010), a 2007 Cornell study found that most call centers servicing American customers were located in the United States. The omission of any statistical analysis underscores how emotional this issue has become.

Smoot-Hawley and WTO. Sen. Schumer has taken a position that clearly violates American trade obligations. Indeed, House Financial Services Committee Chairman Barney Frank (D., Mass.) said as much of this proposal to prohibit TARP recipients from increasing their use of foreign call centers. Rep. Frank’s comments underscore that Sen. Schumer’s policies are not universally accepted, and that Congress should think twice.

But I do want to point out a difficulty that Members of this House should contemplate. We run the risk here that this may violate our obligations under the World Trade Organization. As someone who voted against joining, and I say that without any embarrassment, I would say to Members who will be joining, I believe, virtually every Member of this House in supporting the gentlewoman’s amendment that perhaps it should lead them to rethink to having so enthusiastically subscribed to the WTO agreement without some changes. It certainly seems to us that while we do know the government is directly involved, spending its own money, you can have a requirement for domesticity. It is unclear what the interpretation will be here. The interpretation [might] be not be purely an American one. It will be in the dispute resolution procedures of the WTO.

So as we go forward in this Congress and we are told about the advantages of a multilateral approach to trade, and I agree that, properly done, that is very advantageous, I hope Members who more enthusiastically than I embraced this principle will stop to think about it.

Some of us who were worried about the job impact of international economic relations have been derided as the reincarnation of Smoot and Hawley. Well, I guess Smoot and Hawley would have been with us on this one because it says companies who do business in America cannot go overseas for hiring. That’s not trade in the old way because they didn’t have the option of doing this in the old way with technology. But it is a restraint on international economic activity. It is the government’s saying to the market you may not do this because it will have a negative impact on our employment.

Now, I think that’s legitimate, especially here, since it will only apply to companies that are receiving this assistance. But understand the principle. Those who say it’s always a good thing to allow the market to totally run because it will enhance capacity are agreeing that in this case, because we have the hook on which to hang it, we can undercut that.

But the fact that we have the hook in the TARP doesn’t change what the economics would be. So I welcome what I think is a renewed recognition for some and a belated recognition for others that a regime in which none of these considerations of local employment can be considered is not necessarily in our best interest. SOURCE: Cong. Rec. p. H 408 (Jan. 21, 2009), on debate on Tarp Reform and Accountability Act Of 2009.

GATS. Senator Schumer appears not to have reviewed the policy of “national treatment” under Article XVII of the General Agreement on Trade in Services (GATS), a WTO agreement that is legally binding on the U.S. by reason of American ratification under President Bill Clinton. That text states:

“In sectors described in its schedule [of adhesion to the agreement], and subject to any conditions and qualifications set out therein, each Member shall accord to services and service suppliers of any other Member, in respect of all measures affecting the supply of services, treatment no less favorable than it accords to its own like services and suppliers.”

Clawback. Protectionist laws lead to counter-protectionist laws by trading partners. History has many examples of trade retaliation where the producers of apples suffer new foreign retaliatory tariffs because producers of oranges got a protectionist deal by having a $0.25 per unit excise tax advantage. Those of us American who sell services — such as professional services, consulting services, business advisory services, customer service, IT service, etc – and those who export goods or licensed technologies — will be exposed to retaliation by foreign countries who believe such an excise tax violates the US obligations under GATS. In other scenarios, U.S. producers of unrelated services and goods could be the subject of retaliatory and discriminatory foreign tariffs and taxes. This is old news (click here to read more on this subject).

Rule of Law. Sen. Schumer’s approach to legislation is an abuse of international public law. If Sen. Schumer wants to abrogate U.S. treaty obligations, he should say so and simply seek to abrogate the WTO agreements that give U.S. exporters national treatment in foreign markets. Such an idea may be permitted under U.S. constitutional provisions that allow a later law to abrogate a prior treaty.

Fair Trade. Hillary Clinton, as a Presidential candidate in 2008, actually had a more novel approach that explains why she is Secretary of State. She proposed “Fair Trade,” not “Free Trade.” She promoted a bilateral review of trade benefits (contrary to the multilateral approach of the WTO) and a renegotiation of U.S. trade obligations and termination for those countries that breached their WTO obligations of openness, transparency and national treatment. Sen. Schumer’s protectionist approach would not bother with such formalities, without mentioning the probability of foreign disrespect for American trade rights. Hillary Clinton was smarter about “fair trade” in her campaign. She at least understood existing law. Read more

Patents in Outsourcing: Strategy and Practice for Business Process Patents and International Trade in Services

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

Should a service provider develop a patent portfolio?  In performing outsourced services, the service provider performs certain business processes that range from information technology to office procedures.  Since U.S. courts have interpreted patent laws to make business processes eligible for patent protection, the patent law has played a small but growing role in business process outsourcing.   This article addresses some key issues in patent law in outsourcing, including validity, infringement, extraterritoriality and the role of patents in outsourcing.

What is a Patent?

A patent is a statutory monopoly that allows the inventor to practice an invention, to allow others to use the invention under terms and conditions that the inventor considers acceptable and to prevent unlicensed persons from using the invention.   Under U.S. law, an invention must be novel, useful and non-obvious to one skilled in the existing “art” (science).   It is the specific claims in the specification of the invention that are entitled to the statutory monopoly.  In patent applications, claims are written as independent (and therefore unrelated to any other claim) or dependent (and therefore viable only if the related independent claim is valid).

Impact on Competition.
Quite simply, patents stifle competition.  For this reason, courts and regulators have adopted limitations on abuses of patents, such as tying the use of non-patented goods or services to patented goods or processes.

The Specification.
The patent application must set forth the “specification” that describes the exact scope of an invention and its method of “manufacture” in sufficient detail that it describes what  is left to the public outside the scope.   Markman v. Westview Instruments, Inc., 116 S. Ct. 1384, 517 U.S. 370, 373 (1996).   The specification consists of two parts:

• a detailed “written description of the invention and of the manner and process of making and using it, in such full, clear and concise, and exact terms as to enable any person skilled in the art … to make and use the same.”   35 U.S.C. 112, para. 1.
• a conclusion “with one or more claims particularly pointing out and distinctly claiming the subject matter which the applicant regards as his invention.”  35 U.S.C. 112, para. 2.

General Definition of Patentable Processes.
Patentable process “inventions” must involve a “process, art or method, and include… a new use of a known process, machine, manufacture, composition of matter, or material.”  35 USC 100(b).   “Whoever invents or discovers any new and useful process, machine, manufacture or composition of matter, or any new and useful improvement thereof, may obtain a patent therefore,” subject to the patent law’s other provisions.  35 U.S.C. 101.

Software Patents.
Software patents have been issued in the United States since 1982, when Merrill Lynch patented a financial transaction software application that links securities brokerage accounts with” cash management accounts.”  U.S. Patent No. 4,346,442.  While early judicial decisions quibbled that the processing of data was not an eligible process, the courts and the U.S. Patent and Trademark Office have generally accepted the patentability of software.

Business Process Patents.
Business methods are the sequence of steps that are undertaken to engaged in a specific business activity.  Until 1998, a business method was considered to be an idea, and business methods as ideas were not patentable.  In July, 1998, the U.S. Court of Appeals for the Federal Circuit did away with that interpretation of the U.S. patent law. The case, State Street v. Signature Financial, legitimized the patentability of software that Signature had written to enable it to administer mutual funds more efficiently. The software merely embodied a business process.   The court’s language was broad enough to embrace any business process (as long as it was new and “nonobvious” and had a “useful, concrete, and tangible result”).  Congress has done nothing to restrict this judicial interpretation.

Validity.

Once issued by the U.S. Patent and Trademark Office, a patent is presumed valid.   35 U.S.C. 282.   The party who seeks to invalidate a patent or any individual claims has the burden of establishing invalidity.  To meet this burden of proof, the party seeking to invalidate must prove the invalidity by “clear and convincing evidence,” a standard that is very high.  Helifix Ltd. v. Blok-Lok Ltd., 208 F.3d 1339, 1346 (Fed. Cir. 2000).   In making its proof, the party seeking to invalidate may rely upon a variety of arguments.   Such arguments may include an assertion that the patent holder engaged in “fraud on the patent office” by failing to disclose relevant “prior art” that would have prevented the issuance of the patent in the first place.

In litigation seeking to invalidate a patent, the first issue is one to be decided by the judge: what is the scope of the claims in the patent?  The second issue is one for the jury: has infringement occurred?   Markman v. Westview Instruments, Inc., 116 S. Ct. 1384, 517 U.S. 370, 384-391 (1996).

Enforcement of Patent Rights.

Enforcement of patent rights presents problems both for the patent holder and for the alleged infringer.  The patent holder risks invalidation of the patent, thereby losing the right to claim royalties from all licensees.  The alleged infringer (who may include an unhappy licensee unwilling to pay future royalties) may risk heavy damages.

Doctrine of Equivalents.
Judicial interpretation of patent claims adopt two approaches: literal and interpretive. Under historical case law, the monopoly of a patent claim extents beyond the literal description and covers “equivalents” as well.  Applying some judicial discretion in the interpretation of the literal scope, the doctrine thus allows an infringement claim where the differences between the accused device or process and the patent claim are “insubstantial” and represent only “trivial changes.”

Prosecution History Estoppel.
Affirming this principle, the U.S. Supreme Court has restricted it by noting that the patent applicant’s modifications to its application forms a “prosecution history” that can serve as estoppel for any purpose under the patent law, not merely relating to eligibility (by narrowing it to deal with prior art).   Festo Corp. v. Shoketsu Kinzogo Kogyo Kabushiki Co., Ltd., 535 U.S.722 (2002).   At common law, the equitable principle of estoppel serves as an enforceable bar to assertion of a right or claim of right.  The Festo decision permits alleged infringers to review the file history and rely upon any concessions or limitations made by the patent applicant as a basis for limiting the scope of the patent claims.  Prosecution history estoppel under Festo thus opens the flood gates for competition who read the file history and look for concessions made by the applicant.

In Honeywell Int’l Inc. v. Hamilton Sundstrand Corp., 2004 WL 1202997 (Fed. Cir. June 2, 2004), the Court of Appeals for the Federal Circuit ruled that, in the patent prosecution process, the applicant is deemed to have waived the full breadth of a broad independent claim when it re-writes the claim to be more specific.   Historically, patent prosecution involves the normal process of writing a “stand-alone” (independent) claim followed by a subsequent dependent claim (relying on the “stand-alone” claim’s basic premise).   When the patent examiner rejects the stand-alone claim and asks the applicant to rewrite it to convert the dependent claim into a new stand-alone claim, the applicant may do so.  In doing so, the applicant is deemed to abandon the full scope of the original stand-alone claim, and to rely only on the dependent claim.

Under the Festo decision as interpreted in Honeywell, rewriting the dependent claim into an independent claim form, accompanied by abandonment of the original broad independent claim, creates a presumption of “prosecution history estoppel” that nullifies the “abandoned” claim. As a result, patent applicants will probably be more prudent and narrowly focused when considering use of broad independent claims.

For outsourcing, this means that only narrowly defined claims will pass muster.  Outsourcing services providers hoping to rely on patent protections will therefore be exposed to greater risks of competition due to lack of broad patent monopoly.

Defenses by Alleged Infringers.
The alleged infringer may allege various defenses, such as:

• non-infringement
• absence of liability for infringement
• inenforceability.
• invalidity of the patent or any claim for substantive or procedural reasons.  35 U.S.C. 282

Extraterritoriality in Patent Law.

Patent law is a creature of the national law.   Each country applies its own rules.  U.S. patents do not cover the business processes or manufacturing process used in another country.   John Mohr & Sons v. Vacudyne Corp., 354 F. Supp. 1113 (N.D. Ill. 1973).

However, goods made abroad using processes patented in the United States are subject to exclusion, upon importation, unless licensed by the U.S. patent holder.  Exclusion requires registration of the patent with customs services.  Enforcement of exclusion is hardly 100% effective.

Services performed abroad that result in delivery of information in the United States are generally not subject to U.S. patent protection.   In that case, where a portion of the services are rendered in the United States, a U.S. business process patent will cover the U.S. portion of the services.

Patent Conventions.
A number of international conventions, beginning with the Paris Convention of 1886, accords certain procedural rights in countries that adhere to them.   The World Trade Organization’s Agreement on Trade-Related Intellectual Property requires participating countries to comply with the Paris Convention and certain other intellectual property conventions.   WTO members must treat foreign nationals on a non-discriminatory basis in respect of the patent laws.  The Patent Cooperation Treaty provides a mechanism by which an applicant can file a single application that, when certain requirements have been fulfilled, is equivalent to a regular national filing in each designated Contracting State. There are currently over 112 PCT Contracting States.

Relevance to Outsourcing.

Patent protection — or the lack of it — can affect the service provider’s ability to perform the scope of work under the outsourcing services agreement.  Patents may be relevant to outsourcing, but not necessarily.

Comparative Advantage.
In the field of business process outsourcing, the service provider can achieve competitive advantage by having a patented process, since it allows that provider to perform that process without paying royalties and without patent infringement claims or litigation.

Defensive Strategy.
Having a pool of patents can be useful to avoid having to pay costs of infringement litigation and infringement damages.   Without any patents, the service provider has nothing to barter in a cross-licensing transaction that could be proposed as a settlement.

Branding Strategy.
One service provider uses part of the title to a U.S. patent as the phrase that defines its service brand: “On Demand Process….”  [U.S. Patent No. 6,370,676]    Public relations consultants and business developers might review the service provider’s patent portfolio for similar defining clues to brand development.  Conversely, branding strategists should be consulted for strategic nomenclature of patent applications.

Termination for Cause.
Ordinarily, the enterprise customer relies upon the service provider’s indemnity against infringement in lieu of adopting a right to terminate for cause in the event of infringement.  Such indemnities are customary.   Enterprise customers might wish to consider whether reliance on such indemnification is sufficient as a remedy in case the service provider’s business process is determined to be infringing on some third party’s rights.   Similarly, service providers should engage in appropriate research to determine whether their method of performing or delivering the services infringes, or risks infringing, a valid U.S. patent.   In either event, the issuance of new patents to cover existing processes could be problematic for the business relationship.

BPO Patent Strategy in Practice: Who Actually Patents What?

We conducted a search of U.S. patents issued to leading outsourcing service providers in information technology, human resources and manufacturing.  The results were not surprising.

• ITO and Consulting.
  Outsourcers that specialize in managing IT and in consulting services do not hold many patents.   Such service providers generally engage in “ordinary” and “well known” business processes that are ineligible for patenting, such as installing, configuring, fine-tuning, hosting and maintaining current versions of some commercial “off-the-shelf” software.  Where the customer requires extensive customization, the work product normally belongs to the customer as a special project for a separate fee.  Alternatively, the parties agree that the service provider will own and market the work product under agreed financial and operating conditions.

  To the extent that ITO service providers do apply for patents, the patents tend to be in:

  • a niche area (e.g., a system for cashing checks for persons without bank accounts where the customer must engage in some self-service task, U.S. Patent No. 6,038,553), or
  • a generic function (e.g., data processing apparatus and corresponding methods for the retrieval of data stored in a database or as computer files, notably, methods and systems to facilitate refinement of queries intended to specify data to be retrieved from a target data collection, U.S. Patent No. 6,678,679).
• HRO.
  Outsourcers that specialize in human resources management generally do not hold any patents.  For example, a search of  two HRO industry leaders showed that neither owns any U.S. patent.

• Business Process Outsourcing.
  Business process outsourcing that relies upon software may be a good candidate for patent protection, but only for patenting the software.  At this stage, the difference between a software developer and a service provider gets murky.  Generally, BPO outsourcers do not pursue patent strategies but use other methods for protecting intellectual property and competitive advantage.  Exceptionally, they may patent their software to defend against third party software developers.
• Original Equipment Manufacturing.
  Outsourcers that serve as contract manufacturers logically focus energy on preserving their rights to conduct “contract manufacturing” in the United States and other countries.  Companies such as Celestica, Jabil Circuit, Sanmina-SCI and Solectron have each developed some patents that relate to generic operations, not to specific product designs or manufacturing processes unique to their customers.  As to the latter, the contract manufacturers require their customers to license any customer technology used in the manufacturing process, or at least refrain from suing over the contract manufacturer’s use of such process or any equivalents.

Factors Affecting an Outsourcer’s Patent Strategy.

Limitations of a Patent Strategy in Outsourcing.

Patent strategies depend on obtaining global monopoly through global patenting.  The limitations on patenting of business methods in a global digital economy suggest that patenting is not the solution for protecting a service providers proprietary processes.

• Costs of Global Patenting.
  Assuming that a service provider wished to achieve global exclusivity, it would have to file patent applications in at least the 112 countries that are members of the Patent Cooperation Treaty, in addition to dozens more.  The cost of prosecuting and maintaining patents is high, and could be worthless if “copycat” service providers were to infringe virtually all claims except for a few.

• Costs of Prosecuting Patent Infringers.
  A “plain vanilla” patent infringement lawsuit costs an estimated $750,000 as a minimum.   To such out-of-pocket costs, the patent holder must add the opportunity cost of the executive and technical personnel whose time is diverted towards the litigation process, the portion of their salaries, benefits and overhead allocable to the litigation process, and the costs of enforcing a judgment.

• Uncertainties of Patent Scope and Validity.
  The patent application process contains many uncertainties.  As to scope, under the Festo doctrine, any concession made by the applicant can be used as an “admission against interest” by a defendant.  Patent holders making a concession to the patent examiner in any country may be deemed to have made the same concession in all other countries.  Alleged infringers will scour the patent prosecution files in all relevant countries and look for such concessions.    As to validity, any prior art (including customary usages of the trade, the technical literature and other pre-existing patents) that is not disclosed to the patent office could jeopardize the entire patent.

• Risks of Counterclaims of Patent Abuse.
  In any litigation, the plaintiff risks counterclaims by the defendant.   In patent cases, the counterclaims could include antitrust violations subject to triple damages under U.S. law or  for simple damages as “abuse of dominant market position” under European Union law.  For market leaders, the costs of defending counterclaims can be greater than the costs of pursuing a basic infringement claim.  Also, where patent applications fail to disclose substantial prior art the use of the patents to monopolize a field of business activity could arguably constitute patent abuse.

• Inconsistencies of Law, Legal Systems and Results.
  Given the exclusive right of each country to adopt its own patent rules, service providers considering a patent strategy must accept the fact that what is patentable in one country might not be patentable in another country.   “Whipsaw” in application of legal principles leads to unpredictability and inequity.

• Loss of Secrecy.
  Because patents must be published to be enforceable, the inventor immediately loses all secrecy.  (Exceptionally, a few patents are not published where interests of “national defense” apply.)   Thus, pure “software” or pure “business method” might not be patentable in countries where competitors could use the software or method to perform the same service and export the results to the country that grants patent protection.   Given the availability (and advisability) of encryption technologies and privacy methods, the foreign use of the software or method would likely go undetected, with no resulting enforcement of patent rights.

• Gambling with “Best Embodiment” Rules.
  Sophisticated businesses -whether service providers or enterprise customers – engage in a game of hiding trade secrets and patenting a business process.  The rules of this game are limited by the principle that the patent application must disclose the “best embodiment” of the full process.

• The Business Process Paradox in the Outsourcing Life Cycle.
  Both parties in an outsourcing contract should understand the implications of what we call “the business process patent paradox.”   Patents owned by the service provider make it stronger against competition and may enable the enterprise customer to enjoy the benefits of the service provider’s innovation investments.  Yet, upon termination the customer would need to be converted to a non-infringing process or be given an evergreen patent license usable by the customer or its successor service provider. Perversely, this patent paradox may inhibit the basic efficiencies of outsourcing, namely, scalability, portability, transparency, audit ability and periodic renewal or replacement.  One exception applies.  In contract manufacturing, the customer might wish to patent its processes in the countries where infringement is most likely, such as by the contract manufacturer at the end of the OEM manufacturing agreement.

Advantages of Trade Secrecy.
Many outsourcing service providers prefer to retain their comparative advantage by using trade secrets.  Trade secret protection does not protect against patent infringement. Trade secrets do not provide adequate protection where the trade secret becomes generally known.   This risk is high in a digital global economy where information can be copied and stored in many ways that are not traceable to the authorized recipient of the trade secret.  Optimally, the service provider will develop and use proprietary software covered by patents.  Even then, the patents might not disclose the full process.

Best Practices.

Patents could play a pivotal role in the competitiveness, viability and continuity of services provided by a service provider.

Enterprise Customers.

• Enterprise’s Own Proprietary Processes.
  An enterprise customer that wants its service provider to perform “proprietary” business processes will need to consider the impact of that contractual requirement on its own risk profile, its willingness to indemnify the service provider appropriately and its ability to do, or hire others to do, alternative processes that are not infringing.  Hiring a service provider to perform such processes might contradict other commercial policies, such as not outsourcing “core” business processes and maintaining certain processes confidential as a competitive advantage, even though such confidentiality is customarily protectible under a non-disclosure agreement.
• Due Diligence and Selection Process.
  Enterprise customers should ask the service provider for a description and list of all patents that the service provider owns or has pending.
• Indemnification.
  The customary solution to patent infringement is to require the service provider to indemnify the enterprise customer in case of any alleged or actual infringement by the service provider of third-party patents and other intellectual property rights.
• Termination of Contract.
  Historically, intellectual property infringement is not an event of default in outsourcing contracts.  This situation will probably continue.  Other contractual solutions exist that may allow the customer to enjoy the benefit of the contract or to terminate.

Service Providers.

• Due Diligence.
  The service provider should ask the enterprise customer about any patents and other protect able intellectual property that the customer would require the service provider to use (or that might be needed to perform the agreed services).  As a defensive measure, the service provider should understand the applicability of any customer-owned patents and its impact on its own intellectual property strategies.

• Contract Provisions.
  The infringement indemnity may extend to the interaction between the customer and the service provider’s business methods and processes.  Appropriate allocation of liability and indemnification should be considered to avoid extending the infringement indemnity beyond processes that the service provider controls.

Insider Theft of Trade Secrets in India: Employee of Captive R&D Subsidiary Accused of Source Code Theft (and What You Need to Know About Protecting Your Trade Secrets Abroad)

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

In a global economy, which risks are greater: theft of trade secrets by a service provider or theft of trade secrets by an employee of a foreign subsidiary?  How can a global enterprise contain such risks in either case?  The story of theft of source code by an employee of an Indian research and development center highlights the need for proper strategies for risk mitigation in the face of the inherent risks of human nature.

Indian R&D Center, Site of Source Code Theft.

On August 4, 2004, Jolly Technologies, a division of U.S. business Jolly Inc., publicly reported that one of its employees at its Mumbai, India R&D center had misappropriated key ports of source code being developed along with confidential documents.   The trade secrets relate to one of its key products for the labeling and card software for the print publishing industry.

Profile of a Thief and a Theft.

Jolly Technologies was new to India.  Its center was established only three months prior to the trade secret theft.   The employee alleged to have stolen the trade secrets was a new hire.  The theft was done by simply uploading the source code to her Yahoo account.

Consequences to the R&D Center.

Jolly reportedly shut down its R&D center immediately to assess and contain the damage.  It also sought assistance from Indian police to deal with the matter as a criminal act.  The company’s investment may be a loss, and it may need to expend further resources to prevent the use by its competitors and other third parties of any stolen source code.

Security Precautions.

The theft shows how simple it is for any person with Internet access to misappropriate trade secrets.

• Data Export Controls on Internet Access.
  Internet access may be essential to virtually all knowledge-economy employees, so management may consider that shutting off Internet access may be impossible.  The Affaire Jolly suggests that software development might need to occur in an environment that allows employees access to information but does not allow them to transfer certain types of information from a company computer to anyone via the Internet.   The advent of network administration software, XML metatags, html, virus sniffers and spam blockers may introduce technology that allows a company to prevent the transfer of source code to unauthorized Internet addresses.
• Segregation of Function.
  Most software development projects start with modules and build into integrated suites of modules.  In the manufacturing sector, complex trade secrets may be protected by separating multiple manufacturing processes into separate functions and separating the component processes.  This can be done by either putting the component processes into different operations or by separating subassemblies from final assembly.  Software development could be structured similarly, though segregation of function reduces efficiency.
• Background Checks.
  The new hire at Jolly Technologies might have been investigated for a possibly criminal background.  But background checks probably do not help with curious employees interested in studying stolen code or restructuring it for possible other purposes.

Legal Precautions.

The trade secret theft also highlights the weakness of national legal systems where, in the case of India, courts have historically taken a decade to decide civil disputes.  Whether establishing a foreign captive service subsidiary or hiring a foreign service provider, the legal environment and legal precautions are critical to risk management.

• Statutory Protection for Trade Secrets.
  Most countries hosting R&D centers or outsourcing service centers are members of the basic international conventions on the protection of intellectual property.  Even China, by adhering to the World Trade Organization, now officially grants intellectual property rights under the WTO Agreement on Trade-Related Intellectual Property right (“TRIP’s”).  India has long been a member of the Paris Convention on Industrial Property and protects copyrights, patents and trade secrets.  As the Affaire Jolly demonstrates, it is not sufficient to have a legal right.  You need to have a credible forum for enforcing those rights.
• Contractual Commitments.
  Well-advised enterprises require their employees by contract to abide by various policies and procedures, including respect for intellectual property rights and trade secrets of the employer and third parties doing business with the employer.  Contractual commitments are a basic requirement of any IPR protection.
• Security Surveillance.
  Jolly’s security surveillance, by an internal audit, discovered the theft.  Pre-emptive security precautions cannot prevent fraud or theft, but surveillance can discover it.
• Risk Mitigation after the Theft.
  After the horse has left the barn, how do you get it back into the barn?  In a global digital economy, the only solution might be to find some way to tag the digital works, just as ranchers did for their cows in the 1880’s.
  • Court Systems.
    Indian courts now have a commercial part that is intended to accelerate adjudication. It is not clear whether the Mumbai courts offer any real adequate forum, and even adjudication of civil liability does not automatically result in enforcement of a money judgment.  Access to court systems are so fundamental to investors and employers that the issue should become one of diplomatic entreaty (as the U.S. has done with China), investor due diligence, and recommendations by intermediaries such as trade associations (such as Nasscom and ITAA), venture capitalists, private equity funds and investors and multinational enterprises and their advisors such as international business lawyers and business process and sourcing consultants..  Ratings on access to judicial systems should be part of the due diligence in all international operations.

Other Measures.

Insurance may be available, but the consequential loss may be too high for a fair premium.

Conclusion.

In captives and outsourcing, IPR protection needs practical and legal protections.  Blatant misappropriation will continue as a matter of human nature, so risks can only be mitigated.   Effective methods of mitigation will continue to evolve.  Technology and IP lawyers should be consulted before international operations are launched.

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.

International Outsourcing: Legality of Xenophobia in Outsourcing

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

Summary:

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

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

“Buy American” in State Government Contracting.

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

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

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

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

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

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

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

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

Legality for Governmental vs. Private Purchases of Foreign Services.

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

Impact on International Outsourcing by Private Customers.

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

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

Buy American – Revival of the Past.

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

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

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

Policy Debate: Validity vs. Wisdom of Xenophobia.

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

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

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

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

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

Market Access to Foreign Services Providers under GATS.

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

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

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

Exceptions to GATS Protections.

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

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

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

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

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

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

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

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

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

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

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

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

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

Conclusions for Outsourcing Services Providers.

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

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

Conclusions for Purchasers of Transborder Services.

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

Conclusions for National Governments.

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

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