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There is no hotter hot-button issue than offshore outsourcing. From 2003 through 2008, U.S. businesses will save $20.9 billion using offshore IT resources, according to a study by research firm Global Insight. The McKinsey Global Institute report published in 2003 contends that the U.S. economy captures more than three-fourths of the benefit for every dollar of corporate spending outsourced to India. Since the savings allows companies to invest in emerging technologies and business ideas that create jobs, the report concludes, the U.S. economy gets as much as $1.14 in return for every dollar spent on outsourcing. Forrester Research estimated in 2003 that the $4 billion in U.S. wages that floated offshore in 2000 will become a tidal wave of $136 billion — and 3.3 million IT-related jobs — by 2015. Along with that exodus, intellectual property rights will have to be transferred from the final human developer to the end customer. Six different business models are depicted here to explain the process. � In model No. 1, the developer of the software is within the state (we use California as the model state) and the customer is in California too. Once the software is developed by the human developer and is passed on to the customer, the intellectual property rights must flow from the developer to the customer. To ensure the IP rights are transferred, there has to be a contract in writing between the parties assigning all of the IP rights from the human developer to the customer. If the human developer is an employee of the customer, then technically there is no need to have a written contract because of the “work made for hire doctrine.” But if the human developer is a consultant, then there has to be a written contract because the consultant would be recognized as the owner of the product and the copyright holder. Under U.S. copyright law, transfer of copyright ownership, other than by operation of law, is not valid unless an instrument of conveyance, or a note or memorandum of the transfer, is in writing and signed by the owner of the rights conveyed or such owner’s duly authorized agent. Only those deriving their rights through the author can own copyright in the work. The author may transfer all or part of the copyright to someone else. Copyright protection exists from the time the work is fixed in some tangible form. The copyright immediately becomes the property of the author upon fixation. In the case of a work having more than one author, the authors are the co-owners of the copyright unless there is an agreement to the contrary. In the case of a work made for hire, the employer, not the employee, is presumed to be the author. The parties should specifically state in the contract the rights and privileges related to the ownership or licensing of IP, as well as the acceptance criteria for any work product. Once the IP rights are transferred by assignment, the copyright in the work product has to be registered and deposited at the copyright office. It is also advisable to record the IP rights at the U.S. Patent and Trademark Office if applicable. � In model No. 2, the customer outsources the developmental work to an outsourcer who, in turn, gets the work done by a human developer. All three entities are within California, so outsourcing is within the same jurisdiction. In this model, there have to be two written contracts assigning all the IP rights, one from the human developer to the outsourcer and the second from the outsourcer to the customer. It is advisable to record both assignments, but they need to be registered only once. The only way to perfect a security interest in copyrighted works is to record the security interest with the U.S. Copyright Office. � In model No. 3, the outsourcer is overseas (say in India) and the human developer is in India, but the customer is in California. The customer in California needs two contracts, one from the developer to the off shorer and one from the off shorer to the customer assigning all the IP rights. It is advisable to record these assignments in the copyright offices of both the U.S. and India. Under Indian law, software programs are protected under copyright law, and copyright may be assigned either wholly or partially by the owner of the work. No assignment is valid unless it is in writing and signed by the assignor. The owner of the copyright can also grant license for use of his work on agreed terms and conditions. Registration of copyrights, which is not mandatory, is done in the copyrights office in New Delhi. Registration is useful in safeguarding, protecting and enforcing the legal rights of the owner. The Indian Copyright Act recognizes the “work for hire” doctrine. Under the copyright law, the owner in an existing work or the prospective owner in a future work may assign to any person the copyright either wholly or partially, either generally or subject to limitations, and either for the whole of the copyright or any part thereof. The assignment of a copyright in any work must be in writing and signed by the assignor or by his duly authorized agent. Further, the assignment should identify the work and specify the rights assigned and the duration and territorial extent of such assignment. � Model No. 4 is an example of off shoring through multiple entities. Here the offshore parent company is in India and has a subsidiary company incorporated and situated in the U.S., the human developer is in India, and the customer is in California. There have to be three written contracts assigning the IP rights, and all three contracts need to be recorded both in the U.S. and India. The first contract is between the human developer in India and the offshore parent in India. The second contract is between the offshore parent in India and the offshore subsidiary in the U.S., and the third contract is between the offshore subsidiary in the U.S. and the California customer. � In model No. 5, the California company (the customer) establishes a subsidiary company in India and that subsidiary company hires the human developer in India. There need to be two written contracts assigning all the IP rights, both of which need to be recorded. The first contract is between the human developer in India and the subsidiary company in India. The second contract is between the subsidiary company in India and the California customer. � In model No. 6, the off shoring is done through the California parent customer company, which sets up an Indian subsidiary company to handle the off-shoring responsibilities. This Indian subsidiary in turn contracts with a services company in India, and the services company hires the human developer. In this case, three contracts to assign all the IP rights must be drawn up. The first contract is between the human developer in India and the Indian services company. The second contract is between the Indian services company (who is the indirect off shorer) and the Indian subsidiary. The third contract is between the Indian off shorer and the California parent company, which is the customer. If there is a dispute, the issue of conflict of laws may arise as to which jurisdiction’s laws govern the dispute. In terms of the application of the laws, the courts look at case law in the high courts and the district courts. Some states have enacted statutory choice of law and choice of forum rules that supersede common law rules and permit contracting parties in certain transactions to designate the law that will govern their transaction and the forum that will hear disputes that arise out of their transactions. The courts also look at treatises, law review articles and statutes. If the laws in two jurisdictions are the same, then the court follows the statute. If the judge is faced with a multijurisdictional dispute, then the judge determines whether the issue is “substantive” or “procedural.” If the issue is substantive, then the judge determines the choice of law rules adopted by the highest court in its jurisdiction. If the court is a federal trial court, then the courts will consider the state in which the judge is sitting and that state’s highest court rules. Each state gets to determine its own choice of law rules, and the judge applies those rules to the dispute in order to determine which jurisdiction’s laws will govern, and then the judge applies the appropriate laws to the dispute. Different jurisdictions may use different choice of law rules, which may encourage forum shopping. Also, choice of law rules are constantly evolving in an attempt to perfect them. For example, what the California Supreme Court decides at one time may not be how it will decide the same issue in the future. When different countries are involved, diplomacy plays a significant role in the outcome of the court’s choice of law determination. It is necessary to maintain international order and goodwill, so a more delicate approach is needed than when only sister states are involved. It is a good idea to involve legal counsel in the initial stages, when due diligence is being performed on an off shorer. Also, contact a local counsel at all stages when appropriate. Finally, ensure that there is a total and complete chain of assignment for all the relevant contracts. Sujatha Ganesan is a lawyer practicing corporate and technology law in Fremont. She can be reached at [email protected] Joel Riff, a partner at GCA Law Partners, contributed to the analysis of the topic.

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