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Any outsourcing transaction requires due diligence and careful legal planning to ensure that customers maximize their benefits from the deal, which can range from lowered costs to an ability to focus on core business functions. Vendors, of course, must protect their profit margins. When companies decide to enter into outsourcing arrangements outside the United States, legal complexities increase and appropriate planning must be undertaken. BACKGROUND Offshore outsourcing has taken off in the last decade. As technological expertise and facilities in many emerging areas of the world have caught up with — and sometimes surpassed — levels in the United States, so too have advances in information technology enabled businesses to overcome the geographical distances that have historically limited the cost-effectiveness of these resources. In addition, the standardization of many business applications has made it easier for companies to outsource their business processes to far-reaching and diverse locales. The availability of lower wages has certainly driven offshore outsourcing, but other reasons for businesses to look offshore have included the ability to conduct business functions around-the-clock in the context of numerous time zones, tax incentives and a tight domestic technology labor market. Just like domestic arrangements, offshore outsourcing transactions can take many forms, but several patterns have emerged. Application maintenance and lower-end functions such as code-conversion used to predominate the types of technology-related services that United States businesses were willing to outsource to other countries. But, more recently, as emerging nations have ramped up their technology capabilities and even built state-of-the-art technology parks, outsourcing of more sophisticated services such as software and product development have emerged. Call centers, help-desk support and other so-called “IT-enabled services” such as payroll management and credit card processing have become extremely popular candidates for outsourcing. With its low-wage, highly educated, English-speaking labor force, India is emerging as “the world’s back office.” It has been estimated that the outsourcing market in India for IT-enabled services will reach $16.94 billion by 2008, and United States companies such as General Electric and American Express have taken the lead in establishing huge back-office processing operations in India.[FOOTNOTE 1] Telecommunications advances have contributed to the growth of call center outsourcing, as undersea fiber-optic cable connections between the United States and countries like India have replaced satellite communications, and have enabled near-instantaneous voice transfer. Also, because call centers and help desks are so labor-intensive, the lower labor costs mean that employees can spend more time resolving each call, resulting in a superior service. Overall, India continues to be the leading offshore destination for software and information technology-related outsourcing transactions. But other countries are established and emerging as well. Payroll and accounting functions are being outsourced to the Philippines, where there is a huge supply of accountants trained in United States standards, available at a fraction of the salary. Call centers in Mexico meet the needs of United States companies with large numbers of Spanish-speaking customers. Software research and development is expanding in China and Russia, and Ireland, Israel and Central Europe are also popular locations for technology outsourcing projects. Newer outsourcing destinations include South Africa, Northern Ireland and several Middle Eastern countries. A number of factors should be considered when choosing an offshore destination for a particular transaction, including location, geopolitical risk, cultural compatibility, government support, educational system, national laws and labor cost advantages. Choosing a country to host an offshore outsourcing transaction is so important that, arguably, this decision should be made even before specific vendors are considered.[FOOTNOTE 2] There are many legal considerations for businesses seeking to enter into offshore outsourcing transactions, and some of the major considerations are discussed below. INTELLECTUAL PROPERTY Intellectual property laws and enforcement vary considerably around the world, and one of the primary concerns for customers entering into technology-related outsourcing arrangements is that they retain ownership of their existing intellectual property and gain appropriate ownership of materials generated in the outsourcing relationship. International treaties such as the Paris and Berne conventions establish minimum intellectual property protections in most potential vendor countries, but subtle rule differences in countries’ laws are evident, and enforcement of intellectual property laws is often a separate issue altogether. India, for example, has “one of the most modern copyright laws in any country,” according to the International Intellectual Property Alliance.[FOOTNOTE 3] Despite the statutory regime, enforcement is considered lax, and violations of the law, such as software piracy, are widespread. More importantly, subtle differences in the intellectual property laws of a foreign jurisdiction can affect the parties’ rights in an outsourcing transaction, absent explicit contractual safeguards. India’s Copyright Act was recently amended to create new “fair use” rights for software that seem to go beyond fair use rights under United States law; thus, an outsourcing customer that provides a vendor with copies of its own proprietary software may seek to narrow the license granted to the vendor to strictly limit uses of the software that otherwise would be permissible under Indian law. Rules governing “work made for hire” may also be radically different in other countries, and customers relying on this doctrine to become exclusive owners of technology developed through an offshore outsourcing may be surprised to learn that local law dictates otherwise. Alternative contractual mechanisms such as assignment might need to be considered to assure that ownership of generated technology vests with the customer. In some European countries with strong “moral rights” traditions, ownership of copyright might even be deemed non-transferable and non-assignable. There are many other potential differences in the intellectual property laws of the vendor’s country that can affect the expectations of an outsourcing relationship. Certain intellectual property protections, such as software and business method patents, may be harder to obtain in the United Kingdom than in the United States, while other protections, such as copyright for factual databases, may be easier to obtain in the United Kingdom. Such disparate treatments of intellectual property in other countries may well affect the value of rights to intellectual property generated through an outsourcing arrangement and the extent to which parties may strive to contractually obtain such rights. A baseline issue worth exploring is whether the intellectual property laws of a country can be overridden by contract and, if the answer is no, then the advisability of outsourcing in a particular jurisdiction may be compromised. Of course, local counsel is usually in the best position to explore the intricacies of foreign intellectual property laws that may impact the outsourcing transaction. Also, due to the uncertainties inherent when foreign courts and intellectual property laws are implicated in an outsourcing arrangement, companies may seek measures to protect against the risk of losing control of intellectual property during the course of an outsourcing transaction. Thus, a customer may consider dealing only with vendors that have a United States presence, only outsourcing projects that do not involve sensitive property, maintaining computer code in the United States and limiting the vendor’s ability to make local copies, or requiring that code or data be delivered in regular installments during the course of a project. Such measures might prevent an undesirable situation in which a disagreement arises as to ownership of valuable intellectual property, and the customer’s only recourse is to seek redress in a foreign court, under unfamiliar laws. DATA PROTECTION AND PRIVACY Outsourcing parties may need to consider several different sets of data protection laws. First, customers need to impose specific obligations on offshore vendors to ensure compliance with applicable United States laws such as the Gramm-Leach-Bliley Act governing personal financial information, and the Health Insurance Portability and Accountability Act (HIPAA) governing health and medical information. Such laws take on added significance when services such as human resources are outsourced, or when financial institutions or health care providers are doing the outsourcing. Moreover, a company that collects personal data in other jurisdictions — most notably the European Union — is usually bound to observe the privacy laws of the jurisdiction where it collects the data. While such a company may employ internal privacy practices sufficient to satisfy the “Safe Harbor” requirements of the EU Data Protection Directive, an outsourcing arrangement that requires data collected from EU residents to be transferred to an offshore vendor should similarly bind the vendor. The outsourcing agreement may need to include restrictions on data use, transfer, processing and sharing, and other specific contractual terms that may be mandated by the EU data directive. Other non-EU countries such as Canada and Japan have their own privacy laws that may be more comprehensive than those in the United States, so outsourcing parties need to constantly monitor global privacy developments. The outsourcing agreement should also contemplate the possibility of changes in this rapidly developing area of the law, and the allocation of costs for future compliance. LABOR AND EMPLOYMENT LAWS Employment issues can be some of the thorniest problems in an outsourcing arrangement, particularly when outsourcing of business units entails the termination or transfer of employees. Even in strictly domestic transactions, affected employees may file claims based upon termination of employment or being a member of a protected class, and may be entitled to severance or other benefits upon termination or transfer. The Workers Adjustment and Retraining Notification Act (WARN Act), 29 USC � 2101 et seq., requires employers with 100 or more employees to provide 60 days’ advance notice of a “plant closing” or “mass layoff,” and may apply to outsourcing situations whether or not the vendor is hiring the customer’s former employees. Other United States employment laws, such as those relating to equal employment, should be considered in relation to the vendor’s home laws, and may need to be written into the outsourcing agreement. At the same time, companies involved in offshore outsourcing transactions need to be mindful of local labor laws, which often impose obligations on employers and grant rights to employees that go beyond those conferred under United States law. For example, the European Union’s Acquired Rights Directive requires that in the event of a transfer of business from one entity to another, the prospective employer must assume the rights and obligations of the transferor employer in respect of the affected employees. In an offshore outsourcing transaction with a European Union vendor, this directive might apply in situations where services are transferred back to the customer or another entity at the end of the arrangement. In all cases, care should be taken to ensure that the customer does not exercise control over the foreign vendor’s employees during the course of the agreement to such an extent that they are deemed the customer’s employees under local law. It may be very difficult and expensive to terminate employees, even for cause. As a result, negotiation of indemnification for third-party employee claims becomes very significant. The most common indemnification provision makes each party responsible for the time during which the employee was employed by that party. Thus, the customer would be responsible to indemnify the vendor for any claims made by an employee based upon the time period during which the employee was employed by the customer. If the employee’s employment is transferred to the outsourcing vendor, the vendor’s liability takes over on the first day of employment of the employee by the vendor and continues up through the date until the employee’s employment is terminated by the vendor. It is most important to retain local counsel to advise on the way in which any transfer of employment should be handled. SOFTWARE EXPORT RESTRICTIONS Because many outsourcing transactions require the customer to transfer pre-existing software or other technology to the vendor, United States export restrictions may apply and should be explored at an early stage. The applicable regulations broadly construe the term “export” to include not only physical transport of an item outside the United States, but also the transmission of certain kinds of software (e.g., encryption software) outside the United States, and even the allowance of visual inspections or oral communications about such items. In some cases, exports to certain countries are completely forbidden, as are exports of certain items to persons on the “denied persons list.” The regulations are complex and penalties can be substantial, so care should be taken to comply with any applicable export licensing or reporting requirements. Richard Raysman and Peter Brown are partners at Brown Raysman Millstein Felder & Steiner. They are co-authors of “Computer Law: Drafting and Negotiating Forms and Agreements” (Law Journal Press). Peter Scher, an attorney at the firm, assisted in the preparation of this article. ::::FOOTNOTES:::: FN1 See “India Becoming World’s Back Office,” Reuters (Jan. 1, 2002). FN2 See Rita Terdiman, “Going Offshore: Country Choice Comes First,” ZDNet (June 20, 2002). FN3 See International Intellectual Property Alliance, “India,” in 2003 Special 301 Report, available here. If you are interested in submitting an article to law.com, please click here for our submission guidelines.

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