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Outsourcing — one of the biggest waves in the American economy — is slowly causing a ripple of business at some New Jersey law firms. Firms riding the wave include Newark’s Sills Cummis Epstein & Gross, which has several outsourcing clients served by its intellectual property practice. IP practice chairman Marc Friedman has been busy training lawyers and business executives on the legal aspects of outsourcing. “More and more clients are getting interested in outsourcing, so this should grow,” says Friedman. “Some are increasing their internal capabilities, and some will be relying on outside counsel.” Greenbaum, Rowe, Smith, Ravin, Davis & Himmel of Woodbridge represents several New Jersey-based companies that act as intermediaries between outsource services providers overseas and their U.S. clients. “This is a significant issue for businesses trying to save money by hiring other people to do the work, and clients are under pressure, like everyone else, to save money,” adds William Bierce, a New Jersey licensed lawyer and partner in New York’s Bierce & Kenerson. “I’m getting a ton of inquiries from other lawyers about this.” Bierce helps businesses establish outsourcing programs. He also publishes a monthly outsourcing law newsletter and a “how-to” Web site, www.Outsourcing-Law.com, though he declines to specify the number of hits his Web site gets. “This market will definitely continue growing, especially in the short term,” says Greenbaum Rowe partner W. Raymond Felton III. “But there are political pressures surrounding this, so the market may change.” According to the National Council of State Legislators, lawmakers in 35 states have introduced legislation to restrict the practice, citing a loss of U.S. jobs that outsourcing causes. In New Jersey, state Sen. Shirley Turner, D-Mercer, has sponsored a bill to restrict state service contracts to U.S. companies. Lawyers say outsourcing’s key legal areas include labor, since outsourcing can cause the elimination or relocation of positions; compliance with regulations imposed on the outsourcer; document management; protection of intellectual property; taxation; contract negotiations; business continuity and disaster recovery; and vendor selection. Contract jurisdiction seems to be an especially fuzzy area. While some lawyers say U.S. courts would have jurisdiction when companies contract for overseas outsource services with a U.S.-based intermediary, others note that the intermediary may not have enough assets to pay sizable damages, so the plaintiff would have to sue in the outsource company’s home jurisdiction. “The court system in India may be fine, but it’s expensive to go over there to file a suit,” notes Felton. A 2002 report by the Computer Law Association in New York notes that Indian courts are unlikely to award large damages for breach of contract. Risk control is an area where lawyers can most immediately help clients in outsourcing arrangements, according to Friedman. Typical issues include wrongful disclosure of business information, intellectual property safeguards, the provider’s service and performance levels, business continuation and disaster planning. However, he says there is little recorded experience on how lawyers and other professionals have dealt with these issues. For example, he notes he has not heard of a company using its business interruption insurance coverage because of an outsourcing breakdown. Another major unknown area is how outsourcing complies with the Sarbanes-Oxley law, and its Section 404 that requires public companies to audit and document their internal controls over financial reporting. Relatively few cases of misconduct by outsourcers have been publicly reported. In New Jersey, Medco Health Solutions of Franklin Lakes is a longtime user of domestic outsource services, and general counsel David Machlowitz says he has not had heard of service provider disputes in his four years with the company. And New Jersey businesses apparently do their share of outsourcing. “New Jersey has an advanced economy with unique concentrations of the types of business most likely to outsource — professional services, education, health and financial services,” says James Hughes, dean of the Edward J. Bloustein School of Planning and Public Policy at Rutgers University. He expects outsourcing to continue expanding. “What has defined the new century is an intense focus on corporate costs, and business can now isolate a process and save large sums by outsourcing it, so it would be corporate irresponsibility not to outsource,” he says. Outsourcing covers a wide range of work, from running telephone call centers to running manufacturing operations, including maintaining physical operations and hiring employees. Nonmanufacturing work areas likely to be outsourced include accounting, bookkeeping, data processing, payroll, computer systems design and customer/business support. In the law industry, that includes work such as research, transcription and document management. ‘OFF-SHORING’ BECKONS NEW ILLS Modern-day outsourcing began in 1947 when Automatic Data Processing, the Roseland-based payroll services company, began accepting information from clients over the telephone. Growth surged in the late 1990s, fueled by a shortage of workers here and the entry of outsource service providers abroad. The foreign-based outsource services market, led by India, became so pervasive that by 2003, the term “off-shoring” was coined. Off-shoring has expanded the legal issues associated with outsourcing. “There are some key issues to be concerned about in all outsourcing arrangements, but they become all the more critical when the outsourcing is overseas,” says Friedman. The few highly publicized overseas outsourcing scandals include the 2001 arrest of Shekhar Verma, a former employee of Geometric Software Solutions, an Indian company that was doing outsource de-bugging work for a software company, SolidWorks 2001 Plus. The Federal Bureau of Investigation and Indian authorities arrested Verma after he allegedly tried to sell SolidWorks source code to its competitors for $200,000, according to news reports. Last year, a Pakistani woman, hired to transcribe medical files through outsource contractors, threatened to post patient records on the Internet unless the University of California San Francisco Medical Center paid her money she claimed a third party owed her. That incident prompted California legislators to introduce three bills, all pending, to bar or restrain physicians and health care entities from outsourcing work involving confidential medical information. NO BOOM, BUT FAR FROM BUST Will outsourcing lead to a litigation boom? Bierce doubts it, saying outsource vendors are more careful about entering engagements. “In outsourcing, it used to be that a customer would hire a vendor and think that vendor will take care of everything. But things are now more collaborative and the vendors are more adept at identifying customers that create win-win solutions,” he says. However, Friedman says outsourcing-related litigation is widespread and is just not being publicized. He says he is an arbitrator in a $30 million suit against an outsource service provider, but declines to provide details. For the most part, lawyers in the state are not doing outsource-related work, but are curious about it. “As a consumer, I’m not enamored by the concept of outsourcing, but as a lawyer I can see that it creates a whole new range of issues to deal with,” says Wayne Positan, managing director of Lum, Danzis, Drasco & Positan in Roseland. Even lawyers involved in such work are uncertain about its future. Says Greenbaum Rowe’s Felton, “We are serving our clients but not focusing on this area, which is not to say that we won’t in the future.”

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