Outsourcing Law & Business Journal™:November 2009

December 21, 2009 by Bierce & Kenerson, P.C. · Leave a Comment

OUTSOURCING LAW & BUSINESS JOURNAL (™) : Strategies and rules for adding value and improving legal and regulation compliance through business process management techniques in strategic alliances, joint ventures, shared services and cost-effective, durable and flexible sourcing of services. www.outsourcing-law.com. Visit our blog at http://blog.outsourcing-law.com for commentary on current events. Insights by Bierce & Kenerson, P.C. www.biercekenerson.com

Vol. 9, No. 11 (November, 2009) Last Opportunity to Register - Webinar on Sourcing of Global Talent

Managing Knowledge, Compliance and Legal Risks in Sourcing of Global Talent
Thursday November 17, 2009, 11 A.M. – 12 Noon, Eastern Daylight Time U.S.

Speakers:

William B. Bierce, Esq., Bierce & Kenerson, P.C. – Outsourcing Lawyer
Larry Scinto, PA Consulting, Managing Consultant
Neil McEwen, PA Consulting, Managing Consultant

Agenda. This webinar will discuss the human capital management for the contingent workforce in our current economic climate. The speakers will address issues in designing a contingent workforce strategy, managing this contingent workforce, effective governance and the managing risks and legal issues that arise with the implementation of such a workforce. In this webinar, some of the questions that will be discussed are:

How do I put together an effective contingent workforce strategy to optimize my investment in contingent labor?
How do I ensure that my business customers are engaged in the case for change and buy-in to common technology, process, policy and governance?
How do I govern multiple providers and ensure effective performance and value for my investment?
What technologies should I be using to track provider/contingent worker utilization and performance?
How do I ensure that legal/regulatory/compliance risks are recognized and managed in all geographies where I operate?
How do I ensure that there is effective governance across the entirety of my contingent workforce?
How do I manage risk and compliance issues that arise through the implementation of a contingent workforce?

This webinar is by invitation only. To register, please click here. _________________________________________________________________________
1. “ObamaCare”: Promotion of Automation, Offshore Outsourcing and Job Losses; Penalizing Foreign Companies Based in Tax Havens (and Other Non-Treaty Countries).

2. Humor.

3. Conferences.
____________________________________________________________________________________

1. “ObamaCare”: Promotion of Automation, Offshore Outsourcing and Job Losses; Penalizing Foreign Companies Based in Tax Havens (and Other Non-Treaty Countries). If enacted, President Obama’s healthcare reform would probably hurt domestic employment and accelerate automation, outsourcing and offshoring. It would change the economic incentives for keeping service industries in America. And it would hurt foreign-owned businesses whose ultimate parent company is based in a tax haven or other country that has no U.S. income tax treaty. On November 6, 2009, by a paper-thin margin of 220 votes to 215, the U.S. House of Representatives passed the “ Affordable Health Care for America Act,”H.R. 3962, the 1,990-page health care reform law that has been frequently called “ObamaCare.” If substantially adopted by the Senate and passed into law, the bill would impose significant new burdens on employers and self-employed persons. For the complete article, please click here.

2. Humor.

Healthcare reform, n. (1) a plan to make healthcare “affordable” in America by making employment less affordable.

Independent contractor, n. (1) a staffing company, outsourcing service provider or personal service company working on projects under a defined scope, subject to change control procedures and never under the direction or control of the enterprise customer except by contract revision; (2) a free spirit, within the freedom of the statement of work.

3. Conferences.

December 6-8, 2009, IQPC and SSON’s 4th European Shared Services Exchange, The Hague, Netherlands. Following the success of our Shared Services Exchanges in North America we are now launching the new format for Europe, bringing together senior level conference topics in a highly productive and interactive meeting platform. The 4th European Shared Services Exchange is an invitation-only gathering for VP and C-Level senior Shared Services executives from successful European organizations. With a distinguished speaking faculty from Dell, Lafarge and Microsoft amongst others, the seats at the 2009 Exchange are limited and filling up quickly. We have limited complimentary invitations available for qualified delegates for a limited time. Please give us your reference when inquiring. There are solution provider opportunities also available for companies who want to be represented. You can request your invitation at exchange@iqpc.com or call us at 1866-296-4580. Visit the website for more information.

December 7-9, 2009, Legal IQ and IQPC’s 8th Annual E-Discovery Conference in New York, New York. Legal IQ and IQPC present the 8th eDiscovery event this December in New York City. Bringing industry leaders together to explore current risks, opportunities and challenges facing eDiscovery, this event will offer best practices and possible solutions to the ever remaining question: How can we lower our costs? This event goes beyond the traditional basics by examining the critical, high level, and strategic issues. Some of the topics to be addressed by the expert speaker faculty will be:

Organizing an effective records program by tapping into existing resources
Developing a litigation preparedness plan
Determining judges’ priorities when eDiscovery conflicts arise
Aligning the interests of IT, inhouse and outside counsel
Handling eDiscovery via social media sites and other new sources of ESI
Controlling the cost of review while maintaining defensibility
Saving money by employing Early Case Assessment tools and new technologies

For more information and to register for this event, please click here.

January, 24-26, 2010, IQPC Business Process Outsourcing and Shared Services Exchange 2010, West Coast, USA. This is an invitation-only gathering for VP and C-Level senior Shared Services and Outsourcing executives made up of highly crafted, executive level conference sessions, interactive “Brain Weave” discussions, engaging networking opportunities and strategic one-on-one advisory meetings between solution providers and delegates. With a distinguished speaking faculty from McGraw-Hill, Ingram Micro and Pfizer, amongst others, the seats at the 2010 Exchange are limited and filling up quickly. We have limited complimentary invitations available for qualified delegates for a limited time. Please give us your reference ‘Outsourcing Law’ when inquiring. There are solution provider opportunities also available for companies who want to be represented. You can request your invitation at exchange@iqpc.com, call at 1866-296-4580 or visit their website.

February 22-24, 2010 ,SSON and IQPC 8th Procure-to-Pay Summit, Miami, Florida. Join Procurement, Accounts Payable and Sourcing professionals at the 8th Procure-to-Pay Summit to discuss new initiatives for procurement as IQPC and SSON continues with its Procure-to-Pay series in 2010. More information will be available shortly. In the interim, check out what happened at the 7th P2P Summit this past summer.

March 22-26, 2010, SSON presents the 14th Annual North American Shared Services & Outsourcing Week, Orlando, FL. Here’s a sneak peek of new and enhanced features, which include:

Speakers from Top Companies:Aramark, Arbys/Wendy’s, AstraZeneca, Chevron, Coca-Cola, Conagra Foods, General Motors, Kellogg, Kraft, Microsoft, Monster, NASA, Northrop Grumman, Oakley, Perdue Farms, Schering Plough, Warner Brothers and more
G8: Global Sourcing Think Tank Eliminating the White Noise: The first ever neutral platform to help shape a common industry agenda in the US
Under the C-Suite Spotlight with Rene Carayol, An Exclusive Onstage CXO Interview: Board-room revelations regarding shared service & sourcing model strategy
New, Strong, Business Outcome-Focused Content: 8 content-intense tracks, from Planning & Launching and BPO Evolution to IACCM’s Contracting to Collaboration
Enhanced Annual Features: Quick Wins Energizers, Speed Networking, Blue Sky Innovation Room for Mature SSO’s, and more.

Please contact Kim Vigilia directly at 1-212-885-2753 or at kim.vigilia@iqpc.com with your special code IUS_OSL_#1 to get a 20% discount off the all-access pass. You can also visit the website at www.sharedservicesweek.com.

Filed under: Newsletter
Tagged: Business Process Outsourcing, compliance, contingent workforce strategy, e-discovery, human capital management, humor, ObamaCare

Outsourcing Law & Business Journal™: October 2009

October 29, 2009 by Bierce & Kenerson, P.C. · Leave a Comment

OUTSOURCING LAW & BUSINESS JOURNAL (™) : Strategies and rules for adding value and improving legal and regulation compliance through business process management techniques in strategic alliances, joint ventures, shared services and cost-effective, durable and flexible sourcing of services. www.outsourcing-law.com. Visit our blog at http://blog.outsourcing-law.com for commentary on current events. Insights by Bierce & Kenerson, P.C. www.biercekenerson.com Vol. [...]

Filed under: Newsletter
Tagged: Business Process Outsourcing, cloud computing, e-discovery, humor, management, outsourcing, Shared Services Exchange, sourcing

Case Study: Farmland Industries Inc.

October 16, 2009 by Bierce & Kenerson, P.C. · Leave a Comment

Farmland Industries Inc., a federation of 1,700 rural farm cooperatives that is the largest farm cooperative in the United States, filed for bankruptcy protection on May 31, 2002, after reportedly rejecting an offer by Smithfield Foods Inc. for acquisition of Farmland’s meat business. The meat business is operated as a joint venture with U.S. Premium Beef Ltd., which has the right of first refusal.

In the 1990’s, Farmland Industries re-directed its capital and took on considerable debt to become a larger processor of farm commodities. The subsequent declines in crop prices resulted in a loss of $90 million for the fiscal year reportedly ended August 31, 2001, with additional losses of $46 million for the half year ended February 28, 2002. Investors in Farmland’s subordinated bonds reportedly aggravated the liquidity crisis by redeeming the cooperative’s bonds in droves. This story offers an example to vendors of the impact of massive changes in a customer’s business environment, as well as the inflexibility a customer faces when it has committed to joint ventures.
This bankruptcy could be bad news for Ernst & Young LLP (or its successor Cap Gemini Ernst & Young). In April 1997, E&Y and Farmland formed OneSystem Group LLC (OSG) as an IT joint venture to provide IT outsourcing and business process outsourcing services to Farmland Industries and the Farmland Cooperative System, the largest farmer-owned cooperative in North America. The joint-venture relationship reportedly introduced results-based metrics and gain-sharing through the establishment of unique payment methods for services funded by realized business savings.

In a bankruptcy, executory contracts may be terminated. In a joint venture where one of the parties is bankrupt, the bankrupt joint venturer may terminate future obligations to provide funding and services, but it still owns the joint venture interest.

Filed under: Case Study
Tagged: bankruptcy, Business Process Outsourcing, IT outsourcing

Shared Services in Lieu of Outsourcing: Offshore Captive Internal Bank

October 16, 2009 by Bierce & Kenerson, P.C. · Leave a Comment

Summary.

In making the classic “buy vs. build” decision in relation to services to manage sophisticated business processes, enterprises may elect to establish a captive enterprise to perform “shared services” for affiliates. The “shared services captive” is an alternative to buying outsourced services. But it is also an alternative to internal administration of a business process separately by individual departments, divisions or lines of business. Shared services captives can provide key advantages for diversified multinational enterprises, particularly as a cost-reduction technique when sales and sales margins might be eroding in a global economic downturn.

Captive Internal Bank.

Sony Corporation, the Japanese-based electronics and entertainment group, announced in June 2003 that it was planning a major expansion of intercompany banking services to help reduce financing charges and manage currency risks for all affiliates.

Cost Savings.
According to Sony’s managing director for Global Treasury Services, Mr. Hiro Kurihara (as quoted in an interview with the Financial Times), the London-based shared services operation will generate cost savings of approximately $30 to $40 million per year.

Risk Reduction.
In addition, Sony projected reduction of risks of changes in currency in connection with the settlement of intercompany transactions. Sony plans to offset foreign exchange risks with services — normally offered by money-center banks — of “automatic cashless settlements” and “automatic sweeping.” This requires investment in information technology and integration with others in financial services markets.

Centralization, Specialization and Scale.
Sony’s Global Treasury Services acts like a clearing bank for all affiliates. In this centralized function, the shared services affiliate can aggregate volumes of transactions that are generic, but whose handling requires specialized skills. As a result, economies of scale can reduce per-unit costs and increase focus on specialized transactions that internal financial executives in operating affiliates might not have, or might find difficult, time-consuming or costly to acquire. The Sony shared services affiliate reportedly manages 95% of the enterprise’s financial derivatives and exchange swap transactions.

Transition and Transformation.
The transition to an internal financial services captive is part of a global restructuring that will result in accounting charges of approximately $1.2 billion. Restructuring to include new, enhanced shared-services affiliates may help multinationals such as Sony to transform their services models by increased efficiency and cost management.

Integration with Insourced Transactions.
Establishment of a shared services affiliate requires careful attention to integration with other internal processes. The shared services affiliate must define its “services offerings” and enable managers in affiliated lines of business to use the services with minimal cost and delay. As a result, virtually all “shared services” are digitally integrated. The degree of integration may range from the use of telephones and e-mails to a web-enable Internet-accessible portal. As a result, shared service affiliates generally are purchasers of services and technology from third parties.

Integration with Outsourced Transactions.
Indeed, shared services providers may be the largest purchasers of outsourced transactions. For example, Proctor & Gamble was negotiating for a complete sale of its shared services affiliate to a global outsourcing services provider in 2002. When P&G was unable to obtain its desired sales price at for the services charges that it wanted, P&G chose instead to hire Hewlett-Packard to provide selective outsourced services to support its insourced “shared services” operation.

Advantages in Shared Services.

Shared services affiliates, or “captive” service companies, have many of the advantages of an outsourcing without any loss of ownership and control over business processes, technology, intellectual property and personnel. Shared services captives can develop and retain knowledge capital involving sophisticated business transactions that individual affiliates cannot acquire due to smaller volume of similar transactions. As the business process involved becomes more subjective and susceptible to business judgment, shared services captives retain an advantage over outsourcing because that very subjectivity might be a core competitive advantage and might not be scalable.

Risk Management in Shared Services.

Adoption of a “shared services captive” approach involves a number of risks that can be managed by treating the captive as an external service provider of outsourced services. Such techniques include:

adoption of “service level agreement” obligations, with financial incentives and consequences for failure, applicable to the management and employees of the shared services affiliates;
details concerning the integration of the captive’s services with those of the other operating companies or lines of business;
suitable insurance coverages;
suitable contracting procedures for outsourcing of certain perfunctory tasks of the shared services captive to independent outsourcing services providers;
human resources and intellectual capital management techniques for aggregation and accumulation of related processes and improvement in business processes, quality of service and optimal alignment with the key performance indicators of the core business’s mainstream operations.

Shared Services on the Continuum of Insourcing and Outsourcing.

In conclusion, shared services companies, or captives, perform roles that run along the continuum of fully vertically integrated insourced operations to a skeleton of core competencies supported by a network of outsourced operations. If a business process can be outsourced, it can also be insourced after the outsourcing. If it has been insourced, it could be structured more efficiently as a captive to look like an outsourcing. And once structured as an outsourcing, it could become a true outsourcing service provider to support non-affiliated customers, and could even be spun off to shareholders or sold to a strategic buyer. Thus, the captive shared services organization can mutate according to trends affecting customers, suppliers, corporate strategies, changing processes and changing marketplaces. In establishing internal captives, the lessons of outsourcing can improve performance and flexibility.

Filed under: White Paper
Tagged: Business Process Outsourcing, business processes, Cost management, outsourcing, risk management, service level agreement, service provider, shared services captive

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

October 9, 2009 by Bierce & Kenerson, P.C. · Leave a Comment

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.

Filed under: White Paper
Tagged: alleged infringer, Business Process Outsourcing, contract manufacturing, enterprise customer, patent, Patent Cooperation Treaty, patent portfolio, service provider, services infringes, services providers, statutory monopoly, World Trade Organization

Patent Infringement Warranties in BPO

October 9, 2009 by Bierce & Kenerson, P.C. · Leave a Comment

Today, virtually any contract, including a business process outsourcing contract, for the delivery of goods, services or licensed rights in applied technology contains an indemnification clause concerning possible infringement of third-party intellectual property rights. In the initial draft of the agreement, the typical clause provides for unlimited indemnification for patents, copyrights, trademarks and trade secrets. Increasingly, the suitability and evidentiary issues in such clauses are getting careful scrutiny. A recent U.S. federal judicial decision revoked a twenty-year old common law precedent relating to the measures that must normally be taken in order to eliminate certain special statutory damages and liability for attorneys’ fees.

Ordinary Infringement of a Patent.

Patent holders face a challenge in protecting their rights. The U.S. patent law ordinarily imposes actual damages for patent infringement.

Patent holders must think twice about suing for infringement. The stakes are high.

Legal Fees.
Ordinarily, the patent holder has no right to recover its attorneys’ fees. The patent holder will have a significant amount at stake in order to justify paying the huge expense of attorney’s fees for complex litigation.
Invalidation of Patent.
Invariably, the patent holder’s infringement lawsuit will invite a counterclaim for invalidation of the patent. As a result, the infringement litigation could risk termination of all license royalties from parties other than the alleged infringer.

Willful Infringement of a Patent.

The patent holder’s risk of an invalidation can be reduced if it raises the stakes in the litigation. It can do so by alleging that the infringement was “willful.” This puts into motion a threat that the alleged infringer will be liable for punitive damages.

Consequences of Willful Infringement.
If the infringement can be shown to have been “willful,” then the court may award attorney’s fees and triple the compensatory damages. 35 U.S.C. § 284 (“the court may increase the damages up to three times the amount found or assessed”); 35 U.S.C. § 285 (“the court in exceptional cases may award reasonable attorney fees to the prevailing party”).

The Definition of “Willful” Patent Infringement.
In determining whether a patent infringement was “willful,” the court must balance the totality of the circumstances. Many circumstances may be taken into consideration. See compilation in Rolls-Royce Ltd. v. GTE Valeron Corp, 800 F.2d 1101, 1110 (Fed. Cir. 1986) and Read Corp. v. Portec, Inc., 970 F.. 2d 816, 826-27 (Fed. Cir. 1992). “Willfulness” is not an absolute, based on “all or nothing,” but is a matter of degree. Knorr-Bremse Systeme fuer Nutzfahrzeuge GmBH v. Dana Corporation, __ F.3 __, NYLJ (Sept. 24, 2004), p. 21, cols. 1-4, p. 22, cols. 1-2 (2nd Cir. 2004) Judge Newman.

The Service Provider’s Defensive Strategy: Get an Attorney’s Opinion.
Under a 1983 decision by the U.S. Court of Appeals for the Federal Circuit, judicial precedent required that, as a precaution, the potential infringer of a patent should obtain a review by a patent lawyer of the patents at issue. Underwater Devices, Inc. v. Morrison-Knudsen Co., 717 F.2d 1380 (Fed. Cir. 1983). In the context of a flagrant disregard for the patent owner’s demand for payment of a royalty for infringing presumptively valid patents, that court ruled that “where, as here, a potential infringer has actual notice of another’s patent rights, he has an affirmative duty to exercise due care to determine whether or not he is infringing,” including “the duty to seek and obtain competent legal advice from counsel before the initiation of any possible infringing activity. Id. at 1389-90.

The “duty” or “best practice” of getting a legal opinion is not specified in the patent statute. Instead, the defensive strategy was raised to the level of a common-law duty by interpretation of the patent statute. Courts applied the common law rule as a matter of evidentiary procedure. This applied specifically to cases where a patent holder had warned the potential infringer and asked that the infringement cease.

Change in Common Law.
This “legal opinion” requirement was applicable as judicial precedent from 1983 to 2000. In September 2004, the same court, in the Knorr-Bremse decision, overruled this precedent because the evidentiary principle promoting caution violates an even more fundamental principle, the attorney-client privilege. The court ruled that, while the issue is not one of legal privilege, it is the related issue “whether there is a legal duty upon a potential infringer to consult with counsel, such that failure to do so will provide an inference or evidentiary presumption that such opinion would have been negative” and would have concluded the potential infringer had no right to use the patented process.

Having framed the issues, the Knorr-Bremse court decided that, as a matter of public policy, it is so important to continue the general principle that courts should decline to impose, as a procedural rule of evidence, any “adverse inference” on invocation of the attorney-client privilege. Expanding this principle to the treble-damage and attorney’s fee provisions of the patent law, the court concluded that no such adverse inference may be drawn:

when the potential infringer (such as an service provider in outsourcing) invokes attorney-client privilege, and/or attorney work-product privilege, or

when the potential infringer fails to consult with counsel.

Impact on Outsourcing.

This decision eliminates a negative presumption against potential infringers of U.S. patents. Since the U.S. patent law permits registration of patents on business methods, this judicial decision will make it easier to defend, and harder to prosecute, business method patent infringements. The impact on the ordinary business process outsourcing should be small, but it will give some comfort to service providers. When notified of an alleged infringement, consultation with an attorney will still be highly advisable, but no adverse presumption will apply if no consultation occurs.

Filed under: White Paper
Tagged: attorney-client privilege, Business Process Outsourcing, infringement, infringer, U.S. patent law

Legal Compliance in Outsourcing

October 9, 2009 by Bierce & Kenerson, P.C. · Leave a Comment

When is the Service Provider Liable for its Customer’s Compliance with Laws, including Payment of Fines and Penalties for Non-Compliance?

When is the service provider liable for its customer’s compliance with laws, including payment of fines and penalties for non-compliance? Most outsourcing agreements require each party to comply with applicable laws. However, as business process outsourcing (“BPO”) services move up the value chain, legal compliance obligations can get somewhat tricky. Consider the scenario where the service provider’s services substitute for the enterprise customer’s normal compliance with laws governing the enterprise customer’s operations. If you are a candidate for public office, your consultant might just be liable for your compliance, fines and penalties. If you stay out of politics, you can still learn about a critical BPO contracting issue that played out in a New York City election campaign.

Context: Compliance with Election Laws.

If you are a candidate for public office, your consultant might just be liable for your compliance, fines and penalties. While laws vary, it is instructive to consider the liability of a political consultant. The consultant’s client, a New York City political candidate, failed to timely respond to the Campaign Finance Board’s draft audit report and filed late four disclosure statements. The consultant acknowledged its office failures. It offered two excuses. First, its failures were due to its own disorganization (and not its client’s). Second, the candidate’s records were on a computer affected by a computer virus. This is hardly a case involving the usual due diligence, site visits and other critical infrastructure offered by the usual “big ticket” outsourcing. But the case illustrates what happens in case of “worst practices.”

Statutory Liability.

The particular statute imposes liability on “agents” as well as the political candidates. Under the New York City Administrative Code, §3-711(1), an “agent” includes individuals and entities who have undertaken the responsibility for campaign law compliance.

The Service Agreement.

The political consultant claimed that it had developed computerized systems designed to keep its clients’ political campaigns in compliance with the campaign finance regulations. The agreement provided that the service provider would complete all filings with the regulatory agency and explain to the candidate and monitor all rules and regulations applicable to the political campaign.

The Course of Dealing.

The political consultant actually performed as promised, at least to the degree sufficient to be designated as an “agent” liable under the regulations for compliance. The candidate’s Candidate Certification listed the service provider as the mailing address for notices from the regulatory agency. The service provider’s employee represented to the regulatory agency that she represented the committee for the candidate’s election with respect to compliance. The candidate’s disclosure statements were generally delivered by hand by the service provider’s messenger. The service provider’s contacts with the regulators outnumbered those of other representatives of the candidate’s election committee.

Implications for Enforcement of Other Types of Regulatory Legislation.
This decision represents an enforcement action by the governmental agency responsible for administering a regulatory law. The regulators targeted enforcement action directly against the “BPO service provider” by reason of its contractual undertakings, its actions for compliance and its direct communications with the agency. The same analysis might not apply to non-delegable compliance duties, such as these of the CEO and the CFO under the Sarbanes-Oxley Act of 2002.

Equitable Estoppel.

In this case, the court, without setting forth a theory of law, concluded that it would be inappropriate to allow a service provider to act as agent and not have the liability of an agent.

To allow any entity, that has agreed to fulfill the compliance requirements of behalf of a candidate to shoulder the blame for a candidate’s non-compliance, and then to allow that same entity to escape liability because it claims it is not an “agent” of the candidate, would not serve the purpose of the Campaign Finance Act. To accept [the service provider's] argument would defeat the policy behind the Campaign Finance Act.

As a result, the court found that it was not “arbitrary and capricious” to impose the candidate’s penalty on the consultant, and that such an imposition did not lack a rational basis.

Lessons Learned.

By assuring compliance with laws, the service provider agrees to guarantee the result. Unlike a commitment to use “best efforts” or some other type of “efforts,” a BPO service provider’s guarantee of results implies an agreement to shoulder the fines and penalties imposed on the service provider’s customer by reason of any failure to comply.

Matter of The Advance Group v. New York City Campaign Finance Board, __ N.Y.S.__, NYLJ (Feb. 3, 2004), p. 18, cols. 3-4 (N.Y. Co. Sup. Ct. 2004), per Justice Shafer.

Filed under: White Paper
Tagged: Business Process Outsourcing, compliance, enterprise customer, Equitable Estoppel, service provider

Death of Captive Paradigm? Business Transformation of a Shared Services Captive: Legal and Business Issues in Conversion from SSO to Independent BPO Service Provider

October 9, 2009 by Bierce & Kenerson, P.C. · Leave a Comment

General Electric Company’s announcement on November 8, 2004, that it has agreed to sell 60% of its Indian captive services company GE Capital Information Services (“GECIS”) marks a turning point in the trend towards establishment of offshore captive services companies. This article considers the legal and business issues in a conversion of a foreign captive shared services organization (“SSO”) to an independent business process outsourcing (“BPO”) service provider. It is a lesson in management strategy, risk analysis and, most importantly, return on investment for shareholders.

Disclaimer: The author has not seen the documentation among the parties on this transaction.

GECIS as Captive SSO.

GECIS was established to provide specialized talent and resources to GE’s affiliates globally. Most recently, it has been providing Six Sigma productivity improvement methodology and training, cost savings advisory services and back-office business process support to GE’s affiliates. The legacy of GECIS as a captive organization demonstrates GE’s success in managing services as a core competency across the world. GE’s press release noted:

Established in 1997 to provide internal business support for GE, Gecis has built global operating capabilities supporting nearly 1,000 business processes across each of GE’s 11 business units, including critical finance and accounting, supply-chain management, customer-service support, software development, data modeling and analytics activities. Gecis’ sophisticated IT-enabled operations include fully staffed facilities in North America, Europe, India, and China. Bhasin said Gecis provides its services in 19 languages and is highly experienced in recruiting talent and managing operations in each of these markets.

As a captive, GECIS probably had reached the limit of its ability to scale the processes and generate business value. Even GE globally has limited capacity to absorb shared services.

The Business Transformation to BPO Services Provider.

Sale of Shares.
GE converted the SSO to a BPO service provider by selling a majority share to two private equity firms, General Atlantic Partners and Oak Hill Capital Partners. After the sale, GE will own 40%, with each of the other two shareholders owning 30%.

Recapitalization.
The GECIS company will also be recapitalized. Recapitalization of a healthy, growing company in a booming services economy suggests that the new investors will be contributing new capital. The pricing of the share sale, as well the relative contributions to capital, may depend on an “earn-out” based on on post-sale performance of the company.

Allocation of Shareholdings; Impact on Corporate Governance.
GE could have chosen to sell to one other shareholder. By selling to two investment groups, it dilutes the individual power of the other shareholders and retains an opportunity, by persuasion or other alignment of interests, to potentially share majority control with one of the two investors. Thus, for accounting and regulatory purposes, GE ceases to own control. For corporate governance purposes, it may retain an option (explicit or in a shareholders agreement) to share voting control with one of the two investors.

Expansion of Markets.
GE’s Press Release announced an expansion of into new markets, which will be generate new value for the new private equity investors. GECIS “will accelerate its third-party sales, marketing and delivery capability to significantly expand its client base, especially in China and Eastern Europe, where it began operating two years ago.”

Management.
As announced, Mr. Pramod Bhasin will remain as president and chief executive officer, supported by the current Gecis global management team.

Board of Directors.
Thee new board, comprising four representatives from GE and six from the new investors, will be constituted by the end of 2004.

GE as Customer.
As announced, Gecis will continue to serve GE under a multiyear contract. That contract undoubtedly gives GE a priority claim on some of Gecis’s resources, most-favored-nation pricing and other preferences afforded to the best customers.

International Capital Structure.
The admission of new investors requires an appropriate capital structure. Capital structures are driven by considerations of corporate law, taxation, effectiveness of controls and predictability of the rule of law. Generally, international investments are structured to interpose an offshore holding company so that sales of the portfolio company are sheltered from income tax on disposition.

Income Tax Considerations.
An offshore holding company structure might also reduce the rate of withholding tax in the portfolio company’s country of operations. That reduction typically depends on selection of a jurisdiction with a mature income tax treaty that does not have a provision limiting its benefits if the holding company is not majority owned by residents of one of the two countries. Further, a mature income tax treaty may exonerate from “secondary” withholding tax any distribution of dividends by the holding company to its shareholders.

Corporate Governance.
Selection of the jurisdiction for the holding company, that will be co-owned by the investors, has an important bearing upon the corporate governance. Corporate governance involves the rights to elect and terminate the board of directors, to approve important business decisions that might affect corporate operations, policies, financing, growth, mergers, acquisitions, dispositions, recapitalizations, joint ventures and liquidation.

Each of these corporate governance elements depends on the voting rights established under the applicable corporation or company law, the shareholders’ agreement, if any, the by-laws and resolutions of the board of directors. Every country has its own corporation law, and nomenclature and rights vary across the world. “Offshore” jurisdictions specialize in attracting foreign investment by offering highly flexible corporate structures, with minimal protections for minority shareholders.

Minority Holder’s Statutory Rights.
The right of a minority shareholder to block a major corporate action — such as an acquisition, major divestiture or restructuring — may be greater in some countries than others. In India, the holder of a 25% ownership interest in a limited company are entitled to block such major corporate actions. In Delaware and New York, for example, the minority has no such right, and the holder of a majority of the voting rights can effectively dictate major corporate actions. As a result, when a 100% owner of an Indian shared services captive wishes to recapitalize the Indian company, it will normally choose a jurisdiction that allows absolute control by the majority owners, subject to fiduciary duties to minorities.

Recapitalization vs. Sale of Shares.
For sole owner of an operating company like an Indian captive services provider, sale of shares could trigger a capital gains tax. By having the operating company (or a holding company) issue new shares, the funding of new investment capital into the business can be achieved without capital gains tax because capital contributions are not taxable events.

Classes of Shares.
Frequently, new capital contributions are paid in consideration of the issuance of a new class of common shares. A capital structure with multiple classes of shares has several implications. The same results can be achieved without multiple classes of shares, but to do so would require extensive negotiation and drafting of a complex shareholders’ agreement.

First, by statute, each class may have the right to approve or disapprove certain corporate actions. Thus, if one shareholder has all shares in a class, that shareholder may effectively veto major changes that require the consent of all classes of shares.

Second, if there are three shareholders in any class of shares, it ownership can be structured so that none has a majority control of that class. By loading up the number of minority shareholders in one class of shares, none has any control. Such a structure strengthens the de facto control of the holders of a majority of any other class of shares.

Third, each class of shares can have different rights of voting, dividends and liquidation preferences. This feature can allow different investors to design a plan for their own particular investment parameters, including cash flow and the timing and conditions of exit from the investment.

Impact on GE.

Strategic Redirection.
GE’s sale of the 60% stake in the GECIS subsidiary does not mark any withdrawal from the Indian market. GE’s businesses in India represent annual revenues of $1 billion and 22,000 employees. Rather, the sale suggests a change in strategic direction.

The competitive advantage of having a captive BPO service provider appears to have already been achieved. GE will continue to be a customer, with preferential benefits, of the restructured GECIS. But there appeared no compelling competitive reason not to expand the clientele of the BPO service provider across global markets.

The sale of the 60% stake will support expansion of GECIS’s business. GECIS will accelerate its efforts in marketing, sales and delivery to “underserved” areas that have not experienced productivity improvements, such as China and Eastern Europe. Opportunities for expansion into new markets will take additional capital investment, which will be provided by the new investors as part of the recapitalization. It was not clear whether GE would make an additional investment, but it would be normal to do so if the expansion were to require a staging of capital expenditures.

Human Resources.
The transfer of ownership control can have significant effects upon an entity’s employees.

New Management.
The recapitalization using private equity investment may be accompanied by a change in management. In the GECIS case, the operating management will continue in place, but the board of directors will be controlled by the investors in proportion to their respective ownership percentages. This approach contrasts with the clash that occurs when a strategic acquirer seeks to impose its own management structures and approach upon a new acquisition. In the GECIS situation, the employees and customers have some assurance that, despite the change in control of the board of directors, the new management will do “more of the same” and seek to expand operations rather than integrate them with a strategic acquirer.

Pension Plans.
Rules governing employment law, taxation of deferred compensation and pension rights tend to be territorial in nature. Under the U.S. pension law (“ERISA”), an employer is not required to cover foreign-based employees, whether directly or employed by foreign subsidiaries or affiliates, include in its U.S. profit sharing, pension, retirement and medical insurance plans. In this situation, GECIS probably has its own Indian-based pension plans, and there will probably be no impact on any U.S. ERISA plans. A few exceptions might apply for certain senior executives, and as to them the recapitalization to include new majority ownership will likely result in some special price adjustments over time..

Exit Strategies.
With new capital, the company should grow. But the new investors have predictable time horizons for realizing the return on their investment. Employees and suppliers should anticipate a strategic sale or initial public offering in five to seven years. At that time, a change in control may be expected.

Intellectual Property Rights.
Private equity investments do not normally come with significant intellectual property that can be licensed to the newly acquired portfolio company or can be exploited as part of commercial services to customers. In this case, there might be some cross-licensing of intellectual property rights of the private equity portfolio companies owned by the private investors. Press reports were silent on this issue. In each new private equity investment, the integration and cross-licensing of technologies across portfolio companies of private equity funds merits further exploration.

“Captive of Multiple Unrelated Owners.”

Private equity investors may bring synergies and, like Internet Capital in the late 1990’s, even develop a strategy of assembling service companies that can support each other in the classic conglomerate or Daibatsu intercompany strategic relationships. In this case, the private equity investors will clearly be acquiring a crown jewel that can not only grow by expanding to new markets, but which can develop new synergies, efficiencies and productivity improvements for other portfolio companies. To the extent that other portfolio companies of General Atlantic and Oak Hill Partners can benefit from the GECIS productivity improvement services, the purchase price will yield multiples of value. This intrinsic portfolio enhancement consideration might have been an important factor in pushing up the purchase price.

Local Ownership and Selection of Business Partners.
The BPO market is not protected by local restrictions on foreign ownership. Accordingly, it is entirely normal for foreign investors to share in foreign ownership. One may inquire why GE did not consider a local Indian private equity fund instead of two American-owned funds. This can probably be explained by an affinity of culture and a long-standing relationship among the parties in the American market. Also, the Indian private equity funds are not as liquid and highly developed as American private equity funds.

Conclusion

The transformation of a captive services organization to a BPO service provider presages increased reluctance of global organizations to own their shared services operations, at least where the “first-mover” advantages of having in-house resources have been achieved. Senior managements of global organizations will now face ever so starkly the question whether their shared services organizations are part of the aligned vision of the global enterprise. If the SSO is not efficient, it should be replaced by an efficient paradigm. If the SSO is efficient, it can be used as a launchpad for growing a “sideline” business, generating additional return on shareholder equity.

Conversion from captive to BPO provider requires extensive strategic planning. It involves substantial degree of complexity in execution. Time will tell whether other companies will follow in GE’s footsteps.

Filed under: White Paper
Tagged: Business Process Outsourcing, capital structure, Corporate governance, customer-service support, data modeling, India, Recapitalization, service provider, shared services organization, software development, supply-chain management

Forensic Investigations: Distinguishing Ordinary Outsourced Investigation from Privileged Investigation

October 9, 2009 by Bierce & Kenerson, P.C. · Leave a Comment

Many providers of finance and accounting (“F&A”) services cover a broad array of managed services. The functions of internal audit, pre-litigation claims and, more specifically, insurance claims processing deserve special attention from a legal standpoint. This article addresses distinctions between ordinary managed services (subject to pre-trial discovery) and “privileged” investigations that are not disclosable to adversaries in litigation. The analysis applies across all forms of business process outsourcing (“BPO”), but is particularly appropriate for F&A, HR specialty outsourcing and Sarbanes-Oxley “Internal” Audit.

Normal Rules of Discovery or Disclosure.

Under American rules of civil procedure, litigants are required to disclose to their adversaries information that could be used as evidence, or that could reasonably be expected to lead to the disclosure of evidence. Ordinary conduct of business, including managed services (or “outsourcing”) is subject to the normal rule.

This rule (sometimes called pre-trial discovery, sometimes called pre-trial disclosure) has several purposes:

to force each party to identify “reality” and not make any claims or defenses unless justified by the facts.
to enable a party to discover and use the facts to challenge claims or defenses of its adversary.
to promote settlements, and thereby reduce the burden of litigation on the court system.
in criminal cases, to give the accused access to “Due Process” under U.S. Constitutional norms.

Work Product Exception.

Investigations by attorneys or persons under the control of attorneys may be entitled to escape the normal rules of disclosure. Such investigations are conducted in anticipation of litigation. Businesses at risk of liability to third parties, employers and insurance companies investigating claims are entitled to assert the legal privilege to avoid having their investigators be required to testify in pre-trial depositions and otherwise disclose evidence before trial.

As a matter of public policy, such investigations are confidential and privileged, and the investigators are not subject to depositions during the pre-trial discovery process in order to preserve attorney-client communications and to enable to develop attorney work product free of intrusion. The confidentiality and privilege enable clients to obtain legal advice free of risk of disclosure. The attorney-client privilege and attorney work-product privilege to do not, however, protect a client from the duty to testify as to facts witnessed directly by the client outside any attorney-client communication.

A string of recent court decisions has examined the conditions under which an insurance company’s examination of a claim crosses the line from being an investigation performed in the ordinary course of the insurer’s business (and thus not eligible for the legal privilege) or work performed in anticipation of litigation. Travelers Casualty & Surety Co. v. J.D. Elliot & Co. P.C., ____ F.3d ___, NYLJ Oct. 25, 2004, p. 25, cols. 3-4 (S.D.N.Y. 2004), Judge Pitman; Weber v. Paduano, 02 Civ. 3392 (GEL), 2003 WL 161340 (S.D.N.Y. Jan. 22, 2003); Mt. Vernon Fire Ins. Co. v. Try 3 Bldg. Svces., Inc., 96 iv. 5590 (MJL) (HBP), 199998 WL 729735 (S.D.N.Y. Oct. 16, 1998); Am. Ins. Co. v. Elgot Sales Corp., 97 Civ. 1327 (RLC) (NRB), 1998 WL 647206 (S.D.N.Y. Sept. 21, 1998); see also United States v. Adlman, 134 F.3d 1194, 1199 (2d Cir. 1998).

Burden of Proof.
The party asserting the work product protection bears the burden of establishing the applicability of the work product exception. If that party seeks to deny all testimony by an investigator, it must prove the availability of the work product exception at all stages of the investigation, from beginning to end.

Standard for Determining When Work Product Exception Applies.
In the Travelers decision, the court noted that there is no “bright line” test for determining when an insurance company’s investigative work is not privileged (i.e., it is merely performed in the ordinary course of business) and when it is privileged as an investigation done in anticipation of litigation. The court rejected the use of a line based on investigation done prior to the filing of any insurance claim.

A first factor is whether the investigator was retained before any decision was made whether the insurance carrier would reimburse its policyholder for an insured loss. If the investigation is conducted before there is any reason to expect litigation from either the policyholder or against potential third party sources of reimbursement (under the principle of subrogation), the investigation does not qualify for the work product privilege.

A second factor is whether there was any actual threat of litigation at the time when the investigator was retained to conduct the investigation. If there is nothing in the file to indicate that litigation is on the horizon, or perceived to be “on the horizon,” the privilege will not apply.

A third factor is whether the investigator is hired by an attorney or merely by the business, employer or insurance company. There should be some showing that litigation counsel has been retained in order to justify work product privilege.

Impact on Outsourcing.

Internal investigations by providers of outsourced services are normally not eligible for work product privilege. Enterprises and their F&A outsourcing service providers should adopt certain “best practices” to preserve work product privilege.

Identify that Litigation is Anticipated.
If the enterprise customer or the service provider does anticipate any litigation, whether between the two parties or in relation to a third party whose rights might have been injured by an act or omission of the enterprise customer or the service provider, then litigation counsel should be consulted.
Records Management.
The parties should establish a log of “anticipated litigation” and maintain it under the management of lawyers. The records should be clearly marked so that there is no doubt that the investigations are conducted with some specific fear or threat of identifiable litigation “on the horizon.”
Separate the “Ordinary Work” from the “Work in Anticipation of Litigation.”
The enterprise customer and the F&A outsourcing service provider should clearly define the scope (statement of work) to include separate categories of “ordinary work” (the usual managed services) and “work in anticipation of litigation” that could be identified and administered separately. This segregation would insulate the validly privileged internal audit from the non-privileged ordinary operations.

Filed under: White Paper
Tagged: attorney-client privilege, Business Process Outsourcing, discovery, enterprise customer, ordinary managed services, pre-trial discovery, privileged investigations, service providers, work product

Class Action Litigation in Outsourcing: Managing Consumer Litigation Risk after Class Action Fairness Act of 2005

October 9, 2009 by Bierce & Kenerson, P.C. · Leave a Comment

The enactment of U.S. federal legislation forcing litigants to argue large class-action claims in federal court will help business generally. If class actions are basically about violations of consumer rights, what impact will it have on outsourcing, and why? This article applies to all those who manage call centers, credit cards, employment and payroll, HR administration, finance and accounting and other consumer-facing business functions.

I. The Public Policy and Public Impact of Class Actions

Rule 23 of the Federal Rules of Civil Procedure allows federal courts to aggregate the claims of multiple injured parties – “plaintiffs” – against one or more common defendants. The claims may be joined into one massive complaint so long as (1) the class is so numerous that joinder of all members is impracticable, (2) there are questions of law or fact common to the class, (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class, and (4) the representative parties will fairly and adequately protect the interests of the class.

Rule 23 serves many societal purposes.

A.    What is a Class: Size of Claims and Impact on Access to Judicial Redress.

1. Small Claims.
For small claims, it allows the aggregation of multiple claims that would not otherwise have been litigated. It thereby serves to protect the small consumer against the corporate tortfeasor where the damages per plaintiff are very small and the aggregate damages are substantial.

2. Large Claims.
For large claims, Rule 23 economizes judicial resources by avoiding litigation on the fundamental facts affecting perhaps a small or “finite” number of injured parties each of whom has suffered substantial damages. If the facts are the same or substantially the same, class actions provide judicial efficiency.

B. What is a Class: Technical Requirements.
Following extensive analysis by lawyers and judges that resulted in a multi-thousand page report dated May 1, 1997, on March 27, 2003, the U.S. Supreme Court amended Rule 23 of the Federal Rules of Civil Procedure. See http://www.uscourts.gov/rules/congress0303/CV-Letters.pdf and http://www.uscourts.gov/rules/WorkingPapers-Vol1.pdf As noted above, a class has to have sufficient “numerosity” to bundle a lot of claims, and sufficient “commonality” to justify treating the same facts or legal circumstances to the members of the class.

C. Socially Engineered Remedies.
Remedies in class actions cover several types of damages.

1.    Compensatory Damages.
Each injured party could receive an appropriate amount of compensation for the loss suffered.

2.    Disgorgement.
Beyond compensating the victims, class actions can serve as a socially engineered tool for promoting equitable remedies where it is not possible to locate or compensate every member of the class. In such cases, class actions can force a wrongdoer (or group of wrongdoers with liability allocated by market share, for example) to disgorge ill-gotten gains from consumer fraud and deceit.

3.    Equitable Remedies.
Equitable remedies are applied in order to prevent an injustice. They can include contempt of court, but most often are structured as injunctions.   An injunction can be issued to prohibit future violations of individual plaintiffs’ rights.

D. Emerging Growth of Class Actions in an Automated Process-Driven Society.
Based on a federal court procedural rule initially adopted in 1966, class actions have burgeoned since the 1990’s.

1.   Automation of Injury-Causing Commercial Activity.
There has been a shift from individual litigation to representational litigation, as a more “efficient” and effective method of recovering damages from wrongdoing defendants. Such litigation seeks to recover damages from torts and other repetitious effects inherent in a mechanized, if not automated, Cyber Age. What started as a basis for supporting consumer product safety and civil rights cases became a weapon for extorting settlements, often of trivial financial value to the injured class, for mass torts and, increasingly, “mass actions” of all types.

2.    Impact on Business Process Outsourcing (“BPO”) and Internal Business Process Management (“BPM”).
Class actions have become the tool of choice for effectuating social change, by shifting money to victims, and for redress of torts involving such diverse problems as securities laws violations, consumer product safety, banking and insurance billing methods and debt collection procedures.

The glorious scalability of business process automation (whether outsourced or not) can become an infamous scalability of mass torts. Mass torts occur when many people suffer the same consequences of the same (or similar acts) of the defendant(s). Since BPO and BPM can automate injury-causing interactions with consumers, class actions become everyone’s business. Accordingly, every business that performs, or hires someone to perform, such functions should be aware of the impact of the new Class Action Fairness Act of 2005 upon their business.

II. Consumer Litigation Risks in Outsourcing.

A.    Customer Relationship Management.
Call centers contact customers and prospective customers in outbound calls. Such contacts may violate applicable consumer protection laws and rules of the Federal Communications Commission, the Federal Trade Commission or the various states. Fines and penalties may be imposed by the regulators. In addition, individuals may be able to recover damages for violations of their rights under state or federal law, depending on the type of violation. In short, by allowing the aggregation of clams common to a class of persons that are “similarly situated,” class actions for violations of laws could become a call center’s worst nightmare.

B.    Privacy Violations.
Virtually any outsourced business process may involve privacy violations arising from mistakes or negligence in the receipt, custody, processing, storage, access, encryption and transmission of confidential records of individuals in a class could form the basis of a mass tort. records maintenance.   Such violations may apply to health information, personally identifiable information (such as Social Security Numbers), and financial and other personal information submitted to financial institutions or others for valid commercial purposes. Violations of privacy may result in fines and liability under the Health Insurance Portability and Accountability Act (HIPAA), the Graham-Leach-Bliley Act and the Fair Credit Reporting Act, as amended.

C.    Racketeering and Corrupt Organizations Act (Treble Damages and Attorneys’ Fees).
Outsourcing that is performed remotely usually involves the use of interstate means of communication. Under RICO, two violations of predicate crimes within a ten year period using such means of communication are subject to triple damages and attorneys’ fees. Virtually any type of outsourcing could be theoretically subject to a RICO claim.

D.    Antitrust Violations (Treble Damages ).
Antitrust laws provide for triple damages and attorneys’ fees as well. Where two competitors, each with significant market share in a relevant market, collude to fix prices or allocate territories, the participants will be violating the Sherman Antitrust Act. Such laws are not likely to apply to outsourcing due to the vertical nature of the relationship arising from business process outsourcing. Indeed, consumers rarely assert antitrust violations. Consequently class actions for antitrust violations appear to be a remote possibility.

E.    Civil Rights Violations.
In human resources outsourcing, the service provider may be called upon to engaged in a series of important steps that, if mismanaged, could result in a claim of civil rights violations. Civil rights generally include discrimination on the basis of sex, race, religion, national origin and even sexual preference.   Specific statutes protecting against age discrimination in employment also come into play in HR outsourcing.

III. Changes Introduced by the Class Action Fairness Act of 2005

Class actions have affected banks, insurance companies, asbestos manufacturers, tobacco sellers and pharmaceutical manufacturers. A consortium of business leaders lobbied Congress to change the rules so that interstate commerce can not suffer the burdens of favoritism or arbitrariness that are perceived by many to be part of the state court system. They also wanted to make the rules uniform across the country, which cannot happen but remains a reasonable ideal in a federal system.

Consequently, the new Act will reduce personal benefits to plaintiffs’ class action lawyers unless the benefits are more aligned with a large segment of the class members. This involves resetting the rules governing contingency legal fees and transferring cases to the federal district court if any defendant requests it.

A.    Restructuring of Attorney Fee Incentives for Plaintiffs’ Class Action Lawyers.

Rebalancing the Uses (and Abuses) of Coupons in Class Action Settlements.
Any enterprise sued in a class action for violation of consumer protection laws might concede defeat, issue “coupons” for injured parties that force them to use “free” additional services in lieu of cash payments, and pay the attorneys’ fees of the plaintiffs’ lawyers.   The Act will cut back on the ability of plaintiffs’ lawyers to collect cash based on the gross value of the coupons offered by limiting their fees to a percentage of the coupons actually used. 28 U.S.C. 1712(a), as amended by Class Action Fairness Act of 2005, 109 Cong., 1st Sess., S. 5, Sec.4(a). If any portion of such attorneys’ fees is not based on the gross value of the coupons, then hourly rates will apply. Traditionally, hourly rates are not enough to create a wealthy plaintiff’s lawyer.

In the past, coupons issued in class actions have notoriously have had low redemption rates due to the restrictions on duration of use, blackout dates limiting the scheduled use and other unpalatable coupon redemption rules.   This “coupon” strategy will force plaintiffs’ lawyers to seek to maximize the market value of the coupons, thereby aligning the interest of the injured class with those of their lawyers.

Where the class action results in any injunctive or other equitable remedies against the defendant’s), the court may apply a “lodestar” computation with a multiplier method to award attorneys’ fees.

To punish defendants but not allow attorneys to benefit, the financial value of unused coupons could be donated to charity or to government as agreed to by the parties. 28 U.S.C. 1712(e), as amended by Class Action Fairness Act of 2005, 109 Cong., 1st Sess., S. 5, Sec.4(a).   This would benefit society generally but not benefit the plaintiffs’ attorneys, whose fees could not be based on any such donation.

Net Losses to Lead Plaintiffs.
In some cases, a named plaintiff or other individual plaintiff must pay “sums” to class action attorneys that would make a net loss to that plaintiff. The new law permits such arrangements only if judicially approved in a determination that the non-monetary benefits bestowed substantially outweigh the monetary loss. 28 U.S.C. 1713, as amended by Class Action Fairness Act of 2005, 109 Cong., 1st Sess., S. 5, Sec.4(a).

B.    When Must the Mass Action be Transferred to Federal Courts.

1. The General Rile Requiring Transfer of Mass Actions to Federal Courts.
The new law will transfer to federal courts all class actions that are “mass actions,” subject to certain exceptions, upon the demand by any defendant.   Litigation in state courts must be transferred to federal courts where the amount in controversy, as an aggregate of all claims of all individual plaintiffs, does not exceed the “sum or value” of $5 million, exclusive of interest and costs. 28 U.S.C. 1332(d)(6), as amended by Class Action Fairness Act of 2005, 109 Cong., 1st Sess., S. 5, Sec.4(a); 28 U.S.C. 1453(b), as amended by Class Action Fairness Act of 2005, 109 Cong., 1st Sess., S. 5, Sec. 5.

A “mass action” means “any civil action (except a class action filed in or removed to a federal district court under Rule 23 of the F.R.Civ.P. “in which monetary relief claims of 100 or more persons are proposed to be tried jointly on the ground that the plaintiffs’ claims involve common questions of law or fact, except that jurisdiction shall exist only over those plaintiffs whose claims in a mass action satisfy the jurisdictional amount requirements” of $75,000 per claim.   28 U.S.C. 1332(d)(11)(B)(i), as amended by Class Action Fairness Act of 2005, 109 Cong., 1st Sess., S. 5, Sec.4(a).

2.    The Exceptions to Mandatory Transfer.

(a)    Judicial Evaluation based on Balancing of Factors.
The Act authorizes the district courts to decline to exercise jurisdiction over a class action where between one third and two-thirds of the members of all proposed plaintiff classes in the aggregate and the primary defendants are citizens of the state where the action was originally filed. In such cases, the court may take into consideration various enumerated public policy and procedural considerations listed in the Act. 28 U.S.C. 1332(d)(3), as amended by Class Action Fairness Act of 2005, 109 Cong., 1st Sess., S. 5, Sec.4(a).

(b) Prohibition on Mandatory Transfers in Cases of Local-Impact Class Actions.
Congress chose not to require the mandatory transfer to federal district court of class actions that have a distinctly local character. Local character applies where several conditions all apply. In each case, the plaintiffs and at least one major defendant must be local.   In each formulation, more than “two-thirds of the members of all proposed plaintiff classes in the aggregate are citizens of the State in which the action was originally filed.”   Also, in each “localization” situation, there must be at least 100 members of the proposed plaintiff class.    28 U.S.C. 1332(d)(5)(B), as amended by Class Action Fairness Act of 2005, 109 Cong., 1st Sess., S. 5, Sec.4(a).

(i) One Defendant’s Conduct.
Under one formulation of this principle,” at least one defendant is a defendant from whom significant relief is sought by members of the plaintiff class,” and “whose alleged conduct forms a significant basis for the claims asserted by the proposed plaintiff class is a citizen of the State in which the action was originally filed.”   Such cases must be transferred to federal district court where the “principal injuries resulting from the alleged conduct or any related conduct of each defendant were incurred in the State in which the action was originally filed.” 28 U.S.C. 1332(d)(4)(A)(i), as amended by Class Action Fairness Act of 2005, 109 Cong., 1st Sess., S. 5, Sec.4(a).

As to such situations, Congress chose not to require the mandatory transfer to federal district court of class actions that are not bunched in time with other similar class actions.    Thus, in such situations, there is no mandatory transfer where, ” during the 3-year period preceding the filing of that class action , no other class action has been filed asserting the same or similar factual allegations against any of the defendants on behalf of the same or other persons.” Id.

(ii)    The Primary Defendants.
Under another formulation of this principle, the “primary defendants” are citizens of the local state.   The statute does not define the term “primary,” so legislative history must be consulted on the legislative intent. This formulation of “local” damages does not consider whether the principal injuries resulting from the alleged conduct or any related conduct of each defendant were incurred in the State in which the action was originally filed.

(c)    Excluded Transactions.
Congress denied federal courts any jurisdiction for mass actions involving two types of claims for which local courts are well suited to class actions or that relate essentially to local law, and are already covered by Rule 23.1 (Derivative Actions by Shareholders) and Rule 23.2 (Actions Related to Unincorporated Associations):

Securities Law Violations: a “covered security” (under the federal securities law, Section 16(f)(3) of the Securities Act of 1933 and Section 28(f)(5)(E) of the Securities Exchange Act of 1934) or rights, duties and obligations (inclining fiduciary duties) relating to any “security” (under federal securities laws, Section 2(a) of the Securities Act of 1933); and

Shareholder Claims: shareholder class actions that relate to the “internal affairs or governance” of a corporate entity are not covered if the class action is filed in the state court of the state of incorporation.

IV. Impact of the Class Action Fairness Act of 2005.

This new law requires the transfer to federal courts of all class action litigations that involve interstate or international commerce (which Congress has the constitutional power to regulate) and the claims are at least $5 million in the aggregate, exclusive of interest and costs.

A.    Benefits to Businesses that Might be Defendants.
For businesses (including both outsourcers and their enterprise customers), the benefits derive from:

Less Pandering:
a federal judiciary that is appointed for life, and therefore under no personal compulsion to seek election or re-election by pandering to consumer groups;

Tighter Rules of Civil Procedure:
a body of federal rules of civil procedure that impose the risk of severe sanctions if pleadings and practices are contemptuous or otherwise non-compliant with the rules, including personal sanctions and civil fines on the litigant, the litigant’s executives (if it is an entity) and the attorneys litigating engaging in sanctionable procedural misdeeds.

Allocation of Discovery Costs to Plaintiffs:
an emerging body of cost-allocating and risk-allocating procedural rules that may impose on the plaintiffs significant costs of imposing demands that the defendant (usually a business) deliver myriads of documents and records during the pre-trial discovery process.

Elimination of Geographical Favoritism:
the new prohibition on class action settlements that provide for favoritism in disproportionate payments to some class members simply by reason of closer geographical proximity to the court. 28 U.S.C. 1714, as amended by Class Action Fairness Act of 2005, 109 Cong., 1st Sess., S. 5, Sec.3.

Comments by Regulators of FDIC-Insured Depository Institutions:
state and federal regulators of depository institutions whose deposits are insured or regulated by the Federal Deposit Insurance Corporation will be notified of any proposed settlement and will have 90 days to comment on it. 28 U.S.C. 1715, as amended by Class Action Fairness Act of 2005, 109 Cong., 1st Sess., S. 5, Sec. 3.

Judicial Conference Study Recommendations on Best Practices:
the requirement of a new judicial study to contain “best practice” recommendations for (i) the fees and expenses awarded to counsel in connection with a class action settlement appropriately reflect the extent to which counsel succeeded in obtaining full redress for the injuries alleged and the time, expense, and risk that counsel devoted to the litigation; and (ii) the class members on whose behalf the settlement is proposed are the primary beneficiaries of the settlement. Class Action Fairness Act of 2005, 109 Cong., 1st Sess., S. 5, Sec. 6. This will further focus on alignment of fee incentives for plaintiffs’ counsel with the rewards obtained for the class members.

Neutralization of the Coercive Effect of Class Actions:
a regime that removes financial incentives for plaintiffs’ class attorneys to inflate claims, delay settlement or otherwise impose punishing burdens on defendants solely because the aggregation of claims to huge financial levels creates its own substantive rule that settlement is cheaper at all costs than the risk of astronomical liability. The new Act overcomes part of the substantive effect of class actions that are independent of the underlying claims of the plaintiffs.

B.    Greater Segmentation of Smaller Classes in Narrower Geographic Scope.
This law might encourage the plaintiff’s attorneys to file separate class actions in multiple states, with narrowly defined classes limited to individuals or other victims within a limited geographical territory.

C.    Cost Reduction for Businesses with Possible Sharing with Consumers.
The new law specifically addresses the costs of doing business, with an expressed intention of reducing such costs.   In practice, the reduction in the number of class actions may be expected to reduce insurance premiums for general liability, thereby enabling businesses (whether service providers or enterprise customers) to increase their coverages, retain a higher self-insured deductible or cut insurance premiums.  Such savings could generate chain-reaction benefits of additional capital available for capital investment, research and development, dividends to shareholders and/or reduced prices to consumers.

D.    Promotion of Innovation.
The law seeks to “benefit society by encouraging innovation and lowering consumer prices.”   Act, Sec. 2(b).   This theme will likely be the mantra of the second administration of President George W. Bush (January 20, 2005-Jan. 19, 2009). The Act does not specifically encourage innovation, but if insurance premiums are reduced, the risk of unacceptably high damages is more manageable because federal judges will be deciding class action procedures, then entrepreneurs and businesses could justify taking slightly greater risks.

V. Impact on Outsourcing.

The Act reduces the burden of class action defense by correcting some historic abuses. The Act impacts outsourcing by making reducing litigation risks for both enterprise customers and their service providers. Such risks exist in every BPO relationship, since third parties — who could be consumers, patients, loan applicants, customers, technology users, family members — could conceivably be injured by the acts or omissions of the service provider, the enterprise customer or both.

For suggestions on how to minimize your risks of a class action, with particular reference to diverse services such as call centers and multifarious BPO performed in foreign back offices, engineering, design, manufacturing, distribution and logistics, please consult our White Paper, “Are You Ready for Class Action Litigation in Outsourcing?”.

Filed under: White Paper
Tagged: Business Process Outsourcing, Call centers, class actions, Compensatory Damages, contingency, coupon, Disgorgement, Equitable Remedies, Human resources outsourcing, Internal Business Process Management, service provider

Summary.

Captive Internal Bank.

Advantages in Shared Services.

Risk Management in Shared Services.

Shared Services on the Continuum of Insourcing and Outsourcing.

What is a Patent?

Validity.

Enforcement of Patent Rights.

Extraterritoriality in Patent Law.

Relevance to Outsourcing.

BPO Patent Strategy in Practice: Who Actually Patents What?

Factors Affecting an Outsourcer’s Patent Strategy.

Limitations of a Patent Strategy in Outsourcing.

Best Practices.

Ordinary Infringement of a Patent.

Willful Infringement of a Patent.

Impact on Outsourcing.

When is the Service Provider Liable for its Customer’s Compliance with Laws, including Payment of Fines and Penalties for Non-Compliance?

Context: Compliance with Election Laws.

Statutory Liability.

The Service Agreement.

The Course of Dealing.

Equitable Estoppel.

Lessons Learned.

GECIS as Captive SSO.

The Business Transformation to BPO Services Provider.

Impact on GE.

Conclusion

Normal Rules of Discovery or Disclosure.

Work Product Exception.

Impact on Outsourcing.

I. The Public Policy and Public Impact of Class Actions

II. Consumer Litigation Risks in Outsourcing.

III. Changes Introduced by the Class Action Fairness Act of 2005

IV. Impact of the Class Action Fairness Act of 2005.

V. Impact on Outsourcing.

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