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Insights by Bierce & Kenerson, P.C. Editor. www.biercekenerson.com.
Vol. 12, No. 2, February 2012
(Part I was presented October 26, 2011)
Date: Thursday, February 9, 2012
Time: 11:00 AM EST – 12:20 PM EST
Join our experts in the “business of the law” for Part Two of our webinar series concerning The Future of Law. Listen in as we discuss the disruptive and creative impacts of business process outsourcing (BPO), legal process management (LPM) and legal process outsourcing (LPO) on the traditional delivery and management of legal services and legal support services.
William B. Bierce, President of Bierce & Kenerson, P. C. (full disclosure, also the publisher of this website)
David T. Kinnear, COO of Cerebra LPO; Partner and Co-Founder of GSSOCX
Jason Mark Anderman, President and Co-Founder of WhichDraft
1. Robo-Calls, Call Centers and Collection Agencies: Supreme Court Approves Federal Court Lawsuits under Telephone Consumer Protection Act of 1991.
1. Robo-Calls, Call Centers and Collection Agencies: Supreme Court Approves Federal Court Lawsuits under Telephone Consumer Protection Act of 1991. On January 18, 2012, the U.S. Supreme Court ruled on a case of an outbound telephone call center that contacted one individual using robo-dialers and voice recordings. The decision reminds companies using call centers for outbound contacts that a Do-Not-Call list should be respected or federal litigation could result, and that federal procedural rules could result in high litigation costs and settlement value. For the complete article, click here.
Call Center, n. A recording studio for “training and quality control purposes.”
February 28, 2012, Legal Process Outsourcing, HSBC Center, New York, New York. This roundtable will provide an in-depth overview of how to capitalize on LPO strategies and techniques. We have developed this program specifically to help corporate counsel carefully examine the benefits and challenges of outsourcing certain components of their internal clients’ legal work. Specific takeaways from this roundtable will be: developing workable solutions to cut costs, improving quality and timeliness of deliverables and best practices to manage ethical concerns. As an attendee, you also earn up to 4 CLE Credits. For a copy of the program agenda, click here.
March 7-9, 2012, 16th Annual North American Shared Services & Outsourcing Week, Orlando, Florida. In 2011 we brought you the ‘revolution’ of shared services – 2012 is all about delivering The Next Level of Value by Accelerating Global Growth & Delivering Business Insights to the Board. Over 100 thought leaders and companies including AOL, Volvo, Deloitte, DHL, Monster.com, Salsesforce.com, Hyatt, Molson Coors, Philips, BAE Systems, Intel, Perason, BP, P&G, UBS, Citigroup, WPP Group, Yahoo!, DHL and HP will present their inspiring talks and roundtables to drive global growth and root shared services firmly into the boardroom agenda. If you want to challenge your captive and outsourced operations to influence business outcomes, or endorse the IMPACT shared services can have on the success and progress of a business as a whole, then this event is a must attend for you. To register, visit their website.
March 15, 2012, Global Services Conference 2012, New York, New York. Global Services Conference 2012 will focus on how to build and sustain excellence in services.
This strategy is the key to enterprise services, enterprise transformation, and aligning that transformation to drive competitive advantage to companies. Companies are looking to access data and knowledge in a better way and to leverage the maturity of the services organization that has been in place to drive better business value. For more information, visit their website.
April 23 – 25, 2012, IBC presents The Legal, Regulatory & Compliance Outsourcing Conference, Grange Tower Bridge Hotel, London, United Kingdom. Hear from 20+ international experts on The Smarter Legal Model; trends in regulation, accreditation and certification, the business case for outsourcing; service delivery models; vendor selection; ethics and compliance; case studies; LSO contracts; data protection and security; technology enablers; managing the relationship; business optimisation and the future of outsourcing in law firms. 20% discount for Outsourcing-Law, use VIP code FKW82266OTLEM
April 23 – 25, 2012, 6th Corporate Counsel Exchange, Radisson Edwardian Heathrow Hotel, London, United Kingdom. The award winning Corporate Counsel Exchange is back in London! Our 6th Corporate Counsel Exchange, in London, United Kingdom, will be co – located with the 3rd Corporate Compliance Exchange. View co – located agenda. In April over 150 General Counsel and Chief Compliance Officers will gather to share strategic insights, discuss the latest developments in the legal and compliance sphere and meet with a range of leading law firms and solution providers offering innovative tools and services to help you increase the efficiencies of your department. For more information visit www.corporatecounselexchange.co.uk, call: +442079689745 or alternatively email: firstname.lastname@example.org.
April 23 – 25, 2012, Corporate Compliance Exchange,Radisson Edwardian Heathrow Hotel, London, United Kingdom. Corporate Compliance Exchange will once again unite Chief Compliance Officers in senior level networking forum in London, United Kingdom. The 3rd Corporate Compliance Exchange is co – located with our 6th Corporate Counsel Exchange. Through a series of streamed sessions, joint networking panel discussions and roundtables, the award winning Exchange format offers Chief Compliance Officers and General Counsel a unique opportunity to keep current on the most pressing compliance issues and find out what strategies your peers have put in place to safeguard their organisations against compliance risks.For more information visit www.complianceexchange.co.uk, call: +442079689745 or alternatively email: email@example.com.
May 14, 2012, 4th eDiscovery Oil & Gas Conference, Houston, Texas. Mark your calendar for the 4th eDiscovery Oil & Gas Conference. Building off of the success of our 2011 event, eDiscovery Oil & Gas will return to Houston on May 14-16 for you to improve your organization’s eDiscovery capabilities and comply with the requirements of the FRCP. Learn from industry leading experts about effective e-Discovery strategies that they employ. This conference will leverage best practices to show how to conduct thorough, cost-effective and defensible e-Discovery. For a copy of the program agenda click here.
May 16 – 18, 2012, SSON presents the 12th Annual Shared Services Finance & Accounting, Dallas, Texas. This event covers the entire spectrum of Finance & Accounting challenges in Shared Services from Process Design, Governance, Benchmarks, Metrics, and Audits through to Training and Change Management. Each speaker will be diving straight into the specifics of their case studies offering timelines, metrics, results and lessons learned for you to take back to your own office. For more information, visit their website.
May 21 – 23, 2012, SSON’s 11th HR Shared Services & Outsourcing Summit, Chicago, Illinois. Creating the foundation for strategic human capital management through HR shared services, this event will will cover HR Shared Services challenges in Process Design, IT integration, Standardization, Benchmarks, Metrics, and Harmonization through to Training and Change Management. Topics include Globalization, Inhouse-vs. Outsourcing, Growth Opportunities and more. To register, visit their website.
June 24 – 26, 2012, SSON 6th Annual Shared Services Exchange, Pinehurst, North Carolina. For the 6th year in a row, the Shared Services Exchange will be the elite event for shared services executives who are looking to develop new strategy, solve challenges and source partners that will allow them to create efficiency and drive more value out of their shared services centers. Efficiency is still on the minds of these executives as they search for solutions to create consistency across multiple business functions and develop hybrid strategies that utilize outsourcing and captive centers—all while sustaining centers as a core business strategy. This event will continue IQPC Exchange’s ongoing tradition of offering cutting-edge, strategic networking and learning opportunities for senior level shared services executives. For more information, click here.
FEEDBACK: This newsletter addresses legal issues in sourcing IT, HR, finance and accounting, procurement, logistics, manufacturing, customer relationship management including outsourcing, shared services, BOT and strategic acquisitions for sourcing. Send us your suggestions for article topics, or report a broken link at firstname.lastname@example.org. The information provided herein does not necessarily constitute the opinion of Bierce & Kenerson, P.C. or any author or its clients. This newsletter is not legal advice and does not create an attorney-client relationship. Reproductions must include our copyright notice. For reprint permission, please contact: email@example.com. Edited by Bierce & Kenerson, P.C. Copyright (c) 2012, Outsourcing Law Global, LLC. All rights reserved. Editor-in-Chief: William Bierce of Bierce & Kenerson, P.C., located at 420 Lexington Avenue, Suite 2920, New York, NY 10170, 212-840-0080
Class Action Litigation in Outsourcing: Managing Consumer Litigation Risk after Class Action Fairness Act of 2005
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.
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?”.
Outsourcing Service Provider as Distributor for Customer’s Core Services
In early February 2004, IBM and Sprint Corp. prepared to announce a major outsourcing agreement for IBM to assume the responsibility for customer services for Sprint wireless PCS telecom services. The deal affects 5,000 to 6,000 jobs at Sprint. According to news reports, the value of the deal is estimated at $2 billion to $3 billion, which equals the total amount that Sprint forecasts in its own savings.
The arrangement appears designed to restructure existing call center operations, some of which had already been outsourced, to integrate call centers with technology-enabled data management on customer demand, customer satisfaction and market conditions in real time. IBM will be seeking to dramatically improve Sprint’s customer satisfaction through better customer segmentation, more efficient call routing, reduced average call handle times and a higher rate of first call resolution. IBM will provide customer self-service tools via the Internet and web-based services. IBM will also provide ongoing consulting services to Sprint to continually improve customer satisfaction. IBM will take over management of Sprint’s existing vendor-operated call centers (moving from one outsourcer to another) as well as a Sprint-owned call center in Nashville, Tennessee. IBM claims that in such outsourcing arrangements, “IBM is transforming, integrating and managing key business processes for [its customers] to become more flexible in adapting to market and customer variables in real-time.”
Countertrade: “Counter-Distribution Services.”
The transaction makes IBM one of Sprint’s largest distributors. In the joint press release, the two companies said the relationship will include “a long-term business alliance that designates Sprint as a key IBM vendor for wireless and wireline services and enables IBM to incorporate Sprint’s national PCS wireless services and its IT and data products and services into customized on-demand solutions for IBM’s customers.” Thus, IBM is expected to market Sprint’s core services — wireless and land-line voice and data services — to IBM’s other customers.
By appointing the outsourcing services provider as a distributor, this multinational outsourcing customer barters its purchasing power for marketing and sales, particularly with a global sales organization with easy access to the technical procurement executives in multinational enterprises. And as service provider IBM incurs risks of the failure of its customer Sprint to deliver promised services to IBM’s other customers. That results in a common effort that could be called a joint venture, but the parties did not call it more than a “business alliance.”
Countertrade: “Counter-purchase Agreements.”
The counter-distribution agreement has substantially lower risk of failure for the services provider than a simple counter-purchase by the service provider of its customer’s goods and services. When WorldCom went bankrupt in 2002, EDS took a substantial charge to its revenues, since the balance of trade was negative. EDS owed money to WorldCom for WorldCom’s services, but WorldCom was able to reduce its payments to EDS by reason of the bankruptcy protection for WorldCom’s operations. (Later, WorldCom changed its name to MCI). But if Sprint fails to deliver its services to IBM’s customers, IBM’s reputation will be tarnished, which could cause greater harm to IBM.
Outsourcing as a Tool for Business Process Transformation.
This deal contemplates the transitioning of Sprint from delivering classic telephony services in a “stand-alone wireless and wireline network.” Reading between the lines, IBM will probably help Sprint convert to Internet telephony, or “voice over Internet protocol” (“VOIP”). Telephony will integrate into the desktop and computer network environments.
The press release suggested initially that the deal looked like simply a transfer of Sprint’s existing call center operations from its existing service providers (and some insourced call centers) to a new service provider. IBM’s commitment to improved service level agreements was heralded as a means of “dramatically” improving customer satisfaction.
But the joint press release suggested, without saying clearly, that the deal has much more strategic impact, by asking IBM to convert Sprint’s wireless and wireline telephone service to a network capable of Internet telephony (called “voice over Internet Protocol,” or “VOIP”) for IBM’s other corporate customers. To cushion the shock of cannibalizing its own classic telephony services, Sprint probably enlisted IBM to bundle Sprint’s services into IBM’s other IT-enabled outsourcing services. IBM became a reseller of Sprint telecom services. More significantly, Sprint’s business was to be transformed into an Internet-based service provider to IBM’s other customers.
The deal has the potential, therefore, to transform Sprint’s customer base, its method of service delivery, its revenue profile, and its marketing alliances in addition to hiring a service provider to improve service levels in call centers.
The counter-distribution model offers substantial flexibility for both the service provider and its customer.
- Service Provider’s Perspective.
For the service provider, credit risks (from a prospective bankruptcy of the customer) may be managed by financial management of the delivery of the customer’s goods or services. Similarly, the service provider might not need to make any financial commitments to secure and retain the right to resell the customer’s goods or services.
- Enterprise Customer’s Perspective.
For the enterprise customer, access to a global sales organization may serve as a scorecard criterion for selection of prospective service providers. The customer might rightly conclude that a bigger, more global, more diversified service provider would assure a wider channel for the distribution of the customer’s own core business services. For telecom companies, using an IT services provider to distribute telecom services is a logical extension of the service proposition in response to the convergence of the Internet, telephony and digital communications. Reportedly, IBM will be selling Sprint services to large corporations so that employees of Sprint customers may transfer data from their networked desktop or laptop computers to wireless devices such cell phones, Blackberry® and Palm® handheld mobile devices.
- Mutual Dependency, Mutual Risk.
For each party in a countertrade transaction, however, the lessons of the past invite caution. Once two parties are interdependent as customers or as marketers, the relationship requires a more complex management interaction. The risks for each are increased. If the customer wanted to fire the service provider for a breach of service level agreements, for example, the service provider might have the right to cancel the distribution rights (if unprofitable) or might seek to retain the distribution rights free of any “cross-default” clause. The stakes are higher for potential “win-win” or potential “lose-lose” outcomes.
- Long-Term Impact.
If a Sprint-IBM countertrade model for distribution of the customer’s services were to become the model for a long-term outsourcing contract, securities law and antitrust laws might come into play.
- Securities Regulation.
As to securities laws, the impact might be so important that investors might consider it “material” to decisions whether to buy, sell or hold the enterprise customer’s corporate securities. Initially, such a distribution model does not appear likely to generate any “material” revenue streams for the enterprise customer. Over time, the impact might grow particularly if the outsourcing has the goal or potential of restructuring the enterprise customer’s business model.
At some stage, the disclosure required under applicable securities laws might become problematic, as information publicly disclosed could be used by competitors. As a result, both enterprise customer and the services provider have some incentive not to enter into transactions that are not so important and material as to require disclosure under applicable securities laws.
In reviewing the press release, one may question whether investors are adequately informed of the true nature of the risks of this transformation of the customer’s business, not from the standpoint of the risk of IBM’s nonperformance, but from the standpoint of Sprint’s ability to successfully transform its own service model by the counter-trade structure with IBM promoting VOIP to IBM’s other customers.
- Competition Policy and Antitrust Laws.
As to antitrust laws, reciprocal dealings by organizations in the same competitive arena could be unlawful as anti-competitive under U.S. federal antitrust laws and European Union competition policy. Before entering into a countertrade transaction, the parties should consider the likely impact of the distribution or counterpurchase operations as to exclusivity, market size, concentration of suppliers and customers in the relevant market, and other factors that define structural anticompetitive activities. As global customers hire global service providers to provide distribution services, the impact in any single country’s marketplace may be small compared to a similar business relationship between parties located only in one country or regional market. Consequently, the antitrust risks are relatively small at the global level.
- If IBM were to repeat this paradigm in other industries, though, IBM might gain market power in an important array of global non-IT services. Further anti-trust reviews might be appropriate in such a scenario.
- Securities Regulation.