Criminalizing Offshore Service Contracts:
Xenophobia in Outsourcing, Part II

© 2004 Bierce & Kenerson, P.C.

    State legislators in some 14 states have been responding to labor demands to limit or prohibit the exportation of jobs to offshore outsourcers.   Some draft legislation would criminalize the use of offshore service providers for state-funded operations.   Is this legal?  Can this survive international legal responses?

    Degrees of Hostility.  Opposition towards offshore outsourcing of services funded by state budgets runs the gamut.  For some, it would be sufficient to prohibit state agencies from using service providers who hire non-U.S. personnel to perform services outside the United States.  For others, criminal laws offer a more stringent and punitive control mechanism.  Other approaches exist but are not analyzed here.

    Criminalization.  On January 20, 2004, California Assemblywoman Liu introduced AB 1829, an amendment to the California state Public Contract Law.   The proposed law, entitled "Offshoring State Service Contracts," would require the state's contractors and their subcontractors to certify, under penalty of perjury, that the contract "will be performed solely with workers within the United States."   

    An exception would be granted where, as so certified under penalties of perjury, "the services to be performed under the contract are so specialized that there are not workers within the United States that are trained to perform the services."   This illusory exception poses no threat to the general prohibition that would be created under the proposed law.   The contractor would need to prove a negative rather than affirm a positive.   The proposed law would require the contractor to scour the entire United States for any persons who might have the training, even if they were not available for employment. 

    Legality of Criminalizing the Contractor.  In 2003, we reviewed the compliance of such legislation with the obligations of the U.S. Government (and its subdivisions) under the World Trade Organization multilateral trade agreements.   We noted that this type of legislation is generally WTO-compliant but subject to interpretation in respect of certain state agency activities.   See www.outsourcing-law.com/xenophobia_in_outsourcing.asp
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 Constitutionality under U.S. Constitution.  This type of legislation is subject to being superseded, under the U.S. Constitution's Supremacy Clause, by federal legislation that conflicts with its provisions.  But even in the absence of a federal law, certain state laws are so intrusive into the freedom of interstate and international commerce (over which only Congress has jurisdiction to legislate rules) that the law might be invalid ab initio. A court would need to decide this issue on a case-by-case basis.

    Legality of Foreign "Blocking" and "Clawback" Retaliatory Legislation.   In "blocking" legislation, foreign legislators retaliate against domestic legislation by asserting concurrent jurisdiction, within the foreign territories over conduct that is regulated by the domestic laws.  

    For example, Canada enacted the Foreign Extraterritorial Measures Act (FEMA), effective January 1, 1997, to defeat the impact in Canada of the extraterritorial reach of the U.S. Cuban Liberty and Democratic Solidarity (LIBERTAD) Act of 1996 (the Helms-Burton Act). In particular, Canada wanted to provide some protection to Canadians from lawsuits filed under U.S. law in U.S. courts in respect of property expropriated in Cuba.  

    The Canadian FEMA law had two basic blocking provisions and one clawback provision:

•    Blocking Compliance.  Under the Canadian law, the Canadian Attorney General, with the concurrence of the Minister of Foreign Affairs, is authorized to make orders to block compliance in Canada with an extraterritorial measure of a foreign state where such extraterritorial measure adversely affects significant Canadian trading interests or infringes Canadian sovereignty.   
  

•     Blocking Production of Documents.  Also, the Canadian law allows for the Attorney General to block the production of documents in support of foreign litigation under certain circumstances.  
  

•     Clawback.  Finally, the 1997 Canadian law enlarged on existing "clawback" legislation, then previously limited to antitrust and unfair competition matters, to grant a special "clawback" cause of action.  If a foreign  judgment is blocked by an Attorney General's order under FEMA, the Canadian defendant in the foreign action is entitled to a special legal right to sue in a Canadian court to recover an equivalent amount in damages against the person who took action in the foreign tribunal.   See Canada: Foreign Extraterritorial Measures Act Incorporating the Amendments Countering the U.S. Helms-Burton Act.  

   As an example of blocking and clawback legislation, in FEMA, one sovereign - Canada - opposed certain American extraterritorial measures that contradicted or undermined the laws or clearly enunciated policies of that sovereign exercising concurrent jurisdiction, on a territorial basis, over the same conduct.   

     Probability of Foreign Retaliation.  Possible retaliation through blocking or clawback legislation might not be available against the state law statutes that might prohibit or criminalize offshore outsourcing when funded by state funds.  However, one could conceive of the enactment of such legislation purely to make a political statement of policy, to assert the principle of reciprocity, or to express the political view that such state legislation contradicts and undermines the clearly enunciated policies of foreign countries (such as India or the Philippines) to export services by all lawful means.

Related Topics:

Xenophobia
International Outsourcing