Source: http://www.outsourcing-law.com/tag/business-process-outsourcing/
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Document Index: 479266875

Matched Legal Cases: ['Art. 12', 'Art. 12', 'Art. 12', 'Art. 12', 'Art. 12', 'Art. 12', 'Art. 12', 'Art. 12', 'Art. 12', 'Art. 12', 'Art. 12', 'Art. 12', 'Art. 15', 'Art. 15', 'Art. 15', 'Art. 15', 'Art. 15', 'Art. 15', 'Art. 15', 'Art. 15', 'Art. 15', 'Art. 15', 'Art. 15', 'Art. 15', 'Art. 15', 'Art. 15', 'Art. 15', '§ 284', '§ 285', '§3']

Business Process Outsourcing | Outsourcing Law
Korea As a Service Delivery Center After US-Korea Free Trade Agreement (KORUS FTA)
December 5, 2011 by Bierce & Kenerson, P.C.
President Barack Obama signed the Korean-U.S. Foreign Trade Agreement (KORUS FTA) on October 21, 2011 and it was ratified by Korea’s National Assembly on November 22, 2011. It is now in force.
What’s new, beyond the multilateral free-trade framework under the WTO, NAFTA and the EU, compared to other U.S. bilateral free-trade agreements? The KORUS FTA offers a few embellishments on the concept of admitting individuals for specific FTA-qualified visa categories (as under NAFTA). The KORUS FTA adds specific protections for conducting services businesses generally, including professional services licensure (lawyers, doctors, engineers, like NAFTA’s list). The agreement covers the “electronic supply of services,” “digital products,” electronic authentication, e-signatures and e-documents as instruments of bilateral e-commerce. Most significantly, the KORUS FTA hints at a new paradigm for bilateral FTA’s since it includes the principle that privacy laws will not be used for protectionism.
The United States and the Republic of Korea signed the United States-Korea Free Trade Agreement (KORUS FTA) on June 30, 2007. On December 3, 2010, the United States and Korea concluded new agreements, reflected in letters signed on February 10, 2011, that provide new market access and level the playing field for U.S. auto manufacturers and workers. Once it enters into force, the Agreement will be the United States’ most commercially significant free trade agreement in more than 16 years. SOURCE: US Trade Representative.
New Model of FTA: Privacy Issues Are Within Scope of Bilateral Agreements. The KORUS FTA adopts a novel attitude towards the scope of bilateral FTA’s. It recognizes that privacy laws can be an impediment to trade, and it opens markets in offshore data processing on the basis that a privacy law of a sovereign can, by agreement, be modified to enable cross-border data flows. While this conclusion is not expressly stated in such bald terms, the documents advert to it.
I. Cross-Border Services. Scope of “Cross-Border Trade in Services.” The KORUS FTA applies to “measures” (laws and regulations) adopted or maintained by either party affecting cross-border trade in services by service suppliers of the other party.
“Measures.” Any “measure” that “affects” the “production, distribution, marketing, sale” or “delivery” of a service is covered. The parties clearly contemplated remote transaction processing (BPO) by including “measures” affecting “the access to and use of distribution, transport or telecommunications networks and services in connection with the supply of a service.” KORUS, Art. 12.1(1).
“Cross-Border Supply of Services.” The KORUS FTA covers the supply of services based on the location of the provisioning (from the territory of one of the parties), the location of receipt (in the territory of one of the parties), or the nationality of a service provider while operating within the territory of a party. Art. 12(13).
Outsourcing of Financial Services to Non-Bank Service Providers. Financial services are not covered by the KORUS FTA. Exceptionally, the FTA does cover “financial service” supplied by a “covered investment” (FDI) that is not an investment in a “financial institution.” Art. 12(4). In short, financial transaction processing is covered if the processing is done by a service provider not engaged in the business of banking or insurance. Hence, ITO and BPO services to financial institutions are within the scope, so that each party will provide market access to the other party’s service providers.
Core Freedoms. Subject to a list of non-conforming “measures” identified on “Annex I” and specific sectors and activities in “Annex II,” the parties granted each other national treatment, MFN treatment, open market access and the right to perform all services remotely. Art. 12.
National Treatment. Under the KORUS FTA, “each party shall accord to services suppliers of the other Party treatment no less favorable than it accords, in like circumstances, to its own service suppliers.” Art. 12.2(2).
Most-Favored-Nation Treatment. “Each Party shall accord to service suppliers of the other party treatment no less favorable than it accords, in like circumstances, to service suppliers of a non-Party.” Art. 12.3.
Market Access. “Neither Party may adopt or maintain, either on the basis of a regional subdivision or on the basis of its entire territory, measures that impose limitations on” the number of service suppliers, the total value of service transactions or assets or the requirements of an economic needs test, the total number of service operations, or the number of natural persons performing such services. Art. 12.4. Of course, this does not grant any business visa rights, which are specifically excluded from the scope of the FTA. Art. 12(4).
No Local Presence. The KORUS FTA prohibits each party from requiring any service supplier of the other party to maintain a representative office or any form of enterprise, or to be resident, as a condition of furnishing “the cross-border supply of service.” Art. 12(5).
Conditions to Grant of Authorizations to Perform a Service. The KORUS FTA does not prevent either country from requiring foreign service providers to obtain licenses to peform the services, or to escape local regulation. Any such domestic regulation must be based on “objective and transparent criteria, such as competence and the ability to supply the service.” The licensing procedures themselves cannot be, in themselves, a restriction on the supply of the service. Art. 12(7).
Transparency. In the United States, the concept of “transparency” in government regulation flows from the Constitutional notion of “due process” and from the framework for administrative rulemaking under the federal Administrative Procedures Act. The KORUS FTA adopts similar assurances for public openness, or at least accountability in the absence of public openness, relating to the regulation of services providers. Art. 12(8).
No Third-Party Controlled Service Providers. As with most U.S. income tax treaties, the KORUS FTA treaty denies the benefits of the bilateral agreement to service suppliers of a party that are “owned or controlled by persons of a non-Party.” However, this exclusion only applies where the government denying such benefits to that service provider (i) “does not maintain normal economic relations with the non-Party” (such as North Korea) or (ii) has economic sanctions against that non-Party. Art. 12(11).
II. Regulation of Privacy in Cross-Border Information Flows.
A “Wish List.” The e-commerce provisions of the KORUS FTA do not establish guarantees of free cross-border flows of information. However, the agreement does recognize “the importance of the free flow of information in facilitating trade” and “the importance of protecting personal information.” So the parties agreed to “endeavor to refrain from imposing or maintaining unnecessary barriers to electronic information flows across borders.” Art. 15.8. This is scant legal assurance but offers hope that purely protectionist prohibitions on certain data flows will not be enacted by either party.
Korean Privacy Laws. South Korea has enacted several laws on the collection, use and disclosure of personal information in the private sector. These include:
the Medical Service Act(1973);
the Telecommunications Business Act(1991);
the Protection of Communications Secrets Act (1993);
the Use and Protection of Credit Information Act (1995);
the Real Name Financial Trade and Secrecy Act (initially 1997);
the Framework Act on Electronic Commerce(1999); and
the Digital Signatures Act (1999).
Although South Korea has privacy protection laws which in the past have hindered exportation of personal information, the KORUS FTA will open cross-border trade in financial data processing and related software.
III. E-Commerce, Digital Products and E-Signatures.
Chapter 15 of the KORUS FTA adds a new framework for avoiding barriers to trade in e-commerce.
Access and Use of the Internet for E-Commerce. The KORUS FTA does not set up a legal framework for protecting consumer choice in accessing and using services and digital products, or to run applications and services of their choice. The parties agree to “acknowledge” that consumers in their respective territories “should be able” to have such choices of services and digital products (unless prohibited by law) and choices of applications and services (subject to “the needs of law enforcement”). Art. 15.7.
ITO, BPO and other Remotely Performed or Remotel Provided Services. The KORUS FTA clarifies that “the supply of a service delivered or performed electronically” is subject to the other market-opening requirements governing investment, cross-border trade in services and financial services. However, any exceptions to open market access that apply to such other requirements will also apply to e-commerce and such electronically-delivered services. Art. 15.2.
Digital Products (not Services).
Definition and Context. Digital products are treated separately from electronically performed or electronically delivered services. ‘Digital products” are “computer programs, text, video, images, sound recordins, and other products that are digitally encoded and produced for commercial sale or distribution, regardless of whether they are fixed on a ‘carrier medium’ or transmitted electronically. Art. 15.9.
Market Opening. The KORUS FTA prohibits each party from imposing customs duties, fees or other charges on, or in connection with the importation or exportation of digital products, whether or not “fixed” on a “carrier medium” or transmitted electronically. Art. 15.3(1). However, this general prohibition does not apply to internal taxes or other internal charges on digital products, if “imposed in a manner consistent with this agreement.” In short, sales and use taxes by states and localities remain permitted.
This enables buyers, sellers, licensors and licensees of software to decide on physical delivery (on a CD-ROM, for example) instead of electronic delivery as a tool for avoiding customs duties. It supersedes current practices where sophisticated licensees often require an electronic delivery to avoid customs duties and sales taxes on the CD-ROM’s, but do so at the risk of an incomplete e-transmission. The KORUS FTA thus allows businesses to get both delivery and peace of mind. Further, e-delivery exposes the parties to the risk of deep-packet inspection of the software and thus governmental inspection and potential unauthorized examination and duplication.
MFN: Equal Treatment of Different Digital Products. The “most-favored” nation provisions not only prevent discrimination on trade in digital products from the standpoint of rights and procedures for third-country “digital products.” Art. 15.3(3). The KORUS FTA also prevents discrimination between different types of digital products. This new approach thus requires equal treatment of software, video, audio recordings, visual arts (“images”) and other digitally recorded “products, “ and thus treats e-transmissions (such as via cable, VOIP or satellite) equally with television and radio. Art. 15.3(2) and 15.3(3).
Exceptions. Exceptions are listed in other articles. Art. 15.4, citing Articles 11.12 (investment measures), 12.6 (cross-border trade in services) and 13. 9 (financial services) (collectively, “non-conforming measures”). Also, equal treatment between different digital products is not required where a Party subsidizes a service or service provider, such as by government-supported loans, guarantees or insurance, or services supplied in the exercise of governmental authority. Art. 15.5. Finally, a government can treat digital products with special rules if the e-content (digital product) is “scheduled by a content provider for aural and/or visual reception” and where the consumer cannot access such content on any other schedule. Art. 15.6.
MFN: Jurisdictional Nexus for Avoidance of Free-Riders. The MFN treatment of digial products requires one of two jurisdictional connections. First, the digital products must be “created, produced, stored, transmitted, contracted for, commissioned, or first made available on commercial terms” by anyone (whether or not the persons doing so are Korean or American) in either South Korea or the United States. Second, as a alternative, the individuals involved in the chain of conception and distribution of digital products must be “a person of the other Party.” To enjoy non-discriminatory treatment, such individuals must include one of the following: authors, performers, developers, distributors and owners of digital products must be treated. Art. 15.3(2).
E-Signatures. The KORUS FTA promotes e-authentication and e-signatures.
Definitions. “Electronic authentication” means “the process or act of establishing the identity of a party to an electronic communication or transaction or ensuring the integrity of an electronic communication.” E-signatures on documents cannot be valid without assurance that the parties intended to link the e-signature to the “e-communication” or “transaction.”
E-Authentication Legislation. The KORUS FTA prohibits each government from denying commercial parties the right to mutually determine an agreed appropriate authentication method for a transaction. Also, private parties will be assured access to judicial and administrative review for determination, in disputes, whether “their electronic transaction complies with any [such mutually contracted] requirements with respect to authentication.” Most importantly, neither government may deny the legal validity of a signature “solely” on the basis that it is in electronic form. Art. 15.4(1).
Exceptions. Each country’s government may still regulate by imposing performance standards or governmental certification requirements in respect of e-authentication for “a legitimate governmental objective” where the performance requirements are “substantially related to that objective.” Art. 15.4(2). Obviously, such regulations will apply to the exercise of a government’s regulation of a regulated industry, such as financial services, shipping, insurance, legal process outsourcing, finance and accounting, filing of tax returns and other official records.
Consumer Protection Online. The agreement preserves the right of each party to enact laws and regulations to protect consumers from fraudulent and deceptive commercial practices when consumers engage in e-commerce. The parties agree to cooperate in enforcement of their respective local laws “in appropriate cases of mutual concern.” Art. 15.5.
Paperless Trading. The two governments agreed to put online their “trade administration documents” to allow transparency in regulations under the KORUS FTA agreement. This is not a general e-government mandate. Art. 15.6.
IV. Conclusion. As intergovenmental agreements, FTAs paint the rules with a broad brush. Aside from opening the Korean markets to American automobiles and professional services forms, this FTA opens Korea’s ITO and BPO sector to foreign completition from the U.S.
Filed under: Newsletter ArticleTagged: Business Process Outsourcing, cross-border services, digital products, e signatures, e-comerce, electronic supply of services, emt. bilateral agreement, Korea US Free Trade Agreement, KORUS FTA, most favored nation treat, privacy laws, service providers
Outsourcing Law & Business Journal™: August/September 2010
September 14, 2010 by Bierce & Kenerson, P.C.
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.
Vol. 10, No. 8-9 (August/September 2010)
1. Government Procurement: Civil Fraud and Debarment for Non-Disclosure of [Offshore] “Outsourcing.
2. U.S. Increases Visa Fees by $2,000 for H1-B’s and $2,250 for certain L’s: Sen. Schumer Leaps from “Chop Shops” to “Body Shops.”
1. Government Procurement: Civil Fraud and Debarment for Non-Disclosure of [Offshore] “Outsourcing”. Many companies provide services to the U.S. government. Directly and indirectly, government contractors must disclose extensive information in their bid documents. Under a draft U.S. law, such bids would need to disclose whether the bidder has a history of “laying off of a United States worker from a job, and the hiring or contracting for the same job to be performed in a foreign country.” For more, click here.
2. U.S. Increases Visa Fees by $2,000 for H1-B’s and $2,250 for certain L’s: Sen. Schumer Leaps from “Chop Shops” to “Body Shops.” On Aug. 13, 2010, President Obama signed an emergency supplemental appropriations for border security, P.L., 111-230. Effective immediately, this law requires the submission of an additional fee of $2,000 for certain H-1B petitions and $2,250 for certain L-1A and L-1B petitions postmarked on or after Aug. 14, 2010, and will remain in effect through Sept. 30, 2014. To see the complete article, click here.
NDA, n. (1) not directly applicable; (2) nitwit doing assignment; (3) non-disclosure agreement.
H1-B, n. (1) U.S. work visa category for temporary worker with specialized knowledge working at the U.S. prevailing wage; (2) trade barrier opportunity, to be loaded with high application fees, short maximum duration of six years and long vesting period for enjoyment of reciprocal Social Security regime under equalization treaties; (3) derogatory term, coined by Sen. Chuck Schumer, for any alien employee of a body shop, chop shop or chop suey.
4. Conferences. September 13-15, 2010. 5th eDiscovery for Pharma, Biotech and Medical Device Industries, Philadelphia, Pennsylvania. Presented by IQPC, this event will bring together industry leaders from in-house eDiscovery teams, expert judges and outside counsel as they discuss:
September 27-28, 2010, CxO Dialogue Business Process Outsourcing Conference to be held in Berlin, Germany. The CxO Dialogue Business Process Outsourcing offers a neutral platform for about 50 decision makers from HR, finance, CRM and IT that allows to discuss individual projects regarding the outsourcing of business processes. Case studies, workshops and one-to-one meetings provide the opportunity to network on a level playing field and talk with speakers, colleagues from other companies and expert consultants from leading solution providers about topics that really matter.
Our extensive business matching process guarantees tailor-made agendas and really meaningful contacts. To learn more about econique’s business matching, click here. Participation is free of charge but an executive position is requisite. To reserve your spot, please contact catherine.harrison@econique.com. To become an exclusive solution partner and meet executives from your target group, please contact juergen.haller@econique.com.
October 12-14, 2010, Global Sourcing Forum, New York, New York. Engage with Peers, Thought-Leaders & Top Global Providers at this event, which brings together an impressive list of academics, thought leaders, sourcing executives and over 80 global suppliers from more than 25 countries to the Marriott Marquis Times Square to discuss, debate and learn about current sourcing challenges and opportunities posed by the “new normal” and solutions that will put you ahead in your career.
Gain value from High-caliber Keynote & Plenary Sessions and Three Conference Tracks:
Sourcing Strategy: Achieving New Business Value Through Innovation
Mastering Sourcing: Driving Outcomes Through Smart Partnerships & Delivery Models
Best Sourcing Practices: Exceeding ROI Goals While Minimizing Risk
To register, and for the most up-to-date event information, please visit http://www.globalsourcingforum.com
Filed under: NewsletterTagged: Bill of attainder, Business Process Outsourcing, conferences, Create American Jobs Act of 2010, Government Procurement, Newsletter, non-disclosure of offshore outsourcing, Stop outsourcing
Hidden Agenda: Compiling a Little List. Since public procurement procedures are accessible to the public in the United States, the draft legislation invites inquiry into its effects. If enacted, the draft law would allow the Government to compile a list of all Government contractors and subcontractors (to the infinite level) who had done any “outsourcing” in the prior 12 months. Such a list would then be used for political purposes to harangue any enterprise “guilty” of such lawful behavior. Companies that are indirect subcontractors would face the same reporting, compliance, perjury and debarment risks.
Instead of outlawing “outsourcing,” the draft legislation would outlaw those who wrongfully deny that they outsource (under 18 USC 1001) and create a political stigma for actions that are not illegal. This is reminiscent of the frenzy and abuses of the anti-Communist witch-hunt of Senator Joe McCarthy in the 1950’s.
Filed under: Newsletter ArticleTagged: Bill of attainder, Business Process Outsourcing, Civil debarment, Creat American Jobs Act of 2010, Government Procurement, non-disclosure of offshore outsourcing, Public international law, Stop outsourcing
December 21, 2009 by Bierce & Kenerson, P.C.
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
October 29, 2009 by Bierce & Kenerson, P.C.
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 […]
October 16, 2009 by Bierce & Kenerson, P.C.
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.
Patent Infringement Warranties in BPO
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.
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 PaperTagged: attorney-client privilege, Business Process Outsourcing, infringement, infringer, U.S. patent law
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.”
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 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.
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.
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 PaperTagged: Business Process Outsourcing, compliance, enterprise customer, Equitable Estoppel, service provider
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