Editor’s Note: José Cortina is a member of the Research Triangle Park law firm of Daniels Daniels & Verdonik, P.A. TechLaw is a regular feature in LTW.
_______________________________________________________________________________________As the U.S. economy continues to recover, companies have increasingly looked to outsourcing of services as a cost cutting solution to make them more competitive.

India has a number of companies that provide many different types of outsourcing services, including many that service the software industry. While a software program may be architecturally designed in the U.S., companies have found that having the code written by programmers in countries such as India may cost one-fifth that of having the code written in the U.S.

As a result of the magnitude of the potential savings, the concept of outsourcing has started to expand into other areas, including various professions. While outsourcing of software coding may result in placing cost savings over adequate consideration of various business and legal risks, outsourcing of other services may have more profound risks, risks that cannot be ignored.

One example of outsourcing which creates a serious risk for a company is in the area of medical claims processing for insurance purposes. Similarly, some accounting firms have begun to look to service providers in other countries for tax return preparation services. More recently, overseas firms have offered legal research services, and in one highly specialized area of the law, have offered patent services. All of these areas present potential financial and legal risk to companies outsourcing such services.

Legal Services

In the legal services area, outsourcing legal research may be appealing, but it is not risk-free. Generally, those conducting such research are not U.S.-trained lawyers, and consequently they may read case decisions in a manner which does not warrant the conclusions they reach. This is further complicated by the fact that English is often a second language to the researcher. Thus, while the researcher may be conversationally fluent, he or she may be unable to interpret complex text using highly technical analysis, i.e., they may misinterpret the rulings. If a U.S. lawyer accepts the results at face value, the lawyer risks generating an erroneous work product. If the lawyer scrutinizes the results, so much additional work may be required that the cost savings is lost and the result is a more costly product than if the research had been done in the U.S. originally.

Outsourcing of patent services presents further challenges, challenges that may also apply to other industries. The subject matter of patent applications, as is that of new software, is often a significant technological advance. The U.S. has strict export control laws restricting what types of technical information can be transferred abroad. Formal applications for export licenses may be required prior to exportation of the information on which the patent application is based. Sometimes after patent applications are filed, secrecy orders are imposed on the subject matter of the application. If the laws of the U.S. are not followed in this area, a company can be subject to severe civil and criminal sanctions. On the other hand, if a strict review of the export restrictions is conducted in the case of each patent application to be outsourced, whatever cost savings may be realized will be quickly lost due to the extra non-related work required as well as the necessary delay.

Another potential problem area is that U.S. laws impose on all persons involved in preparation of a patent application a duty to disclose all material information relevant to a patent examiner reviewing a patent application. A writer of an application overseas may have knowledge of such information, but may not know what communication is required. This can result in that information not being properly submitted the U.S. patent attorney, and thus the information may not be submitted to the U.S. Patent Office by the U.S. attorney during the patent prosecution process. This presents a risk to the validity of the patent if it comes out in later litigation that the information was withheld.

Finally, in the case of later litigation of patents, subject matter protected by attorney-client privilege when the work has been undertaken by a U.S. attorney may be lost. This is because courts may feel that the writer of the patent specification is basically a scribe reciting facts in a particular pattern. Put another way, while the information disclosed may be subject to a confidentiality agreement, such agreements do not preclude disclosures in litigation unless the attorney-client privilege is present. If the patent preparer is not providing legal counsel, the privilege is unlikely to be found to exist. This can result in information being made available at trial that the inventor would prefer not to have brought in as part of the litigation.

All of these issues were acknowledged by large U.S.-based multinational corporations at a meeting on October 27-29, 2005 of the American Intellectual Property Law Association. In that meeting, IBM Corporation and others indicated that outsourcing of services related to patents was being limited to proofreading the patents after issuance. The risks related to other patent services, such as writing patent applications, they acknowledged presented greater challenges such that the risks could not be overcome.

Medical Insurance and Tax Return Services

In the area of medical insurance claims processing and tax return preparation, the risks are fairly self-evident: disclosure of sensitive personal information. More specifically, while many countries have strict laws with respect to patient personal information, if the country to which the work is being outsourced does not have such laws, there is a serious risk of disclosure or misuse of the information. Further, some countries with such laws rarely enforce them, so that the risk of disclosure or misuse remains high regardless of the laws. While requiring compliance with strict privacy rules in a contract may satisfy some, it is not foolproof since terms of a contract may be breached and enforcement of the terms under the legal system of the country to which the work is outsourced may be difficult to achieve. The U.S. Company that has outsourced the services, however, will in most instances still be liable as the result of disclosures both under U.S. laws and for damages by the persons impacted.

In the tax return preparation area, sensitive client financial information may be divulged, possibly exposing clients to identity theft and other types of fraud.

The End Result

Outsourcing has the potential to yield significant savings in certain areas. However, what initially appears to be a cost savings may give rise to cost increases in other areas beyond what is realized. Companies should proceed carefully before deciding to outsource and conduct a full analysis of the total costs before deciding to outsource.

Daniels Daniels & Verdonik, P.A. has been serving the legal needs of entrepreneurial and high technology clients for more than 20 years. A. José Cortina is a registered patent attorney who focuses his practice on the intellectual property needs of small to large technology companies, including providing patent, trademark, copyright, counseling, licensing, conflict resolution and transactional services. He is experienced in a broad range of technologies, including electronics, communications, computer hardware and software, biomedical, materials, and selected chemical and chemical engineering technologies. Questions or Comments can be sent to jcortina@d2vlaw.com