With the outsourcing boom of the last decade, more than half of the Fortune 500 companies have become IT clients of Indian IT firms. Overall, India is home to approximately seventy percent of the global offshore IT services market. In addition to IT functions, US companies, recognizing the benefits of favorable tax treatment and a relatively inexpensive labor market, have increased the level of their outsourced business processes and functions to India as well.
In a special report, published by WorldTrade Executive, Inc., James Steinberg, Sunjay Sood, and William Helmstetter of Kilpatrick Stockton LLP, examine some of the vital export issues, commercial disputes, IP and data protection which corporate counsel should consider if their client or company is outsourcing to India. The following are excerpts from the report:
The outsourcing of services to a service provider in a foreign country will likely require you to determine if any software or technology being transferred to the service provider constitutes an export and is thus subject to the export controls of the U.S. For instance, if a call center application currently utilized by your employees in the U.S. will be transferred to contractors in India, that software may require an export license.
A significant risk for U.S. companies doing business with Indian outsourcing vendors is the possibility of being forced into litigation in the Indian court system. Litigating in India can often be a protracted process taking numerous years for cases to be resolved or even heard by the Indian courts. Indian courts are severely backlogged and, as of 2005, lower courts in India had over twenty-five million pending cases and the higher courts had over three million pending cases. This tremendous backlog, coupled with an insufficient number of judges available to hear cases, has lead to significant delays in the Indian judicial process and Indian courts are unlikely to be of much help to U.S. companies involved in commercial disputes.
As a result, many U.S. companies would prefer to sue in U.S. courts and have these decisions enforced in India. India, however, only enforces judgments from countries that have a reciprocal relationship with it. The U.S. does not currently have a reciprocal relationship with India and it is, therefore, unlikely that U.S. judgments would be enforced in India. Consequently, U.S. companies doing business in India generally prefer to make use of an alternative dispute resolution process to settle commercial disputes.
Copyright
A significant area of legal risk for U.S. companies engaged in outsourcing transactions in India is the protection of intellectual property. In India, a copyright assignment is enforceable only if signed in writing by the party assigning such copyright interest. Unless a contract specifically provides otherwise, the term of a copyright assignment defaults to a term of five years and the territorial breadth of such assignment is limited solely to India. Additionally, if the rights assigned are not utilized by the assignee in the first year of an assignment not specified in writing, the assignment will lapse.
As a result, U.S. companies engaged with an Indian Vendor should require that assignment of copyright agreements are in writing and specify a fixed term of years and territory in order to ensure the largest grant of rights possible under Indian law. Additionally, U.S. companies must be aware that the Indian “works made for hire” doctrine applies solely to employees within the scope of employment and does not include com-missioned works or works created by an independent contractor. As a result, U.S. companies should be sure to receive supplemental protections, such as an intellectual property assignment clause within the MSA, and ensure that the Indian Vendor executes agreements containing intellectual property assignment provisions with each of its employees or contractors involved in providing the outsourced services.
Patent Protection
Historically, patent protection in India has been far weaker than patent protection offered in the U.S. Prior to 1970, Indian law provided for a compulsory license system for patents with a low royalty ceiling, short patent terms (as low as three years for certain types of patents), as well as many exclusions of certain inventions from patentability. Procedural delays associated with patent registration in India create a minimum six year patent examination period. Since 1994, when India joined the WTO, it has strengthened protection for foreign and domestic patent holders and has passed three amendments to its Patents Act of 1970 (the “Patents Act”) to bring its patent laws into compliance with TRIPS.
American companies, however, should remain vigilant of certain loopholes in the Indian patent system. India’s patent laws do not recognize patents on computer programs, per se. While this appears to be an absolute bar on the patentability of a computer program, patents are available for computer programs if a party can demonstrate additional technical applications related to such program. U.S. companies should remain aware of these additional barriers to patentability of computer programs in India. More
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