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Outsourcing to India:Legal Considerations

May 31, 2007

Presented byJames Steinberg – Partner – Kilpatrick Stockton LLP

Alex Montagu – General Counsel – Lipper, Inc.

Association of Corporate Counselwww.acc.com

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Outsourcing to India

Overview1. Export/Import Issues2. Commercial Disputes3. Ownership of Intellectual Property4. Data Protection and Security in India

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Export/ImportFirst Step is to catalog the I.P. to be used/viewed by outsourcerIdentify third party consent issues

Scope of license – who and whereConfidentiality provisionNon-assignment provisionFee schedule

Identify possible need for export licensesAllocate responsibility in Outsourcing Agreement

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Primary Export RegulationsInternational Traffic in Arms Regulations (“ITAR”)

[covers defense related items]

Export Administration Regulations (“EAR”)[covers commercial and “dual use” items that can be used for bothcommercial and defense related purposes]

Office of Foreign Assets Control (“OFAC”)[Prohibits exports to countries where the U.S. has imposed sanctionsand embargoes (e.g., Cuba, North Korea, Iran)]

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What is covered under the EAR?The export of software, technology and commodities

What is required?A relatively small percentage of exports are prohibited or require a licensedepending on the technical characteristics, destination, end user, and end-use.

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Outsourcing to IndiaHow do you determine if a license is required?Is the item covered by the EAR?

Publicly availably software and technology is not covered by the EAR. 15C.F.R. § 734.2(a)(1).

Is the item being exported?The method of transfer is immaterial; an item can be sent my mail, fax,email, downloaded from the Internet or conveyed during a telephoneconversationThe release of technology or source code subject to the EAR to a foreignnational in the United States is "deemed" to be an export to the homecountry of the foreign national under the EAR

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What item is being exported?Determine the Export Control Classification Number (“ECCN”) (e.g.,3A001) and identify the reasons for control for the specific ECCN (e.g.,NS for National Security, AT for Anti-Terrorism, CC for Crime Control)Items that do not fall within a specific ECCN are classified underEAR99; these generally consist of low-technology consumer goods anddo not require a license in many situations.

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Outsourcing to IndiaWhere is the item being exported?

Compare the Commerce Control List to determine any applicable controls (e.g., licenserequirements, prohibitions), which vary by country

If there is an “X” in the box based on the reason(s) for control of your item and thecountry of destination, a license is required, unless a License Exception is available.

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Where is the item being exported?License exceptions “APP” authorizes the export of certain technologies,and software to India upon confirmation of eligibility by the Bureau ofIndustry and Security (“BIS”).

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To whom is the item being exported?Certain individuals and organizations are prohibited from receivingU.S. exports and others may only receive goods if they have beenlicensedThe exporter must check the following lists available on the BISwebsite:

Entity ListTreasury Department Specially Designated Nationals andBlocked Persons ListThe Unverified ListDenied Persons list

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Commercial Disputes

Select governing lawSelect method of dispute resolutionConsider practical alternatives

Assets in the United StatesInsurance with U.S. based insurerLetters of credit or security bond

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Commercial Disputes and ArbitrationJudgment Enforcement:

India only enforces judgments from countries that have a reciprocalrelationship with it. The U.S. does not have such a relationship, making itunlikely for U.S. judgments to be enforced.

Indian courts are severely backlogged (in 2005, lower courts had over 25million pending cases and the higher courts had over 3 million) and may notbe of much assistance other than for injunctive relief.

As a result, many U.S. companies conducting business in India have and willcontinue to make use of the alternative dispute resolution process to settlecommercial disputes.

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Commercial Disputes and ArbitrationAlternative Dispute Resolution:

Alternative Dispute Resolution in India is governed by the Arbitration andConciliation Act, 1996 (the “ACA”).

ACA allows for parties to decide in advance on the venue of arbitration and governingprocedural law. Parties are not bound by India’s Code of Civil Procedure on matterssuch as procedure and evidence.

Additionally, the finality of a tribunal’s award has the same power as a decree of anIndian court and may not be appealed to the Indian court system.

India recognizes foreign arbitration awards under the U.N. Convention on theRecognition and Enforcement of Arbitral Awards (the “New York Convention”).

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Commercial Disputes and ArbitrationCustomer will want strong arbitration clause due to the followingadvantages over the Indian court system:

Arbitration provides a venue free of the lengthy court filings andappeals process in India.

Parties can decide in advance on the judges, the governing law,venue, procedure, and timetable for arbitration.

Additionally, in virtually all cases, arbitral decisions may not beappealed to Indian court system.

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Outsourcing Agreement should clearly define ownershipResolution can be aided by categorization:

Pre-existing customer codePre-existing vendor codeCustomer third party codeVendor third party codeVendor work productInterfacesImprovements/enhancements

Ownership of Intellectual Property

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Ownership of Intellectual Property

The Battle for Ownership

Generally, customer has paid for the work product and desires ownership orits equivalentVendor, however, will desire to retain rights in order to freely re-use forbenefit of all its clientsNumerous solutions exist; they can be more easily ascertained by reviewingthe categories and the parties’ needs and competitive position

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Concerns Regarding Code

Additional Concerns Regarding Code:

Customer should ensure that embedded Vendor code does not prevent Customer fromfully exploiting the deliverables being provided by Vendor.

Customer should consider requiring Vendor to notify and obtain Customer’s consentbefore embedding any third party or Vendor owned code into the deliverables.

If Customer owns the code developed by Vendor, it should consider having sourcecode for such developments delivered directly to it rather than placed in source codeescrow.

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Assignment of Code in India:

India grants copyright protection under the Indian Copyright Act of 1957and Copyright Rules 1958.

1999 Amendment to the Copyright Act is compliant with Trade-RelatedAspects of Intellectual Property Rights (TRIPS).

Generally, copyright protection in India can be granted for originalliterary, dramatic, musical or artistic, film and sounds work and isgranted for author’s lifetime plus 60 years.

India’s copyright law provide intellectual property protection of computerprograms. Latest amendment to Copyright Act in 1999 extendsprotection to original databases.

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Assignment of Code in India:In India, a copyright assignment is enforceable only if signed in writing.

Unless a contract specifically provides otherwise, the term of anassignment defaults to 5 years and the territory of an assignment islimited to India.

If the rights under an assignment are not used in the first year, theassignment lapses.

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Patent IssuesPatent Protection in India:

Historically, patent protection in India has been weaker than U.S.

Prior to 1970, Indian law provided for compulsory license system with alow royalty ceiling, short patent terms (three years for food and medicinepatents), as well as many exclusions from patentability.

Procedural delays associated with patent registration included a minimumsix year patent examination period.

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Patent IssuesPatent Protection in India:

Since 1994, India has strengthened protections for foreign and domestic patentholders. India joined GATT (now WTO) in 1994.

Since 1994, India has enacted three amendments to its Patents Act of 1970 tobring its patent laws into compliance with TRIPS.

Still has loopholes that American companies should be aware of:India does not recognize patents on computer programs, per se.2004 Patents Ordinance extended patentability to the technical applicationof a computer program to industry or in combination with hardware.2005 amendment, however, scrapped this language, and reverted to per seexclusion of computer programs from patent protections.

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Patent FilingsIndian Law regarding Patent Filings:

Indian law requires that for any innovations originating in India or involving an Indianresident inventor, applications for patents must first be filed in India.

Parties may seek a preliminary grant of a foreign filing license allowing for primaryfiling in a foreign jurisdiction.

Unclear what the penalty is for failing to comply with this requirement, and the law issilent in this regard.

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Patent Filings

United States Law:

United States law requires primary filing in U.S. with a six month delay priorto any foreign filing.Can apply for a license allowing for primary filing in a foreign jurisdictionfrom Commissioner of Patents.Clear conflict between both countries’ laws.

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Patent FilingsJoint Development

Inventions made solely in India:Should file in India first.

Inventions made partly in U.S. and India:Conflict between two regimes is implicated.Messy situation with no clear guidance.Laws were designed to protect the disclosure of military or classified secrets.If dealing with non-military applications, practical advice is to file first in UnitedStates.Want to protect the primary market.Real risk is loss of enforceability. Will it affect Company more to not haveprotection in the U.S. or in India?Balancing act that usually favors filing in United States with later national phaseunder the PCT.

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Patent FilingsPatent Filing Strategies:

Customer should negotiate responsibility for deciding which innovation will lead to thefiling of applications and in which countries applications will be filed and set forththese responsibilities in the MSA. Customer will want to control the filing process.

Customer should decide in MSA who has responsibility for obtaining any applicableforeign filing licenses and prosecuting the applications.

Customer should assign responsibility in MSA for the maintenance and potentiallicensing of any issued patents.

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Patent FilingsAdditional Patent Filing Concerns:

Assuming a subsequent U.S. filing, initial Indian application should meet standards ofpatentability provided by U.S. patent law (i.e. written description, enablement, and bestmode).

Also, later filed U.S. application must satisfy the duty of disclosure owed to USPTO.

As Indian providers may not recognize this duty, the Customer should explain dutiesand create processes in Outsourcing Agreement to ensure conformance.

In MSA, require Indian company to perform relevant prior art searches.

Indian partner company should be required to proactively review any subsequent U.S.application for relevant prior art.

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Patent FilingsU.S. Patent Interference Issues:

India is a first to file system.

U.S. remains a first to invent system, providing for detailed proceedings to determinepriority of inventions.

In U.S., even if applicant may have filed later application, it may obtain patent rightsthrough proof of earlier conception and diligent reduction to practice.

Proofs may be prepared in WTO countries such as India.

U.S. company should educate Indian provider and include procedures in OutsourcingAgreement to maintain documentation of innovations that satisfy dictates of U.S.interference practice.

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Data Protection IssuesIndian Data Protection and Security Laws:

India lacks data protection laws similar to the U.S. or Europe.

In India, data protection is achieved through enforcement of privacy andproperty rights.

Indian Penal Code prohibits dishonest misappropriation of data or criminalconspiracy.

India’s Information Technology Act of 2000 prescribes penalties for cyberoffenses such as hacking, source code tampering, and breach ofconfidentiality and privacy.

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Data Protection IssuesPending amendments to India’s Information Technology Act of 2000 proposegranting the Central Government rulemaking authority to ensure appropriateprotection of the security and confidentiality of electronic records.

National Association of Software and Service Companies (NASSCOM) intends tolaunch a self-regulatory organization to improve protection of information outsourcedto India.

For cases of data theft or misuse, a criminal complaint can be made to local police or aspecial Anti Cyber-Crime Cell. Civil suits can also be filed and courts can issuetemporary injunctions.

Indian courts, however, may not be much help due to severe backlog.

Customer should define security procedures in Outsourcing Agreement.

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