The Hidden Risks of Outsourcing:Is Your Ip Safe Abroad?

• Author: Christopher L. Sorey
• Position: JD candidate at American University Washington College of Law
• Pages: 08

Christopher L. Sorey is a third-year JD candidate at American University Washington College of Law and a Student Attorney with the Glushko- Samuelson Intellectual Property Clinic. In 2000, he received his BA, cum laude, from George Mason University. Mr. Sorey has worked for several IP boutique firms. Mr. Sorey has benefited from the support and encouragement of his wife, Ujjaini. Mr. Sorey would also like to acknowledge the mentoring he has received from Allen S. Melser, Esq., Evan A. Raynes, Esq., Christina J. Hieber, Esq. and others. Mr. Sorey intends to pursue a career in IP litigation.

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The outsourcing debate has focused on the exportation of well-paying jobs to foreign countries. Close attention to job losses is justified when one considers that by the year 2015, the U.S. will have exported an estimated 3.3 million jobs to countries such as India, Russia, and the Philippines to the detriment of American workers.¹ A recent poll of U.S. corporate executives revealed that companies are ignoring the possibility of political backlash resulting from outsourcing and plan to send more jobs overseas in the coming months. Currently, only 30 percent of these companies indicated that they are moving forward in a cautious manner due to public outcry.² In previous years, outsourcing accounted for $100 billion in revenue; projections for 2005 estimate that figure will grow to $200 billion.³ The savings generated by outsourcing cannot be ignored, but neither should the risks. Besides the loss of jobs, intellectual property (IP) theft is another insidious threat to the American economy and its edge in the world markets. Companies looking to take advantage of the enormous savings produced in outsourcing arrangements have often ignored the risks to IP. These companies must be cautious because theft and devaluation of a company's IP have far-reaching consequences. Most companies do not adequately address the risk of exportation of intellectual property. Thus, these companies risk loss of competitive advantage and overall market share.

Outsourcing: Why do Companies do it?

IN THE 1990'S, COMPANIES UTILIZED OUTSOURCING to gain expertise and to provide access to scarce information technology (IT) resources in a booming economic market.⁴ Instead of starting an in-house IT division, an employer could contract with a third party to provide IT expertise. Common forms of this third party expertise included support for maintaining computer hardware and software systems, support operations, and telecommunications.⁵ While the IT work may not have been in-house, at least it was in country. Sending work abroad was once labeled "offshoring," and is still known by this term in some circles. Offshoring occurs when one company hires a foreign company to perform some business function. The definition of "outsourcing" has evolved to mean sending jobs and work overseas, and thus, these words have become interchangeable. As a result, when most people hear the word "outsourcing" they automatically assume it means work going abroad. In a world driven by profit, the cost savings aspect of outsourcing is the primary motivation for U.S. companies. For example, a company could acquire engineering services from three Indians, four Chinese, or five Russian workers for the same salary as one U.S. engineer.⁶ However, American firms do cite other reasons for outsourcing. Companies claim that outsourcing gives their firm access to a larger skill set and cuts down on production time by freeing up domestic personnel to concentrate on more time sensitive projects.⁷

An Illustration of the Risk

IN THE INFORMATION AGE, a company's edge over its competition is frequently embodied in either trade secrets or copyrighted source codes. Unfortunately, if stolen, a company is then hard pressed to regain a competitive advantage in its marketplace. A look at historical IP misappropriation best illustrates the risks involved with outsourcing. The year is 1876, and Alexander Graham Bell's telephone is sweeping the globe. It is the "must-have" technological advancement of its time. In Sweden, a company starts repairing the devices and, in that effort, is able to reverse engineer the product and start producing its own telephone. Ericsson, the Swedish phone company we know today, is born.⁸ Ericsson's fortune is built on Bell's misfortune. Bell failed to file for patent protection in Sweden,⁹ and this oversight resulted in the birth of an industrial empire. Bell was partially foreclosed from further exploitation of the Swedish market and the second comer was enriched by Bell's innovation. A 2004 example illustrates the current dilemma. An employee at an Indian outsourcing firm was confronted by her Page 34 supervisors for suspicious activity taking place at her workstation. Allegedly, the employee was caught uploading source codes along with design documents and sending them to her Yahoo! email account. When confronted, the employee excused herself from work and vanished.¹⁰ Since this incident, Jolly Technologies, Inc. ("Jolly"), the American company that outsourced the work to India, has pleaded to no avail with Indian authorities to arrest the alleged thief and enforce India's law. Likewise, Jolly has met resistance from the Indian IT industry group that represents outsourcing firms in India. Jolly also alleges that the Indian police asked for what amounted to a bribe before they would seek the criminal suspect. The situation has forced Jolly to file suit in India accusing the police of negligence, claiming that they refused to investigate the case.¹¹ This story is just the tip of the IP iceberg. Many of these crimes go undetected or unreported - just as individuals are reluctant to report crimes where one has been duped, companies may also be reluctant to report IP theft because of the repercussions at home.

Stories such as these illustrate reasons why companies should be cautious when outsourcing IP. Source code (i.e., the uncompiled code of a computer program) is the backbone of many companies' business. To get computers to do the wonderful things they do, the computer must be provided with instructions. The instructions are written in source code, which then translates in the form of binary object code that is readable to the computer. These codes are often times very long and intricate. In one case, a source code for a simple alarm clock was roughly 11,000 pages long. For many companies, source code is much more than propriety information. Source code is the...