Offshore Outsourcing: Big Savings, Big Risk

U.S. companies continue a pell-mell rush into offshore outsourcing of software development. Those that haven't stopped to look at global intellectual property law are in for a big surprise.

The key question, of course, is the real degree of risk U.S. companies face. If overseas IP theft court cases are hard to find, doesn't it stand to reason that CIOs and CSOs are doing a decent job of protecting corporate IP assets? Dean Davison, vice president and director of outsourcing and service provider strategies at Meta Group, emphasizes that he almost never hears complaints about IP thefts, and in general doesn't hear horror stories about overseas outsourcing. On the other hand, Elliot Turrini, an attorney with McElroy, Deutsch & Mulvaney, sounds much more dire. "Intellectual property is a legal fiction we've created to ensure a return on investment and promote the arts and sciences," he says. In countries with less developed laws, Turrini says, "Basically you're wide open."

Anecdotally, there are additional examples of IP spats overseas. Davison does say he's aware of one case where a U.S. company outsourced product design to an Indian firm, which successfully completed the project, then turned around and used the code to create a version for the Indian market. The U.S. company didn't care because it had no interest in the Indian market. A third case is currently pending in India. Legato Systems, a maker of storage software, has alleged that eight of its former employees in India took some of its intellectual property with them when they went to a competitor. Legato declined to comment on the action publicly, though one of its officials, speaking as an individual, told an Australian publication in February that he would recommend against future offshoring in countries without better legal protections.

The irony: While these IP theft cases are from India, that country actually has a much better cultural and legal climate for IP protection than many other nations offering offshore coding. Observers say India has a culture that generally seems to respect intellectual property, as compared with China or Russia, for exampleconsider those nations' records regarding piracy of shrink-wrapped software and of copyrighted materials such as movies and music.

Indeed, Indian prosecutors in the SolidWorks case appear to have decided to charge Verma in part to establish firmer support for IP rights. India does not have laws against trade theft, so prosecutors filed charges against Verma under a general civil theft law, with a secondary charge of criminal breach of trust against his employer, GSSL. Another charge, pertaining to copyright law under India's recently enacted IT Act, was added later. But despite being caught red-handed, Verma might well win his case. Because the source code didn't belong to GSSL, technically, Verma didn't steal from an Indian company. Thus India's laws don't necessarily apply. It's a frustrating situation for U.S. law enforcement officials. As Day says, "How can he steal something from GSSL when they don't own it? And when the nondisclosure breach of trust was signed between him and SolidWorks?"