ISSUE IV : The perils to intellectual property – IP in India’s outsourcing market

INTRODUCTION

India currently faces a significant threat to its status as the world’s most attractive Information Technology (“IT”) outsourcing hub, as corporations discover that Intellectual Property (“IP”) protection, so vital to the IT industry, remains inadequate across the country. Without significant reformation of its current IP legislation and anti-piracy enforcement methodologies, IT companies whose vitality depends so heavily on the intangible value of intellectual property may begin looking outside of India to places where the IP protection is more substantial. India should act quickly to preserve its status as the Silicon Valley of the East, or find that lucrative outsourcing contracts have discovered other destinations as the outsourcing market continues its global expansion.

India has experienced unprecedented economic growth since the liberalization of its economy in 1991, especially in the IT arena, as western outsourcing ventures have poured massive commitments of foreign investment into the country. The initial impetus for this extraordinary growth in the IT outsourcing sector was the possibility of hiring highly educated engineers at a fraction of the cost necessary to perform the equivalent labor in the home market. This early explosion of such foreign investment in outsourcing saw corporations paying little heed to anything outside the possibility of financial savings, and vitally important issues such as IP protection were secondary to the possibility of drastically reducing overhead costs. As the Rupee continues its appreciation against the dollar and India sees wages increase across the IT sector, the creation of an IP friendly environment becomes pivotal to India’s sustained growth in this industry. This fact is further emphasized as Eastern Europe, Russia and other burgeoning outsourcing destinations become more competitive in the outsourcing market. Therefore, an examination of the state of IP protection in India, the current focus of this bulletin from a US perspective, is important, as it leaves the blind outsourcing stampede behind and other market pressures begin to emerge.

1. Market Circumstances

The US and India have enjoyed tremendous economic advantages through their outsourcing relationships, particularly in the IT industry. Many of America’s largest IT corporations have developed outsourcing ties with India and are currently reaping the financial benefits derived from India’s massive, cheap, and highly educated labor force. For its part, India has simultaneously experienced unprecedented financial growth primarily due to the IT explosion, as foreign investment continues to pour into the country.

1.1 The Indian Workforce

India presently has an IT workforce exceeding 1.6 million people, and has seen sustained growth over 30% since 2002. 1 In 2006, Indian corporations received over $24 billion derived from export profits from the IT sector alone. This figure totaled almost one-fifth of India’s export market profits.2 In fact, over the last 10 years India has seen massive growth in the IT sector, with revenues estimated at $4.8 billion in 1997-1998 growing to an estimated $47.8 billion in 2006-2007.3 Indian IT labs have gained worldwide

prominence. In fact, many of Silicon Valley’s most influential corporations have experienced lucrative outsourcing partnerships with Indian corporations, and a number have created their own IT centers within India.4

1.2 Mutual Benefits: US and India

The US and India have an extraordinary outsourcing partnership, with up to 80% of India’s outsourcing based revenues derived from the relationship.5 While initially the rise of outsourcing created a backlash within the American IT sector over the fear of lost job opportunity, this fear has been assuaged as IT employment in the US continues to grow, with a 17% increase since 1999 in the total number of IT workers today.6 While early on the overwhelming majority of such IT outsourcing deals concerned low-end work that could be accomplished by the far lower salaried Indian engineers, there has been a recent trend for such IT juggernauts as Cisco Systems and Microsoft to up the ante and create Research and Development (“R&D”) labs in India.7 Consequently, India is quickly becoming the most important R&D center in the world outside of the US. India itself currently receives over 25% of global investment in R&D centers.8 The mega-corporations of Oracle, Intel, and Adobe all have their largest R&D departments in India outside of their respective corporate market, and others like IBM, Texas Instruments, Hewlett Packard, Microsoft, and Google have long employed local talent from India.9 Six IT companies have made commitments of over $ 1 billion in Indian operations, including Cisco’s investment of 1.1 billion, Intel’s of 1.25 billion, and IBM’s of 6 billion.10

While this astronomical growth rate and foreign direct investment in the IT sector may not be sustainable, IT growth in general should see continued investments as these institutions become established in India and as others follow suit in order to maintain a competitive edge. However, India can no longer rely exclusively on its cheap and highly educated labor force to attract foreign companies. As the market explosion balances to more sustainable levels, India must ensure that it provides an atmosphere which protects intellectual property, thereby guaranteeing that IT corporations remain comfortable with such operations and assured that their valuable IP rights remain intact. This is particularly vital to maintaining the investment in R&D centers, as their primary function is to create intellectual property.

2. Intangible Assets Dilemma

percentage of market value consisting of these intangible assets, IP protection is absolutely essential to the sustained vitality of these companies and the general health of the industry as a whole.

It is alarming that the future wealth of these corporations is entirely linked to intangible assets, as these assets necessitate an entirely different form of legal protection and enforcement that receives little attention outside of developed countries. IP theft can be as simple as a rogue employee “cutting and pasting” valuable information into an e-mail and sending it to a competitor in the field. Such IP as trade secrets may consist entirely of source codes, which can be copied and downloaded by anyone with access to the information.13 These trade secrets may be valued at millions of dollars, and constitute the entire basis of a corporation’s services. Without adequate security that can be supported by strong legal protection, corporations may be startled to discover that the service they offer is now exploited in the public domain, and its overall value significantly diminished. As the technological field progresses and items such as USB flash drives and mass storage devices like the Apple iPhone become common in the workplace, IP piracy may become even more difficult to circumvent. Devices like the iPhone, which Apple hopes will compete with business staples such as the Blackberry, offer mass storage and internet access but fail to offer the encryption possibilities available on more business-friendly units.14 Without such security measures, sensitive corporate information may become compromised, which could have significant repercussions concerning IP.

In the 21st century, further development of intangible assets will be vital to the continued vitality and growth of corporations worldwide. Corporations obviously are aware of this trend, as R&D centers are springing up across the world, especially in India. Innovation will continue to thrive in markets that protect the intangible assets that are so integral to the process, but corporations may begin to shun those economies which do not protect these intangibles through legal enforcement. Such IP is too valuable to risk the possibility of piracy as the IT playing field levels across the globe.

3. Indian Intellectual Property Law

To ensure that the American IT industry continues its good relationship with Indian outsourcing firms, it is essential to guarantee that U.S. companies are provided adequate IP legal protection reinforced by proper enforcement of such laws. American companies are beneficiaries of a rigid system of domestic IP legislative protection, and such legislative protection is enforced through a variety of governmental organizations.15 International IP protection remains far more haphazard, comprising of a patchwork quilt of various treaties and agreements designed to encourage the protection of IP rights. Organizations such as the World Intellectual Property Organization (“WIPO”) and the World Trade Organization (“WTO”) have sought to create and implement such international agreements promoting IP protection in order to stimulate the worldwide growth of IT development. The Agreement on Trade Related Aspects of Intellectual Property (“TRIPS”) is one such attempt by the WTO to create enforceable international law concerning the protection of intellectual property.16 To comply with the requirements as delineated by the TRIPS Agreement, a member nation must meet its various minimum requirements and operate in accordance with

Articles 1 through 21 of the Berne Convention (Article 6 excepted).17 The problem remains, however, that while a country may in fact be TRIPS compliant strictly in legislative terms, enforcement of this legislation is often limited at best.

While India is a member nation of the WTO and now TRIPS compliant, there remain significant impediments to its IP protection. In an effort to address this issue, the Indian Parliament has passed such reforming legislation as the Trademarks Act of 1999, and amended The Copyright Act of 1957 and The Patent Act of 1970 in the Amendment Acts of 1999 and 2000.18 These amendments ensured that Indian legislation was in accordance with the TRIPS requirements. The Trademark Act of 1999 specifically created comprehensive legislation providing for registration of trademarks for services and goods, in view of “developments in trading and commercial practices, increasing globalization of trade and industry…and to give effect to important judicial decisions.”19 The Patent Act amendments further defined a patent owner’s rights regarding the proprietary interests in his invention, including but not limited to his exclusive marketing rights.20

Finally, the Indian Parliament went a step further with regard to their copyright law in an attempt to continue to attract software development focused outsourcing. Computer software writing and development is one of the most dominant forms of outsourcing in India, and computer software is protected in India by copyright law. The changes adopted in the amended version of the 1957 Copyright Act have created legal protection for such software that is some of the most stringent in the world.21 Indian copyright law allows for civil, criminal and administrative remedies for copyright infringement. Criminal and civil remedies can be sought concurrently against the infringing party, and Indian civil remedies allow for injunctions, damages, and delivery of infringing copies along with damages for conversion.22 Criminal penalties are also fairly strict with the possibility of a prison sentence for a minimum duration of six months to a maximum of three years. Fines can also be imposed separately or concurrently at a minimum of Rs. 50,000 to Rs. 200,00023 ($ 1,220 to $ 4,878 approximately).

While these IP laws are a step forward, there remains important legislation that can be passed to aid in enforcement of Indian anti-piracy laws, and to ensure India remains current in its compliance with various treaties. For example, India could adopt a system of damages that is determined statutorily, which would remove some of the burden on the aggrieved party to prove its actual damages.24 This would effectively encourage punishment of the infringing parties and provide deterrence to future offenders. Laws should also be passed to allow customs officers to destroy seized pirated goods, which would alleviate the problem of the goods being sent back to the market to be sold.25 While these laws may in fact be helpful, the problem India faces is not with its legislation but with the enforcement of its current laws.

The adoption of serious IP protective legislation and enforcement thereof is not only important to sustain the future of the Indian IT outsourcing market, but also essential to fostering a culture of innovation within India itself. Such legislation, when enforced, cultivates an appreciation of IP which inherently inspires a culture of innovation and vice versa. Such innovation manifests itself in valuable corporate IP assets, and to inspire such a culture will pay dividends for the domestic IT industry for years to come.

4. Inadequate Law Enforcement

The global perspective is that India currently struggles with IP piracy across multiple sectors, from business software piracy to the rampant illegal sales plaguing the music and film industries. As has been noted, Indian legislation would be sufficient to curtail the piracy epidemic, but currently India’s law enforcement and political will must be strengthened to seek out and dismantle these illegal schemes. India currently sees up to 55% piracy rates in the recording and music industry, 82% in entertainment software, as well as losses exceeding $ 40 million in book piracy.26 Though the government has attempted to implement various measures to combat this piracy, the majority have been overly ineffective as they remain too sporadic and insufficiently funded.

However, there are some positive signs as a result of various attempts to curb this widespread piracy. For example, Indian law enforcement officers are now conducting more suo moto raids in some copyright areas, and deriving positive results therefrom.27 This is especially significant to the recording industry and its rampant problems with illegally copied and marketed compact disks. The government of Tamil Nadu itself set a positive precedent in the fight against piracy by implementing the Goonda Act, which places infringers in detention for deterrence purposes.28 This act has seen positive results as the overall piracy rate in the region has decreased, while legitimate sales have increased.

The International Intellectual Property Alliance (“IIPA”) has proposed a variety of methods that could alleviate the piracy problem, thereby making India a more attractive market for both outsourcing and trade. One such suggestion involves the creation of a “National Anti-Piracy Task Force” to aid in coordinating efforts to stem piracy and compiling resources necessary to attack the piracy industry.29 Obviously, such an organization would only aid the situation if it is provided the necessary funding and support from the government, which seems thus far to be a problem. The IIPA further suggested that law enforcement officials increase the number of suo moto raids that are already seeing success across India. Such raids aid in punishing the offenders, but more importantly serve as deterrence against other would-be infringers.

5. Inefficient Judicial System

Aside from the difficult issues facing the law enforcement branches in India, the other significant impediment to IP protection remains the beleaguered court system. Each year the Office of the U.S. Trade Representative (“USTR”) analyzes the “adequacy and effectiveness of IP protection” in 87 countries,

designating the countries with the most egregious IP violations under the “Priority Watch List,” of which India is a part.30 According to research data compiled by the IIPA and the USTR, to date India has never had a successful criminal conviction for software piracy, specifically referring to corporate end-user piracy.31 This information is not unknown amongst IP infringers in India, which creates an environment in which piracy remains unchecked without fear of punishment. A reformed and efficient judicial system would help inspire law enforcement officers with a belief in the judiciary, and these officers would then have the opportunity to see rewards in the form of civil and criminal convictions. Reformation of the current judicial system is imperative, therefore, to guarantee that both foreign and domestic corporations are comfortable with business operations and IP in India, while the conviction of such IP infringers would go far to deterring future attempts.

Perhaps the most pressing issue regarding the Indian judicial system remains the inefficient and time consuming process required for judicial contract enforcement. Each year the World Bank compiles statistics on business regulation and contract enforcement, and in 2006 India ranked 173rd in a list of 175 economies with respect to the ease of enforcing contracts. While the US sees an average of 17 procedures and 300 days to judicial enforcement of contracts, India sees those statistics multiply to an average of 56 procedures and 1,420 days to enforcement.32

These statistics become even more significant as other outsourcing destinations are growing in popularity across the globe, particularly in Eastern Europe and Russia. Poland, a burgeoning IT hub with low wages and highly educated engineers, ranks 63 places better than India in contract enforcement at 112. Romania by comparison is quite efficient, ranking in at 45th, while Russia, with its ever growing number of highly educated mathematicians and engineers, comes in at 25th. Contract disputes are inevitable in the corporate world, and operating in a judicial environment like India’s will inevitably discourage corporate executives from further operations in India while such disputes remain in the court system for an average of nearly four years.

In the absence of any significant trade secret law in India, contracts remain the only viable legal protection against loss of such IP, which invariably emphasizes the absolute necessity of an efficient and pro-IP court system. An example of the negative impact of India’s inefficient court system becomes manifest when a company is dealing with this form of IP. Protection of a company’s trade secrets is vital, as once a trade secret enters the public domain, the original company can no longer monopolize its use. Therefore, in India, the only means a company has to protect such IP remains non-disclosure agreements, along with the companies own internal security. With the current state of contract enforcement in India along with the issues troubling local law enforcement, such legal protection is minimal at best.

6. Inadequate IP Protection: The Consequences

The problems India faces in regards to IP protection are a black eye upon its lucrative outsourcing market, a black eye that grows more evident as the outsourcing destination market expands, and new players enter the scene. Over the course of the massive IT outsource boom, India has seen its “median annual wage

for a software engineer jump 11% from $6,313 in 2004 to $7,010 in 2005.”33 India’s incredible success in the IT arena is causing wages to rise and the available labor force to significantly decrease, as its technical institutions are incapable of producing sufficient numbers of engineers to meet demand.34 In fact, in an effort to sustain corporate growth, Indian outsourcing heavyweights themselves have begun adding locations in other low cost outsourcing markets like China and Eastern Europe, attempting to take advantage of the next low cost and highly educated workforce.35 One recent example involves Pune-based outsourcing company Zensar, who recently committed to opening an outsourcing base in Poland, joining Tata Consulting Services in taking advantage of the low wage and skilled labor available there.36 It is evident therefore, that India’s impressive growth comes with a price, as the overall cost of outsourcing in India increases and the once seemingly limitless supply of skilled workers shrinks.

CONCLUSION

Despite the systemic dangers to IP protection currently present in India, India’s tech future remains bright, as American companies continue to pour investment dollars into outsourcing projects, thus sustaining the impressive growth across the IT sector in India. This trend is evidenced by the opening and expansion of the various R&D centers in the country by some of the U.S.’s most influential tech firms. Thus, far the fear of losing valuable IP rights has not stymied the desire for economic savings that are currently sustaining their ability to remain competitive in their respective markets.

In short, however, the global outsourcing market is becoming far more competitive, and as American attitudes sober after the rush of the initial Indian outsourcing boom, other factors aside from cost effectiveness alone will begin to demand attention. As this process occurs, India must continue its trend of reforming restrictive legislation and promoting the efficient enforcement of its IP laws. Without such reform, India may find the lucrative outsourcing market, responsible for such a large portion of foreign direct investment, has found its way elsewhere.

(This bulletin was prepared under the guidance of Priti Suri by Mr. Robert D. Thomas, a Ist year law student at the University of Georgia School of Law who did a summer internship at PSA).

1 Ruth David, “The Father of Indian Outsourcing,” (2007), Forbes.com, Retrieved June 28, 2007.

2 Id.

3 IBEF, “Information Technology,” www.ibef.org, Last updated April 11, 2007, Retrieved June 22, 2007.

4 Keith Naughton, “India and Outsourcing: Silicon Valley East,” www.newsweek.com, May 2006, Retrieved June 27, 2007.

5 Ruth David, “The Father of Indian Outsourcing,” (2007), Forbes.com, Retrieved June 28, 2007.

6 Keith Naughton, “India and Outsourcing: Silicon Valley East,” www.newsweek.com, May 2006, Retrieved June 27, 2007.

7 IBEF, “Information Technology,” www.ibef.org, Last updated April 11, 2007, Retrieved June 22, 2007.

8 Id.

9 Id.

10 Id.

11 Christopher L. Sorey, “The Hidden Risks of Outsourcing: Is Your IP Safe Abroad?” Business Law Brief (Am. U.), Spring 2005.

12 American Stock Exchange, “Ocean Tomo Introduces Industry’s First Intangible Asset Growth Index,” www.amex.com, Retrieved June 27, 2007.

13 Russell L. Jones & Rena Mears, “Who’s had a Taste of Your Intellectual Property?” May, 2007, searchsecurity.techtarget.com, Retrieved July 4, 2007.

14 John Edwards, “The iPhone Security Threat,” June 25, 2007 www.itsecurity.com, Retrieved July 2, 2007.

15 Christopher L. Sorey, “The Hidden Risks of Outsourcing: Is Your IP Safe Abroad?” Spring 2005, Business Law Brief (Am. U.).

16 Id.

17 Id.

18 IBEF, “Information Technology,” www.ibef.org, Last updated April 11, 2007, Retrieved June 22, 2007.

19 Dr. B.L. Wadehrap, Law Relating to Patent, Trademarks, Copyright, Designs, and Geographical Indications, 3rd Edition, Universal Law Publishing Co. Pvt. Ltd., Delhi, 2004, p. 163.

20 Id. at 10.

21  Zinnov, LLC, “Intellectual Property Protection in India,” http://www.zinnov.com/research_ip.html, Retrieved June 22, 2007.

22 Dr. B.L. Wadehrap, Law Relating to Patent, Trademarks, Copyright, Designs, and Geographical Indications, 3rd Edition, Universal Law Publishing Co. Pvt. Ltd., Delhi, 2004, p. 398.

23 Id. at 402.

24 International Intellectual Property Alliance, “2007 Special 301 Report – India,” www.iipa.com, Retrieved June 22, 2007.

25 Id.

26 Id.

27 Id.

28 Id.

29 Id.

30  www.ustr.gov/Document_Library/Reports_Publications/2006/2006_Special_301_Review/Section_Index.html.

31 “Corporate end-user piracy concerns the unauthorized use of business software in a business setting.” Id.

32 The World Bank Group, “Doing Business in India,” 2006, Retrieved June 22, 2007.

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