The dotcom collapse did IT law a big favour it purged from the sector those firms lacking commitment. And with only the real experts remaining, that's good news for clients

The dotcom boom of the early '90s ushered in a new and potentially profitable practice area for many law firms across Asia. With IT law still in its infancy, technology companies were getting out of their depth especially when protecting their intellectual property and internet start-ups were getting entangled in legalities. Across the world, law firms were quick to pick up on the needs of the technology companies, both large and small, requiring their services.

Several firms in Asia have long had dedicated technology practices and possessed the specialised capabilities to provide sound counsel to companies expanding their global IT reach. Such firms who existed long before Silicon Valley gave birth to a new global phenomenon continue to practise IT law successfully in Asia, while those whose IT practices were hurriedly set up to tap the lucrative market in the wake of the dotcom boom are now defunct.

Ups and downs
Many firms who were quick to grab the business created by the explosion of dotcom companies did not have lawyers onboard who actually specialised in IT law. Instead, firms took an ad hoc approach as the business came in, fighting fires where needed and attempting to get their lawyers up to speed on IT issues as the firm diversified, in an attempt to obtain more and more of this work.

And, as lawyers readily agree, many Asian firms just weren't ready to engage these companies and provide the same quality of counsel as they were able to in other areas of their business.

'On the back of the tech boom everybody became a technology lawyer, including people whose backgrounds were in very different disciplines. It was just flavour of the month,' says Poh Lee Tan, a partner at Baker & McKenzie in Hong Kong. 'So one queries whether firms had real technology practices then or whether it was just, at that time, lucrative and expedient to focus on that particular sector,' he adds.

Gabriela Kennedy, Lovells' new TMT group head for Asia concurs with Tan, suggesting that during the early years of the dotcom boom everybody was jumping on the IT bandwagon, happily capitalising on the large volume of work available.

There was a frenzy of deals and consumers were not, and didn't have time to be, as sophisticated as they are now and give you feedback, she says.

During the dotcom boom, IT law underwent a period of self-exploration and capacity-building in order to cover even the most basic attributes of the new technology that was expanding throughout Asia.

But the burst of the internet bubble in 2000 saw a large percentage of the once powerful technology companies fall from grace, and alongside them were those law firms whose IT practices were built on shaky foundations.

But despite the sharp reduction in IT business, some firms' practices survived and emerged stronger than before as their peers floundered in the wake of the technology collapse. They now compete for shares of the smaller but nevertheless substantial amount of business available.

Post-bubble burst
Firms with well-established IT law practitioners, having escaped the flames relatively unscathed, are currently setting the standard for what is expected from law firms' IT practices today. In effect, they are defining IT law in its purest sense.

What is IT law?' asks Kennedy. 'It's everything: it can span criminal law, contract law, tort, intellectual property, regulatory issues and data protection.

At the end of the day, it's whatever the needs of an IT client may be and it depends what transaction you're doing,' she adds. 'An M&A transaction involving hi-tech companies, for example, will have the corporate side to it, a pure IT side to it, and an IP side to it, to name just a few. Clients need lawyers who can provide the complete advisory package and not just bits of it.

Many lawyers span the overlapping and converginge areas of IT and intellectual property.

I started offering IP advice to the IT industry that crossover still exists and the firms that can offer that are the ones that are going to survive,' Kennedy says.

Others target IT in the telecommunications area, although with networks now being driven by software rather than hardware, regulatory work of this kind has waned somewhat.

Telecoms companies are not doing well globally and certainly if they have cash for acquisitions they wouldn't be primarily focusing on acquisitions in Asia. So that's one area that's not doing well,' says Tan.

IT remains a fast-moving industry and the law firms that specialise in this area are quick to refer to themselves as risk identifiers as well as solution finders.

Following the dotcom collapse, many firms were quick themselves to identify a risk in continually pouring resources into the area. But some perhaps to some extent lacked foresight in doing so more often than not the ones who weren't specialised nor particularly committed. The same firms could offer clients little in comparison to firms with well-established and dedicated IT practices.

Some question what level of commitment law firms have for that practice [in Asia],' says Tan. 'Would they keep an equity partner? Then the next level would they keep a salaried partner? And would either of these focus solely on the TMT space?

Now that the tech boom is over, you would naturally expect that category of lawyer to no longer focus solely on technology because it is not as lucrative to do so,' Tan says. 'And that leaves the lawyers who are committed to technology in the first place still being involved in advising clients in the TMT sector.'

Law firms' IT practice areas have been diversified, but, as Tan suggests, this means they have simply become better suited to deal with all facets of IT law, consequently allowing themselves to provide a wider degree of service for their clients.

What I frequently see is people who do focus in this area, but who also wear a couple of other hats one of them could be an IP hat, another could be a corporate hat. It was much the same prior to the tech boom.

Towards the future
So what of the future for IT law? According to Lovells' Kennedy, there is and will remain a sound market for the services of an accomplished IT practice.

It's a common misconception that when times are bad, we're not going to need IT lawyers. But we're always going to need IT lawyers because all of us are using IT. It's a way of life now and it's here to stay.

However, it is becoming increasingly apparent that firms wanting to excel in this practice area need to be dedicated and in for the duration. Clients are increasingly expecting more sophistication and an in-depth knowledge of key industries in the TMT area, and so dabbling from time-to-time is no longer sufficient.

Lots of people were just giving pure contractual IT advice. In sophisticated deals, knowing how to draft software licences is not enough. A more solid foundation in at least two or three areas of law is going to stand you in good stead and make you stand apart from competitors, says Kennedy.

When times are harder, consumers choose more carefully. Nowadays clients are looking for complete solutions from law firms rather than having to shop for distinct services from different providers. It's got to be the right package that is provided for the right price.'

Avoiding the pitfalls in multi-jurisdictional outsourcing
Outsourcing is increasingly seen as a core business strategy to achieve cost reductions, quality improvements and to enable companies to focus on their core business operations. Multinational companies are also increasingly using outsourcing, following acquisitions or disposals, to consolidate international operations and systems onto common platforms and processes. The growth in outsourcing activity not only involves IT and communications services but also a wide range of business processes including manufacturing, audit and finance, human resources, real estate management and procurement services.

While outsourcing can generate significant value if structured and managed effectively, it also creates new risks as a result of the transfer of business operations to third party suppliers including:

• performance risk relating to services;
• costs risk relating to costs savings; and
• reputational risk relating to the overall impact of the services on the customer's business and goodwill.

The business value in outsourcing transactions can only be realised if these risks are properly managed and controlled. The supplier needs to generate value and to control performance risk, while the customer needs to achieve cost savings without compromising quality of service. Balancing the interests of supplier and customer and understanding how to create value and manage risk are central to negotiating the right outsourcing structure and key services issues but often the parties do not focus on this during contract negotiations.

This failure is particularly acute in multi-jurisdictional outsourcings where it can be difficult to scope business operations and systems for different countries and to structure the transaction recognising the significant differences in local law and regulation.

Structuring the deal
In multi-jurisdictional transactions, recognising the need for both central control and local implementation is crucial. Independent agreements could be put in place for each country or region, but the benefits of global consolidation and control would be undermined. A single global agreement is also of limited value as it ignores inevitable local variations in legal, tax and regulatory issues.

A more attractive solution would be to set out the principal commercial terms in a master transfer agreement containing the principal commercial terms for the transfer of assets, contracts and employees, including payment terms and any relevant warranties and indemnities. A master services agreement would set out the principal commercial terms applicable to the ongoing provision of services, such as pricing, the scope of services and service levels, customer protections, termination and liability. Simplified local implementation agreements would be used in each jurisdiction to comply with local laws relating to the transfer of assets and employees and to specify local service requirements.

Key transfer and services issues
The transfer of a business, including the transfer of assets, contracts and employees, as part of an outsourcing arrangement is not unlike any multi-jurisdiction business disposal. However, because the assets are being purchased specifically to provide the services to the customer, the customer will often argue that it need give only very limited warranties and the supplier should rely on its own due diligence. The supplier will argue for more general warranties on the basis that it cannot undertake comprehensive due diligence as it is not yet providing the services or that it is buying the assets for more general purposes and at a market or net book valuation.

Further, the customer will often argue that the only remedy for a breach of warranty as to the sufficiency or quality of the transferring assets should be appropriate relief for the supplier from its service obligations. The supplier will argue it should also be entitled to damages.

There could also be capital gains liability and other tax considerations for both parties, which may be mitigated by use of appropriate elections and exemptions, or by adjusting the allocation of consideration between different categories of assets.

The services agreement, with its numerous schedules covering specifications, service levels, charges, relationship management, security, audit and many other issues, is likely to be a complex document requiring careful coordination of legal, commercial and operational workstreams. There are five key elements in any service agreement on which the parties should focus:

• scope of services (including both existing and new services) and service fees;
• customer protections (such as audit rights, benchmarking, step-in rights);
• supplier protections (principally to secure a revenue stream);
• termination and termination consequences (as an ultimate remedy for breach once other remedies are exhausted); and
• liability (considering the types and likelihood of breach, likely loss arising and insurance coverage).

Local implementation transfer and services issues
Ideally, the local implementation agreements should be subject to the governing law of the master transfer and services agreements but, at the same time, will often also be subject to local law and regulation which must be applied irrespective of the law applicable to those master agreements. It is possible to make the agreements subject to mandatory local law and regulation but, to avoid uncertainty as to the rights and obligations of the parties, local law requirements should, as far as possible, be addressed in the local implementation agreements.

The main local law issues under the transfer agreements will relate to:

• treatment of employees;
• transfer of assets;
• transfer of contracts;
• exclusion from warranties on asset sales; and
• transfer tax issues.

Local law issues that will impact services agreements include:

• data protection and regulatory compliance;
• representations and warranties;
• intellectual property rights;
• charges and taxes;
• termination rights; and
• limitations on liability.

Checklist for success
There is no standard correct way of addressing these issues for all transactions. However, parties which focus on:

• a flexible master agreement which balances the interests of customer and supplier;
• effective coordination between, and management of, the various workstreams usually involved in the negotiations; and
• the formation of a lasting relationship between them,
  will be more likely to achieve a quality contract which creates value for the both customer and supplier.

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Offshore outsourcing: it pays to plan
The strategy of transfer-ring back office functions to offshore service providers has been gathering pace in Asia. It is now common to see mention in the press of another outsourcing to India, mainland China or some other relatively low-cost jurisdiction. With such significant potential to improve the bottom-line, offshore outsourcing is often referred to as the 'next big wave' in this lean business environment.

Many Asian businesses have found that offshore outsourcing makes sound commercial sense. Why it works can perhaps be explained by the economists' law of comparative advantage: companies (and countries) prosper when they specialise in whatever they are best at doing, leaving their trading partners to provide everything else. A Hong Kong-based insurance company can, theoretically, reduce operating costs by moving claims processing to Manila, where skills are comparable but labour is cheaper.

However, for some companies the reality can be very different to the theory. The promised benefits might not materialise over the life of the outsourcing deal. Experience teaches that the main reason for unmet expectations is a failure to take account of the substantial operational challenges and overheads of switching business processes from one country to another.

Checking for legal impediments to the outsourcing, and obtaining any necessary regulatory approvals, can take time. It is advisable to get expert legal assistance for these tasks. Once any legal and regulatory hurdles are cleared, the deal with the service provider has to be properly documented. More than in any other type of outsourcing, a precise description of the scope of the services and the expected service levels is essential when the service provider is in another country. Next, it is usually necessary for the customer to put in place strong governance and service level management teams.

Geographical separation and cultural differences sometimes diminish the effectiveness of the arrangement. Inevitably, there is less 'face to face' contact between the service provider and the customer, which not only complicates iterative tasks such as joint development of business processes, but can also hamper the development of the healthy, productive working relationships that are the real source of value in any outsourcing arrangement. Finally, quality and productivity issues sometimes offset any cost savings of lower labour rates.

Companies thinking about an offshore outsourcing need to balance the overheads of switching from the status quo against the potential cost savings. Even if that balance favours going ahead with the deal, meticulous planning and careful execution are necessary to realise the full benefits of the strategy.

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Making IT work for you

Newly appointed partner Gabriela Kennedy talks to ALB about Lovells' longevity in the information technology sector in Asia

I'm Lovells born and bred,' says Gabriela Kennedy, head of the firm's Technology, Media and Telecommunications Group in Asia.

With the firm since 1994, Kennedy has devoted her time since to working on IT matters in its Hong Kong office. Promoted to consultant in 2001, becoming in the process head of the TMT practice in Hong Kong, she was further rewarded on 1 May this year when she was appointed a partner and head of the practice throughout the region.

Kennedy now works with a team of lawyers across the firm's offices in Asia including Beijing, Singapore and Tokyo where the firm services a number of hi-tech Japanese clients.

'And I am, if you like, the CPU the Central Processing Unit that coordinates.'

The city of Shanghai can now be added to that list, with the firm recently receiving its second office licence for the Mainland.
'The day we obtained the licence we sent e-mails to certain clients to tell them,' she says, 'and I'm not kidding, within 10 minutes we had instructions to handle an IT deal that was taking place in Shanghai.  Our China team worked very hard (with support from us in Hong Kong) to close that deal in a record 10 days.'

Most of the transactions falling under Kennedy's remit are multi-jurisdictional in nature and, in the last couple of months, she has spent a lot of time working with the Tokyo office for a Japanese client providing content to WAP-enabled phones and structuring deals for this client with mobile operators in Hong Kong, Taiwan, the UK, France and Spain. Multi-jurisdictional IT and e-commerce projects have kept the Asian team busy in the last year.  Some of the transactions also required multi-jurisdictional regulatory advice (on issues such as data protection, encryption regulation and outsourcing regulations for financial institutions to name just a few). 'Having to obtain such advice from over 30 jurisdictions may seem daunting. It does help if you have offices in many jurisdictions or a reliable network of law firms that you can tap into, like that offered by the Pacific Rim Advisory Council, of which Lovells is a member.

Having an established local client base in Hong Kong (consisting of smart card providers, IT vendors, telcos and financial institutions), Lovells is now focusing on  regional work. Within the last year it has become the exclusive firm in Asia for PeopleSoft, and has also been advising three other major US software houses on licensing and contentious issues in Asia. 'The fact that we have won such clients in difficult times is the best accolade we could have hoped for.'  The team has also advised a French media group in relation to the syndication of its publications throughout Asia. 'Being able to speak the client's language was an added advantage,' says Kennedy, who speaks five languages.

Appetite
Expansion has been the key for Lovells in Asia. Originally an offshoot of the firm's IP practice in Hong Kong, the TMT practice in the region has grown in line with the expansion of its TMT practice worldwide.
The firm's European practice, in particular, has been well established and well-regarded for many years and the practice in Asia has broadened in a similar vein.

'In the last two years, we felt that it had grown enough for it to be an individual group.'

Assisting with this growth is the fact that Lovells' IP/IT (and now TMT) Group has always been a standalone operation. Unlike some of the blue-chip firms experiencing difficulties in this area, Lovells' TMT group has never been a support group. 'Saying that, we have provided support to our corporate and banking groups in relation to corporate or financing deals for telcos.'

Kennedy believes that TMT lawyers should be multi-skilled and should have an appetite for study. 'We practise in an area of law where changes take place at great speed. Unless you keep up with such changes in as many jurisdictions as possible, you cannot seriously compete. If you have acquired skill sets in two or three areas, this is an added advantage as there is a lot of cross-over in TMT.  IT work is very much interrelated with IP work, but you also need to know your contract law and your tort well. An interest in criminal law does not go amiss either. 

'In addition to providing telecoms regulatory advice and handling a few substantial IT projects, in the last year we have handled a number of interesting cases involving the Internet. One case that involved the hijacking of the online accounts of our client's customers was particularly interesting. We were handling this at the same time as the on-line auction fraud at eBay was making headlines in the States a few months ago.'

Lovells' TMT practice in Asia comprises individuals with heavy industry knowledge and background. 'Quite a few members of our team worked for telcos or IT vendors prior to joining us.'

Kennedy herself is no slouch in this regard. Specialising in semantics and philosophy of language at university, she then became an academic and used to be a theoretical linguist focusing on computational linguistics.

I used to write articles that I look back on now and I feel they were written in a foreign language and believe me they were written in English!

Committed and passionate about the TMT area, Kennedy practises what she preaches and preaches while she practises:  she teaches on the LLM in IT and Telecoms offered entirely on-line by Strathclyde University and has given guest lectures at the University of Hong Kong on the LLM in IT law. Kennedy also sits on the Management and Technology Committee of the Law Society of Hong Kong and is a member of the editorial panel of UK specialist journal, Computer Law and Security Report.

Next month she will be running IT law courses for a client who supplies anti-hacking software and wants its customers 'to know the law' before they use their products.

And the future? 'I left my crystal ball at home, sorry,' says Kennedy. 'I hope this year will be as good as our last if not better and (to paraphrase a famous man) that we continue to help our clients by 'making things as simple as possible for them, but no simpler than necessary'.

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Should your business consider 'open source'?
Open source software (OSS), the full definition of which is available at  www.opensource.org/docs/definition_plain.html, has existed for over 30 years. However, OSS has only recently gained acceptance by business and governments. Several governments, including the Chinese, now discriminate in favour of OSS by encouraging users to adopt Linux and by requiring public authorities, wherever practicable, to use OSS in preference to proprietary software.

Why choose 'open source'?
Major benefits include increased reliability OSS is, at all stages of its development, examined critically by large numbers of independent expert programmers and flexibility for users to modify. There are also cost benefits, although 'free' (as in Free Software Foundation) refers to users' freedom to share and customise the software and many companies (e.g. RedHat) package, enhance and distribute commercial variants of OSS for financial gain.

Licensing
OSS is protected by copyright in the usual way, and anyone wanting to use or work on OSS must comply with the applicable licence terms. Under OSS licences (e.g. the GNU General Public Licence available at www.fsf.org/copyleft/gpl.html), copyright law is used to keep the software 'free'. Users may use, modify and distribute modified versions of the OSS, but they may not add usage restrictions when they pass on copies. Modifying OSS is not a method of making free software proprietary.

Warranties
OSS licences disclaim warranties because the authors do not generate a revenue stream from which to fund liability. Warranty protection can however be bought separately (as can support, training, etc.) from companies such as RedHat when purchasing their products.

Support
Support for OSS has historically been inadequate for commercial users. However, as OSS becomes mainstream, the skills and infrastructure required formally to support OSS are increasing rapidly.

Durability
The long term viability of OSS appears more assured as its installed base increases and, at present, OSS is less susceptible to internet attacks and viruses than common proprietary software.

Other risks
SCO, the company that owns rights in Unix, has recently filed massive infringement claims against IBM, alleging that it illegally copied Unix code into Linux (thus enabling free software to compete with software that SCO sells). SCO has also threatened many Linux users with liability.

Whether OSS is suitable for your business will depend on many factors. One thing is clear: major organisations are increasingly adopting OSS. Notwithstanding fundamental differences between free and proprietary software, any major OSS procurement will involve negotiations and require documentation in respect of which advice from lawyers who understand the issues can prove invaluable.

For further information, contact Richard Fawcett, richard.fawcett@twobirds.com, +852 2248 6005 or Edward Alder, edward.alder@twobirds.com, +852 2248 6054

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China: get orientated
There's no use pretending it's easy for foreign technology companies to do business in the People's Republic of China. Foreign firms have and will continue to get their fingers burnt there, but they also get burnt in other countries. And is it really any easier for a European technology company to do business in, say, Japan?

We not only help technology companies by giving them legal advice. We help manage their expectations, maximise their comfort levels, introduce them to potential partners and, as far as possible within the PRC's cultural and legal framework, minimise the risks. Sometimes our advice causes clients not to invest. More frequently, it means they do, though differently from how they had planned.

When a technology client new to the PRC comes to us, we recommend they undertake an orientation exercise so they can make a more informed investment decision. We make no apologies for the apparent simplicity of what follows

Do know why you're investing
There is at least one international telecommunications provider that is so desperate to be 'in China' that it considers almost any sector of the market. That the CEO suddenly noticed that the PRC is really, really big is not a good enough reason to start a venture in Shanghai. Make sure you know what you are trying to achieve and understand you will need to be committed for the long term.

Don't expect legal or regulatory certainty
This is often the hardest thing for a foreign company to understand. You will not be able to tell head office that the rules covering your industry are clear-cut or stable. It's not like that. Rules change or are clarified all the time, often with bewildering rapidity. Occasionally, the rules of one agency will conflict with those of another. Happily, there is an increasing trend for these changes to be consistent and for the better.

Fortunately, we tend to no longer see the confusion exemplified by the 'China-China-Foreign' joint ventures of the late 1990s; where local governments (often with the participation of central government representatives) approved telecom joint venture structures that, after many such ventures had been established, were eventually declared illegal by central government.

Do choose your partner carefully
Here, 'partner' is the key word. Your company may have capital to bring to the table, but contributions to a venture should not merely be judged in dollars. Local knowledge counts in the PRC. The right partner should be able to open doors and navigate the bureaucracy in ways you never will. That can represent value to the venture.

Don't assume you have anything unique to offer
Your integrated billing software may work superbly in California but be assured PRC companies have been successfully billing their customers for a long time without it. Your engineers may be brilliant, but so are the engineers on the other side of the table, and they have fewer resources. A country that already ranks second in worldwide IT hardware production might need you less than you think.

Hong Kong
Contact: Ted Ringrose
Address: Squire, Sanders & Dempsey
Room 4008, Gloucester Tower
The Landmark
11 Pedder Street
Central, Hong Kong
Tel: 852 2509 9977
Fax: 852 2509 9772

China
Contact: Dan Roules
Address: Squire, Sanders & Dempsey LLP (formerly an office of Graham & James)
Suite 2002, CITIC Building
19 Jianguomenwai Dajie
Beijing 100004
China
Tel: 86 10 6507 8557 / 6591 8342 / 6591 8343 / 6591 8344
Fax: 86 10 6500 2557