Lawyer-blogger Jay Parkhurst has some good comments about the problems that can arise when a customer tries to make a SaaS / Web services vendor use the customer’s standard master services agreement form.

Feed enhanced by Better Feed from Ozh

When drafting a contract, it can pay dividends to give some thought to the personal interests of individual players. That’s because when disputes arise, the involved individuals will naturally want to protect their own interests, such as —

• not having fingers pointed at them;
• being thought of by their side as a committed team player who’s willing to fight to win, not a defeatist who throws in the towel;
• protecting their bonus, their commission, their pay raise, their promotion, etc.

These desires can manifest themselves in a variety of ways; here are a few, along with some possible ways of managing them contractually:

Focusing on the interests of individual players is just a variation on public-choice theory.

Feed enhanced by Better Feed from Ozh

This afternoon I posted version BAILEY, an easier-to-edit revision of the TATE Compendium community library of annotated technology contract clauses — a great framework for creating a starter draft of an actual contract — along with a Drafter’s Guide.

• I re-edited the commentary into Microsoft Word comments. The user feedback I was getting indicated that: 1) many users (but not all) preferred Word comments over in-line commentary. In large part, this was because, when using the Compendium as a starter draft, it’s easier to mass-delete all the Word comments with a couple of mouse clicks than to individually delete each in-line annotation.
• To make it easier to scan the document, I moved a number of subclauses into their own separate clauses for greater visibility.
• This version contains a number of new clauses, while others have been edited.
• Each clause now has a unique identifier in fine print — later on this should help with automating part of initial contract review.

Feed enhanced by Better Feed from Ozh

(This is a legit reproduction — the Dilbert site provides HTML code for embedding strips this way.)

Feed enhanced by Better Feed from Ozh

“Sometimes being ethical [in bidding on a project] means you sacrifice a sale. But clarifying your position upfront helps you avoid an uncomfortable situation or damaging legal ramifications.”

Read it all.

(Recommended by Tim Cummins of IACCM.)

Feed enhanced by Better Feed from Ozh

Introduction

This post is based in part on comments made by the panelists during a one-hour Negotiations Community of Interest “ask the expert” conference call this past Tuesday, October 20, presented by the International Association for Contract and Commercial Management (IACCM).

During the call, we talked about a few selected excerpts from the TATE Compendium, with my co-panelists role-playing as counsel for a vendor, a reseller, and a customer, respectively, and with me as moderator and commentator.

(As planned, we ran out of time before running out of discussion material in the excerpts.)

Territory and term

Some of the most important business points typically negotiated in a reseller agreement are the territory, the exclusivity, and the term.

A vendor might be willing to grant a comparatively-long term to give the reseller time to do sales- and marketing activities to build up the territory.

On the other hand, the vendor may want a short term and a comparatively-small exclusive territory (if any exclusivity at all), so as to preserve its flexibility —

• to make sales itself in the territory (which of course may cause the reseller to be concerned about being undercut by the vendor)
• to “hire” other resellers in the territory if the first reseller doesn’t work out
• to grant exclusivity in other territories to other resellers (the larger the reseller’s territory, the harder that is)

A reseller, in contrast, will normally want a longer term, a bigger territory, and exclusivity —

• in the hope of making more money during the time available in the term
• so that it doesn’t make a significant investment in training, salaries, etc., to sell the vendor’s product or service, only to have the vendor yank the territory at the end of a short term. (That may be a particular concern for the reseller if the product or service is a new one that has yet to be proven in the marketplace and doesn’t “sell itself.”)

Customers often don’t especially like exclusive-reseller arrangements, because they want alternative sources of supply — not least so they can play the alternative sources off against one another).

Training

Some reseller agreements require the reseller to send people to be trained in the provider’s products and services.

It’s usually uncontroversial for the reseller to pay its personnel’s travel and lodging expenses.

Whether the reseller should pay a training fee to the provider, to help cover the provider’s internal training costs, will likely be influenced by who brings what value to the table:

• A reseller with an established track record could argue that the provider should bear its own internal costs of providing training to reseller personnel as an investment in potential future sales.
• For a less-experienced reseller, on the other hand, the provider could argue that it has no guarantees whether the reseller will actually be able to sell anything, therefore it’s the reseller that should make the investment in training its people.
• The arguments can be reversed, of course, if the provider does not yet have much of a track record but the reseller does.

Sales targets

The bigger the territory the longer the initial term, and the more-proved the product or service, the higher the vendor will want the minimum sales targets to be.

The vendor may also want to have the targets be increased by X percent year-over-year.

If the reseller fails to hit its targets, the vendor may want to be able to “fire” the reseller so that it can bring in someone else.

The reseller, however, may take the view that its sales problems were due to problems with the product or service.

One possible compromise is “progressive discipline” — IF: The reseller fails to make its targets (or to pay the vendor an equivalent amount in cash); THEN: Not necessarily in the following order:

• the reseller’s discount(s) get reduced
• its exclusivity goes away
• the product line available for resale is cut back

How often should sales be measured against targets — annually? Quarterly? Monthly? That may depend largely on the length of the sales cycle for the product or service — for a product with a six- to nine-month sales cycle, it might not make sense to measure the reseller’s progress every month, at least not initially.

Resale restrictions

Vendors will prefer not to see a secondary market develop (a so-called gray market), which could happen if Reseller sells Vendor’s products, not to end-customers, but to other resellers or distributors. Vendors may be concerned about, for example:

• list-price undercutting
• product quality
• customer support obligations
• warranty obligations
• brand reputation
• legal liability, especially where regulated products are involved such as pharmaceuticals and medical supplies

Depending on the jurisdiction, though, Vendor may find it challenging or even impossible to stop certain secondary markets from developing.

For example, in the European Union, parallel imports between EU member states are generally legal — see this 2004 European Commission press release explaining Commission policy on parallel imports. On the other hand, imports into the U.S. of trademarked goods that are materially different than the trademarked goods offered in the U.S. market, without the trademark owner’s permission, are illegal under 19 USC § 337 — see this October 2009 Steptoe & Johnson memo.

Concerning antitrust implications of resale restrictions, see the Robert James memo cited above (scroll down to “Legal Principles”).

Franchise-law liabilities

[Added 2009-10-24] Providers entering into reseller- or distribution agreements should be careful not to become an “accidental franchisor,” for example by charging any kind of “fee” (a term that can encompass a lot of economic arrangements). Doing so can give rise to enormous complications and potential civil and/or criminal liability — see this useful overview by attorney John Tang.

Acknowledgements

Many thanks to the other panelists (listed in reverse alphabetical order, so as to strike a blow against end-of-the-alphabet discrimination):

• Tiffany Kemp of Devant Ltd.
• Bill Bosworth of Think! Inc.
• Jason Mark Anderman of WhichDraft.com

and to Katherine Kawamoto and Mark Heminway of IACCM.

The other panelists brought up a number of the above points during our discussion, but they don’t necessarily endorse or agree with the write-up in this blog posting, the responsibility for which is entirely mine.

Feed enhanced by Better Feed from Ozh

I’ve posted version BADEN of the TATE Compendium of technology-contract clauses. This is a major reorganization, with clauses arranged in the order they would typically appear in an actual contract instead of alphabetically. That way, it should be easier to draft a contract by deleting clauses you don’t want.

Feed enhanced by Better Feed from Ozh

This past week I had to review and mark up a draft software development agreement for a client. It was a thing of beauty: Densely printed in single-spaced, 10-point type, using complex sentences in long paragraphs, it covered scores of contingencies in remarkable detail. It may have been THE most compre­hensive such agreement I’ve ever seen.

The agreement’s very comprehensiveness, though, cost my client a good deal of money. I had to spend a not-inconsiderable amount of time carefully reviewing the language to make sure its complexities didn’t mask any unpleasant surprises. That was a shame, because —

• most of the concepts covered by the agreement could have been stated far more succinctly;
• most of the contingencies it planned for were unlikely ever to occur;
• if the contingencies ever did occur, the parties probably would try to handle them on a business basis.

I was reminded of the article I read several years ago about the Pathclearer approach developed by in-house counsel at a UK brewery. The approach involves using short letter agreements instead of long, complicated contracts, and relying on commercial motivations and the general law to fill in any gaps that might be left.

I’m hoping the TATE Compendium can stand on the shoulders of the Pathclearer approach, using short, understandable, “Lego-block” clauses to help cut the time and expense of drafting and reviewing contracts, even complex ones.

Feed enhanced by Better Feed from Ozh

I wouldn’t want to be the software-vendor account rep trying to up-sell this customer — not after the vendor successfully sued the customer to force it to spend nearly $500K to re-buy its license after an internal corporate reorganization.

The software license agreement included an assignment-consent requirement

Here’s what happened, according to the appeals court in Cincom Sys., Inc. v. Novelis Corp., No. 07-4142 (6th Cir. Sept. 25, 2009) (affirming summary judgment in favor of vendor). I’ve added emphasis and extra paragraphing below:

Cincom is an Ohio-based corporation that develops, licenses, and services software for its corporate customers. The rights to use two of Cincom’s most popular software offerings form the basis of the current dispute.

SUPRA© [sic; should be ®] is a database management program that allows a corporation to manage millions of records. MANTIS© [sic; ®] is a fourth-generation application development system, i.e., a computer language that allows a corporation’s software professionals to develop computer programs that allow the corporation’s operations to function more smoothly. …

Rather than sell the computer programs themselves, Cincom only sells licenses that allow its customers to use the two programs for an annual fee.

On July 5, 1989, Cincom agreed to license SUPRA© and MANTIS© to Alcan Rolled Products Division (“Alcan Ohio”), an Ohio-based corporation that would later become known as Novelis.

The license Cincom issued listed “Alcan Rolled products [sic] Division” as the “Customer” and granted to Alcan Ohio “a non-exclusive and nontransferable license” to use Cincom’s software. (License at 1.) …

Alcan Ohio could only place the software on designated computers that the parties specifically listed in a schedule attached to the license. (License at 1.) Alcan Ohio listed the designated computer as one located at its facility in Oswego, New York.

The license agreement closed by noting that Ohio law would govern its terms and that Alcan Ohio could “not transfer its rights or obligations under this Agreement without the prior written approval of Cincom.” (License at 3.)

The customer did an internal corporate reorganization

Then came the internal corporate reorganizations, which amounted to reincorporating the customer in Texas (it was originally an Ohio corporation) and changing the name:

Before the commencement of Alcan Ohio’s internal reorganization, Alcan Ohio was a wholly-owned subsidiary of Alcan, Inc., a Canadian corporation.

On May 15, 2003, Alcan Ohio created a separate corporation known as Alcan of Texas (“Alcan Texas”), organized under the laws of Texas.

Alcan Texas, like Alcan Ohio, was also a wholly-owned subsidiary of the Canadian parent corporation Alcan, Inc.

On July 30, 2003, Alcan Ohio merged into Alcan Texas, with Alcan Texas remaining as the surviving corporate entity.

The next day, Alcan Texas simultaneously merged into itself and its three Texas subsidiaries.

As a result, the former rolled products division of Alcan Ohio became a subsidiary of Alcan Texas known as Alcan Fabrication Corporation.

In September 2003, Alcan Fabrication Corporation changed its name to Alcan Aluminum Corporation. A final name change occurred on January 1, 2005, when Alcan Aluminum Corporation changed its name to its current appellation, Novelis.

So what was the net effect? Not much, really:

Thus, as of January 2005, the software Alcan Ohio licensed from Cincom remained on the same computer in Oswego, New York, but in a plant now owned by an entity named Novelis. [DCT COMMENT: For all practical purposes and most legal ones, the "entity named Novelis" was one and the same as the original licensee, Alcan Ohio.]

Alcan Ohio never sought or obtained Cincom’s written approval to continue to use the SUPRA© and MANTIS© software before restructuring its rolled products division.

The vendor sued, and forced the customer to re-buy its license

When the vendor learned of the corporate reorganization, it filed suit, alleging that the customer’s actions violated the license agreement.

The trial court granted summary judgment that, under the federal law governing patent- and copyright licenses, the customer’s internal corporate reorganization transactions constituted a “transfer” of the software license which the license agreement prohibited without the vendor’s consent.

(Under state law, other types of property are deemed automatically vested in the ’surviving’ corporation, but federal law controls for patent- and copyright licenses.)

The vendor and the customer stipulated that the vendor’s monetary damages were $459,530.00 — which (surprise, surprise) was equal to the amount of the initial licensing fee. See id., slip op. at 3-4.

On appeal, the Sixth Circuit affirmed, explaining that:

… Allowing state law to permit the free assignability of patent or copyright licenses would “undermine the reward that encourages invention.” This is because any entity desiring to acquire a license could approach either the original inventor or one of the inventor’s licensees. Absent a federal rule of decision, state law would transform every licensee into a potential competitor with the patent or copyright holder. In such a world, the holder of a patent or copyright would be understandably unwilling to license the efforts of his work, thereby preventing potentially more efficient uses of the invention by others.

… where state law would allow for the transfer of a license absent express authorization, state law must yield to the federal common law rule prohibiting such unauthorized transfers.

See id., slip op. at 6-7 (citations and internal quotation marks omitted).

This vendor was penny-wise but pound-foolish

It’s totally understandable that a software vendor would want to impose an assignment-consent requirement in a license agreement, in order to keep its software, and the trade secrets therein, out of the hands of competitors.

And it’s also understandable that the vendor would want the ability to consent even to a transfer involving an internal reorganization by the customer — otherwise, the customer might transfer its obligations to a worthless shell corporation.

But that doesn’t mean the vendor has to seize on a customer’s corporate reorganization as an opportunity to extract extra revenue from the customer.

You can bet that this customer is looking around for ways to ditch the vendor.

And if the vendor has competitors (and who doesn’t?), one of those competitors may well be offering a rip-out-and-replace deal, in which the customer gets the competitor’s software for free in return for an agreement to pay maintenance for X — years.

(See also: Assignment-consent provisions in the General counsel notebook, as well as the sample assignment-consent clauses.)

Feed enhanced by Better Feed from Ozh

Smart vendors are judicious about investing time and resources in a response to a request for proposal (“RFP”) before they know whether they’re a serious candidate for the business.

With that in mind, here’s a “canned” preliminary legal response that I’ve found useful for vendor clients to attach to RFP responses.

Feel free to edit the text below for use in your own responses — of course, you shouldn’t rely on the text as a substitute for legal advice about your particular circumstances.

Warning: Once in a while, the customer’s procurement people can get their noses out of joint when vendors don’t fall all over themselves catering to the customer’s every whim. So, give some thought to whether you’d fatally p*** off Procurement by including this text in your response — and if so, whether you can live with that.

(That’s why many of the points below try to explain why the vendor is taking the positions it is. The hope is that the customer won’t reject the vendor for supposedly being an arrogant so-and-so.)

[Text follows:]

1. Only the final contract document can be binding

Detailed legal reviews and comments for RFPs involve some cost. Because those costs must eventually be covered by our pricing, our general policy is not to incur them at the initial RFP stage, and instead to wait until it is evident to both sides that we are likely to win the business.

(We take very reasonable positions in negotiating “legal T&Cs,” which we would be happy to confirm by sending you our standard contract form.)

Consequently, until both sides have agreed on and signed a final written contract, we do NOT agree, and we OBJECT, to the terms and conditions of an RFP or of any attached contract drafts, EXCEPT FOR the confidentiality obligation stated in paragraph 5 below.

2. Comments about future products or services are for your general information only

Our response to your RFP conceivably might describe a particular function or feature that we expect to release in a future product (or a future version of an existing product), or that we expect to include as part of a future services offering. If so, we are providing that information solely for your general information and not as a contractual commitment. If you need for us to make such a commitment, we would be glad to discuss that on a case-by-case basis, and to include whatever terms we agree to in the final written contract.

Here’s why: If we were to include a future-deliverables commitment in the final contract, that could affect the timing of our ability to recognize revenue. Certainly revenue recognition is our problem, not yours. But revenue-recognition issues could affect our willingness to offer the pricing and other terms you prefer, in the time frame you need.

3. Our RFP responses can be incorporated into the contract only on a case-by-case basis

Some customers want to incorporate particular portions of our response to an RFP into the contract as warranties or promises. We would be glad to discuss that with you on a case-by-case basis.

But we do NOT agree, and we OBJECT, to any blanket statement in the RFP, to the effect that the RFP and our response will be incorporated into the contract in their entirety.

We try hard to ensure that our RFP responses are accurate. But because of the number of RFPs we process, at this stage of the process we cannot subject each of those responses to the same (costly) level of technical scrutiny that we give to our contractual warranty commitments.

If this will be a significant concern for you, it would save time for both you and us if you could indicate which specific points are particularly important to you, so that we can focus on those points early on.

4. Our exceptions to your RFP statements might not be a complete list

We will make reasonable efforts to explain any conditions, exceptions, or limitations (if any) in our RFP responses. But we do NOT agree, and OBJECT, to the idea that, if for some reason we do not object to a particular point in your RFP, then we have permanently waived the objection and are required to accept that point as part of the final binding contract.

5. Our confidentiality obligations are limited unless we enter into a separate confidentiality agreement

We will treat as confidential any non-public information that we first received from you in our discussions about the transaction contemplated by your RFP (other than information that we also receive from other, non-confidential sources, or that we independently develop ourselves).

We will be happy to discuss including suitable confidentiality provisions in the final written contract.

We would also be willing to enter into a two-way nondisclosure agreement to protect both parties during our pre-sale discussions. We can provide a reasonable form of agreement if you wish.

Otherwise, though, for the reasons summarized in point 1 above, we do NOT agree, and we OBJECT, to any confidentiality provisions in your RFP itself.

Feed enhanced by Better Feed from Ozh