Something else we discussed in class yesterday: Suppose a customer company has a lot of bargaining power. And suppose the customer uses that power to force a vendor to make some tough concessions in a contract negotiation.

The customer’s negotiators might well regard those concessions as an entitlement: We’re the big dog; of course we get what we want.

But they should recall that ultimately, all contracts have to be performed by people. And people will almost certainly be influenced, not just by the words of the contract, but by their employer’s then-current interests — and by their own personal interests as well.

If the vendor’s people feel they’ve been crushed by the customer, they’re unlikely to harbor warm and fuzzy feelings for the customer. (This is at least doubly true if the contract later proves to be a train wreck for their company — most business people know that being associated with a train wreck is seldom good for anyone’s professional reputation.)

The vendor’s people are not likely to be motivated to go above and beyond for that customer. They may be tempted to “work to rule,” to use an expression from the labor-relations world — to do just what the contract requres, and no more. That does neither party any favors.

The reverse can be true when the shoe’s on the other foot. Suppose the customer thinks that it’s been taken advantage of by a vendor. When it comes time for renewals, or repeat business, or recommendations to other companies, that vendor probably won’t have a lot of brownie points with the customer’s people.

The lesson for contract drafters and negotiators: Even if you’ve got the power to impose a killer contract on the other side, think twice before you do so. You could be setting up your client to have to deal later with a wounded tiger.

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During a discussion yesterday in my contract-drafting class, I pointed out that —

• Contracts are not computer programs that will be carried out, exactly as written, by mindless, disinterested robots. Quite the opposite: contracts try to encourage human beings. We generally aren’t mindless, and often we’re anything but disinterested;
• Legal obligations are just one type of human motivator in the toolkit. Steven Weatherley gets it right in his groundbreaking Pathclearer article: Legal obligations are a blunt instrument: They can be difficult, expensive, uncertain, and time-consuming to enforce.

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I plan on spending some time in my contract-drafting class talking about this case:

• British Sky Broadcasting contracted with EDS to develop a customer relationship management (CRM) software system, and eventually filed suit when things didn’t go as planned.
• The judge concluded that EDS made fraudulent misrepresentations when one of its senior UK executives lied to Sky about EDS’s analysis of the amount of elapsed time needed to complete the initial delivery and go-live of the system (see ¶ 2331 and ¶¶ 194-196.)
• The judge also concluded that during subsequent talks to modify the contract, EDS made misstatements that didn’t rise to the level of fraud, but still qualified as negligent misrepresentations (see ¶ 2336).
• One clause in the contract capped the potential damage award at £30 million — but by its terms, that limitation did not apply to fraudulent misrepresentations, and the judge held that the limitation didn’t apply to negligent misrepresentations either (see ¶¶ 372-389).

After the decision was handed down, Sky announced that it expected the damage award to be at least £200 million. Had it not been for the misrepresentation claims, the pure-contract damages presumably would have been capped at £30 million. The difference works out to about US$270 million.

One of the most interesting aspect of the judge’s opinion, it seems to me, is its detailed exposition of the facts, which illustrate the ’sausage factory’ by which technology deals sometimes get made — and how even just one vendor representative can make a deal go terribly wrong for his employer.

Hat tip: ContractsProf blog.

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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.

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

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See this Trading Secrets blog posting by Seyfarth Shaw attorney Jason Stiehl, discussing Southwest Stainless, LP v. Sappington, 582 F.3d 1176 (10th Cir. 2009) (reversing damage award for misappropriation of trade secrets). In that case, the appeals court “held that sharing pricing with a customer, without restriction, removes any claim of confidentiality [in the pricing] that may have existed.”

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A federal appeals court has ruled that, at least under Massachusetts law, a company that acquired another company’s technology assets, for cash plus an earn-out, was obligated to use reasonable efforts to promote the tech­nology, so that the seller would have a shot at the earn-out payments. See this Law.com article about the First Circuit’s Sonora Scanners case, re­vers­ing and remanding a summary judgment in favor of the acquiring company (discussed on another point in this posting).

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“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.)

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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.

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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.

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