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Negotiating Technology Transactions With US Businesses
UKTI Trade Services
www.ukti.gov.uk
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Contents01 About the Author
01 Introduction
02 All US laws are not created equal
03 Indemnificationisexpected
04 Ensureappropriateconfidentialityprotection
04 Bewareofjointownership
05 Avoidthepotentialtrapsof“workmadeforhire”
06 Usethepresenttense
07 Protectagainstyourpartner’sbankruptcy
08 Pay attention to source code escrows
08 Anticipatepotentialacquisitions
09 Anticipatepotentialsales
09 Conclusion
10 Other Sources of Information
Caveat:Thisarticleisforgeneralinformationalpurposesonly.Itisnotintendedasasubstitutefortheadviceofcompetentlegalorotheradvisersinconnectionwithanyparticularmatterorissue,andshouldnotbeusedasasubstitute.Opinions,interpretationsandpredictionsexpressedinthisarticlearethewriter’sownanddonotnecessarilyrepresenttheviewsofFried,Frank,Harris,Shriver&JacobsonLLP.Whilethewriterhasmadeeffortstobeaccurateinhisfactualstatementscontainedinthisguide,neitherhenorhislawfirmoranyoneconnectedwithitmakeanyrepresentationorwarrantyinthisregard.
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1 Negotiating Technology Transactions With US Businesses
DanielGlazerisapartnerintheTechnologyTransactionsGroupat Fried,Frank,Harris,Shriver&JacobsonLLP.Hispracticefocuseson domesticandcross-borderintellectualpropertyandinformationtechnologytransactions,suchaslicensing,outsourcing,distribution,development,consulting,manufacturing,supply,sponsorship,marketingandtransferarrangements,aswellastheIP/ITaspectsofmergersandacquisitions,jointventures,securitizations,creditarrangementsandothercomplexcorporatetransactions.HeisagraduateofHarvardLawSchoolandDartmouthCollege.
Hisprofessionalbiographyisavailablehere,andyoucandownloadhiscontactVcard here.
Dan can be reached at [email protected],onLinkedinhere,atthefirm’sNewYorkofficeat+1.212.859.8674,orthroughthefirm’sLondonofficeat+44.20.7972.9600.
About the Author
Author: Daniel Glazer
Fried, Frank, Harris, Shriver & Jacobson LLPTel (NY) +1.212.859.8674Tel (UK) [email protected]
YourUK-basedtechnologycompanyhasreachedadealwithaUS-basedbusinesspartner,subjecttofinalizingthecontract.TheUScompanyinsistsonusingitsformagreement,whichcontainsnumerousunfamiliartermsandconcepts.Youdon’twanttorisklosingthedealbytakingaheavyhandtothecontract,butlikewisewanttoavoidexposingyourcompanytoneedlessrisk.
ThispublicationaimstohighlighttenpitfallsUKcompaniesshouldavoidwhenenteringintoagreementswithUS-basedcompaniesforthelicensingordevelopmentofsoftwareandothertechnology.Theseriskscanbemitigated,butonlyifyourcompanyissensitivetotheseconsiderationswhennegotiating the contract.
Introduction
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2 Negotiating Technology Transactions With US Businesses
All US laws are not created equal
Althoughforsimplicity’ssakethisarticlewillreferto“USlaw,”forthemostpartthereisnosinglebodyofUScontractlaw.Rather,eachofthe50USstateshasitsowncontractlaw,andyourUSpartnerlikelywillinsistthatthecontractbegovernedbythelawsofaUSstatewithwhichthatcompanyisfamiliar.ThelargerUScommercialcenters,suchasthestatesofNewYorkandCalifornia,tendtohavebetter-developedcontractlaws.
Thecontractlawsofthevariousstatesgenerallyadheretocommonthemes,buteachstate’slawshavetheirownidiosyncracies.Forexample,NewYorkstatelawallowspartiestoselectNewYorklawtogoverncommercialcontractsthatbearnorelationtoNewYork,butonlyifthecontractisworthmorethanUS$250,000.Asanotherexample,Californiastatelawoffersbroadprotectiontotechnologydevelopers,insomecircumstancesinterpretingIPtransferlanguageinamannerthatrecognizesapotentiallyunintendedemploymentrelationshipbetweenCaliforniatechnologydevelopersandcompaniescommissioningtechnologydevelopment.
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3 Negotiating Technology Transactions With US Businesses
Indemnificationisexpected
UScommerciallitigationisrelativelycommon,inpartbecauseunsuccessfulUSlitigantsusuallyarenotrequiredtopaytheprevailingparty’slegalcosts.Accordingly,thereisaparticularfocusinUScontractsonobtainingfinancialprotectionintheeventoflitigationclaims.
WhencontractingwithaUScompany,yourcompanymostlikelywillbeaskedtodefendtheUScompanyagainstcertaintypesofclaimsandindemnifyitforrelatedlosses.Everycontractisdifferent,butcommontopicsforindemnificationincludebreachofconfidentialityobligations,violationsofapplicablelaw,damagetotangibleproperty,andpersonalinjuryordeath.
Indemnificationforintellectualpropertyinfringementclaimsassertedbythirdpartiesisakeyprovisionintechnologycontracts,asUSintellectualpropertylitigationisparticularlywidespreadandcostly.TechnologyrecipientstypicallywillaskforanIPinfringementindemnityfromtheirproviders,buttheprovidermayseektolimit,eliminateorevenreversetheindemnityobligationwhentheallegedinfringementwastherecipient’sfault(suchaswheretheallegedinfringementwascausedbytherecipient’sunauthorizeduseormodificationsoftheprovider’stechnology,therecipient’sfailuretoimplementawork-around,ortheprovider’scompliancewithrecipient’sinstructions).
Inallevents,thetechnologyprovidershouldconsiderreservingtherighttoreplace,modify,orobtainalicensefortherecipienttousetheallegedlyinfringingtechnology,aswellastherighttoterminatetherecipient’srighttousetheallegedlyinfringingtechnologyasan“optionoflastresort.”
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4 Negotiating Technology Transactions With US Businesses
Ensureappropriateconfidentialityprotection
USlawsgoverningconfidentialityobligationscanbetricky.Yourcompanyshouldcarefullyconsidertheramificationsofanyproposedlimitonthedurationofyourpartner’sobligationtoprotectyourvaluableconfidentialandproprietaryinformation(characterizedas“tradesecrets”underUSlaw).TradesecretprotectionexistsindefinitelyunderUSlawunlesstheinformationisdisclosedwithoutadutyofconfidentialityorindependentlydiscovered;thelong-secretCoca-Colaformulaisperhapsthebest-knownexample.Agreeingtoterm-limitedconfidentialityobligationsforyourcompany’stradesecretscreatesasignificantriskthatyourcompanywilllosetheabilitytoprotecttheinformation.
However,attemptstoextendperpetualconfidentialityobligationstoconfidentialinformationthatdoesnotqualifyasatradesecretmaybeunenforceableunderthelawsofsomeUSstates.Further,somecompaniesobjecttoperpetualconfidentialityobligationsasamatterofcorporatepolicy.
Accordingly,itmaybeappropriatetodraftyourcompany’sagreementinamannerthataccountsforbothconsiderations;forexample,theconfidentialityobligationscouldremaininforceforapre-determinednumberofyears,exceptthatobligationswithrespecttotradesecretssurviveindefinitely.Ifthecounter-partywillnotagreetoanyconfidentialityobligationsthatareperpetual,yourcompanywillneedtoconsidertheriskofdisclosingitstradesecretstoacompanythateventuallymayhavenolegalobligationtoprotectthem.
Bewareofjointownership
Jointownershipoftechnologycommonlyisviewedasanefficientwaytoavoiddifficultnegotiationsoverintellectualpropertyrights.However,jointownershipcanresultinuncertaintyasbestand,atworst,hinderyourcompany’sabilityto use and commercialize the jointly-owned technology.
Therulesofjointownershipvarynotonlyamongthedifferenttypesofintellectualproperty(e.g.,patents,copyrights,tradesecretsandtrademarks),butalsoamongvariouscountries.UnderUSlaw,eachjointcopyrightownermaycommercializethecopyrightedworkwithouttheotherjointowners’consent,butmustaccountforlicensingroyaltiesreceivedandmaynotdestroythevalueofthework.ThisisdifferentthanEnglishlaw,whichstatesthatjointcopyrightownerscannotexploittheirrightsintheworkwithouttheotherjointowners’consent.ItalsoisdifferentthantheUSruleonjointpatentownership,whichisthatjointpatentownershavenodutytoaccounttotheotherjointownersforlicensing royalties.
Jointownerscanagreetomodifytheserulesintheircontract,buttheylikelywillapplybydefaultifthecontractspecifieswithoutfurtherelaborationthatthepartiesare“jointowners”ofdevelopedtechnology.
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5 Negotiating Technology Transactions With US Businesses
Avoidthepotentialtrapsof“workmadeforhire”
UnderUSlaw,the“workmadeforhire”conceptisacommonmeansofvestingcopyrightownershipinapartycommissioningtechnologydevelopmentfromitsemployeesorindependentcontractors.Thecopyrightina“workmadeforhire”isownednotbythecreatorofthework,butratherbythecreator’semployerorotherpartythatcommissionedit.Thedoctrineisquitenuancedwhenappliedtonon-employeecontractors,andthefailuretogetitrightcanprovidethebasisforaneventualinfringementsuitagainstthecommissioningpartyoritscustomers.
Evenifpartiesstateinanagreementthatalldeliverablesare“worksmadeforhire,”onlycertainworksqualifyifcreatedbyanon-employeecontractor.Cruciallyforcompaniescommissioningtechnologydevelopment,softwarecodegenerallycannotbea“workmadeforhire”whencreatedbyacontractor.
ToensureyourcompanyobtainsallrightsindeliverablesitcommissionsfromUScontractors,prudentdraftersshouldconsiderusingadditionallanguagethatassignstoyourcompanyallofthecontractor’srightsinthosedeliverables.However,thereareincentivesunderUSlawtocharacterizeasmuchtechnologydevelopmentaspossibleasa“workmadeforhire.”Inparticular,“worksmadeforhire”areexceptionstoadeveloper’sirrevocablerightunderUSlawtoterminateanassignmentofcopyrightinsoftwarecodeafter35years.
Asaresult,itmaybeappropriatetoincludetransferlanguagestatingthatalltechnologythecontractordevelopsisa“workmadeforhire”totheextentitqualifiesunderUSlaw,andthatthecontractor’srightsinthattechnologyareassignedtothecommissioningpartytotheextenttheworkdoesnotqualify.
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6 Negotiating Technology Transactions With US Businesses
Usethepresenttense
Languageintendedtoassignrightstoyourcompanyshouldreflectapresenttransferofrights(thedeveloper“herebyassigns”itsrights),notafuturepromisetotransfer(e.g.,“willassign”or“agreestoassign”).Underthelatterformulation,yourUSpartner’sfailuretodeliverthepromisedassignmentmayresultinabreachofcontractclaim,butnotnecessarilyownershipoftherelevantcopyrightorotherIPrights.
ThisdistinctionfiguredprominentlyinacaserecentlydecidedbytheUSSupremeCourt,wherebyaStanfordUniversityresearchfellowsignedanagreementinwhichhe“agreedtoassign”toStanfordhisrightsinanysubsequentlydevelopedinventions.Aspartofhisresearchactivities,hebeganvisitingthelaboratoriesofCetusCorp.,wherehesignedanagreementinwhichhe“didherebyassign”toCetusanyinventionshecreatedasaconsequenceofhisaccesstoCetus’facilities.
InJune2011,theUSSupremeCourtaffirmedalowercourt’srulingthatStanford’s“agreetoassign”languagewasmerelyapromisetoassign–apromisethattheresearchfellowcouldnotkeepasaresultofhissubsequentassignmentofrightstoCetus.Althoughthisisclearlyaworst-casescenario,ithighlightstheimportanceofdraftingthe transfer of rights in a manner that will withstand scrutiny under US law.
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7 Negotiating Technology Transactions With US Businesses
Protectagainstyourpartner’sbankruptcy
USlawoffersprotectionagainstatechnologylicensor’sattemptstoterminatealicensee’srightsfollowingthelicensor’sbankruptcyfiling.UnderUSbankruptcylaw,technologylicenseestypicallycanretaintheirrightsinthelicensedtechnology,aslongastheycontinuetopaywhendueallapplicablelicensefeesandotherwisecomplywiththetermsoftheagreement.TherelevantprovisionoftheUSbankruptcycode(Section365(n))omitstrademarklicenseesfromthisprotection,althoughsomecourtshaverefusedtoallowlicensorstoterminatelicensees’rightswhenlicensesoftechnologyandtrademarksareinextricablybundledinthesameagreement.
YouragreementswithUStechnologylicensorsshouldincludeanacknowledgementthatSection365(n)appliestoalllicensesgrantedintheagreement,andthatyourcompanymayelecttoretainitsrightsinalllicensedintellectualpropertyandtechnologyintheeventofthelicensor’sbankruptcy.Ifthatbankruptcyactuallyoccurs,yourcompanyshouldconsultaUS-qualifiedbankruptcylawyertoensureappropriateandtimelyfilingsaremadewiththerelevantbankruptcycourt.
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8 Negotiating Technology Transactions With US Businesses
Pay attention to source code escrows
Fromtimetotime,itmaybenecessaryforyourcompanytoensurethatsourcecodeandrelateditemsforcertainkeyin-licensedsoftwareareplacedinescrow.Oneofthetypicaleventstriggeringreleaseoftheescrowmaterialsislicensor’sbankruptcyorinsolvency.WhileescrowarrangementsgenerallyareenforceableunderUSlaw,thenuancesofUSbankruptcylawrequirespecialattentionwhencontractingwithaUSlicensor.
Somesourcecodeescrowagreementspurporttograntalicensetosourcecodethatiseffectiveonlyifthereleaseconditionoccurs.However,USbankruptcycourtsmaycharacterizesuchalicensegrant,whichiscontingentonthelicensor’sbankruptcy,asanunenforceabletransferofassetsfromabankruptentity.
Tobetterensuretheeffectivenessoftheescrowarrangement,theescrowagreementshouldincludeapresentgrantoflicensetothesourcecode.Thelicensormayobjectonthebasisthatithasnointentionofallowingyourcompanytousethesourcecodeunlessabankruptcyorotherreleaseeventoccurs,butofcourseyourcompanycannotobtainthecode(andthusreceivethebenefitofthelicensegrant)untiltheescrowagentreleasesit.
AnotherwaytoaddresstheconcernspresentedbyUSbankruptcylawistoavoidtheimpactofbankuptcyaltogether,typicallybyexpandingthescopeofreleaseeventstoinclude“pre-bankruptcy”warningsignsoffinancialdistress,suchaslicensor’sfailuretopaybillsastheycomedueorconcernsexpressedbyindependentfinancialauditors.
Finally,yourcompanyshouldconsiderwhetherbankruptcyandotherreleaseeventsshouldbeexceptionstoanyagreementtonothireorcontractwiththelicensor’ssoftwaredevelopersandprogrammers.Thesourcecodemaybequitedifficulttoutilizeinpracticewithouttheabilitytoconsulttheindividualswhoknowitbest.
Anticipatepotentialacquisitions
Maintainingthetransferabilityofthird-partycontractsallowsforflexibilityinbusinessplanningandcanhelpyourcompanybecomeamoreattractivetargetforpotentialinvestorsandacquirors.Whileagreeingtocertainprohibitionsonassignmentmaybeunavoidable,UKcompaniesshouldbeawareofcertainrestrictionsontheassignabilityoftechnologylicensesunderUSlawthatmaybeunexpected.
Forexample,someUScourtsviewmergersandsimilarbusinesscombinationsasviolatingassignmentprohibitionsintechnologylicenseagreements,butnotinothertypesofcommercialcontracts.Further,underUSlawanon-exclusivetechnologylicenseegenerallymaynotassignitsrightswithoutthelicensor’sconsentifthelicenseagreementissilentontransferability;severalUScourtshaveextendedthisruletoexclusivetechnologylicenses.Bycontrast,ifthelicenseagreementissilentatechnologylicensortypicallymayassignitsrightswithoutthelicensee’sconsent.
Accordingly,toavoidfutureuncertaintyandpotentiallycostlyconsentrightsorlitigation,itisadvisabletospecifyintheagreementthetypesofbusinesscombinationsthatarepermissible.
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9 Negotiating Technology Transactions With US Businesses
Anticipatepotentialsales
Largecompaniesoftenrequiretheirtechnologyproviderstoassisttheminplanningfortheirpotentialfuturedivestitureofsubsidiariesandotheraffiliates.So-called“divestedentity”provisionsarebecomingincreasinglycommoninUSagreements,wherebyalargecompanyreceivestherighttousecertaintechnologyorservicesonbehalfofdivestedaffiliates,orfordivestedaffiliatesthemselvestocontinuetousethelicensedtechnologyorservicesfollowingasale.Thecontractingcompanyalsomayrequestcommitmentsfromitstechnologyproviderstoenterintonegotiationsfornewagreementswithdivestedaffiliates.
Ifyourcompanyisaskedtoprovidethisflexibility,makesurethecompanywithwhichyouarecontractingremainsresponsibleforthedivestedaffiliate’sandtheacquiror’sactions;youalsomayconsiderretainingtherighttoaudittheircompliancewiththeagreement.Perhapsmoreimportantly,ensureyourcompanywillbeadequatelycompensatedfortheadditionalbenefitsthisarrangementwillprovidetoyourpartner,itsdivestedaffiliateandtheacquiror.
Conclusion
Businessmovesquicklyinthedigitalage,andthereisunderstandablereluctancetopotentiallyloseadealduetoanexcessofcautionoverlegalterms.However,asthesayinggoes,anounceofpreventionisworthapoundofcure.Havingaqualifiedtechnologylawyerconductatleastabriefreviewofyourcompany’sagreementultimatelycanmakeallthedifference.
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Other sources of information
UKTrade&InvestmentUKTrade&InvestmentistheGovernmentDepartmentthathelpsUK-basedcompaniessucceedintheglobaleconomy.Wealsohelpoverseascompaniesbringtheirhigh-qualityinvestmenttotheUK’sdynamiceconomy,acknowledgedasEurope’sbestplacefromwhich to succeed in global business. UK Trade &InvestmentoffersexpertiseandcontactsthroughitsextensivenetworkofspecialistsintheUK,andinBritishembassiesandotherdiplomaticofficesaroundtheworld.Weprovidecompanieswiththetoolstheyrequiretobecompetitiveontheworldstage.
Forinformationontheservicesavailabletoyou,or to locate your nearest International Trade Team,pleasevisitourwebsite:www.ukti.gov.uk
UKTrade&InvestmenthasteamslocatedintheBritish Embassy in Washington DC and eight BritishConsulatesaroundtheUnitedStates.Formoreinformationonouroffices,pleasevisit: www.ukinusa.fco.gov.uk
U.S. StatesIf you are looking for advice on establishing apresenceintheUnitedStates,SelectUSAisaprogrammeundertheUSDepartmentofCommercethatexplainsthebenefitsandputsyouintouchwithrelevantUSEconomicDevelopmentAgency contacts: selectusa.commerce.gov
Inaddition,manyUSStatesmaintainofficesintheUKorelsewhereinEurope.TheUSstategovernments are a good source of advice and information about business conditions in their states. Please visit the Council of the American StatesinEuropewebsiteformoreinformation:www.case-europe.com
U.S.LawyersA list of American attorneys based in the UK is available on the US Embassy website: www.usembassy.org.uk
TheAmericanBarAssociationwebsiteprovidesextensivelistsoflawfirmsacrosstheUnitedStates.Youcansearchbygeography,areaofpracticeorjustbrowsethelistoflawfirmstosearchforABA-certifiedlawyersbystateandbyspecialty: apps.americanbar.org/legalservices/lris/directory
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Select U.S. Government Resources
All US federal agencieswww.usa.gov/directory/federal/index.shtml
AlcoholandTobaccoTaxandTradeBureau(TTB)www.ttb.gov/index.shtmlRegulatesAlcohol&Tobacco
AmericanEmbassy,Londonlondon.usembassy.govRepresentsUSdiplomaticinterestsabroad
ConsumerProductSafetyCommission(CPSC)www.cpsc.govRegulates Consumer Products
Customs&BorderProtection(CBP)www.cbp.govRegulatesandfacilitatesinternationaltrade,collectingimportduties,andenforcingUSregulations,includingtrade,customsandimmigration
FederalTradeCommission(FTC)www.ftc.govPresides over Dissatisfaction with Business Practices
FedWorldwww.fedworld.gov OnlinelocatorserviceforacomprehensiveinventoryofinformationdisseminatedbytheUSFederalGovernment
Food&DrugAdministration(FDA)www.fda.govRegulatesCosmetics&Drugs,Food,MedicalDevices,VeterinaryMedicines&ElectronicProductRadiation
InternalRevenueService(IRS)www.irs.gov Responsiblefortaxcollectionandtaxlawenforcement
NationalInstituteofStandardsandTechnology(NIST)www.nist.govPromotesUSinnovationandindustrialcompetitivenessbyadvancingmeasurementscience,standards,andtechnology in ways that enhance economic security andimprovequalityoflife
OccupationalSafety&HealthAdministration(OSHA)www.osha.gov Assures safe and healthful working conditions by settingandenforcingstandardsandbyprovidingtraining,outreach,educationandassistance
SmallBusinessAdministration(SBA)www.sba.govProvidessupporttoentrepreneursandsmallbusinesses
UnitedStatesInternationalTradeCommission(USITC)www.usitc.gov Provides international trade statistics and the HarmonisedTariffSchedule
UnitedStatesPatentandTrademarkOffice(USPTO)www.uspto.govIssuespatentstoinventorsandbusinessesfortheirinventions,andtrademarkregistrationforproductandintellectualpropertyidentification
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UKExportandInternationalBusinessDevelopmentResources
BritishAmericanBusiness,Inc.www.babinc.orgLeadingtransatlanticbusinessorganization,dedicatedtohelpingcompaniesconnectandbuildtheirbusinesson both sides of the Atlantic
British Standards Institutewww.bsigroup.com/enMultinationalbusinessservicesproviderthatadvisesonhowtomeettechnicalstandardsandapprovalsprocedures
BusinessLink www.businesslink.gov.uk UKgovernment’sonlineresourceforbusinesses,providingguidanceonregulationsandtoaccessgovernment services.
DepartmentforBusinessInnovationandSkills(BIS)www.bis.gov.ukUKdepartmentthatsupportssustainedgrowthandhigher skills across the economy
ExportControlOrganisation www.businesslink.gov.uk/exportcontrolHelpsbusinessesregardingexportproceduresanddocumentation.
ExportforGrowthGuide(Clickhere forPDFGuide)SMEexportguideproducedbyForumofPrivateBusinessinconjunctionwithUKTrade&Investment
HMRevenue&Customswww.hmrc.gov.ukUKdepartmentresponsibleforthecollectionoftaxes
UKExportFinancewww.ukexportfinance.gov.ukExportcreditagencythatprovideassistancewithcreditinsuranceandfinancingproducts
CompanyInformation
Better Business Bureauwww.bbb.org
Dun and Bradstreetwww.dnb.com
Oanda www.oanda.com Foreignexchangerates,currentandhistorical.
Nasdaqwww.nasdaq.com
USSecuritiesandExchangeCommissionwww.sec.gov
ForbesMagazinewww.forbes.com/forbes
USNews&WorldReportwww.usnews.com
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UKTrade&InvestmentistheGovernmentDepartmentthathelps UK-basedcompaniessucceedintheglobaleconomy.Wealsohelpoverseascompaniesbringtheirhigh-qualityinvestmenttotheUK’sdynamiceconomyacknowledgedasEurope’sbestplacefromwhichtosucceedinglobal business.
UKTrade&InvestmentoffersexpertiseandcontactsthroughitsextensivenetworkofspecialistsintheUK,andinBritishembassiesandotherdiplomaticofficesaroundtheworld.Weprovidecompanieswiththetoolstheyrequire tobecompetitiveontheworldstage.
UK Trade & Investment is responsible for the delivery of the Solutions for Business product “Helping Your Business Grow Internationally.” These “solutions” are available to qualifying businesses, and cover everything from investment and grants through to specialist advice, collaborations and partnerships.
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