Kilpatrick Townsend recently published some notes on a presentation made by Silicon Valley-based Kilpatrick Townsend Counsel Alan Dow on issues in the intellectual property arena concerning consulting agreements.
In the article, Dow discusses four key takeaways: Consulting agreements make it possible for companies to own IP produced by consultants, work-for-hire clauses, conflicting obligations, and failure to protect trade secrets.
Most arbitrations, and all commercial arbitrations, are creations of contract, and courts are generally required to enforce an arbitration agreement as they would any other contract, points out Samuel M. Tony Starr on Mintz Levin’s ADR: Advice From the Trenches blog.
Because the arbitration clause in a commercial contract is so critical, careful review of that clause surely must be a component of an enterprise’s risk analysis.
He offers 10 basic considerations that will help to guide that review.
By Amy Dugan
King & Fisher Law Group, PLLC
In 2014, the New York Court of Appeals, in Biotronik A.G. v. Conor Medsystems Ireland, Ltd., held that the lost profits claimed by a party were “general damages”, and were recoverable. They were recoverable despite the limitation of liability provision in the contract, which stated that neither party would be liable for “any indirect, special, consequential, incidental or punitive damage with respect to any claim arising out of [the] agreement” for any reason, including a party’s performance or breach of the agreement.
Why is a case that was decided in 2014 worthy of writing about now? It’s been over three years since the Court’s decision, and we still commonly see limitation of liability language in commercial contracts that does not clearly address the issue of lost profits, and whether they are direct or indirect damages. That may be a strategic decision of the drafter, or it may be an oversight. While New York law does not govern all commercial contracts, other courts may rely on Biotronik in the future, or reach a similar holding independently. Regardless, it’s generally better to have a contract that clearly expresses the intent of the parties, rather than have a court determine it.
Direct Damages vs. Indirect Damages
Consider whether lost profits are reasonably foreseeable and quantifiable. Will breach of the contract almost surely cause a party to lose profits? Is there a reasonably certain way to prove the amount of lost profits? If so, lost profits may be considered direct damages. For example, if the parties have a non-compete agreement, the main purpose of that agreement is to ensure one party does not compete with the other party for business, thereby diverting customers, which results in lost profits. Lost profits can be reasonably quantified by sales to each diverted customer by the competing party. This is a situation where lost profits would likely be considered direct damages.
Defining Lost Profits
Consider whether the parties want lost profits to be recoverable. A provision can be included in the contract expressly stating that lost profits are direct damages, or that lost profits are indirect damages. Limitation of liability language can be included that states lost profits are not recoverable, regardless of how they are categorized. Alternatively, the limitation of liability language can expressly exclude lost profits from the limitation, making them recoverable.
Ultimately, whether lost profits should be recoverable, and how they are addressed in a contract will depend on the individual relationship or transaction in question. Given the potential for dispute, drafting clear language is key.
Certain contracts must be in writing and signed, points out David E. Peterson of Lowndes, Drosdick, Doster, Kantor & Reed, P.A. But what if the “writing” is an email exchange? Is that enforceable, and if so, then what suffices as the signature?
Peterson discusses a recent case interpreting the Texas version of the Uniform Electronic Transaction Act and how this works in the case of an email exchange.
“In Khoury v. Tomlinson, the Texas Court of Appeals considered a situation where the parties had exchanged emails to resolve a dispute among themselves,” according to the article. In the end, a court held that Tomlinson’s name, appearing in the sender field of the email, was sufficient to constitute a signature.
Cloud Service Providers (CSPs) are evolving their customer agreements, points out Kemp IT Law.
Richard Kemp discusses how CSPs are addressing the growing risks to service availability from patent claims and in particular how Amazon Web Services (AWS) had included in their Customer Agreement an unusual IP non-assert term.
“From the way the AWS terms work, it’s also at best an open question whether they protect the customer from the risk that open source software used in providing the service infringes third party patent or other rights,” he writes. “Open source is a critical component of the cloud and customers need to understand and review this aspect when selecting their CSP.”
As a result of a rule imposed by the Consumer Financial Protection Bureau, consumer contracts entered into after March 19, 2018, with a wide range of consumer financial services companies will need to be revised in regard to their agreements’ arbitration clauses.
Pillsbury Global Sourcing explains on its website that those companies “will need to: (a) remove language in pre-dispute arbitration provisions that bars consumers from participating in class actions; and (b) add language informing consumers of their rights to participate in class actions. The Rule will also require such companies to provide information on individual arbitration awards to the CFPB for publication in a public database (redacting consumers’ private financial information).”
Alston & Bird asks and answers the question: In an international arbitration, when an arbitration provision is ambiguous about the seat of the arbitration, who resolves the question?
Authors Andy Tuck and Lee Deneen discuss Bamberger Rosenheim Ltd. v. OA Development Inc., in which the Eleventh Circuit held that interpretation of a venue provision is the arbitrator’s prerogative.
They write:
The federal circuits are split on whether the FAA serves as a proper basis for vacatur of an international arbitration award. In this case, the panel saw “no reason to analyze [Bamberger’s] arguments under the New York Convention or [the FAA] separately,” since Bamberger’s argument was the same for both bases for vacatur. The court stated in a footnote that it “assume[d], without deciding, that [the FAA] applies to the award in the present case.”
Employers must ensure that their supervisors do not unwittingly modify the at-will relationship with employees, warns Pullman & Comley.
“Statements such as ‘you’ll have a long career here’ or ‘you’ll be taken care of’ may be interpreted by an employee to mean that an implied contract of employment has been formed,” writes Margaret Bartiromo. “Connecticut courts recognize a claim for wrongful termination based on an implied employment contract if the employee can prove that the employer agreed, by words or action, not to terminate the employee without just cause and that the parties agreed on definite terms (such as compensation and fringe benefits) that are supported by consideration (such as a bonus or pay raise).”
She added that employee handbooks should state that the at-will arrangement can only be altered in a writing signed by the employee and an authorized officer of the company.
Some companies have taken the idea of demanding loyalty through noncompetition agreements a bit too far, writes Alan Greenblatt in Governing.
“They are forcing workers at all levels of the business to sign noncompete agreements, barring them from leaving to join another company in the same field for a specified period of years. Those contracts may be defensible for the head of research at a pharmaceutical company, or even a top-flight software engineer, but sandwich makers, yoga instructors and summer camp counselors have also been prevented from jumping to competitors,” according to Greenblatt.
He quotes Evan Starr, a management professor at the University of Maryland: “If only CEOs were signing these, I don’t think anybody would care about it.”
The speed and informality of email can lead to the inadvertent use of contract-forming language, resulting in unintended binding agreements, warns Jason A. Levine, a partner in Vinson & Elkins.
“This problem is exacerbated by legal regimes that favor the recognition of contracts formed by email, with the intent of facilitating electronic commerce and online shopping. There are, however, several steps that companies can take to reduce their exposure to the danger of accidental contracts,” he writes.
In his article, he discusses the benefit of adding a statement to business emails stating that the company intends to be bound only by a written agreement. He then goes on to cover other ways to avoid accidental contracts.
Aliya Ramji, director of legal and business strategy for Figure 1 Inc., responds to a question from a corporate lawyer who asks about the most important parts of a non-disclosure agreements.
Writing in the ACC Docket, she explains that she uses two strategies to keep up with the volume of NDAs.
The first is to draft a template NDA for the business unit. Then, in order to better facilitate the review process, she develops negotiation parameters for the business units.
In the article, she discusses some key elements to include, including identification of the parties, defining the confidential information, the purpose of the disclosure, what is excluded, and the term.
The use of artificial intelligence technology, though still in its infancy, is gaining traction with law firms, helping to provide better outcomes for clients, faster, writes Russell Kostelak in Proskauer Rose’s Minding Your Business blog.
His article discusses the use of AI in the many phases of contract review: contract creation, contract analysis, and contract due diligence.
“While many law firms rely on templates for initial drafts of a contract, there is no one-size-fits-all template for the intricacies of each situation. AI systems can scan a law firm’s contract library and generate spreadsheet reports sorting and categorizing the underlying data within the contract library,” writes Kostelak.
A non-competition agreement raises state-law public policy concerns. As a result, states often restrict the scope of non-competition agreements before they will enforce them, warns Mark Koogler in Porter Wright Morris & Arthur’s Federal Securities Law Source.
“Most jurisdictions disfavor non-competition agreements as a matter of public policy because they view such agreements as a restraint of trade,” writes Koogler. “Broader language places a heavier burden on the employer to justify the restrictions whereas narrowly tailoring the language of a non-competition agreement reduces the risk that a court will construe the agreement to unnecessarily restrain trade.”
Koogler writes about the importance of balancing the interests of the employer and employee.
Image by NY Photographic
Executives and other high-level employees often negotiate a contractual provision requiring the payment of severance if terminated without “Cause” prior to the expiration of a term agreement, points out Bill Wortel in Bryan Cave’s At Work blog.
“Too often, employers limit the definition of Cause to intentional misconduct that harms the company, criminal behavior, or the executive’s death. Such a narrow definition ties the employer’s hands when an executive is not making a good-faith effort to perform well or is performing very poorly despite reasonable efforts,” Wortel writes.
He advises that the agreement should include a definition of cause that provides the company with flexibility to terminate an executive for legitimate, non-discriminatory business reasons.
Jared Butcher, writing in the Steptoe Blockchain Blog, suggest three tools to address smart contract risks: (1) cybersecurity insurance policies, (2) indemnification agreements with outside vendors, and (3) “make whole” agreements among the smart contract parties themselves.
He writes that insurers, vendors, and other contract parties can provide the best source of indemnification, assuming that the proper contractual arrangements are put in place.
Under the heading of cybersecurity insurance policies, he writes:
“One issue worthy of particular attention is the employee exclusion. These exclusions in the policy language should be scrutinized to determine the level of coverage for losses caused by employee errors, which are likely to be a significant source of risk in a smart contract system.”
By Stephen F. Pinson
Scott & Scott
More and more businesses are considering accessing hosted software rather than purchasing on-premise software. They are also placing data in third-party public or private clouds instead of selecting on-premise software. This article will explain the key considerations and contractual provisions when deciding to utilize a hosted software cloud solution versus On-premise software solutions.
KEY CONSIDERATIONS
1. Strategic Considerations
Using hosted software in the cloud allows for greater flexibility such as: allowing a business to access its information from any location, and not having the initial outlay of capital to purchase servers and other infrastructure when implementing the software’s use. This is a significant departure from on-premise software, which often requires substantial infrastructure investment, and can only be accessed from the device the software installed.
2. Financial Considerations
Cost Savings
Most businesses switch to the cloud because of the belief in inherent cost savings. However, in the long run, switching to the cloud will not always result in savings. Cloud infrastructure costs money, and the business will be the one that bears the costs, usually in a monthly subscription, instead of a yearly license fee.
Return on Investment – Moving from CapEx to OpEx
On-premise software products and hardware infrastructure are generally considered capital expenditures, while subscriptions to cloud software are typically classified as operating expenses. It is important to consult with tax professionals to ensure there are no unintended consequences from making the switch from on-premise to hosed software products.
Infrastructure investments / upgrades
Generally, on-premise software requires purchase of hardware or use of infrastructure that is already in place. On the other hand, moving to the cloud may require an investment in upgraded devices or equipment to maximize the value of the hosted solutions.
Cost to implement or migrate. When moving from on-premise to the cloud, there can be significant implementation or migration costs. Companies may not adequately consider the costs related to migrating data to the hosting or storage providers. The number of man hours required to successfully migrate can be significant and costly. Accordingly, the scope and complexity of the migration is an important consideration when negotiating a contract.
3. Operational Considerations
Outsourcing activities
Using the cloud can pave the way to outsourcing non-core operations. On the other hand, on-premise software may require more sophisticated security credentials currently in place, whereas the cloud application may reduce that need.
Support
On-premise software generally requires maintenance and support along with support levels and support times. These generally are limited to business hours, and come with increased costs for after-hours support. When using the cloud, maintenance and support are included as part of the package, and are generally included as a 24/7/365 service.
4. Technical Considerations
Infrastructure
To use on-premise software, companies must procure appropriate hardware. For cloud solutions, the cloud vendor provides the hardware, infrastructure and applications for the software to work, but that does not mean that there is no investment by the end user to the software. The end users may need to upgrade devices and security plug-ins. They also may need to expand firewalls to cope with the additional internet traffic. Internet providers may need to provide more bandwidth.
Location and Ownership of the data
There is little question as to where data will be stored and who will own the data when using on-premise software – the customer owns the data. However, when using cloud solutions, the location and ownership of the data may become unclear. A business wants to own its data and not let it be used for research or statistical purposes, particularly by its competitors. Additionally, many businesses want or need the data to be stored in the nation where they are located or where they are doing business, and not some remote or foreign locations.
5. Security, Backup, & Privacy Considerations
Security
When using cloud or on-premise software security is important. On-premise software provides a level of security that is implemented through patches and updates to the software. Cloud providers can hand off their hosting and security to a third party provider, which can compound security risks. It is critical to understand and document who bears the risks of a security incident in the event of a security incident.
Backup
For on-premise software, the backup is left to the business user. For cloud, the cloud provider generally provides the backup for certain intervals of time, which is generally contracted for by agreement. It’s important to have a backup schedule with redundant backups when contracting with a cloud provider, as well as a general understanding of what information is purged from the system.
Privacy
For on-premise software, privacy is generally not a concern, because the software is part of the business infrastructure. However, in a cloud implementation, privacy issues become a major concern because business information is sent over the internet which can be intercepted by hackers. Understanding how the cloud provider protects your privacy is always important.Accordingly, below is a list of key contractual provisions that are critical when deciding to utilize hosted software in the cloud vs. on-premise software.
KEY CONTRACTUAL PROVISIONS
1. Strategic Considerations
It is critical to clearly identify the requirements for companies that will host software applications or store the business’ data. For flexibility, it is also important to evaluate whether traditional on-premise license metrics will be appropriate for any hosted software solutions. Generally, it is its best practice to negotiate the number of users rather than the number of devices when negotiating a cloud deal for maximum use. A user can use several devices at once, and being charged for each device would be costly to the business.
2. Financial Considerations
To be sure fees are controlled when deciding on utilizing an on-premise solution versus a hosted software solution, the business should calculate the cost of both on-premise licenses along with maintenance and support and compare the costs to the total amount required to subscribe to the hosted version of the software solution. If the costs are relatively the same, then capping the monthly cloud subscription every year would be wise to keep costs in line. Additionally, it’s important to negotiate infrastructure upgrades and implementation and migration costs to the cloud or to any subsequent provider.
3. Operational Considerations
It is important to negotiate who will have access to the cloud and what administrative rights will be assessed to each user. Additionally, its best practice to negotiate the support levels when using cloud, and any service credits for failure to implement the service.
4. Technical Considerations
When negotiating a cloud deal, companies should understand and document ownership of the data, allowable uses of the data (even in aggregated form) by the cloud provider, and locations where the data may be stored.
5. Security, Backup, & Privacy Considerations
For security, it is a best practice to include security protocols in the contract and to successfully negotiate a reasonable limitation of liability for security incidents, back-up failures, or privacy incidents. In these scenarios, the limitation of liability may include a carve-out, or a super-cap to handle the increased risks involved. For backups, it is always important to contract with the cloud provider the specific backup procedures, protocols, and backup intervals required by the business. Additionally, it is important to include in the contract security reports or audits for the business to ensure that the cloud provider is following those contractual obligations. Lastly, for privacy, it is always important for the business to include privacy language and protocols for incident response. Specifically, when an incident occurs, the business should require the vendor to notify the business immediately of any privacy or security incidents. Lastly, it’s always best to negotiate the appropriate levels of insurance for provisions dealing with these topics.
When switching from on-premise software to a hosted software cloud solution, there are numerous business issues to consider. Having a plan when switching to a hosted software cloud provider is crucial to a business’ success. Given the risks, it is increasingly important to seek advice from experienced counsel when negotiating contracts like these to make sure the risks are adequately assessed and each party’s interests are protected.
Glenn West, writing in Weil, Gotshal & Manges LLP’s Global Private Equity Watch, says that agreed damages provisions are a staple of many commercial contracts.
But their enforceability is frequently questioned because of the common law’s requirement that the damages payable for breach of contract not exceed the amount required to compensate the non-breaching party for the foreseeable losses it actually sustained by virtue of the breach.
West discusses a case that he says presents an important practical reminder: practitioners seeking to ensure that agreed damages provisions are enforceable should avoid limiting the items of loss for which the agreed damages are providing compensation and constitute a legitimate pre-estimation.
When businesses have large contract portfolios, tracking the contract lifecycle from initiation though award, compliance and renewal can become a burden without the proper reports, according to WoltersKluwer.
“No matter the information you need – from expiring contracts, contracts awaiting signature, to specific contract values – it should always be close at hand,” according to the article at Lexology.com. “With organized contract management reporting, you can pull critical information such as contract review dates and values and sort contracts by contract owner, responsible departments and counter-parties, to inform business decisions.”
The contract management reports discussed include expiring contracts, draft contracts, pending signature, active contracts and inactive contracts.
In most cloud engagements these days, it is not only the customer’s data that is in the cloud, but also many key parts of the vendor contract as well, explains Mike Overly of Foley & Lardner.
“That is, the average cloud vendor today generally places several key areas of the contract in the cloud (e.g., service level standards, security measures, support obligations, service descriptions, etc.). In some instances, the entire contract is in the cloud. What this means is that these key contract provisions or the entire contract ‘floats’ in the cloud and can be changed at any time by the vendor, frequently without notice to the customer. Even if the customer is given notice, in many cases, the customer has no right to object to the changes,” Overly writes.
The perfect confidentiality agreement is, in most cases, overkill and in any event would probably never be signed, writes Bryan K. Wheelock, a principal in Harness Dickey & Pierce.
He says a vast majority of the many CDAs, NDAs and other secrecy agreements signed every day perform adequately for their purpose. Rather than chase perfection, the parties should focus on avoiding mistakes.
He discusses the topic from the perspectives of the both the disclosing party and the receiving party. His article also provides a checklist for a confidentiality agreement.