FacultyFaculty/Author Profile

Specialty Agreements: Licensing (SF)


SPEAKER 1: And Glen Nash from Sidley Austin, a partner of mine, is coming forward to talk to us about issues in initial property contracts. Do you-- you usually like to stand up.

GLEN NASH: It doesn't matter.

SPEAKER 1: OK. It's up to you. Thanks, Lauren. You can choose. This is the clicker. OK.

GLEN NASH: Well, let me just make sure I got this clicker going right. Where am I pointing it?

SPEAKER 1: I don't know, actually. It seems to work over there. There you go.

GLEN NASH: OK. That way, somewhere. Well good afternoon. I'm Glenn Nash from Sidley's Palo Alto office and I work in the technology and IP area.

I spend all my time doing interesting technology deals for companies both within the US and companies outside the US-- partnering with companies in the US. And we've got, right now, 59 minutes to go. I'm going to go through a lot of sort of key issues in technology deals and in IP licenses.

I know we've got the group in the room, here. We've got a lot of people on the webinar here. So welcome to all of you, as well.

So flipping to the outline of what we're going to go through today is talk about what are the key elements of the technology and IP deal? The importance-- some drafting tips, some default rules that exist under IP law when you're doing technology deals that you should be aware of. And then talk a bit about joint ownership what that means in the IP context, when you're jointly owning something that has an IP value.

And then on the commercial agreements side, some key issues that come out in warranties and indemnities and limitations of liability in contracts. And this is sort of quick look at where people can go sideways on those very key provisions of technology deals. And then we'll a bit about termination and the miscellaneous provisions in these agreements.

When I talk about technology deals, what am I talking about? It is any form of arrangement where technology is being shared or acquired between companies or individuals. That's it at its broadest context.

And, for example, I'm representing a company now-- a major company south of here, and they're getting rights to some technology from another company. That is, in order to get the rights to that technology, they will license in that technology to our client. That is an in-license.

An outbound license is I will turn around tomorrow and take that technology and probably distribute out into my network of customers and partners and distributors. That is an outbound license. And so we'll talk a bit about that.

The other area when we talk about technology and IP deals is what we would consider a pure IP license. I own a patent that covers something that you are doing in your business. I grant you a license to that patent. That's what we consider like a pure IP license.

Similarly, I own a trademark. You want to take that trademark and use it on t-shirts or cups or mugs or in your business. I will license you that trademark. That is a trademark license.

And then the other area-- and this is an area Martin and I worked a lot together in-- is on the IP side of corporate transactions. When Martin is representing a company, acquiring another company or selling a company, a lot of times what is being bought and sold is IP and the IP rights. And so I will come in and help diligence the IP and then make sure the transfers are occurring properly.

And then last but not least, when companies decide to sue each other in the IP area, they often-- you just saw the Waymo v. Uber settlement-- they will often settlement. There in all likelihood, there's probably lots of those matters. Some license to IP being granted to settle out the matter. So we work-- that's another area of IP deals that the issues I'm going to talk about today can come up in those areas.

So I have talked about the example I just gave you. Let's talk about what the key component of a technology IP deal is. This is one of the fundamental principles that people often get wrong when they start drafting or negotiating these agreements. It is-- the technology and the IP are separate.

So in my example, I'm representing a company in Silicon Valley who is now in the process of getting some software from another company. The software is the tangible. There's a piece of code that our engineers want to get access to. That's the tangible technology.

That software is surrounded by what we call a bunch of IP rights. The IP rights relate to the software but they're separate. And this comes up in a lot of our agreements. People sometimes start using them interchangeably. That's where problems can arise in agreements.

We would talk, for example, about the software will work. It will perform as warranted. We will talk separately about you, licensor, own the IP rights in the software. You, licensor, will grant me a license to use those IP rights in the software. So that's just as a very basic preliminary concept and technology deals. You have this concept of the technology and concept of the IP rights.

When we then talk about the IP rights-- and this session today is very focused on US IP law with a particular focus on California law. A lot of the issues on commercial contracts can vary, in particular between and among states. So even at that level, this is very California-focused. On the IP side it's US federal law-focused. And with trade secrets it's really state law-focused.

But when I talk about-- my client is getting access to some software and I'm talking about IP rights in that software. What are the IP rights? There could be at least three rights in that software that might come into play. Patent rights, copyright rights and trade secret rights.

They're all separate forms of IP. And when I represent my client getting access to that software, I'm thinking about those three rights. I want to use that software now. If they have any patents-- that other company that covers the software-- I'm making sure I get a license to those patents in order to use the software.

If that software is protected by copyright law-- which it likely is-- I need a license to the copyrights. If they give me the software-- the confidential portions of the software-- that is protected by a trade secret. I need to get a license to the trade secret. So you will see-- and this comes up in agreements-- we will start using language of the patent statute, the copyright statute and the state law for trade secrets.

And then if that company has a trademark that they want me to use that covers that software that I have to include their mark when I go out and distribute this software, I'll be getting the trademark license. So that, in the US generally-- there are other IP rights, but there are the four main ones you will hear us talking about when we do technology deals and we are getting the licenses. Or if we're granting licenses, we are always thinking about that bundle of rights.

So we talk about the IP rights and I've also talked about the word license. What's a license? A license is essentially permission to do something that otherwise would amount to infringement without the license.

Let's take my client example. My client gets a copy of that software and wants to use it but they get no rights from the other party. If they started using it, they may be infringing the patent-- without a license, without a right, they're now in Infringement Land.

They're probably infringing one of the rights-- the patent rights, the trade secret rights or the copyrights of that other company. How do they deal with that? They get a license. A license is permission to do something that would otherwise be infringement.

Remember-- I'll just track back to the prior page-- I listed out-- and I'm not going to go through them because they each are nuance but I just want you to have them as an overview. You see under the patent rights there all these words. What are the patent rights? Make, use, sale, offer to sale and import.

Under the copyright rights there's a set of rights-- reproduce, prepare derivatives, distribute, perform, display-- in the music sense. They're music rights. In a trade secret you see I have the word use.

All of those rights have different meanings. And when I go to get a license when I'm representing my client I'm making sure I'm tracking to these rights. These are the rights granted under the statutes. And if you don't get them expressly, the law will say you don't have them. So be very careful in licensing. In particular there's always this tension going back and forth. When I'm representing my client, who's the licensee, I'm looking to load up all those rights and get as many rights as I can because I don't want questions later about whether I can do something with that software.

But when I turn around now and represent a company who's giving out the rights, I'm going to be holding back as many rights as I can and only giving the ones that they can make a credible argument they need. So the importance of understanding the underlying statutory rights is that if you don't include them and an issue comes up later and there's nothing implied in the contract, the courts will generally say, you actually don't have that right. So we go through a lot of it in commercial deals. A lot of time gets spent parsing those rights and what rights you're getting to the technology or licensing.

Let's talk-- I'm going to move to the second item I wanted to cover with you today. This always surprises people because you would think, is this really where people spend their time in terms of present-tense drafting? Look up on the screen. I've got two examples. I say licensor hereby grants-- as opposed to licensor agrees to grant.

Second case-- assignor-- let's say I have some technology that you want to buy from me and now I have to assign that to you. I've got two iterations-- I hereby assign it to you or I agree to assign it to you. In both these cases you have to draft in the present tense.

Amazingly, courts have spent a lot of time really getting into this. Is there a present grant of a right or an assignment? And so if I'm representing an assignee or licensee, I'm making sure that the grants-- the license, grant or the assignment are drafted in the present tense. Why is that?

The first thing you're going to want to have happen later is for the licensor or assignor to come out of the woodwork and say, I never gave you those rights. I agreed to give you them, but I actually never gave them to you yet. Something else has to happen. So that's-- it's an easy fix, but just always be very careful with it.

The other area this comes up-- and Martin and I see this a lot in the acquisition practice. Let's say I am going out and buying technology from a company. One of the things I want to be able to do when I buy that technology and buy all those IP rights is I want to be able to go out and enforce those IP rights against a third party if they are misusing my technology.

If you do not get-- and this is where this whole line of cases came up. It actually came up in a litigation context-- if you do not get a present assignment of that technology-- those IP rights and the technology and then you go and try and enforce against a third party, the third party will sit there as any defendant will do and say, show me you have the right to sue me. And this came up in the Stamford v Roche case. If you just search that, you'll see a whole line of cases coming out of that where the university thought it had rights but it only got an agreement to assign the rights and the court held-- you don't have the rights. You don't have standing now to go enforce those rights.

So in the acquisition context, you know, we go in and diligence when developers develop IP, be it employees or consultants. Have they assigned the technology-- and the IP rights and the technology to the company, or is there just an agreement to assign? And we've seen cases where a deal is ready to go. You're ready to sign the deal and acquire the company. Boom! You realize a bunch of engineers have not actually assigned the rights, which even happens in Silicon Valley.

They haven't assigned the rights. They've agreed to assign it, and now you have to go clean it up before you enter into the deal, which you really never want to have to do because going to someone on the 11th hour saying, could you sign this paper where you're signing all your rights? It's often a red flag that there's missing something, and that comes with now with the payment of money in order to get them to sign that.

The other reason-- using-- this is more the license context, the assignment context-- using a present license is. Let's say I grant you some rights to use technology and you are using that technology in your business. And it's critical to your business. If I go into bankruptcy, what happens to those rights if I'm bankrupt? Do you get to keep those rights?

US bankruptcy law says you will if I gave you a present license. But I haven't licensed it to you, you're not protected. So that is the other area where a present license is really important. It's if the licensor were to go into bankruptcy.

I'm now going to move to what we call default IP rules that impact commercial, contract or a technology deal. And what I mean is, you know, companies spend a lot of time negotiating these technology deals, parsing every word. But at times you may not have that luxury. And agreements get put together quickly because companies are trying to get a deal done quickly. They cannot get into all the nuances.

And sometimes there are areas in the contract that are not specifically addressed. In that situation, if they're not specifically, expressly addressed in the contract, and it's regarding an IP right, what's going to happen? The rules under IP law in the US and the state law contract rules will come into play to fill in the vacuum.

So I'm just going to highlight some areas where those-- if it's silent in the contract on a particular issue where what IP law will then do with that issue and how we'll handle it. I've put up here on the screen a sample license grant. And this is-- in a technology deal, if you're licensing technology or IP rights back and forth, you will have the actual license grant. That's the grant that says what the licensor-- remember I talked about those rights earlier-- what the licensor is giving the licensee permission to do and what rights the licensee is actually getting.

So here is a sort of standard license grant in a software context. And here the licensor grants a distributor-- now we've got a litany of rights-- words now starting to pop on the page-- nonexclusive, nontransferable, revocable, royal to buried license to reproduce and distribute copies of the license software, solely is integrated with the distributor's product to end users in the territory.

So you can see right there that's a lot of words. And it's a lot of qualifiers. And that's-- the license grant it's probably one of the most heavily negotiated provisions in a lot of these technology deals. Because remember, I said that's where you're parsing out what rights you're giving them and what rights are getting.

But let's go through a couple of items. I'll highlight with respect to this language. Licensor grants to a distributor-- let's say you are the distributor-- a company who's going now to get that software and start distributing it. OK? Now, you're a multinational. You're the US parent and you have subsidiaries in France and Germany and Argentina and China and Japan.

Can those subsidiaries use that license? License grant says nothing about the subsidiaries. It just says the distributor-- the parent. Silent in the contract, nothing implied in the contract whether the affiliates can use it. Default law will say they can't use it.

Because a license is personal to the one receiving it-- the distributor. The parent. So absent an addition of the word licensor grants to distributor and its affiliates or absent some implied language in the contract. Technically the affiliates can't use that software.

Now if I'm representing the licensor and you're the parent distributor and you tell me, look, my subsidiaries in Japan or Argentina or Germany-- they need those rights. I'm probably going to say, OK, yeah, I'll give you those rights. But, by the way, I don't have contractual privity with them.

So if something goes sideways, you're standing in their place. And so here, if I am going to give you rights for your subsidiaries and affiliates to use that software, I'm going to tell you, look, you have to make sure that your subsidiaries only get to use it for as long as they are a subsidiary. So if you sold off a subsidiary, they still can't use those rights.

Second, I want from you a guarantee that they're going to comply with all the obligations of the contract covering those IP rights. They won't use it in certain ways. They won't sell it to someone they're not supposed to. They won't give it to our competitors. All of those restrictions I will say you have to guarantee that the subsidiaries are going to comply with them.

And I'm going to-- and this is the litany of things I may ask you. I may not get all of these but I certainly come first draft and be asking for them. And then a negotiation will begin. I would want you to agree that if your subs breach, it's deemed a breach by you. Remember, I want to be able to tap into the parent right away if there's a problem.

And then I might even ask for third-party beneficiary status, which would say, I want the right to go directly in force against your subsidiary. Once again, this is the wish list of items. You may not get them all, but if you're granting out rights to subsidiaries and affiliates through a parent, you will see some of these flavors appear.

In the license grant-- the prior license grant-- you see I had the word, I granted-- the licensor granted the distributor a revocable license. So here is another area on licensing where people can often go sideways. And it's three words that sometimes get used and people often don't know what they mean, which is understandable, because you would think, really? Are we parsing language this much? But we are.

You will see licenses talked about as being perpetual, revocable or irrevocable. And at a very broad level, there are, unfortunately, lots nuances in this area, depending on the states that you're talking about. But think of it this way-- a perpetual license is one that's meant to go in perpetuity. It's meant to survive forever. So if the agreement expires, the idea is that it's meant to continue the license.

But what about if the agreement terminates? If I granted a perpetual license to you but then the agreement terminated, do you get to keep it? In that area, you're generally looking to the termination provisions to see how they handle it-- what happens to the licenses on termination.

Let's talk about a revocable license. Revocable means I can terminate the license at any time. So back in the prior example, if I'm representing the distributor and the licensor said to me, I'm granting you a revocable license. I'm saying no, no, no, no, no. You can't revoke it at any time.

If we've signed up to a five-year deal and I'm supposed to get the license rights for five years, you can't revoke it within that five-year period. To which you will say, OK, but if you materially breach, then we can revoke. And then I might say, OK, if we materially breach, but what types of breaches are material?

Because if I'm representing the distributor, I'm trying to lock in those rights today for that five-year period. But that is what, really, a revocable license is. It's one that can be terminated at any time.

So if you're representing the licensor, you probably want irrevocable. If you're representing the licensee, you're like, whoa, whoa, whoa. Steady. We need to get these rights for a period of time. You can't just be taking the rights away from us.

And now let's talk about an irrevocable license. This one-- if you're representing a licensor, it can be a very dangerous license to give someone. And I've represented many license awards where licensee is sometimes large multinationals. They come in and throw in the word, the license you grant to me is irrevocable.

What does that mean? Generally, under US law, it means it survives breach. The idea is if I've granted you an irrevocable license and now you breached that license, you get to keep the license and use it in its authorized way. I don't get to stop you using the license. I can sue you for breach and get damages, but I can't stop you from using the license in the authorized way. I can stop you from the unauthorized use by getting an injunction, but you get to keep your license.

If I'm a licensor that's not a good place to be. If you're breaching, I want to come and have the ability to sue you for damages, enjoin the unauthorized use and shut off your license. And that gets negotiated. I've seen cases made where a licensee has made a credible argument that the technology is so now embedded in our product we can never have the license go away. And you might, in that situation, agree to give a license that irrevocable, but it is heavily negotiated on that point.

And one other thing about all these words-- perpetual, revocable, irrevocable-- this all gets addressed in the area of the contract dealing generally with termination and survival of what provisions survive. So make sure you're checking them to make sure they're consistent. Because sometimes you will handle what happens to a license on termination in the termination section. So you need to make sure you're being consistent across the agreement so that ambiguity doesn't arise later.

OK. Let's talk about another area where contract law and IP law intersect and they treat things differently. The general rule in California is that a contract is assignable without consent of the other party. That's a general rule in California. That's what we grew up with in going to law school. That's what you learn.

But what about if that contract has an IP license? So say Company A grants a license to Company B in a contract and now Company B is getting acquired by Company C. Can Company B assign that contract to Company C? Someone will say, well, a contract is freely assignable. Yeah, you can. Wait, it's got an IP license in there. Can you?

If you didn't state it in the contract of [INAUDIBLE] what's the default rule going to say? The default rule under US IP law will say no, B can't assign that license. It's the same theory along the lines of the parent and the sub, is the license is person to the one granted. You can't be then going off and transferring that license to someone else without the express consent of the owner of the IP-- the licensor.

If an exclusive license is granted, US IP law is nuanced on that point. So basically, if it's a nonexclusive license you need the consent to assign that license. If it's an exclusive license, there's some law holding. You really got something that's tantamount to ownership by getting an exclusive set of rights. You should be able to transfer it, but it really depends on the form of IP right.

The practice tip is if you see any form of IP license in a contract, when you go to decide if that contract can be assigned you have to figure out the form of IP you're talking about and the state you're talking about that's governing the law to figure out when it can be assigned without consent. Once again, our best practice tip on this point to the extent you can is be specific in the contract about whether it can be assigned or transferred without consent of the licensor.

The fourth theory I'm going to talk about today is another area that often gets missed in technology deals. And I'll take you through an example. In this example, let's say I'm A, and I have licensed some IP to you, B. You're B. Now I go ahead and sell that IP to C. OK, so you are happy. You were sitting happy. You were using my technology. I'd granted you license. Everything is fine. You're going on, running your business using that technology. And then you get notice that oh, by the way, that license? Remember all that IP I licensed to you? I've sold that IP now to Company C. So what happened to you in that exchange? Do you get to keep that license now? I don't have the rights anymore. I sold them to C. They're gone.

Are you protected? Can C come to you now and say, you can't use that stuff anymore? Fortunately, and generally speaking, under US law, you're protected. When I transfer the IP-- if it's a non-exclusive license that I gave you-- when I transferred the IP to C, the licenses travel with it. So you end up being protected. That's a general rule.

If I had given you, surprisingly and ironically, if I'd given you an exclusive license-- exclusive rights to use some of that IP and then I transferred that IP in the areas of IP where you had the opportunity to record that exclusive license? If you do not, you may be out of luck. So you would think an exclusive licensee would get more protection, but they actually don't because the law works to say that if you, exclusive licensee, had the opportunity to go record your license, you should have done that. Otherwise it's the bona fide purchase over value concept kicks in.

Let's talk about, in our world, we-- the whole-- all of our technology companies, both in the US and outside the US, the factory has all these engineers, both in the company working and developing and then collaborating with engineers in other companies. That's where all of our best products get developed. And often when we do technology deals, we are working with the fact that our engineers and the other company's engineers may collaborate. And what happens in that situation to the question of who owns the IP coming out of that collaboration?

So if you have Company A here with an engineer and Company B sitting in a room together, working, developing some software or other technology and some great invention comes out of that, who owns it? We go into these technology deals trying to parse that out. This becomes a very hard area to negotiate because, of course, Company A wants to own it on its own. It doesn't want Company B to own it. Likewise, Company B wants to own it on its own. It doesn't want Company A to own it.

What about the concept of, could they jointly own it? Sort of a ownership interest? And this sometimes happens where companies-- they either-- it might be in their interest to go co-ownership model or they feel like they can never negotiate out all the nuances and parse all of the technology. So in exasperation they sometimes say, well, we will just co-own it.

It's easier to get the deal done, but what does that mean? So the first thing is-- word to the wise-- co-ownership means two companies own the IP and now they're free to exploit it. And it'll come with some issues that I'll get into it a bit. But the general theme is they both own it.

So how does co-ownership arise under US law? It arises in two ways. Something is jointly developed with or without an agreement. The engineers in Company A and the engineers in Company B are working together and something gets created that they each contributed to that meets the standard for inventorship or authorship under US patent or copyright law. Let's take that as an example.

What happens? The law comes in and says it is co owned by both companies. That's one way it can happen. The second way is you negotiate it out and you agree that whatever gets developed by Company A engineers and Company B engineers when they're working together, regardless of the level of contribution of each, you go for a default. They both co-own it. Company A and Company B co-own it.

Generally, does that work under US law from a legal point of view? Can you co-own IP? Yes. You can generally, under US law, co-own IP. You can have multiple owners of a piece of IP. So it is recognized under US law.

Once again, a word to the wise-- when you go outside the US, always be careful to check with the law of the country you're in and where the IP is being developed because the law of that jurisdiction is going to govern if something is developed, so you need to make sure you're going down this road of allowing for co-ownership. The law of another jurisdiction-- if the work is happening there-- would allow for joint ownership.

What happens, if in our situation, we agree that there could be co-ownership? So here is an area where lots of these technology deals can sometimes go a bit sideways because people do not spend the time thinking about what it's like to be a co-owner.

Think of if you'd like co-owned a house. You have to think about who gets to use house when. Can they have anyone over? Who pays the bills-- water heating bills? It's the same thing with IP.

The question is you have to map out what are the rights and obligations of each co-owner. Sometimes that doesn't happen in technology deals. And if it doesn't happen, the law will read in what happens.

And here, let's talk about-- I'll give you some of the highlights in joint ownership and things to watch out for. It's important to specify who can do what with the jointly held IP because if you don't specify who can do what and when they pay for the use of it, under US law, just look at the screen here.

Patent and copyrights law-- they don't match each other. So if I and you jointly own a patent, you can go exploit that patent without my consent and if you make money from it, I don't get any money from you. But, let's take a copyright. Say we co-owned the copyright together. You go out and exploit that copyright or license it to someone else, but what if you made a million off that exploitation?

Can I come to you and say, actually, I get a percentage of those profits? Yes, I can, because I'm a co-owner. You have a duty to account for profits. The only way you're getting out of that duty is if we agree upfront that you don't have that duty.

So that's an area where specifying the rights and obligations of the joint owners is really important. Likewise, in some foreign jurisdictions, you can't even license the IP without the consent of the co-owner. So remember I said under US law, you can go exploit it without my consent, but what if you're under UK law? Different jurisdictions have different laws as to whether you can exploit the jointly held IP without consent of the other co-owner.

And let's take the biggest one that comes up in the technology world a lot. Let's say Company A and Company B back in our example have invented some great piece of technology and they decided they can co-own it. Can Company B now go license that company A's competitors? Of course they can, unless the agreement blocks it. And so that's another area you see in technology deals-- where they're co-owning IP and there is a sort of mapping out of whether they can license it to the other party's competitors or not.

The second area in joint ownership to think about is-- remember, for IP rights in particular, patents-- you have to go file a patent to have the right ultimately protected. So what happens if we, in our example, agree that any patents of Company A and Company B, when they're working together, that any inventions that are patentable are co-owned. Let's say we agree they are co-owned. Remember, under patent law, it's the first to file. It's a race to file that patent in order to protect it.

In the agreements you should map out who has the prosecution rights and duties. Otherwise you could both own the patent but it has no utility because you haven't filed it on time and therefore it has no value. So specifying the prosecution rights is really important.

And then the other areas is specifying the enforcement rights. Let's say you and I own a patent together. We co-own it. And now someone is infringing that patent. And you want to sue them but I don't.

How does that get worked out? So that's another area in technology deals. We spend time figuring out who can enforce the IP right. Does the other party have to join as a plaintiff? And what happens now when there's money flowing in from that litigation? Do the co-owners get to split, or do they both have to pay the litigation costs?

That's the other area in joint ownership where, hopefully the agreements are negotiated right and all of this is mapped out. If not, you're going to have these holes and you'll hear a lot of IP counsel internally who have dealt with joint ownership saying one of the hardest parts of their job is when they've agreed to joint ownership and it's not been mapped out. And now they're always having to go talk to the other side and not knowing what's going to happen-- if they want to file some patent or some copyright or if they want to go sue someone because nothing was figured out front.

The next area I'm going to talk about is-- and they are sort of-- in commercial deals and technology deals, there are three areas that we call the risk areas of the contract, where you allocate risk and liability in the contract. And they happen in three areas of the technology deal-- the warranties that are granted, the indemnities that are granted and the limits of liability.

And my practice tip to anyone working in this space is always look at the warranties and the indemnities and the limitations of liability in the contract holistically. Never look at them in a vacuum. They are all supposed to work together. And sophisticated drafters will get you to think about them individually and do very nasty stuff in the other provisions.

So always think about the whole package when you think about the warranties you've got, what indemnities you're getting and what limitation of liability. For example-- I'll give you an example. Say I'm getting some-- or I'm giving you some technology and you want all these warranties-- that I have the rights to give it to you and it doesn't infringe and all of that. And you want, if something happens with it, I'll indemnify you. If you get sued, I'll cover you.

And I sit there and go, yeah, yeah. OK, I'll do all that. And then the limitation of liability-- I put my liabilities $100K. I'm going to keep your energy focused on your getting all these warnings and indemnities.

But I'm focused on the indemnity because when something comes up I'm like, $100K. You can get nowhere with $100K. The practice tip there is those three areas-- think of them holistically.

Let's just go through a bit about each of them. On the warranties-- what is a warranty? It's a promise to do something or it's a statement about something that becomes material in the contract.

And when you think about a warranty, you're thinking about it-- if I gave you some software I may warrant to you that it works. It says it does ABC. I will warrant to you that it does ABC. And so you're trying to get from me a warranty that says it does ABC and it will do ABC for x years.

And if it doesn't do ABC, what is the remedy? What am I to do? Am I to go fix the software? Am I to give you a replacement? Am I to refund you money?

So that's what the warranties are trying to address. And you have to figure out what has been warranted, for how long it's been warranted and what are the remedies. And are those remedies sole and exclusive?

So if I warranted you that the software works and I said, I will try and fix it. And then something went wrong, is that all you can do regarding the-- do I just have to come here and say, yeah, I can't fix it. That's it. Can you sue me for breach? I will be trying to put myself in a situation to say, my sole obligation and your exclusive remedy is if something's wrong with the software I'll try and fix it, but if I can't, you can't sue me for breach and I don't incur any damages. So always think about the remedies and whether they are sole and exclusive remedies.

The other area in technology deals-- and this is really-- you'll see in technology deals an area where there is this bold and often all-caps language where the disclaiming warranties of merchantability fitness type are non-infringement. Why is that? US law requires conspicuous disclosure. And if you don't conspicuously disclose implied warranties-- or the disclaimer-implied warranties, they get read into the contract. Just be careful with that.

Let's talk about indemnities. We've talked a bit about warranties. The indemnity provision of technology deals is trying to allocate liability if something goes wrong. Who's responsible for what?

Indemnities are probably the most heavily negotiated outside of the license grant-- one of the most heavily negotiated areas of technology deals. Because they're trying to address that something has gone wrong with the technology being licensed and one party has been harmed by that. Who's going to step in and cover that issue? Think of it like it's a form of insurance.

And I'm going to take you through a sample indemnity clause just to highlight one of the problems and how language gets parsed so much in technology deals. Let's say you're A and you licensed me some software. And I came to you and say, now I'm going to use that software in my business and it's going to be my product, so I want an indemnity from you if your software infringes. So I serve up this provision that's up on the screen, where you're A and you're going to defend, indemnify and hold me harmless from any-- look at the littany of words here-- any loss, liability, or claim proceeding arising out of a third party claim that your product infringes the intellectual property rights of a product.

Six months goes by. I'm using your technology. I get a notice from X Company going, A's technology that you're infringing actually was copied from my stuff and we're going to sue you for $50 million.

They wouldn't put the number out there but you know it would be high. And then I come to you and go A, here's your indemnity. You told me now because I've been sued or about to be sued, you told me you'll defend me and then you'll indemnify and hold me harmless.

So you're sitting there going, whoa, how broad is my exposure here? And you're going to think that in probably, in some level of fairness, you should have to defend me because you agreed to do that. And you should have had to-- whatever that third party, when they come sue me-- if you're defending-- if that third party gets awarded-- let's say they got awarded to $10 million in damages because the product infringed. You should have to pay that $10 million. It said you would defend, indemnify-- which is pay the money-- and hold me harmless from any damage arising out of a third party claim.

So yeah, you probably have to cover that and your in-house counsel will take you through and you'll be saying, this is what we signed up to. This is what you paid for. But say if I said, A, by the way I can't ship my product anymore. Your product infringed. I can't ship anymore. I was counting on making of the shipping of this product $50 million in the next two years. My lost profits because I can't ship the product now. You promised me it wouldn't infringe. It infringes. I can't use it anymore. I have to pull a product off the market. You look at your indemnity and go no, no, no. We said we will cover you from any damages arising out of the third party claim. I'm only going to have to pay you that $5 or $10 million that the third party gets.

I'm sitting there going, no, no, no. That's not what this says. You told me you would pay me any damage arising out of a third party claim. My lost profit is a damage arising out of that third party claim. You have to pay my lost profit.

This happens in so many technology deals because people take a shortcut and merge the defense and the indemnification obligation. If drafted properly-- if people have the time, you should really separate out the defense obligation from the indemnity obligation if you're the one giving the indemnity. If I'm B, I'm like, I'm loading this up like it is.

But if I'm representing A, I'm saying to you, look, I will defend you if my product infringes. And then I will have a separate section that says, and here's what I'll pay you if it infringes. So when you do it that way, you can get very clear as to what your actual payment obligation is.

And I would be saying, I would only pay you those damages awarded to the third party and some attorney's fees, but I'm not going to be paying you cost to cover lost profits and all of that. So that's one area where I've seen many people over the years pull out an indemnity clause and hand it to their litigators and they think they have given a narrow indemnity because it was drafted that they talked about the stuff arising out of the third party claim when in fact, it's much broader than they ever really intended. So just be careful with the drafting of those provisions.

When we talk about indemnities and technology deals there are a few areas that routinely come up. I've already mentioned one-- IP infringement-- if the product infringes. Two, probably the most heavily negotiated area in technology deals now under the indemnities is who is responsible for privacy and security and data breaches. If companies are holding data of each other and that gets compromised or hacked, who takes the responsibility?

You'll also see in technology deals, they may ask for an indemnity if the other party fails to comply with the law. It depends on which side of the fence you're on. If you're having to give that indemnity, that's a pretty hard indemnity to give because it means like, it could be conceivably anything you'll have to indemnify for.

Plus, remember, we spent a lot of time negotiating the scope of an IP infringement indemnity in our technology deals-- you know, what you're going to indemnify for-- what the coverage is. One of the biggest back doors to an IP infringement indemnity is a compliance with laws indemnity, because if you have misused someone's technology you're arguably not in compliance with law. So be careful of that one.

And then sometimes you will see companies ask for an indemnity if the other party breaches a rep or warranty in the agreement. Once again, if you're asked for that, stand back and take a deep breath, because you would be like giving unlimited liability in the contract, now, for anything you do wrong. So just be careful of that if that is served up to you.

Let's talk a bit about the third area on these risk provisions, which is limitation of liability. And remember I said make sure you take that holistic approach. Read the warranties, read the indemnities and read the limitation liability because they should all be working together if the work has been done right.

And always think about when the warranty, indemnity and the obligations now trigger in a contract. What is the exposure, both in terms of the types of damages and the amount of recovery? What is that going to be? Where will you look to that? You'll look in the limitation of liability provision of the contract.

And here is-- and I'll just give you some examples. Here is an example of what a limitation of liability provision might look like. It says, well, in no event will licensor be liable for any consequential, indirect, exemplary, special or incidental damages, including any lost data or profits arising from or relating to the agreement. That is disclaiming all of those. So basically, here the licensor is saying, the only coverage you get is direct damages. All the other damages you're not going to get.

Then the licensor goes on in the second sentence to say that their cumulative liability-- so for the damages you can tap into, they're now putting what we call a monetary cap on liability. For the damages you can tap into, I'm saying it's only up to a certain dollar amount-- the fees paid under the agreement-- something to that effect. You will often see in these contracts these provisions come in various different forms. They are heavily negotiated and there are lots of carve-outs to the provisions.

But let me just show you a couple of things to think about in damages, disclaimers and caps on liability. They are generally-- if you're licensing a product to someone and you're having a damages disclaimer like I just showed you and a cap on liability, you have to wonder at some point if something goes wrong is that damages disclaimer and cap on liability fool-proof? That's what will happen.

If an issue comes up and gets handed to litigators, you're like, is this fool-proof? I'm banking that I can't be exposed to lost profits and liability is $100,000 or $5 million on this contract. Will that be enforceable if it gets litigated? And generally, yes, under US law they're enforceable.

Unless-- three areas to highlight they're unconscionable. That's state by state, what's unconscionable. If the remedies fail of their essential purpose-- so if it turns out that you've ended up drafting the damages disclaimers and caps on liability such that the other party has no real remedy, a court may say, actually, it fails. There really is no agreement on this point because there's no remedy for the other party.

So we sometimes see it where a company comes in and they try and disclaim all damages, even directs. But when that goes to get litigated, the court's going to say, well, wait, so you have no liability under the contract? So you might have been better to expose yourself to direct damages and put a cap, because then you can argue no, no. There's coverage. There's some coverage and this was the bargain for exchange.

So, once again, always be thinking about if it gets enforced will it be enforceable? And then the standard one is fraud, willful misconduct or gross negligence. Try as you may, you can't disclaim liability for those under the vast majority of US states.

I want to just highlight one thing that people always-- and it's, again, it's sort of like the agrees to agree language that I highlighted earlier. A lot of this language these contracts is nuanced and, of course spend a lot of time analyzing these provisions.

When companies sign up to technology deals one of the areas they're always trying to make sure of is they're not responsible for lost profits if something goes wrong. That's one of the biggest types of things are trying to make sure. If a breach claim comes up and you've licensed some technology, you're trying to make sure, what's my exposure? There are certain things you don't want to be exposed to, one of which is lost profits-- the other side's lost profits arising out of that breach. Say the software caused the disclosure of all the customer data or the software infringed that you had licensed to someone.

In the earlier example that we went through the other company said, you have to pay me my lost profits. I can no longer use that product. So they spend a lot of time disclaiming lost profits, but it often gets done and goes state by state. But if you look at these examples of this language up here, there is a disclaimer of consequential, incidental, special or indirect damages, including any lost data or lost profits. OK, let's go down to some other language. Under no circumstance will either party be liable to the other for indirect, incidental, consequential or exemplary damages, such as but not limited to lost revenues or lost profits.

Something went wrong and the other party said, I get lost profits. Party A said, no you don't. Here's this provision that says we've disclaimed lost profits. The court held, no, no, no. Lost profits got disclaimed as a form of incidental damages, but if the state allows recovery of lost profits as a form of direct damages, which lots of states do, you can go recover.

They hinged on two words-- such as and in another case, neither party would be liable to the other party for any loss of production, profits or use or any other indirect or consequential damages, irrespective of cause. In both these cases, the court held, lost profits were recoverable as a form of direct damage. That is not the answer you want if you sign up to a contract and it's a breach. So be very careful.

What we will do is carve out lost profits entirely on its own. There's no liability for lost profits. Whether it's a form of direct damages or indirect damages, there's no liability. So just be careful on that. As I mentioned, I've got two minutes left.

The other area I mentioned from all these damages, disclaimers and caps on liability, there are to be various exclusions that gets negotiated, which means if something goes wrong in these areas, it's sort of a free for all. You get to tap into lots of types of damages and the limit of liability-- the monetary cap-- may not apply. I've just highlighted some there, which are infringement of IP rights, breach of confidentiality.

These are areas where in general in technology deals, some of these will be carved out from the limitations of liability. But once again, it's heavily negotiated in terms of what provisions, breach of licenses, IP infringement, breach of confidentiality, breach of non-compete, exclusivities-- which ones get carved out from a damages disclaimer or a cap on liability.

Given that I have one minute, termination I just alluded to the biggest thing about termination is think about you'd hate at the beginning of a deal to think about the deal terminating, but it happens. Think about what happens to the customer base and the technology on termination and the rights under the technology deal.

And then the last area I wanted to highlight is always pay attention to the miscellaneous provisions and the exhibits in a technology deal. We bury lots of nasty stuff in there because people don't read them that closely. So really read them.

And I've highlighted some of the ones where, if a contract ever comes to be litigated you hand it to a litigator. They are going to look at the governing law, the dispute resolution and the limitation of liability. That's where they're going to look first and foremost, and then they'll get into all the other stuff.

So here are just some areas to think about in the miscellaneous provisions. The assignment one is a big issue and changing control. That is where it maps and what happens if one of the parties is being bought or sold. Be very careful of that provision. Exclusive jurisdiction-- this is one where people sometimes go sideways.

A California company agrees, in a cross-border deal, [INAUDIBLE] litigation, the exclusive jurisdiction is in California. We're in California. Wait-- if the counter-party is in Germany and you need to sue them and Germany and all of the assets are there, you're now stuck in California. So exclusive jurisdiction may not necessarily be the best thing for you. So always think about that because it can come back to bite you.

And then dispute resolution-- we see a lot of litigation used in the US, but in cross-border deals we see a lot of international arbitration used as the form of dispute resolution.

Now I'm at my time limit and you guys have a break. Thank you for the run through on technology deals.

SPEAKER 1: Thanks, Glen. Thanks, everyone. We'll be back in 15 minutes.


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