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         Navigating the Tech Deal:
Technology License and Services Agreements
           for the Non-Specialist
                 February 1, 2012
                Presented By:
   Mary Sarwary, Assistant General Counsel
    Financial Industry Regulatory Authority (FINRA)
                   Washington, D.C.

              Daniel Glazer, Partner
         Patterson Belknap Webb & Tyler LLP
                 New York, New York                   2
  "Intellectual Property" vs. "Technology"
•  Intellectual Property
   –    Patents
   –    Copyrights
   –    Trademarks
   –    Trade Secrets
•  Technology and Software
   –  Not Intellectual Property
   –  May be tangible embodiments of or otherwise reflect
      Intellectual Property rights

               Types of Agreements
Licensed Technology/Software
•  Proprietary materials provided for Licensee's use

Technology Services Agreements
•    Software/Website Development
•    Software as a Service (SaaS)
•    Consulting
•    Hosting
•    Outsourcing
•    Maintenance/Support                               4
       Issues Common to
License and Services Agreements

        Representations and Warranties
•    Corporate representations
•    Infringement / misappropriation
•    Sufficient rights and consents
•    Good title / no liens or encumbrances
•    Worms, viruses, Trojan horses, and other defects or bugs
•    Implied warranties
     –  Title, non-infringement, merchantability, fitness for a
        particular purpose

      Representations and Warranties
•  Validity / enforceability of Licensed IP
•  Error-free performance in accordance with documentation
Provision of Services
•  Professional, competent and workmanlike manner
•  In accordance with generally accepted industry standards
•  Using fully trained and qualified personnel
•  Free from defects in material and workmanship
•  Conform to requirements / specifications
         Representations and Warranties
Open Source Code
•  Does Licensed Software/Work Product incorporate open
   source code?
•  If so, what are the potential consequences?
•  Due Diligence:
   –  Review terms of relevant open source license agreements
   –  Determine whether Licensor/Provider has and complies with
      internal policies concerning use of open source code
   –  Request code logs
   –  Perform a scan on applicable source code
   –  Understand nature of any modifications to open source code
     Open Source Code Representation/
Representation/Indemnity for "adverse consequences"
•  Use of open source code will not
  –  Require licensing of any source code to any other person
  –  Limit receipt of consideration in connection with licensing
     applicable software or products
  –  Allow any person to decompile, disassemble or otherwise
     reverse-engineer applicable software or products
  –  Require the licensing of applicable software or products to
     any other person for purpose of making derivative works
          Infringement Indemnification
Division of responsibility for claims based on the party
responsible for authorizing infringing conduct
•  Actions within/outside scope of Agreement
•  Compliance with Licensee/Recipient's specification
   –  Is non-infringing compliance possible?
•  Post-delivery modifications
   –  To what extent was infringement due to the modification?
•  Combinations with third-party services/materials
   –  To what extent was infringement due to the combination?
   –  Did the parties reasonably anticipate the combination?
•  Failure to implement a work-around
   –  Would implementation have eliminated the infringement?
        Other Indemnification Obligations
•    Breach of representations/warranties: actual and alleged
•    Violations of applicable law
•    Product liability
•    Damage to tangible property
•    Personal injury/death
•    Gross negligence/willful misconduct

      Other Indemnification Obligations
Indemnify, defend and hold harmless
•  Risk of unanticipated meaning: "indemnify" vs "hold harmless"
•  Address defense obligation with specificity
Do parties intend to address only third-party claims?
•  Under NY law, an indemnity is not presumed to cover claims
   between parties to the indemnity

Licensor/Provider obligated to replace, modify, obtain license
•  Licensor/Provider should ensure it retains right to terminate
   license or services as "option of last resort" to avoid treble
   damages for willful infringement                             12
 Limitation on Liability / Damages Disclaimer
•  Limit each party's liability to pre-determined cap /
   Disclaim consequential and other damages
   –  Potential risks and benefits
   –  Acknowledge certain damages as "direct," not "consequential"
       •  Direct: Immediate, natural result of breach
       •  Consequential: Reasonably foreseeable by the parties
   –  Potential Exceptions:
       •    Indemnification obligations (infringement claims)
       •    Breach of confidentiality
       •    Violations of applicable law
       •    Damage to tangible property
       •    Personal injury/death                                13
       •    Gross negligence/willful misconduct
•  Clarify relationship to any existing NDA
•  Confidentiality of agreement terms (M&A exception)
•  Obligation to mark disclosed information as confidential
     –  Consider potential benefit vs. burden
•  Term limitation
     –  Perpetual confidentiality obligations for trade secrets
     –  Some states will not enforce perpetual obligations on individuals for
        non-trade secret information
•    Treatment of personally identifiable information (PII)
•    Treatment of information on backup tapes and leased hardware
•    "Confidential Information" vs. "Licensed Technology"
•    Use of other party's trademarks to publicize relationship
      Issues Specific to
Technology License Agreements

              Nature of Rights Granted
Licensed Technology/Software
•  Scope
    –  All technology in a particular field owned by Licensor or affiliates
        •  Consider effect of change of control
    –  All software marketed under a particular product name
        •  Consider effect of re-branded functionality
        •  Maintenance releases and updates
•  Separable rights: Access, download, display, use, reproduce,
   distribute, perform (execute)
•  Right to Modify: Object code vs. source code
•  Geographic Scope: Worldwide, U.S. only, etc.
•  Field of use: Internal business purposes / embed into commercial
           Nature of Rights Granted (Cont.)
•    Revocable / perpetual & irrevocable (tie to termination provision)
•    Transferable / non-transferable (tie to assignment provision)
•    Use by affiliates, contractors, divested entities
•    Number of copies provided or permitted to be made or used
•    Delivery and testing obligations
•    Support and maintenance obligations
      –  Updates
      –  Scope
      –  Renewals
      –  Pricing
              Sublicensing and Assignment
•  Licensor and Licensee should clarify intent with specificity
•  Default rules for non-exclusive licenses:
    –    Right to grant sublicenses generally not presumed
    –    Non-exclusive IP licenses may not be assigned by Licensee without
         consent (majority view)
•  Default rules for exclusive licenses:
    –    If silent, a right to grant sublicenses may be implied
          1)  Address Licensor's disposition of exclusively licensed rights if
             Licensee fails to adequately exploit
    –    Exclusive IP licenses are assignable by Licensee without consent
         (majority view)
    –    Licensor may assign exclusive or non-exclusive IP license without
         consent                                                        18
                   Restrictions on Transfer
•  Restrictions on assignment and/or change of control
    –  General rule: Non-assignment provisions triggered if Licensee
       doesn't survive the transaction (e.g., asset sales, forward mergers)
        •  Stock sales do not violate non-assignment provisions
        •  Minority view: Reverse subsidiary merger constitutes an assignment
           (SQL Solutions (N.D. Cal. 1991))
            –  Reverse subsidiary merger may violate provision restricting assignment
               "by operation of law." Meso Scale v. Roche (Del. Ch. April 8, 2011)
    –  Change of control provisions typically triggered by mergers, asset
       sales, and certain sales of stock/membership interests
•  Restrictions on assigning license vs. assigning entire agreement
•  Effect of breach of non-assignment provision ("null and void")                 19
                 Source Code Escrow
•  Representations
   –    Source code is correct, accurate, sufficiently documented
   –    Licensor to cooperate with escrow agent to verify
•  Ensure present grant of license
   –    Bankruptcy court likely will not enforce license grant that is
        contingent on Licensor's bankruptcy
   –    Licensee's rights should expand to include rights to modify Licensed
        Software and provide support for customers (if applicable)
•  Delivery
   –    Initial deposit and identification of programmers
         1)  Bankruptcy exception to non-solicitation provision
   –    Ongoing update obligation
•  Release events
•  Contractual restrictions on bankrupt licensee's assignment
   typically are ineffective
   –  Look to "applicable non-bankruptcy law"
•  Section 365(n) of U.S. Bankruptcy Code protects
   licensees of patents, copyrights and trade secrets from
   unilateral termination by bankrupt licensors or their
   –  365(n) does not protect trademark licensees
   –  Include provision confirming that Section 365(n) of the
      Bankruptcy Code applies to all IP licenses
       Issues Specific to
Technology Services Agreements

 Intellectual Property / Proprietary Rights
•  Ownership of Work Product
   –  Ensure appropriate scope of "Work Product"
       •  All items created or developed in performance of services vs.
          deliverables specifically identified in Work Order
       •  Does Provider require ongoing right to use or license?
       •  "Inventions" / "works of authorship"/ "ideas" (Mattel v. MGA)
       •  Data and metadata resulting from services
   –  Further assurances / power of attorney
•  Pre-existing Rights
   –  Incorporated in or otherwise necessary to use Work Product
   –  Identification in Work Order
   –  Recipient typically requires broad license to use
 Intellectual Property / Proprietary Rights
Present transfer of rights ("hereby assign") vs. promise to transfer
("will assign" or "agree to assign")
 •  "Work for hire" only applies to copyright, not all IP
 •  When prepared by a non-employee (e.g., a contractor), software code
   cannot be a work made for hire

Author retains irrevocable right to terminate any copyright
assignment within a five-year window beginning 35 years after the
 •  56 years from the date of copyright for pre-1978 assignments
 •  Does not apply to works made for hire
            Systems Security and Backup
Provision of services may necessitate interconnectivity
between Provider and Recipient's systems and networks
Common obligations
 •    Access limited solely to provision/receipt of the services
 •    Compliance with each party's stated network security policies and procedures
 •    Avoid circumventing or compromising security measures
 •    Protect against unauthorized access to the other's party's systems
 •    Reasonably cooperate to investigate and address security flaws or breaches
 •    Reserve right to terminate access to prevent security breaches
 •    Maintain appropriate protections against worms, viruses, Trojan horses, etc.
 •    Maintain appropriate business continuity and disaster recovery resources
Mary Sarwary        202.728.8272

Daniel Glazer       212.336.2523


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