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                                                       1
         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.
                     www.finra.org

              Daniel Glazer, Partner
         Patterson Belknap Webb & Tyler LLP
                 New York, New York                   2
                    www.pbwt.com
  "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

                                                            3
               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




                                  5
        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

                                                                  6
      Representations and Warranties
License
•  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
Deliverables
•  Free from defects in material and workmanship
                                                              7
•  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
      (www.opensource.org)
   –  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
                                                                   8
   –  Understand nature of any modifications to open source code
     Open Source Code Representation/
             Indemnification
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
                                                            9
          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
                                                                 10
   –  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




                                                        11
      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
                        Confidentiality
•  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"
                                                               14
•    Use of other party's trademarks to publicize relationship
      Issues Specific to
Technology License Agreements




                                15
              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
                                                             16
   applications
           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
                                                                  17
              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
                                                                    20
•  Release events
                      Bankruptcy
•  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
   trustees
   –  365(n) does not protect trademark licensees
   –  Include provision confirming that Section 365(n) of the
      Bankruptcy Code applies to all IP licenses
                                                            21
       Issues Specific to
Technology Services Agreements




                                 22
 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
                                                               23
   –  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
assignment
 •  56 years from the date of copyright for pre-1978 assignments
                                                                 24
 •  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
                                                                              25
                 Contact
Mary Sarwary        202.728.8272
                    Mary.Sarwary@finra.org

Daniel Glazer       212.336.2523
                    dcglazer@pbwt.com


                Questions?


                                             26
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posted:5/16/2012
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