Licensing Agreement Negotiations

Something that women and/or minority business owners may want to consider is registration with the Indiana Department of Administration Minority and Women's Business Enterprises Division to become certified as a minority-owned or woman-owned business.

Established in order to give such businesses an equal opportunity to participate in the state purchasing process, the criteria considered for such certification include that the minority/woman member possess:

• ownership of the business (at least 51%);
• the requisite expertise in the industry;
• management and control of the entity and its operations; and
• U.S. citizenship.

It is an onerous application process, which includes on-site visits, interviews, and the submission of documentation to support the status of the business.  However, it could be well worth registration to those who are qualifying entities, as each year the Governor's Commission on Minority and Women's Business Enterprises votes on contracting goals and sets the level of participation for minority- and women-owned firms on state contracts.

If you are a minority or woman owned business enterprise, you may want to consider certification to give you an edge on state contracts and perhaps other opportunities.

As an attorney with Alerding Castor Hewitt, LLP, an Indianapolis business law firm that provides legal counsel to companies of all sizes, my practice ranges from formations of young start up companies to assisting with licensing agreement negotiations for well-established corporations. 

And, as a woman and a minority myself, I am more than willing to help guide clients through the process to achieve certifcation as a minority or woman owned business enterprise. 

We all know the beauty of the SaaS business model: great cash flow from up front payments, recurring revenue from clients that renew, ratable revenue recognition that results in smooth rather than lumpy revenue models, etc.  But what if during your licensing agreement negotiations the client is pushing back and threatens some or all of these SaaS model advantages?

This is when its great to work with attorneys that have extensive SaaS legal consulting backgrounds; attorneys that not only understand ASP law or cloud computing law but can help achieve business goals during licensing agreement negotiations. 

If a client does not want to pay up front, provide and incentive for them to do so.  Give them 60 day payment terms and a 2% discount for paying for a 1 year subscription / license up front.  That's better than receiving payment over a 13 month term, no?  And if you are a start-up struggling to manage cash flow, a small discount for an up front payment is a small price to pay.

If this is a consistent issue, consider incentivizing your sales force for up front payments.  Give them a bigger / better commission for clients that pay up front within 30 days.

The United States Supreme Court (SCOTUS) has granted certiori on a case  in the privacy litigation arena that focuses on the question of whether a governmental employee has Fourth Amendment rights in the contents of an employer issued pager.  The case is City of Ontario v. Quon (www.ca9.uscourts.gov/datastore/opinions/2008/06/18/0755282.pdf).  In Quon, the Ninth Circuit made several decisions.  It first decided that a third party company that provided texting services to the City of Ontario was a Electronic Communication Provider and not a Remote Computing Provider for purposes of the Stored Communications Act ("SCA").  Given the impact on liability, I think this aspect of the opinion (which was not raised on cert) is very intriguing from a technology litigation / electronic discovery perspective.  If a text message company is a ECP and not a RCP, they are exposed to more liability.  This fact can be used as a sword or a shield in a litigation arena.

The remainder of the 9th Circuit opinion focuses on Fourth Amendment privacy rights in electronically stored information.  The point that was raised on cert is whether a governmental employer has an expectation of privacy in his information transmitted electronically from a government provided device.  This has some implications for Indiana privacy litigation as well as general licensing agreement negotiations.  Interestingly, if SCOTUS agrees with the 9th Circuit, the employee would have a reasonable expectation of privacy in the information, regardless of what state public record acts say.  Thus, I, Joe Citizen, would have more access to the information than the State itself.  This has the potential for interesting results.  Maybe the state will have to ask me to find out if their employees are responsibly using the equipment provided to them.  

Additionally, if the Court agrees with the 9th Circuit, a search that was conducted when there were less intrusive means of obtaining the information would not be reasonable.  This also creates a lot of grey area and room for courts (and litigants) to maneuver.  I think it certainly raises instant triable issues regarding whether a means was intrusive and what less intrusive means existed.  

Overall, this ruling should be fun, even if I personally think the more interesting question was not raised on cert.  (ie whether a third party provider is an ECP or a RCP under the SCA [you have to love acronyms]).  I'll be watching this one.

Alerding Castor Hewitt, LLP is proud to announce the addition of Indiana technology lawyer Bill Boncosky to the firm. 

The former General Counsel for ExactTarget, Bill has tremendous experience as technology counsel for one of the most successful technology start ups based right here in the heart of Indianapolis.  A company that had just over a dozen employees when he joined, Bill has substantial experience in licensing agreement negotiations, ASP Law and Cloud Computing Law serving in that role for over seven years.  He will be able to provide significant guidance based on solid experiences to many of our clients operating within this industry.

If you're looking for SaaS legal consulting, the attorneys at Alerding Castor Hewitt, LLP can help.  The newest attorney to join the firm, Bill Boncosky, is no exception.

The other day I wrote a post on my reasons not to use the term "affiliates" in licensing agreement negotiations.  See post here.  My general point is that the term has no common meaning in the law and may create ambiguity in the contact.

I addressed several different definitions of the term in laws, but the term is not only defined differently in law, it is also used differently in business.

For accounting companies, for instance, the Interstate Commerce Commission defines the term as companies controlled by the accounting company alone or with others under a joint agreement.  So, “affiliates” falls outside of typical entity ownership structures and to companies with controlling interests through contractual relationships.

In the banking industry the term is commonly used to refer to an FIB which processes credit card data for other financial institutions or financial institutions that issue MasterCard or Visa cards.  The term here has nothing to do with ownership structures.

In television and radio industries, affiliates are companies not necessarily under common ownership which have contracted with a network to broadcast its programs.

In the Internet world a marketing affiliate refers to a company who links to another company via a weblink which then allows the hosting company to obtain a commission on sales made as a result of user’s clicking through that link.

"Affiliate" is a term that is used in contracts when the parties want to refer to an entity relationship but do not want to take the time (or don't know how) to define it.  Again, it is best to avoid this term, but if you must use it, make sure to define it clearly in the contract. 



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Alerding Castor Hewitt, LLP is an Indianapolis law firm focusing on business law, information technology law (including SaaS law and legal technology consulting), private equity consulting, and business and Internet litigation.

There are several scope of license issues to work through when handling license agreement negotiations.  In my SaaS law (SaaS legal consulting) practice I often see licensees wanting to open the scope of the license to its “affiliates”. 

For many larger SaaS customers this makes sense as these businesses often operate as families of companies rather than single operating entities.  The customer may need to open the license to its other companies in order to properly use the software.  Just last week I was negotiating a Software License and Services Agreement with a Fortune 100 company that has over 50 companies in its U.S. operations alone.  They needed SaaS user seats for most of these companies.

The problem with the term “affiliates” is that it is not precise and may mean different things to different parties.  Some contract terms have clear legal meanings.  For example, “subsidiaries” commonly means companies which are owned and controlled by another company.  “Parent” commonly means the company that owns the subsidiary.  “Joint venture” commonly means a contractual relationship between two companies to engage jointly in a particular operation. 

“Affiliates” does not have a common meaning for most contractual purposes.  At the highest level the term points to a working or organizational relationship between two companies, but it is unclear how related the two companies have to be in order for them to be considered affiliates.  For example, are joint ventures affiliates?  Are management companies or consulting companies affiliates?

The term is defined differently in Federal and State laws and by legal dictionaries. 

The Banking Act of 1933, for instance, contains a very broad definition as any organization that a bank owns or controls by stock holdings, or which the bank's shareholders own, or whose officers are also directors of the bank.  This definition is probably much broader than most licensees intend and most licensors are willing to accept. 

The IRS defines the term much more narrowly (for purposes of consolidated tax returns) as a group of companies whose parent or other inclusive corporation owns at least 80% of voting stock.  This definition may be more narrow than the licensee intends.

The Investment Company Act defines “affiliates” as a company in which there is any direct or indirect ownership of 5% or more of the outstanding voting securities.  I am not sure if any licensee or licensor is intending that precise scope when using the term.

Black’s Law Dictionary defines the term broadly as a corporation that is related to another corporation by shareholdings or other means of control.  By that definition a management or consulting company could arguably be considered an affiliate.

The Ninth Circuit court recently adopted the Black’s Law Dictionary definition as it applies to the TCPA (an opt-in privacy law related to telephone marketing), but interestingly, the court also determined that because there was no direct contractual relationship between the two companies, they were not affiliates.  Thus, the court apparently also needs to see a contractual relationship between the businesses for them to be affiliates.

Finally, a note for Indiana technology companies – Indiana Code 23 (the Indiana business statute) does not define “affiliate” and Indiana courts have not yet addressed the definition in a business structure context. 

You see the point.  The term is messy – which is why it should be avoided.  The point of contracts is to be clear and avoid ambiguity.  This term can create ambiguity and lead to unnecessary disputes down the line. 

So you've launched your company and hired a web-developer to breathe life into the idea you've poured your heart and soul into developing over the past several months, perhaps even years...

Maybe you never even thought to ask the question, but at the end of the day who actually owns "your" website?  You or the web designer?

Indiana software litigation in a ruling by the Supreme Court of Indiana, Conwell v. Gray Loon Outdoor Marketing Group, points to the fact that hiring a contractor for the development of content and programming of a website is considered a service rather than a purchase of a good.

In this case, the Indiana Supreme Court ruled that the independent contractor owns the property, while the hiring party owns a non-exclusive and perpetual license to use such property, unless of course, there is an agreement specifying otherwise.

Looking towards prior Indiana technology litigation the Supreme Court applied the definition of an implied non-exclusive license to the development of a website:

An implied non-exclusive license is granted when (i) a person (the licensee) requests the creation of a work; (ii) the creator (the licensor) makes that particular work and delivers it to the licensee; and (iii) the licensor intends that the licensee copy and distribute the work.

This definition applied to the facts surrounding the website development in this particular case ultimately led the court to its conclusion.  

So, expect this to be the case (at least in Indiana) the next time you hire a webdesigner for your next project: upon final payment, the webdesigner owns the property, while you own the right to use it... forever. 

(Unless, of course, you involve technology legal counsel first and negotiate otherwise.)

For an example of a newly developed Indiana-based website check out: GlobalToaster

A client asked me today if it is more usual for customer payments to be in advance or in arrears in Software-as-a-Service (SaaS) license agreements.  It is a great question as this is a common point raised in licensing agreement negotiations. 

The nature of a SaaS law license is that it is a subscription transaction.  There is a guaranteed term with a right to some use of the technology.  What makes SaaS transactions unique is the collaborative support services that support the license.  Some attorneys want to treat these transactions as service engagements rather than software licensing - but true to the heart of any SaaS transaction, it is a license to use the technology.  There is scope of use, restrictions on use, user seats, types of seats, IP restrictions and other common licensing terms.

This is key when chosing a pricing model as it should be priced as a software license (which requires the water to be turned on) rather than a services engagement (which requires delivery and acceptance).  Regarding the guaranteed term, most SaaS licenses are either on-demand (client pays as they use) or term subscriptions (e.g., monthly or annual rates regardless of amount of use).  For the on-demand licenses, payment terms are easy - they pay as they go. 

For the installment payments, payment terms should be set based on the nature of the SaaS tool itself.  If the payment is based on some variable component, such as a savings level acheived through the technology, it should be in arrears.  If it is a structured payment schedule, it might as well be in advance.  

One of the business law firms located in downtown Indianapolis, Alerding Castor, LLP began in April of 2007 and has now recently added Brian Hewitt as partner.  Under the new name, Alerding Castor Hewitt, LLP, I couldn’t be more enthusiastic to be a part of this legal team.  What I find exceptional about this firm is that we work as a team in order to provide our clients with outstanding legal counsel.   

 

While I practice mainly on the transactional side of the law, working with clients on such projects as: strategizing and negotiating multi-million dollar agreements, preparing private placement offerings in accordance with funding law, and offering legal technology consulting for SaaS licensing, we work collectively as a firm for our clients and have many attorneys who focus more on litigation. 

 

For instance, litigators, who spend most of their lives in the courtroom, have an eye toward recent courtroom rulings and interpretations of the law (because they have spent countless hours researching court opinions and crafting their arguments against opposing counsel).  So, I find that in order to provide my clients with the best possible legal advice, at times it is absolutely essential for me to discuss and carefully consider the perspective of our litigation attorneys – and they are always glad to provide me with that insight.

 

That is what a team is all about: utilizing the strengths of every member for the collective benefit of the team… which ultimately means the client. 

 

As an Indianapolis attorney, I’m proud to be associated with this growing legal team: Alerding Castor Hewitt, LLP.

Let's face it - most contract terms are boring.  SaaS licensors and their customers want to close deals.  They want to hammer out the business terms and key legal terms and get the contract done.  I don't blame them.  Nobody in their right mind wakes up in the morning and says "I want to negotiate a contract today."

After weeks (or even months) of negotiations over key business and legal terms, the parties often are left with a few miscellaneous "legal" terms that seem more of a burden than important to the ultimate goals of the transaction.  One common term that reaches these final stages is the forum selection clause (i.e., if a lawsuit arises based on the contract, where will it be brought?). 

An Indiana technology company obviously wants all actions to take place in Indiana courts.  The out of state (or out of country) customer wants their home forum. 

So the key question is: Is this clause really important enough to delay closing the transaction? 

My favorite attorney answer: It depends.

As a business law attorney, answers are not always so clear.  For instance, a SaaS client of mine once asked me regarding a large scale SaaS licensing agreement valued at hundreds of thousands of dollars in which we were negotiating a choice of law clause, "What is the difference between choosing Indiana law or Illinois law to govern this contract?"  There are two potential answers.  The first answer engages the standard large business law firm approach - have an associate draft a massive memorandum comparing statutory and case  laws of each state on each and every clause of the contract and then outlining each and every difference to the client.  Spend: 40 legal hours @ $250/hr = $10,000.  

The second answer is approached from a business risk standpoint.  This is usually more what the client is looking for.  The attorney answers that there will be some differences but anticipates the differences will be fairly minor as both are seventh circuit states and have approached business law in very similar manners.  That said, this does not mean there are not differences in law, and we can look into specific issues further if there are key issues you want addressed.  Spend: 0.3 Hour @ $250/hr = $75.

The second answer provides a platform of risk assessment for the client to make an informed decision.  Do they want more information or are they willing to take on the risk of not knowing all of the answers in order to get the transaction done.

That example is for choice of law.  With forum selection clauses you are taking on the risk of a lawsuit arising from this contract and the need to bring an action on this contract.  The attorney can either do a detailed analysis of the differences in procedure and history of case law in SaaS transactions in the other state or provide the client with the opportunity to weigh the risk.

An out of state (or country) forum selection clause will greatly increase the costs of an action on the SaaS licensor.  So, there are several factors to consider when weighing the risk.  

• Is the SaaS licensor collecting a subscription fee over time or payment upfront?  A foreign forum selection will make small collection actions more difficult to obtain.
• Does the contract provide for attorney's fees and collection costs to be recovered by the SaaS business?
• Does the foreign selection clause put the SaaS business' customer on their home turf (there is a such thing as home court advantage in law) or is it a neutral site?
• What is the estimated cost for securing counsel in the forum (e.g., If you have London or New York forum, the SaaS business will pay double or triple on legal rates than Midwest rates).

Moral of the story - consult with an attorney who truly wants to get business deals done and weighs risks with you based on particular transactions.  Be aware of attorneys that want to provide over analysis on all provisions or ignore the particulars of a transaction.  Finally, don't overlook what sometimes are considered miscellaneous, general or "boilerplate" terms.  There are often "hidden" costs down the road in these clauses.


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Alerding Castor is an Indianapolis law firm focusing on business law, information technology law (including SaaS law and legal technology consulting), private equity consulting, probate and business litigation.

Much of my SaaS law (Software as a Service) practice consists of negotiating SaaS agreements.  Whether you count SaaS as a license, service or a hybrid of both, expect one thing in your negotiations, corporate counsel usually just don't get it. 

Most in-house counsel for large corporations spend their time on securities, employment or common vendor or customer issues.  SaaS licensing is still a relatively new area of technology / information technology law and most in-house counsel want to throw it into a bucket of a purchase of goods or an installed software transaction.  Common provisions that point to this lack of understanding are terms like acceptance testing, termination on convenience, reoccurring purchase order requirements, IP ownership, on-site insurance provisions and so on.

I once had a corporate counsel hold up a SaaS agreement over a maritime insurance clause.  Not only was this a SaaS agreement where the client is merely turning on the switch to provide the customer Internet access to the SaaS solution, but my client was located in Indianapolis – the largest city in the US without a navigable water way. 

The biggest problem caused by inexperienced counsel in these negotiations is that it causes delay in finalizing the transaction, which equates to increased expenses and risk of not landing the deal.

So what can you do? 

During the proposal phase “ask, ask, ask”.  Find out if the customer is experienced in SaaS transactions.  Get the customer business representative to partner with you and to side with you when they present this to their counsel.  Ask if their counsel can talk to your experienced SaaS counsel before negotiations begin.  Inquire about the bureaucracy of the customer’s contract negotiation procedures.

Answers to these questions may not prevent all of the delays, but they should streamline resolutions to some of the issues that may otherwise come up during negotiations.


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Alerding Castor is an Indianapolis law firm focusing on business law, information technology law (including SaaS law and legal technology consulting), private equity consulting, probate and business litigation.

Negotiation strategies are often quite similar to interrogation strategies.  “Clock Negotiation” is a process often used by large companies with deep pockets and bureaucracy when dealing with smaller companies with lesser pockets.

The goal of the large company is to send contract negotiations through multiple stages of review – with each stage going to a different division or office of the company.  In each stage following the first, the officer will chip away more and more at the terms or require additional services be added.  To the small company, this looks half hazard, but it definitely carries a purpose. 

Take a small software licensing business, for example.

Stage 1:  The contract starts at an informal meeting between the small software licensing company sales rep and large company business officer.  This is the exciting stage.  Everyone seems to be in agreement on everything!

Stage 2:  The contract is passed to some type of “commercial terms” review person – at which point sales rep is informed that large company has certain business terms (that are always "policies") that it must have in the contract.  These are not ideal terms, but they are definitely not deal killers and can fairly easily be agreed to.  There is little negotiation.  Software licensing company wants the deal and accepts the terms.

Stage 3: The contract goes to the “contract review” office at large company.  This is not legal counsel – just some mid-level worker with a checklist of what terms the company can and cannot agree to.  If there is pushback by the small company at this stage, there will be several conferences and e-mail exchanges, and the stage will stretch on for some period of time.  Finally, the contract officer will give some leniency on what originally were “non-negotiable” terms, but only if the software licensing business gives a lower price, a termination on convenience, or additional services at no cost. 

Then the contract officer tells small company that they now have to get the contract approved by legal – at which point the small company cries out something to the effect of, “I THOUGHT YOU WERE LEGAL!” 

Stage 3 ½:  Somewhere during Stage 3, the original business contact asks software licensing sales rep for some level of demo or pilot… or some level of free service as a proof of concept.  This, of course, is at the cost to software licensing company.

Stage 4:  The contract gets sent to legal.  Software licensing company is praying that this is only for their blessing and not for further negotiation.  But, in-house counsel are not paid to bless documents, they are paid to negotiate the best deal possible for large company.  At this stage large company understands that small company has sunk a lot of costs into this deal and to some degree has to take what is fed to them.  Legal asks for additional indemnities, warranties… they ask for termination terms… they ask to strike anything that leaves large company on the hook for any long term obligations.  Small company takes on more contract risk, large company takes on less. 

But it is never that clean.  There will be an impasse on certain terms… on to Stage 5.

Stage 5: When there is an impasse, legal discusses the contract term with some business officer off-line.  They then come back and tell small company that they can waive certain terms which were previously “non-negotiable” in return for lower pricing, additional services…

Stage 6:  Deal is made with legal.  But legal tells you that the contract must get blessed by some other sub-office (e.g., risk management, IT, ethics committee, green committee).  Taking risk management for example, they ask for changes to the insurance provisions of the contract.  This adds additional administration obligations and cost requirements on software licensing company.  Software licensing company is so deep into negotiation costs at this point that they almost have to say yes to anything given, and they know that if there is an impasse, you go back to Stage 5 and give up more business terms.

Stage 7:  Deal is made with sub-offices.  But legal tells you that this must be blessed by a final head officer – usually some Vice President.  Same cycle as Stage 6, and more unfavorable terms are pushed down on small company.