Defining Technology Agreement
An agreement is a legally binding understanding between two or more parties. Agreed upon terms may be documented in a formal written contract or in a simple handshake. Activities of IT Professionals are extremely diverse in nature, and so are the agreements governing the performance of those activities.
A Technology Agreement is a contractual instrument between parties engaged in an information technology transaction. These transactions typically involve the transfer of computer hardware or software. However other areas of IT service such as telecommunications , support and maintenance, and system service and repair are also governed by Technology Agreements.
New IT acquisitions, including hardware, software, and services, are common situations in which Technology Agreements are used. Other uses include resales of hardware and software, as well as collateral assignment of existing IT equipment and service responsibilities.
Categories of Technology Agreements
Three of the most prevalent forms of technology agreements are software licensing agreements, Software-as-a-Service or SaaS agreements, and joint development agreements.
The earliest forms of technology agreements were software licensing agreements. The essential purpose of these agreements was to address the transfer of computer software from one party to another, typically in the form of a copy. Just as companies license book, music, and film rights, software licensing agreements permit the use, and sometimes the reproduction, of computer programs. In many instances, the licensed computer program must be adapted, installed or modified (i.e., customized) to function successfully within the buyer’s system. A third party may provide such services to implement the license agreement. In such instances, the software licensing agreement will often acknowledge the third-party implementation services as being facilitated by the licensor.
In addition to addressing sophisticated delivery and implementation issues, software licensing agreements typically contain many of the rights and responsibilities contained with other technology agreements. Typical agreements include disclaimers of responsibility regarding the quality and fitness for a particular purpose of the software. Parties should address liability for consequential and indirect damages, as well as limits on insurance coverage. For large projects, technology agreements can be hundreds of pages long. Depending on the size and scope, obtaining a signed agreement may take over a year from the initial negotiations to the signing stage.
Software licensing agreements are often reused in their entirety in new projects or adapted to new environments. The license agreement may simply exclude references to parties or products not involved in the new project, and the remaining terms kept intact. This practice substantially reduces the cost of negotiating tailor-made technology agreements. While there is nothing wrong with this approach generally, it is important to remember that each new project could create unforeseen issues that warrant additions or changes to the typical terms.
Software licensing agreements often anticipate additional agreements regarding third-party hardware and services required to implement the software. For example, a simplified version of a software licensing agreement might omit a requirement for implementation services by a third party. Or, the typical non-competition and non-disclosure clauses might be limited to only the parties to the software licensing agreement.
Software licensing agreements are often used in conjunction with two other types of technology agreements. The first of these are work-for-hire agreements where a technology service provider is contracted to develop software specifically to meet the needs of the customer. The other technology agreement is a joint development agreement where software is created in close cooperation by the parties. Both of these agreements have the same general purpose as software licensing agreements, but with a higher degree of project involvement by both parties.
More recently, technology agreements have addressed the use of software delivered on-demand in a web-based environment. These types of technology agreements are often called Software-as-a-Service or SaaS agreements. Under these agreements, the software is hosted in a third-party environment for the customer’s use. In a typical SaaS environment, the SaaS provider retains full control over the software and its environment while providing the customer with access to the software on an ongoing basis.
SaaS agreements are sometimes used to allow customers to customize the software for individual needs. In many cases, the SaaS provider offers a large enough pool of storage or computing resources to accommodates many different customers. Each customer can store its own data in the SaaS provider’s system while retaining the ability to customize the operation of the software. From a customer’s perspective, the time and cost to access the customized software is often substantially less than having to purchase the software and create the required infrastructure. From an economic perspective, the SaaS model has been extremely successful.
Joint development agreements are more versatile than either of the other types of technology agreements. Joint development agreements can be organized around hardware developments, software applications, network systems, or any combination of these. The flexibility of joint development agreements is both a benefit and a drawback. The benefit is that the agreements can be tailored to meet the specific technical requirements of the parties for each new project. The drawback is that most parties have to rely on custom expert advice to draft joint development agreements. Often an attorney experienced in technology agreements can provide a more efficient process than a technology engineer or product manager.
Joint development agreements are particularly popular when multiple parties are involved in a project. The technology can be created separately or in close association between the parties. The parties share the costs of the effort and use of the results of the development activities.
Essential Provisions in a Technology Agreement
The specific components of a technology agreement can vary depending on the nature of the relationship and the objective of the agreement, but there are several key components that should be included in every technology agreement, such as:
Scope of Work. The scope of work sets out in detail the intended deliverables of the technology agreement. If the development is in phases, the scope of work will also outline the different stages of the development and the mutually agreed upon completion dates. If the fulfillment of the agreement is dependent on the completion of a plan or the obtaining of a third party approval or right, the scope of work should outline the requirements of such third parties.
Intellectual Property. Any technology agreement should address whether the technology developed under the agreement, or developed prior to the agreement, which is improved upon by the developer’s changed work techniques (i.e., know-how, conceptions and techniques) becomes the property of the client or the developer. The agreement should also address the rights of the parties with respect to the use of the new technology by either the client and/or the developer. If the developer holds a patent for the technology, the agreement should expressly provide the client a license for the use of the patented technology within a reasonable commercial time frame. In addition to a license to use the technology, it may be appropriate to also grant the client the right to sublicense the technology to other third parties. In this regard, care should be taken to restrict the client from granting a blanketing license to the technology to any one third party that can use the technology in competition with the developer.
Confidentiality. Many times, the client’s main concern with an assignment to a developer is the potential disclosure of the client’s confidential information. The agreement should carefully define what confidential information is (including technology, data, customer and vendor lists, trade secrets, operational information, etc.) and the obligations of both parties to keep such confidential information confidential. The agreement should also outline how the confidential information is to be used. In most cases, confidential information is to be used only for the benefit of the client. However, the same obligation should be imposed on the client not to disclose confidential information of the developer to the client’s employees.
Dispute Resolution. It is very common for two parties during the development of technology to have quid pro quo between each other. This reciprocal relationship can become adversarial if a dispute arises between the parties. Therefore, it is advisable that the agreement outline the process of dispute resolution (mediation, arbitration, etc.) and the method of executing the agreed upon dispute resolution process. For example, are all mandatory dispute resolution procedures a prerequisite to litigation of a dispute?
Intellectual Property Considerations in a Technology Agreement
Intellectual property (IP) is, in many cases, among the most important assets of the companies involved in technology agreements. Whether you are licensing technology or purchasing it, the acquisition cost may be dwarfed by the potential revenues that your company can generate from its use. Conversely, licensors are giving up the ability to exploit the IP themselves, so they expect a significant return in the form of milestones and royalties.
While ownership of patents and copyrights may be relatively straightforward, the ownership of other forms of IP is often ambiguous, and the risks of assuming one position or another can be profound. For instance, a particularly risky clause in collaborative research agreements is an assumption by the parties that all rights to unpatented ideas and know-how developed during the collaboration automatically vest jointly in both companies. In the long run, however, if one party holds a superior patent position, then the implementing party could risk an infringement suit, whether or not it was aware of the patents. A good rule of thumb is to say that subsequent patents will be owned outright by the party inventing them, while joint and non-joint work must be distinguished: the former belongs to the inventor that conceives it and the latter will be jointly owned.
Another important factor to consider when negotiating technology agreements is whether you are agreeing to upgrade an existing product or to defend a lawsuit. If so, can the seller meet its obligations? As a buyer, it is in your interest to ensure the milestone timelines are achievable and to perform your own diligence to confirm that the vendor has the resources to meet them.
Key Issues in Technology Agreements
One of the most common challenges faced when negotiating technology agreements is a lack of understanding of the business terms and how a strong agreement should incorporate them. This is often compounded by a desire to move quickly in the transaction even where more commentary is needed. The adage, "haste makes waste" is particularly true when it comes to technology transactions. A rushed negotiation falls prey to being one-sided or not fully protective setting the parties up for failure long after the ink dries .
It is important that the business terms of the agreement are properly memorialized. This will not only help to enforce the business terms if there is a dispute, but will also help to clarify business terms for the parties in the name of performance.
Other challenges include:
In a legal landscape that is increasingly protective of business relationships, it is critical for companies to ensure their technology agreements account for these pitfalls before they happen rather than relying on unenforceable indemnification and confidentiality agreements.
Guidelines for Drafting Technology Agreements
When it comes to drafting technology agreements, best practices can go a long way toward providing clarity and avoiding disputes down the road. First and foremost, negotiate the agreement with your best interests in mind at the outset. The final agreement will likely be extensively negotiated, so put the most important terms in the beginning. Also make sure that the agreement complies with applicable laws and regulations (especially when it comes to data privacy, or intellectual property). If it does not comply, either modify it, or don’t enter into it. Make sure to write the agreement clearly and in detail, devoting separate sections to the different provisions. Look out for vague terms and conditions, as both sides will have different interpretations of what certain words and phrases mean. While technology agreements often use the same boilerplate language found in previous agreements, do not be afraid to change the terms to fit your needs, even if you have never done so before. Above all, pay attention to and double check the details. It is best to avoid surprises after execution. Even the best agreements can be subject to amendment, but it is best to get it right the first time. If you need assistance navigating technology agreements, please do not hesitate to contact us!
Emerging Trends in Technology Agreements
Emerging trends in technology development and deployment will pose new challenges for technology agreements. Blockchain technology, for example, is already fundamentally changing the way we think about ownership of digital materials and the monetization of digital content. It also presents unique privacy and data security issues. Technology agreements are likely to evolve to address such changes. For example, while agreements typically contemplate a licensing arrangement, an agreement may need to contemplate a new way of transferring control over digital materials. While licensing arrangements can allow greater control and monetization by the owner of the material , they require the owner to relinquish custody over it. Blockchain ownership may be more in line with sales to the extent that ownership and control will transfer to the purchaser and may be permanently removed from the owner. How those permissions are controlled and implemented will need to be addressed in the agreements.
Artificial intelligence (AI) is another area where the future may challenge traditional assumptions about technology agreements. While traditional agreements typically assign ownership rights over intellectual property resulting from the use of the technology, AI challenges us to consider what constitutes work for hire and what constitutes the invention of the human creator. Furthermore, where AI programs interface with one another, existing agreements may not contemplate a transfer of ownership amongst the NFT assets involved. Likewise, issues relating to liability for the decisions made by AIs may outpace technology agreements. These are just a few examples of how technology — and technology agreements — may evolve.