Monday, June 29, 2009

We Have Questions! (Part 1)

"What shall I write about today?" is always a vexing question.

Happily, readers have come to my rescue with a variety of tough questions. I'll start with two:

1. What clauses would you recommend to protect, assist with and reduce the costs associated with software compliance audits?

To limit the likelihood of "fishing expedition" audits, I typically use language such as:

"Vendor may audit Customer's compliance with this Agreement no more than once each year during the Term hereof. Such audits shall be:

  • Conducted by properly trained personnel and in a manner designed to minimize disruption of Customer's business operations;
  • Restricted to those records, files and machines as are reasonably necessary to provide accurate verification of Customer's use of the licensed software; and,
  • Solely at Vendor's expense."
Vendors might respond "We need a right to audit more than once a year if we receive credible evidence of license violations," and "If we discover a significant violation, Customer should pay for the cost of the audit." These are commercially reasonable requests, but need not be "freebies." If an audit discloses a violations, it may make sense for customer to pay for the audit cost, and pay the necessary additional license fees, but nothing more. Unless the audit discloses deliberate attempts to pirate vendor's software, customer should not incur additional penalties.

The best response to an audit, however, is to maintain careful records of licensed and installed software and to actively enforce policies against the use of unauthorized software. If you know what you have "in house," you will have no need to worry when the auditor knocks at the door. And, if you can present the auditor with complete records that answer all his/her questions, you may very well cut down the time needed for the audit.

2. Please comment on ways to protect a creative invention while searching for funding.

The short answer is "Consult a patent attorney."

A patent attorney is an attorney registered to practice before the Patent and Trademark Office. They are trained in the rules governing what can, and cannot be patented, and in the procedures for filing a patent (in legal-speak, "prosecuting an application). I am not a patent lawyer, but I can comment on the obvious pitfalls.

Create an invention disclosure.

Write up a narrative describing what you invented, when and how. Have your signature notarized and lock the original away in a safe place. Share only photocopies, not the original.

Use a nondisclosure agreement.

Before you disclose the invention to anyone, require them to sign a nondisclosure agreement.

Beware of the "on-sale bar."

Once you publicly disclose the invention, or offer it for sale, the clock begins to run. If you do not file for patent protection within 12 months, you can lose your all right to patent protection.

Be prepared for rejection

If you approach large corporations, be prepared to be turned away without any opportunity to make your pitch. They may have someone already working on a similar invention. If they look at your idea, they could be opening the way to an expensive and frustrating lawsuit.

Remember Rollin White

Rollin White invented the "bored through" revolver cylinder used in modern handguns. He sold his patent to Smith & Wesson and probably expected to die rich and happy. But he overlooked the clause in the sale agreement that required him to sue all those who might infringe on the patent. Despite earning a fortune, Mr. White died so broke that we don't even have a photo of him. He spent it all on lawyers and lawsuits.

Which brings us back to my first point: Talk to a patent attorney. It will be money well spent.


Wednesday, June 24, 2009

Are Your Contracts Litigation Waiting to Happen?

The law school definition of a “contract" is simple: offer, acceptance and consideration. I offer you $100 for a “car.” You pocket the money and hand over a set of keys. We have formed and performed a contract and all is right in the world. Unless I expected the keys to a Ferrari and received keys to a rusty, unreliable East German Trabant. You might say "My mistake, let me get the correct keys.” More realistically, you might respond “You want a Ferrari for $100? Here, take your money back; I can't afford such a deal.” If I insist that you took my money and are now required to deliver a Testarossa, you might respond: “So sue me.”

Our lawyers will begin shopping for vacation homes, while you and I start taking money from productive programs and setting aside time for depositions, discovery and hearings. Consider the vast array of issues our learned counsel may dispute:

  • Was there a "meeting of the minds"?
  • Was buyer simply mistaken or confused?
  • Did seller mislead buyer?
  • Would it be against public policy to enforce the deal as buyer understands it?
  • Was buyer hoping to take advantage of a seller he thought to be unsophisticated (i.e. one who didn't know the true value of that “strange looking” foreign car)?
Of course, the fireworks may be short - circuited by an impolitic question from the judge: ''What does the contract say?''

You may have noticed that I have made no mention of a written contract. Therefore the case is merely my word against yours. Did you really offer a Ferrari for $100? Did I hand over my money without at least specifying what make and model vehicle I expected in return? This uncertainty explains the old legal proverb that “oral contracts are not worth the paper they are written upon.” Without a document setting forth the agreement, and without any witnesses regarding whether you offered me a Ferrari, the judge has limited options. She can tell me to accept the Trabant, or a similarly priced vehicle, or take my money back.

This example, although a bit extreme, illustrates the value of a written agreement. That document provides an independent source of information regarding the nature, extent and terms of the agreement. It provides a reference a third party – typically a judge – may consult when asked to enforce the agreement. As such, it forces the parties to focus on the details of the transaction. Winston Churchill once quipped that “there's nothing quite like being fired upon to focus one's attention." The business equivalent is being asked to sign a contract, to say, in effect, “I believe this document, this deal, represents a good deal for MY company." By signing, one also implies that "I have done my homework on this transaction and we are adequately protected."

Yet, even if our agreement for “a car,” had been put in writing, dispute would not have been precluded. We failed to define the “car,” to specify make, model, year, color, engine, interior, etc. We would have given our attorneys lots to argue over. Despite the risks that can result from a poorly prepared contract, drafting is often an afterthought. “We'll let the attorneys fill in the details later” may get the project started quickly, but it also creates a variety of potential exposures, such as:
  • Lost savings opportunities;
  • Late or flawed performance;
  • Expensive, time consuming disputes over what is, or is not, to be delivered;
  • Delivery of unsatisfactory services or final product.
A sound contract will tell a story, without any unanswered questions. It will identify who will do what, when, how, why, and for how much. It will also provide a “safety net” of remedies to protect the parties in the event something goes wrong. A contract that addresses both obvious and reasonably foreseeable contingencies is one with reasonable chances of success. In contrast, a contract filled with undefined terms and unanswered questions is a litigation waiting to happen.