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Contents

Acknowledgments ......................................................................................................xv

Chapter 1: Introduction ...............................................................................................1

Chapter 2: Th e Negotiation and Contracting Process .................................................3 A. Th e Traditional Negotiation Process ........................................................................ 3 B. Th e Competitive Negotiation Process ...................................................................... 4 1. Overview ............................................................................................................ 4 2. Requests for Information (“RFI”) ................................................................... 4 3. Requests for Proposal (“RFP”) ........................................................................ 5 4. Procedures and Rules for a Competitive Negotiation ...............................10 5. Documenting the Negotiations/Letters of Intent .......................................11 6. Structuring the Transaction ..........................................................................13 7. Negotiating the Agreement ...........................................................................13 8. Inclusion of the RFI and RFP Response in the Final Agreement .............15 9. Concerns for Lawyers ....................................................................................17 10. Metadata ..........................................................................................................17 C. Successful Procurement ...........................................................................................18 1. Vendor Selection .............................................................................................18 2. Th e Negotiation Process ................................................................................18 3. Managing the Customer–Vendor Relationship ..........................................19

Chapter 3: Licensing Soft ware....................................................................................21 A. Overview ....................................................................................................................21 1. Th e Concept of Licensing ..............................................................................21 2. Intellectual Property Rights Applicable to Soft ware ..................................21 B. Th e First Sale Doctrine ............................................................................................29 1. In General ........................................................................................................29 2. Applicability to Soft ware................................................................................32 C. Th e Transfer of Intellectual Property Rights .........................................................33

Chapter 4: Terminology of a License Grant (§ 3.1) ...................................................35 A. Defi nition of the “Licensee,” “Licensor,” and “Affi liates”......................................35 1. “Licensee” ........................................................................................................35 2. “Licensor” ........................................................................................................38 3. “Affi liates” and Local Country Addendums ................................................38 B. Term of License (§ 4.2) ............................................................................................39 1. Overview ..........................................................................................................39 2. Th e Failure to State a Term ............................................................................40

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3. Perpetual Licenses ..........................................................................................41 4. Evergreen Terms .............................................................................................41 C. Use (§ 3.1) ..................................................................................................................41 1. General .............................................................................................................41 2. Internal Use .....................................................................................................43 3. Nonexclusive/Exclusive Use ..........................................................................43 4. Scope of Use ....................................................................................................45 5. Creation of Derivative Works (§ 3.4) ...........................................................46 6. Prohibition of Reverse Engineering .............................................................48 7. Reservations of Rights Clauses .....................................................................52 D. Geographic Restrictions (§ 3.1) ..............................................................................53 E. Object Code Licenses and Source Code Licenses (§ 3.1) ....................................53 F. Irrevocable/Nonterminable Licenses (§ 3.1) .........................................................54 G. Assignment/Novation (§ 3.1, § 22) ........................................................................55 1. By Licensee ......................................................................................................55 2. By Licensor ......................................................................................................58 3. Novation ..........................................................................................................58 4. Transfer ............................................................................................................59

Chapter 5: Ancillary Clauses ......................................................................................61 A. Representations, Warranties, Covenants, and Disclaimers (§ 16) .....................61 1. Representations and Warranties (§§ 16.1, 16A–AE, 16.2) ........................61 2. Covenants ........................................................................................................81 3. Disclaimer of Warranties (§ 16.1.4) .............................................................81 4. Length of Warranty (§ 16.1) ..........................................................................84 B. General Indemnifi cation (§ 15) ..............................................................................84 1. Overview ..........................................................................................................84 2. Relevant Language ..........................................................................................85 3. Exclusions .......................................................................................................89 4. Contributory vs. Comparative Negligence ..................................................90 5. Equitable and Implied Indemnifi cation ......................................................90 6. Draft ing Considerations ................................................................................91 7. Indemnifying a Party for Its Own Negligence ............................................93 C. Intellectual Property Indemnifi cation (§ 14) ........................................................94 1. Overview ..........................................................................................................94 2. Implied Indemnifi cation under UCC § 2-312 ............................................95 3. Limits on Indemnifi cation .............................................................................96 4. Potential Concessions ....................................................................................96 5. Conditions to Indemnifi cation .....................................................................98 6. Mitigation ........................................................................................................98 7. Exclusions ........................................................................................................99 8. Assumption of Defense ................................................................................100 D. Acceptance and Acceptance Test Procedures (§§ 1.14, 7) .................................101 1. Soft ware .........................................................................................................101 2. Shrinkwrap Soft ware ....................................................................................102

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3. Professional Services (§ 16.C) .....................................................................102 E. Breach, Cure and Termination/Cancellation (§ 5) .............................................103 1. Breach .............................................................................................................103 2. Termination for Convenience (§ 4.1) .......................................................109 3. Force Majeure (§ 33) ....................................................................................112 4. Bankruptcy ....................................................................................................113 5. Termination for an Adverse Change in a Licensor’s

Financial Condition ..................................................................................113 6. Expiration (and Termination) of the Agreement ....................................114 F. Remedies (§§ 5.2, 5.3) ............................................................................................114 1. Remedies under the UCC ...........................................................................114 2. Licensee Remedies (§ 5.3) ...........................................................................115 3. Licensor Remedies (§ 5.2) ...........................................................................120 G. Limitation of Liability (§ 17) .................................................................................124 1. Limiting Monetary Liability (§ 17.2) .........................................................124 2. Disclaimer of Consequential/Incidental/Punitive

Damages (§ 17.1) .......................................................................................134 3. Deemed Direct Damages (§ 17.4, Form N.2.DD.7 § 1.2.) ......................140 4. Reducing the Statute of Limitations (§ 17.1) ............................................140 5. Exclusive Remedy .........................................................................................142 H. Price and Payment (§ 8) .........................................................................................143 1. Pricing ............................................................................................................143 2. Price Indexing (§ 8.4) ...................................................................................151 3. Revenue Recognition Issues ........................................................................152 4. Payment .........................................................................................................154 I. Taxes (§ 8.6) .............................................................................................................156 J. Licensee Obligations ..............................................................................................158

Chapter 6: Boilerplate ..............................................................................................159 A. Recitals and Headings (§ 53) .................................................................................159 1. Recitals ...........................................................................................................159 2. Headings (§ 53) .............................................................................................160 B. Defi nitions (§ 1 and Form N.1) ............................................................................160 C. Insurance (§ 38) ......................................................................................................161 1. General Insurance ........................................................................................161 2. Intellectual Property Infringement Claims ...............................................164 D. Force Majeure (§ 33) ..............................................................................................165 E. Public Disclosures and References (§§ 44, 50) ...................................................168 1. Public Disclosures (§ 44) .............................................................................168 2. References (§ 50) ..........................................................................................168 F. Waiver (§ 31) ...........................................................................................................169 G. Waiver of Right to Jury Trial (§ 32) ......................................................................169 H. Governing Law and Venue (§ 28) .........................................................................170 1. Governing Law ..............................................................................................170 2. Venue ..............................................................................................................183

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I. Compliance with Laws (§ 25) ...............................................................................185 1. Utilizing the Change Order Process ...........................................................186 2. A Compromise ..............................................................................................187 3. Contractual Language ..................................................................................187 4. Monitoring Changes in the Law .................................................................188 5. Ensuring Compliance ..................................................................................189 J. Notices (§ 52) ..........................................................................................................189 K. Th ird-Party Benefi ciaries (§ 40) ...........................................................................190 L. Legal Fees (§ 49) .....................................................................................................192 M. Survival (§ 18) .........................................................................................................192 1. General ...........................................................................................................192 2. Lack of a Survival Clause .............................................................................194 N. No Construction Against Draft er (§ 51) .............................................................194 O. Amendment of Agreement (§ 23) ........................................................................195 1. Online Amendment .....................................................................................195 2. Limiting Risks ...............................................................................................197 P. Service of Process ...................................................................................................198 Q. Integration/Entire Agreement (§ 58) ...................................................................198 1. General ...........................................................................................................198 2. Collateral Agreements .................................................................................201 R. Seals (Penultimate Paragraph and Signature Line) ............................................201 S. Signatures, Signature Lines, and Signature Pages ...............................................202 1. Electronic Signatures....................................................................................202 2. Manual Signatures ........................................................................................203 T. Dating the Agreement ............................................................................................203 U. Incorporation of Corporate Policies ....................................................................203

Chapter 7: Other Important Issues ..........................................................................205 A. Th e Work Made for Hire Doctrine and Moral Rights .......................................205 1. Work Made for Hire Doctrine ....................................................................205 2. Moral Rights ..................................................................................................211 3. Patent Rights .................................................................................................213 B. Ownership of Custom-Developed Soft ware (§§ 3.2, 3.5, 12.1) ........................214 1. In General ......................................................................................................214 2. Joint Ownership ............................................................................................216 3. Other Alternatives ........................................................................................217 C. Statements of Work, Functional Specifi cations and

Technical Specifi cations (§ 1.7) .........................................................................217 1. Statements of Work ......................................................................................217 2. Functional Specifi cations .............................................................................219 3. Technical Specifi cations ...............................................................................221 D. Change Orders (§ 9.8) ............................................................................................222 1. Methodology of the Change Order Process ..............................................222 2. Th e Contents of a Change Order ................................................................223 3. Th e Failure to Agree .....................................................................................223

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E. Audit/Quality Assurance (§§ 9.13, 16.Q; Form N.2.E) .....................................224 1. From the Licensee’s Perspective ..................................................................225 2. From the Licensor’s Perspective (§ 8.J) ......................................................238 3. Audits by Th ird Parties ................................................................................240 F. Service Level Agreements (§ 3.B) .........................................................................240 1. Overview ........................................................................................................240 2. Limitation of Liability ..................................................................................242 3. Law of Small Numbers .................................................................................242 4. Negotiating SLAs ..........................................................................................243 G. Business Continuity and Disaster Recovery (§ 35) ............................................243 1. Business Continuity .....................................................................................243 2. Disaster Recovery .........................................................................................244 H. Future Development (16K) ...................................................................................245 I. Training and Documentation (§§ 11, 13.1) ........................................................246 1. Training (§ 11) ..............................................................................................246 2. Documentation (§ 13.1) ..............................................................................246 J. Transition/Continuing Services (§ 42.2) .............................................................247 K. Benchmarking (§ 8.B) ............................................................................................247 L. Antitrust and Copyright Misuse Issues (§ 3.6) ...................................................249 1. Antitrust Issues .............................................................................................249 2. Copyright Misuse Issues ..............................................................................251 3. Digital Millennium Copyright Act—Computer Maintenance

Competition Assurance Act .....................................................................253 M. Export/Import Issues (§ 43) ..................................................................................254 1. General ...........................................................................................................254 2. Defi nitions .....................................................................................................254 3. Export of Soft ware and Technology ...........................................................255 4. Cloud Computing .........................................................................................256 5. Deemed Exports ...........................................................................................256 6. Contractual Considerations (§ 45) .............................................................257 7. Customs .........................................................................................................257 N. Bonds, Parent Guarantees, and Letters of Credit

(§§ 8.H, Exhibit 8H, 34) .....................................................................................257 1. Bonds (§ 34) ..................................................................................................257 2. Parent Guarantees (§ 8.H, Exhibit 8H, Signature Line)

(Form L.1, N.2.LL.39) ...............................................................................258 3. Letters of Credit (Form N.2.LL.36) ............................................................258 O. Most Favored Customer (§ 8.A) ...........................................................................259 P. Work for Competitors/Exclusivity (§ 9.12) .........................................................260 Q. Best Eff orts, Good Faith Eff orts, and Commercially Reasonable Eff orts ........260 1. General ...........................................................................................................260 2. Good Faith .....................................................................................................261 3. Best Eff orts.....................................................................................................262 4. Commercially Reasonable Eff orts ..............................................................263

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R. Time Is of the Essence ............................................................................................263 S. Consent Will Not Be Unreasonably Withheld ....................................................264

Chapter 8. Licensing Issues Arising from Alternative Delivery Models .................265 A. Cloud Computing ...................................................................................................265 1. Overview of Cloud Computing ..................................................................266 2. Escrows in the Cloud ...................................................................................283 3. Soft ware as a Service ....................................................................................284 B. Hosting .....................................................................................................................293 1. An Overview of Hosting ..............................................................................293 2. Licensing Models ..........................................................................................294 3. Dedicated versus Shared Hosting ...............................................................294 4. Th e Benefi ts and Drawbacks of Hosting ...................................................295 5. Issues for Consideration in Hosting Agreements ....................................296 6. Licensing and Contracting Concerns in a Hosted Environment ...........296 C. Reseller, OEM and VAR Licenses .........................................................................302 1. Reseller Licenses ...........................................................................................302 2. Original Equipment Manufacturers (“OEM”) ..........................................303 3. Value Added Resellers (“VAR”) ..................................................................303 4. Potential Risks and Concerns .....................................................................303 D. Outsourcing Licenses .............................................................................................305 1. Provision of Outsourcing Services by Licensee to Th ird-Parties ...........305 2. Outsourcing of Licensee by Th ird-Party Vendor .....................................305

Chapter 9: Free and Open Source Soft ware .............................................................307 A. Overview ..................................................................................................................307 B. Free vs. Open Source Soft ware ..............................................................................308 C. Costs Associated with Using Open Source Soft ware .........................................309 D. Advantages and Risks of Using Open Source Soft ware .....................................309 1. Advantages ....................................................................................................309 2. Risks ...............................................................................................................310 3. Legal Concerns .............................................................................................310 E. Open Source License Types ...................................................................................312 1. Permissive Licenses (“Nonviral Licenses”)................................................312 2. Nonpermissive Licenses (“Viral” Licenses) ...............................................313 F. Negotiating Licenses for Soft ware Which Incorporates Open

Source Soft ware ...................................................................................................313 1. Incoming Licenses ........................................................................................314 2. Outgoing Licenses ........................................................................................315 G. Quantifying the Risk ..............................................................................................316 1. Establishing an Open Source Review Board/Compliance Program

for Soft ware Development .......................................................................316 2. Evaluating the Risks of Using Open Source Soft ware ..............................317 3. Open Source Soft ware Audits .....................................................................318 H. Legal Challenges .....................................................................................................319 1. Contract-based Claims ................................................................................319

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2. Copyright-based Claims ..............................................................................319 I. Going Forward ........................................................................................................320

Chapter 10: Shrink-wrap, Click-wrap and Browse-wrap Licenses .........................323 A. Shrink-wrap Licenses .............................................................................................323 B. Click-wrap Licenses................................................................................................324 C. Browse-wrap Licenses ............................................................................................326

Chapter 11: Applicability of the Uniform Commercial Code (UCC) and the Principles of Law and Soft ware Contracting .......................................327

A. Article 2 of the Uniform Commercial Code .......................................................327 B. Th e Uniform Computer Information Transactions Act (UCITA) ...................329 1. History of Attempts to Apply UCC Article 2

to Soft ware Licensing ................................................................................329 2. Present Status of UCITA ..............................................................................330 3. Signifi cant Provisions of UCITA (2002 Version) .....................................330 4. Rejection of UCITA (Bomb Shelters) ........................................................337 C. Principles of the Law of Soft ware Contracts .......................................................337

Chapter 12. Maintenance and Support (Forms C.5 and 6)/(§§ 11, 16K) ................339 A. Nomenclature ..........................................................................................................339 1. Maintenance versus Support .......................................................................339 2. Upgrades, Releases, and Updates ...............................................................340 3. Numbering Protocol ....................................................................................340 B. Maintenance (§ 16) .................................................................................................340 1. Licensor Obligations ....................................................................................341 2. Licensor Exclusions ......................................................................................343 3. Pricing and Payment (§ 8.4) ........................................................................343 C. Independent Service Organizations (ISOs) (§ 3.6) ............................................345 D. Maintenance versus New Versions .......................................................................346

Chapter 13: Data Privacy and Security Issues Arising from Soft ware Licensing ..........................................................................................347 A. Data Privacy and Security ....................................................................................347 1. Evaluation of the Underlying Risks ............................................................348 2. Contractual Provisions Addressing Data Privacy and Security .............351 3. Potential Damage Claims for Privacy and Security Breaches .................357 4. Limiting the Risk ..........................................................................................358 5. Responding to a Data/Security Breach ......................................................360 6. Insurance .......................................................................................................362 B. HIPAA and HITECH .............................................................................................362 1. Applicability ..................................................................................................362 2. Description of Services ................................................................................364 3. Business Associate Agreements .................................................................364 4. Mitigating the Risk .......................................................................................373 C. Compliance with Other Privacy Standards .........................................................373

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Chapter 14: Confi dentiality Provisions and Trade Secret Protection ....................375 A. Proprietary Information Clauses and Agreements (§ 12) .................................376 1. General ...........................................................................................................376 2. Principal Provisions of a Nondisclosure Agreement ...............................379 3. Th ird-party Access .......................................................................................388 4. Employees ......................................................................................................389 5. Overlapping Nondisclosure Agreements ..................................................390 6. Confi dentiality and Data Security in the Cloud .......................................391 B. Trade Secret Laws/Protections ..............................................................................400 1. General ...........................................................................................................400 2. Th e Inevitable Disclosure Doctrine ..........................................................405 3. Uniform Trade Secret Act............................................................................406 4. Computer Fraud and Abuse Act .................................................................408 5. Restatement (Th ird) of Unfair Competition .............................................408 6. Economic Espionage Act of 1996 ...............................................................409 7. State Laws ......................................................................................................410

Chapter 15: Escrow Agreements ..............................................................................411 A. Release Events .........................................................................................................411 1. In General ......................................................................................................411 2. In the Event of Bankruptcy .........................................................................413 B. Use of Th ird-party Escrow Agents .......................................................................414 1. In General ......................................................................................................414 2. Verifi cation of Escrowed Materials ............................................................414 3. Materials to be Escrowed .............................................................................416 4. Escrow Fees ...................................................................................................417 C. Restrictions on Use of Escrowed Materials .........................................................417 D. Th ird-party Soft ware .............................................................................................418 E. Practical Nature of Soft ware Escrow ....................................................................418

Chapter 16: Representing the Global Entity ............................................................421 A. Access and the Scope of Use .................................................................................422 B. Provision of Technical Data to Non-U.S. Citizens .............................................423 C. Ownership of Developed Work ............................................................................424 D. Taxes and Import/Export Duties ..........................................................................424 E. Governing Law and Venue Provisions .................................................................424 1. Governing Law ..............................................................................................424 2. Venue ..............................................................................................................426 F. Applicability of Local Laws....................................................................................427 1. European Council (EC) Directive 91/250/EEC ........................................427 2. European Union (EU) Data Protection Directive 95/46/EC ..................427 3. Canadian Legal Issues ..................................................................................428 4. Indian Legal Issues .......................................................................................429 G. U.N. Convention on Contracts for the International Sale of Goods ...............431 H. Th e Foreign Corrupt Practices Act ......................................................................433 1. Anti-Bribery Provisions ..............................................................................433

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2. Books and Records Provisions ....................................................................435 3. Applicability of FCPA .................................................................................436 4. Risks under FCPA Anti-bribery Provisions ..............................................437 I. Th e USA Patriot Act (Public Law 107-56) ..........................................................441 J. Availability of a Meaningful Remedy ...................................................................442

Chapter 17: Bankruptcy Issues ................................................................................445 A. Th e Treatment of Soft ware Licenses in Bankruptcy ...........................................445 B. Th e Licensor’s Bankruptcy.....................................................................................447 1. Nonexecutory License ..................................................................................447 2. Executory License .........................................................................................447 3. Draft ing Techniques .....................................................................................448 C. Th e Licensee’s Bankruptcy .....................................................................................451 1. Nonexecutory License ..................................................................................451 2. Executory License .........................................................................................451

Chapter 18: Employee Issues ....................................................................................457 A. Assignment of Intellectual Property Rights ........................................................457 1. Employer’s Ownership of Employee Inventions .......................................457 2. Documenting the Employee’s Existing Intellectual Property .................458 3. Executing a Proper Assignment .................................................................458 B. Protection of Employer and Client Confi dential Information .........................459 C. Nonsolicitation of Employees by Former Employees (§§ 5.3.7, 9.14) .............462 D. Nonsolicitation of Employees of Licensor/ Licensee ........................................463 E. Noncompetition Agreements ................................................................................464 F. Th eft /Destruction of Employer Property—Computer Fraud

and Abuse Act ......................................................................................................466 1. Overview ........................................................................................................466 2. Th e Meaning of “Loss” .................................................................................466 3. “Unauthorized Access”: A Dichotomy of Opinion ..................................467 4. Contractual Protections ...............................................................................469 5. Corporate Policies ........................................................................................470 6. Other Th eories of Recovery ........................................................................470

Chapter 19: When Problems Arise ..........................................................................471 A. Addressing Issues Th at May Arise ........................................................................471 1. Be Proactive ...................................................................................................471 2. Maintaining the Attorney-Client Privilege/Attorney Work

Product Doctrine ......................................................................................472 3. Keep Lines of Communication Open ........................................................476 4. Document the Process .................................................................................477 5. Quality Assurance Audits ............................................................................477 6. Prepare for the Possibility of Litigation .....................................................478 B. Responding to an Audit .........................................................................................478 C. Potential Claims, Defenses, and Counterclaims .................................................479 1. Customer Claims ..........................................................................................480 2. Customer Actions .........................................................................................483

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3. Vendor Defenses ...........................................................................................484 4. Vendor Claims/Counterclaims ...................................................................487 5. Termination for Convenience (§ 4.1.A) ....................................................491 D. Th e Negotiation Process ........................................................................................491 1. Tolling Agreement ........................................................................................491 2. Settlement Negotiations ...............................................................................491 3. Renegotiating the Contract .........................................................................494 E. If Litigation Arises ..................................................................................................494

Chapter 20: Alternative Dispute Resolution (§§ 29, 30) .........................................497 A. Mediation (§ 29) .....................................................................................................497 B. Arbitration (§ 30)....................................................................................................498 1. General Benefi ts and Drawbacks ................................................................498 2. Legal Concerns .............................................................................................500 3. Practical Concerns .......................................................................................500 4. Th e Risks Associated with a Bifurcated Approach ...................................502 5. International Arbitration .............................................................................507

Chapter 21: Best Practices for Contract Draft ing and Successful Implementation ..................................................................511

A. Carefully Craft the Defi nitions .............................................................................511 B. Create Uniform Terms and Conditions ..............................................................511 C. Use Plain Language/Choose Your Words Carefully ...........................................512 1. Choice of Words ...........................................................................................512 2. Terminology Harmonization .....................................................................514 3. Avoid Creating New Obligations ................................................................514 4. Headings and Formatting ............................................................................514 D. Eliminate Ambiguity ..............................................................................................515 E. Implement Peer Review .........................................................................................518 F. Use an Authority Matrix .......................................................................................518 G. Do Not Ignore the Exhibits and Schedules .........................................................519 H. Audit Compliance Aft er Contract Execution .....................................................519 I. Avoid Scope Creep..................................................................................................520 J. Document the Process ...........................................................................................521 K. Manage the Relationship .......................................................................................521 L. Create an Early Warning System ..........................................................................522

Chapter 22: Recommended Resource Materials ......................................................525

Selected Model Forms Form B.1: Soft ware License and Services Agreement (Annotated) .......................527 Form C.5: Soft ware Maintenance and Services Agreement....................................691 Form H.1: Source Code Escrow Agreement (Annotated) ......................................705 Form J.3: Bilateral Proprietary Information Agreement (Annotated) ..................725

Appendix 1: Types of Licenses .................................................................................733 A. Beta Licenses ...........................................................................................................733

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1. General Terms ...............................................................................................733 2. Warranties .....................................................................................................734 3. Intellectual Property Indemnifi cation .......................................................734 4. Confi dentiality ..............................................................................................735 5. Feedback/Publicity .......................................................................................735 B. Demonstration/Evaluation Licenses ....................................................................735 1. Term ...............................................................................................................735 2. Warranty and Warranty Disclaimer ...........................................................736 3. Indemnifi cation ............................................................................................736 4. Confi dentiality ..............................................................................................736 5. Feedback ........................................................................................................736 6. Th ird Party Access ........................................................................................737 C. Development Licenses ...........................................................................................737 1. License Grant ................................................................................................737 2. Restrictions ....................................................................................................738 D. Distribution/Reseller/Original Equipment

Manufacturer (“OEM”) Licenses .......................................................................738 E. Production Licenses ...............................................................................................738 F. Sublicenses ...............................................................................................................739

Appendix 2: Technology Acronyms .........................................................................741

Appendix 3: Glossary ...............................................................................................745

Table of Cases ...........................................................................................................753

Index .........................................................................................................................773

About the Author .....................................................................................................789

CD-ROM Contents ..................................................................................................791

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