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By Arshia Tabrizi
"The
greatest change in corporate culture - and the way business is being
conducted –
may be the accelerated growth of relationships based... on partnership."
Peter F. Drucker
Cooperation within the technology industry is no longer a choice
but rather a business imperative. Strategic alliances are formed
on a daily basis between companies in every sector of the new economy.
The pace of change demands cooperation. Large companies look at
alliances to diversify their product offering and spread out the
risk of obsolescence. Start-up ventures look at partnering with
established players for a way into untapped markets. Suppliers are
forced to warm up to one another and combine their products to answer
the demand for integrated business solutions. The need for standardization
and the push for convergence make friends of traditional competitors
(at least in the short-term). Further, the depressed business environment
has driven technology companies to consider any cooperative arrangement
that will increase their chances of survival.
The above scenarios share an underlying rationale: the need for
two or more entities to pool their resources towards the achievement
of a common business objective. These resources may include technology,
intellectual property, capital and/or access to markets. In many
cases, large companies look to smaller partners for innovative products
and technologies, while more vulnerable, emerging businesses seek
the capital and marketing strength of the established players. The
key is that regardless of the actual resources being exchanged,
the parties to a strategic alliance are generally engaged in a close,
long-term relationship rather than a discrete commercial transaction
(e.g. in the hardware sector, this would take the form of a contract
manufacturing and volume purchase agreement as opposed to a one-time
purchase order).
At this very moment, your own company is almost certainly operating
within a complex web of strategic alliances with other industry
players. Any arrangement with another party relating to the development,
exploitation and/or marketing of a technology product and/or service
involves the pooling of certain resources, from a distribution agreement
with a VAR (value added reseller) to a complex transaction for the
joint development and marketing of a new product. A strategic alliance
may also involve an influx of capital on top of the contractual
arrangement; for example, a development agreement may be coupled
with a buy-out option that is triggered upon the attainment of certain
development milestones and the acceptance of the deliverables by
the sponsoring entity.
Every business deal has risks. Strategic alliances, however, involve
a number of unique legal and commercial risks that are critical
to the long-term success of the contracting entities within the
technology industry. It is not possible to discuss all of these
risks in this article, however, we can highlight three important
areas of risk that arise in a strategic alliance: (1) the exchange
of core technology and intellectual property; (2) the exchange of
confidential information; and (3) the increased commercial inter-dependence
of the contracting parties.
INTELLECTUAL PROPERTY
Parties in a strategic alliance are often exchanging some core technology
and intellectual property (i.e. the crown jewels). Of course, the
nature and sensitivity of the exchange can vary greatly from deal
to deal; for example, the risks differ considerably between an end
user object code software license and a joint development agreement
requiring the cross licensing of source code. In every case, however,
it is important to grant to your strategic partner rights in your
technology that are sufficient to enable the achievement of your
shared business objective, while ensuring that you maintain control
over your proprietary technology. Ownership of technology becomes
especially relevant when we are dealing with future modifications
to your technology by your strategic alliance partner. For example,
in the context of a software license to an OEM (Original Equipment
Manufacturer), we will normally specify (1) whether the OEM has
the right to modify the software being licensed, and (2) if so,
who will own the modifications to the software. Modification rights
may be required where the OEM licensee needs to customize the in-licensed
software for its own software product or hardware platform (of course,
in many cases today, APIs may suffice to incorporate the software
into an existing software product and modification rights will not
be required). Under copyright law, your partner would own the rights
to the code it produces; this is referred to in legal parlance as
a “derivative work”. Although your partner would own
the copyright in its derivative work, your copyright in the underlying
pre-existing work (the original in-licensed software) would remain.
Depending on the context of the deal, however, you may actually
want to obtain ownership rights in the derivative work, or at the
very least a license back of any modifications from the OEM. This
is particularly true if the customization of the software by the
OEM will also be of benefit to your other customers.
In addition, by not giving away rights that are unrelated to the
specific business objective of the deal, companies can retain future
sources of revenue. In OEM deals, small companies should ensure
that the agreement limits the licensed rights to their technology
to a specific product line or platform of the OEM. By restricting
use of the technology in this manner, start-up companies will leave
room for negotiation of royalty rates for other uses of their technology.
This is especially important in light of the fact that a start-up’s
bargaining position may be significantly enhanced even a few months
after signing the OEM deal.
INFO IN CONFIDENCE
Disclosure of your company’s confidential information and
trade secrets, as well as exposure to such information belonging
to your strategic alliance partner, can have important repercussions
in the future. At the outset, contractual, as well as practical,
restrictions should be placed on the disclosure and use of your
company’s confidential information since owners of trade secrets
may lose their rights in their confidential information if they
fail to take reasonable efforts to protect the secrecy of such information.
At the same time, your company should take care in structuring its
arrangements so that its employees are not tainted by the confidential
information they may receive from your strategic partner. This is
especially relevant for a start-up company that is receiving confidential
information from a larger player in the same market, as the larger
player may later bring an action for breach of confidence and obtain
an injunction to prevent the start-up company from patenting, developing
and/or using its own product. Such a result would obviously be devastating
to any emerging company and should be avoided. Therefore, in preparing
your NDA (Non-disclosure Agreement), it is important that you carefully
consider the nature of the exchange, and in particular, whether
you will be mostly disclosing or receiving confidential information.
INTER-DEPENDENCE
The increased inter-dependence of companies in a strategic alliance
should be kept in mind when negotiating certain standard commercial
terms. For example, when in-licensing some key technology from a
third party supplier, the OEM should carefully address the on-going
support obligations of the supplier. A solid support and maintenance
agreement is particularly important in such arrangements as the
OEM’s on-going business with its end user customers as well
as its goodwill can be materially affected if it is unable to address
problems in its products that result from in-licensed third party
technology. In addition, early termination of a strategic alliance
can have significant implications in light of the increased inter-dependence
between the partners. By way of example, if the manufacturer of
a key hardware component under a long-term supply agreement were
to terminate its arrangement with your company by means of a thirty
day notice, would your company be able to find a suitable replacement
partner, negotiate an agreement, and integrate the new technology
into your product all within thirty days? Probably not. Therefore,
termination provisions in such agreements must incorporate the necessary
flexibility required by the strategic nature of the parties’
relationship. In some agreements, the OEM will negotiate for a provision
that makes termination by the licensor subject to determination
by a court proceeding or a panel of arbitrators. In addition, a
wind-down period for termination of the licensed rights will be
required to allow the OEM to complete its existing distribution
deals and provide on-going support to its end user customers.
SUMMARY
During the process of structuring and negotiating a strategic alliance,
companies should consider the nature of the business relationship
being forged and the strategic objectives that are driving the alliance,
and attempt to balance these objectives against the unique risks
involved in such cooperative arrangements. Engaging in this balancing
task is even more critical in the technology industry since, as
most executives have experienced, market conditions are in such
continuous flux that the rationale for the agreement may no longer
be valid even a few months after the deal is made.
Strategic alliances are a fact of life and technology companies
cannot live without them; the recipe for success is taking the time
upfront to ensure that your company can in fact live with them.The
information in this article should not be construed as legal advice
and is provided as general information only. To obtain legal advice,
you should consult appropriately qualified legal counsel to advise
you in the context of your particular situation.
Arshia Tabrizi is a Technology Transactions Lawyer and founding
partner of Tabrizi Law Office (www.tabrizilaw.com). Tabrizi holds
an Honors Degree in Computer Engineering and a Juris Doctor Degree
from the University of Toronto (Canada), and is a Member of the
State Bar of California and the Law Society of Upper Canada. Prior
to opening his own law firm, he practiced technology law at Wilson,
Sonsini, Goodrich & Rosati in Palo Alto, California.
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