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July 12, 2008 03:13 PM

Categories: Licensing Issues

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petero

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Joined: 07/07/2006

We're a small financial software company currently negotiating a license agreement with a money center bank. We've had to use their baseline MLA which is, of course, highly slanted in their favor.

We have the standard disclaimer of all liabilities for lost profits, consequentials, etc. however, they're asking for the following carveouts:

1) gross negligence/willful misconduct
2) personal injury/death
3) breach of confidentiality
4) IP/infringement
5) property damage

In past negotiations with similar entities, we've occasionally wound up giving on some combination of 1)-4). However, 5) seems extremely broad and is never something we've caved on. The nightmare is "Your software made my computer freeze which means we lost a transaction worth $10million..."

What are others experience on negotatiating this provision? If you have given on any of these, which ones? Thanks in advance

Discussion:    Add a Comment | Comments 1-14 of 14 | Latest Comment

July 12, 2008 8:50 PM

Thinking laterally, there is something else that you might want to consider after you've done your best to negotiate the contract. It can be helpful and not outrageously expensive to have professional liability insurance for these types of situations.

July 12, 2008 11:45 PM

Thanks Bert. We have not only considered but have a number of insurance policies (profesisonal liability, E&O, etc) but the darn thing about insurance - there are always policy limits. These are unlimited liability situations. We can double check to see what costs are involved in raising our limits and then pass that back to the customer. That's another avenue but I'm trying to get people's experience on negotiating this provision.

We could always use a fallback position of trying to cap the limits on these carveouts, and I've considered that as well. This is not acceptable to many large corporations - at least not the financial services behemoths with whom we work.

July 13, 2008 9:25 AM

My experience in negotiating these provisions can be grouped into two main buckets:

1. With several customers we've flatly refused to give in on some clauses and identified our reasons. In about 2/3 of the cases, the client backs down or we work out something that everyone can live with. In about 1/3 of the cases, we and they walked away from the deal and both sides felt glad to have done so.

2. With other customers, we made noise but reluctantly agreed on the basis that if they ever enforced the provision, we'd go into bankruptcy. It doesn't help if a customer that's dependent on a supplier is cut off from any support because they killed their supplier.

In all cases, we were able to sleep well afterwards.

July 13, 2008 10:52 AM

As a small firm, we also would become "judgement proof" at some point given the speed with which a big legal defense would drive us to file for bankruptcy protection. Unfortunately, we have an item 3. to add to your list, which I'm really more worried about. It is:

3. Big Wall Street dealer that thinks THEIR job is to create great financial software (on some level), wants to drive us out of business - even though they're our client.

If they drive us to file, then they can continue to use the software under the terms of the agreement. In fact, a filing may even trigger a source code escrow release which allows them to maintain the software under the terms of the original license agreement.

It obviously assumes nefarious intent but having worked at a number of these places, I know they don't play for fun.

July 13, 2008 2:59 PM

I can't say I've ever negotiated this type of deal with this type of customer but I think Bert's idea could be put to use in the following way...

Now that you know the risks they want you to accept, I would find out in great detail what they are worried about. It has been my experience that, other than wanting some boilerplate, sometimes there is a real concern that needs to be addressed.

Once you know what they are REALLY concerned about, why not suggest that THEY pick up the insurance they need to mitigate the risk and you all split the cost. (Or deduct what they pay from the deal price.)

I think anytime someone wants someone to bear a risk, they need to pay for it.

As for the issue that Peter raises, I would imagine it is pretty easy to exclude it from the escrow agreement. That is, if the client (or one of their agents, entities, etc.) develop competing software that results in driving you out of business, they don't get the source.

But frankly, if I thought a customer was likely to do that, I might avoid them -- or even better let your comeptitor deal with them.

HTH,

Jim Geisman

[COLOR=DarkRed][B][URL="http://www.softwarepricing.com"]Software Pricing Partners, Inc.[/URL] [COLOR=Black]+508-647-0330[/COLOR][/B][/COLOR]

July 13, 2008 3:46 PM

Thanks for the input, Jim. We've already discussed their specific concern with at least one example. However, these are highly paid lawyers whose job is to negotiate the best position possible for their client. 100% candor is a nice idea, but not what you'll get. What they say they're trying to cover will not be nearly as broad as the provision itself.

On the 2nd point, unfortunately no - it would not be "easy" to create a provision in the agreement that precludes a source code release in the event they've created some competing software. First, they don't need to have created any software in order to potentially be motivated to shut us down (preclude competitors from using us). Second, enforcement would be impractical at best; we have limited resources. Third, its a reasonable guess to say that such a provision would be so far outside their standard license agreement (which their lawyers HATE to change and likely has never included such an excemption) as to be a non-starter. In fact, this property damage carveout is likely an issue because someone put it in their "standard" doc and they just don't like moving off the standard - and because they're so big they usually just push people around and get their way.

Walking away is of course always an option. Walking away from engaging a top 5 global financial services firm as another client would not be easy, particularly not in this environment.

I'd really like to hear if ANYONE has yielded on "property damage" as a limited liability carveout for lost profits/consequentials. Or even heard of it being asked for.

?

July 13, 2008 3:53 PM

We set a maximum limit on property damage at the the total amount that the client had paid for the software and walked away if the client insisted on more. We were not dealing with clients as big as yours. Only one client ever insisted and forced us to walk from the deal.

July 13, 2008 4:12 PM

Thanks for the information, Bert.

Just to be clear, I'm not talking about direct damages here - these are indirect and consequential damages as a result of property damage (like lost profits). It's my experience that our (software industry) standard is to completely disclaim ANY liability for indirect/consequential damages. Usually looks something like:

NEITHER PARTY WILL BE LIABLE TO THE OTHER PARTY (OR TO ANY PERSON OR ENTITY CLAIMING THROUGH THE OTHER PARTY) FOR LOST PROFITS OR FOR SPECIAL, INCIDENTAL, INDIRECT, CONSEQUENTIAL OR EXEMPLARY DAMAGES ARISING OUT OF OR IN ANY MANNER CONNECTED WITH THIS AGREEMENT OR THE SUBJECT MATTER HEREOF, REGARDLESS OF THE FORM OF ACTION AND WHETHER OR NOT SUCH PARTY HAS BEEN INFORMED OF, OR OTHERWISE MIGHT HAVE ANTICIPATED, THE POSSIBILITY OF SUCH DAMAGES.

July 13, 2008 4:26 PM

Peter:

We had the same clause with one additional sentence and never allowed anyone to strike this:

NEITHER PARTY SHALL BE LIABLE FOR ANY INDIRECT, INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES, INCLUDING LOSS OF PROFITS, REVENUE, DATA, OR USE, INCURRED BY EITHER PARTY OR ANY THIRD PARTY, WHETHER IN AN ACTION IN CONTRACT OR TORT OR BASED ON A WARRANTY, EVEN IF THE OTHER PARTY OR ANY OTHER PERSON HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. LICENSEE┬?s sole and exclusive remedy for Software nonconformity shall be recovery of the License Fee paid to LICENSOR.

July 13, 2008 7:19 PM

Thanks for the comment Peter. I appreciate what you say.

But if I understand what you are saying, you (and your limited resources) are going up against some pretty heavy hitters and want to know what to do...

Somehow you have to level the playing field as much as you can.

Since the attorneys (who are giving you the problem) are representing their in-house "client" maybe the discussion should be with that person instead.

I've found that the principals of a deal are often more candid and easier to deal with than the attorneys who represent them. (And, yes, sometimes the opposite is true...)

But at the end of the day, the golden rule is still true (he who has the gold makes the rules) so you may have to swallow hard and make sure they can't do anything to you personally.

You may want to ask the question in the ops/legal forum too since there may be attorneys who can tell you what they (or their clients) have done.

HTH

Jim Geisman

[COLOR=DarkRed][B][URL="http://www.softwarepricing.com"]Software Pricing Partners, Inc.[/URL] [COLOR=Black]+508-647-0330[/COLOR][/B][/COLOR]

July 13, 2008 10:36 PM

Thanks for the feedback, Jim. You've hit on exactly why I posted the original question - I want to go back to the business people (with whom I have solid relationships), and say, "Look, this may be [BANK] standard, but this is wildly outside the realm of what's standard in the software industry and for good reason, etc." The more feedback I can get on this, the more credibly I can go back to the biz side and ask them to their counsel to let this slide.

I'll see what else comes my way here for a few days and then may post over on legal/ops.

Thanks again

July 14, 2008 8:46 AM

I┬?ve negotiated a significant number of these deals on behalf of my software and Internet clients with Fortune 1000, 500, and 100 entities.

Generally speaking you┬?re up against relatively large entities which have well-defined policies for assumption of risk with software vendors. These policies make it difficult to negotiate favorable assumptions of risk on your (the vendor┬?s) part.

What you┬?re trying to accomplish is to negotiate a package of clauses, all of which relate to your assumption of risk, that when taken together result in an overall assumption that is acceptable under the circumstances. Don┬?t forget that it all comes down to dollars in the end ┬? your pricing structure assumes some overall assumption of risk and this must be compared to each specific transaction and it┬?s unique risks and rewards.

For the reasons stated above, there is no way to adequately address the complete package of issues on this forum; the variables are too numerous.

Nevertheless, here are a few comments that may assist you with negotiation of these carve-out issues.

1. Gross negligence/willful misconduct - leave this in; you will be expected to be responsible for your gross negligence and willful misconduct.

2. Personal injury/death ┬? limit this liability to damages (i) caused by your personnel while on their premises, and (ii) only if caused by your sole negligence (if their negligence contributed, negotiate an apportionment).

3. Breach of Confidentiality ┬? in some cases you can limit this to breaches caused by you negligence, but in most cases you will have to live with being liable for any breach.

4. IP infringement ┬? in the past, vendors have generally acquiesced to this carve-out; however, there seems to be an emerging trend to provide some limit of liability on the indemnity. Look at the value of the transaction ┬? if the value of the transaction is relatively low, it doesn┬?t make sense to be liable on an unlimited basis. Also, in your IP indemnity, be sure to provide for yourself rights to negotiate rights of continued use and substitution of another product, among other issues.

5. Property damage ┬? usually property damage is included in the same clause as No. 2 above (personal injury/death), so the same strategy applies; however, you should be careful to define property to include tangible personal property and not data. Damages for data loss can be substantial.

Per the comments above, always disclaim liability for incidental and consequential damages, and negotiate a reasonable cap on direct damages.

Chip

Disclaimer: my comments on this forum are for informational purposes only; they do not constitute legal advice, and should not be construed as such.

July 14, 2008 1:26 PM

Thanks for the feedback, Chip. The rest of the document (i.e. "portfolio of risks") is already negotiated and I frankly don't see them giving on something somewhere else that compensates us for what they're asking for on this particular liability limit carveout.

I thought I was following you well until your ending when you say "Per the comments above, always disclaim liability for incidental and consequential damages, ... "

My original question, and what I thought you were responding to in your post reviewing the 5 items, are proposed EXCEPTIONs to the disclaimer of liability for incidental and consequential damages. Was this not your intent? If not, what am I missing?

To be clear, we have disclaimed all liabilities for indirects/lost profits/consequentials EXCEPT for the items in my original post. The items (and my question) are NOT related to direct damages - that cap is already negotiated.

Thanks again to everyone for all the feedback.

July 15, 2008 8:26 AM

Sorry for the confusion.

My statement: "Per the comments above, always disclaim liability for incidental and consequential damages..." was meant to be general advice of a summary nature.

I recognize that you have already accomplished this in the facts presented.

Good luck with your transaction.

Chip

Disclaimer: my comments on this forum are for informational purposes only; they do not constitute legal advice, and should not be construed as such.

Discussion:    Add a Comment | Back to Top | Comments 1-14 of 14 | Latest Comment

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