This is the second part of our blog series addressing the top ten challenges that UK and European companies face after establishing an initial US presence. Part 2 covers (a) managing sales and contracting processes with large companies; and (b) protecting key intellectual property.
Part 1 addressed various challenges relating to employees.
A. Managing sales and contracting processes with large companies
You’ve just persuaded your business counterpart at a major bank or corporation to take your service or product – terrific! You then receive an e-mail from him or her attaching their 50 page “doorstop” standard form contract, with a request that you “mark it up” and send it back. If you can possibly avoid it, don’t do that.
Large US banks and corporations (and, indeed, large banks and corporations in many countries) will nearly always insist on contracting based on their standard terms. They have large legal departments, with lawyers on salary, who deal with these contracts. The main focus of these lawyers often is on protecting the bank or corporation (and the legal department) on a “one size fits all” basis, not on getting your deal done. Getting into a ping pong match of sending drafts back and forth is likely to be time-consuming and, for you (to the extent you use outside lawyers) expensive.
What’s the alternative? First, review the agreement. There will be many provisions to which you object, or that don’t make sense in the context of your transaction, but if you focus on trying to fix all of them you will never get your deal done.
However, there will be a number of items (hopefully no more than five to ten) that you absolutely cannot accept without risking material harm to your company. First, the description of the services that you are rendering and the performance conditions that you are being asked to meet is probably wrong – you’ll need to fix that. Additionally, though, there will be some problematic legal terms. For example, there may be a provision that specifies that all intellectual property that you use in performing the contract will belong to them. There may also be a provision that limits your ability to perform services for their competitors, and one that limits their confidentiality obligation to one year (about which see below). There also is probably going to be a broad-form intellectual property indemnification provision that makes you responsible in circumstances where you are not at fault.
So what next? Our advice is that, instead of sending a mark-up, you go back to your business counterparty with a two-column issues list. On the left side, list their unreasonable or inaccurate provision. On the right side, show your reasonable alternative provision and any explanation for why the change is needed. Negotiate those points at a business level with your business counterparty, and then ask him or her to get their legal department to redraft the contract to reflect your agreement on those points. This will probably take a few exchanges of drafts before they get it right, and there may be a few outstanding issues at the end that require your lawyer to get on the phone with their lawyers (notably – intellectual property indemnification is frequently one such item). However, if this process works, you will have shortened the process of getting to contract and also saved on your legal fees.
B. Protecting key intellectual property
The key asset of your business is likely to be your intellectual property. In certain businesses, like medical devices, patents may be critical to protect your inventions. In other businesses, like many software-as-a-service businesses that rely on algorithms and machine learning, your intellectual property may be best protected through maintaining confidentiality. The scope of patent protection is a bit broader in the United States than in some other countries, particularly in the context of software-embodied inventions. However, the decision about whether or not to seek patents is a complex one (and beyond the scope of this blog).
In nearly all cases, it will be important to protect your key names and brands through trademark registration in the jurisdictions that really matter to you, like the United States. Note that, under state law in the United States, a business can get unregistered rights to a trademark through use. Consequently, before filing for a trademark it is important to have a trademark search done in order to identify potentially conflicting uses.
Putting aside patents and trademarks, what do you need to do to make sure that you own your intellectual property, and what can you do to try to protect it?
First, anyone who has access to your intellectual property, including contractors and employees, should sign a written agreement binding them to confidentiality and providing an assignment to the business of any IP that they develop which relates to the business. It is important that this be a current assignment of all current and future IP, not simply an agreement to assign in the future. Additionally, don’t rely on “work for hire” language in contractor agreements –“work for hire” language is not effective to give you ownership of certain kinds of rights, like rights in software. IP assignment agreements also need to meet certain standards to be enforceable in California (particularly permitting the employee or contractor to schedule IP that he or she has developed previously).
Second, non-disclosure agreements in the United States typically have term limits, frequently of only one year. As a legal matter, this means that your counterparty would be entitled do anything they want with your confidential information after that period – use it, put it on the internet, or whatever. How do you address this problem? First, you can try to negotiate longer limits – we think that, for emerging companies, it is reasonable to ask for three years (or more) since your business is still being developed. Additionally, you can try to obtain an unlimited period of protect for trade secrets (which will need to be properly labeled), although this is not always possible. Finally, you simply need to be careful about what information you share, and when you share it. If you need to share particularly sensitive information, you will want to wait until you know your counterparty better before doing so. Also, keep in mind that venture capital firms will rarely agree to sign any non-disclosure agreement (except, perhaps, in the context of due diligence, an NDA that protects the third party information of your customers).
Finally, beware of joint ownership of intellectual property. If you are developing IP jointly with another party, one party should own it and the other should have a broad license that covers that party’s intended uses. In this structure one can protect the interests of both parties. The problem with joint ownership is that for certain kinds of intellectual property, like software (which is covered by copyright), joint ownership means that each party is entitled to a 50% share of the profits made by the other party from the IP. This clearly is not what you intend in circumstances where the parties intend to divide the fields of use.
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Want to learn more about how best to pursue US expansion or US investment? Feel free to get in touch with Daniel Glazer or Robert Mollen.
Post produced in partnership with Daniel Glazer and Robert Mollen at Fried Frank Technology.