Drafter’s Guide to Technology Transactions

Friday, February 20, 2015 - 17:53

Helping in-house lawyers work like the experts

MCC interviews Mark G. Malven, member, Dykema Gossett PLLC, leader of the firm's Technology Transactions practice and author of a recently published treatise entitled Technology Transactions: A Practical Guide to Drafting and Negotiating Commercial Contracts.

MCC: Let's start with an overview of the treatise and why you decided to write it.

Malven: PLI contacted me to write a treatise on technology transactions to fill in a missing segment in their published offerings. I have a long history of relying on PLI for their practical and comprehensive materials, so I was thrilled to be asked.

In my practice, I see a lot of people making avoidable mistakes, and it's not really anybody's fault. These days, companies are entering into so many IT- and technology-related agreements that it’s a business and economic necessity for in-house legal departments to handle this work. Therefore, one of my target audiences is corporate counsel who are asked on a regular basis to do this kind of work even though they're not experts in the area of technology transactions. Another audience is experts like me who would benefit from key checklists and from in-depth supporting arguments. I wasn’t aware of any publication that met this need, so I wrote a book that I would like to use, and I’ve actually been using the draft for the last few months to make improvements before publication. I’m happy to say it works, and I believe it fulfills a genuine need.

MCC: The book is divided into two parts, and Part One discusses specific types of commercial agreements used in technology transactions. Would you describe some of the common transaction types?

Malven: Sure. You could break down the common transaction types as software licensing and customer-vendor agreements relating to the provision of IT services, whether that's software development or outsourced or cloud-type services. There's a huge industry of IT providers that offer valuable products and services, and just about every company now is a customer in one way or another. Those agreements get negotiated every day, and many are not standard enough to be handled with a purchase order, so there's lawyering to be done.

Other kinds of transactions are more specialized, such as IP and technology licensing or joint ventures that are heavily IP oriented. Those transactions are more horizontal, meaning an agreement between business partners, rather than a customer-vendor contract. One of my partners, Steve Tupper, wrote a chapter based on his expertise in technology escrow. Another partner, Kit Winter, wrote a chapter covering the nuances of domain name purchases. I would say that one of the most common agreements in today's marketplace is the non-disclosure agreement and, even there, I see people make mistakes that easily could have been avoided.

MCC: Along that line, your book pays a lot of practical attention to what you call “traps for the unwary.” Please give us an example.

Malven: In technology licensing and joint venture arrangements, the parties frequently grapple with how to treat IP that is created during the relationship. Sometimes they conclude that the fairest solution would be joint ownership. Unless the IP is not particularly valuable, this is rarely a good solution, however, because it leaves many important questions unanswered regarding their intentions. Do they expect to take actions to maintain the value of the created IP? If so, who will file, prosecute and enforce the patents and copyrights? In addition, who decides whether inventions are maintained as trade secrets or are published through the patent application process? Trade secret value is generally destroyed by disclosure, so this is an important decision. Joint ownership will also mean that no one owner can grant an exclusive license without the consent of all the owners. The problems are further multiplied in a cross-border relationship because the default rules for joint ownership can vary significantly. This is a hot button issue for me so I had better stop here ­– even though I have only described roughly half of the problems. Your readers will have to buy the book to get the rest!

MCC: I noted that your book discusses scholarship on numerous matters of terminology, such as the distinction between “indemnify” and “hold harmless” or between “direct” and “consequential” damages. What practical guidance can readers take away to improve their ability to select language in a strategic way?

Malven: That's exactly right; you want to use the right language, and education is the first step. There's been a big movement in recent years toward the use of plain language in lawyering and in contract drafting, which carries the benefit of reducing the risk of misunderstanding and the potential for litigation based on ambiguous language. The “indemnify and hold harmless” language is a perfect example. Many people use the terms “indemnify” and “hold harmless” as a doublet or as synonymous terms; however, that usage is not consistent with the contract interpretation principle that every word is supposed to mean something. This has led to a lot of unnecessary litigation, where sharp litigators have tried to add or change the drafter’s meaning if doing so offers an advantage. It’s incredibly wasteful in my view. Before moving off this topic I would like to give credit to Bryan Garner, the well-known lexicographer and editor of Black's Law Dictionary, who has written Garner's Dictionary of Legal Usage, where he addresses this issue in depth and even uses humor to make some points.

I am also concerned about the widespread misunderstanding of the term “consequential damages.” Although some think otherwise, the term consequential doesn’t mean vague or speculative or remote. The term describes those losses that result from special circumstances, but only if the breaching party knew or should have known about them. The misunderstanding about this language has spread for a long time and for many reasons, so no one is really to blame; however, it remains the case that many people are drafting contracts and foregoing their remedies for breach based on misinformation. These waivers also increase the incentives for litigation disputing whether damages are direct or consequential, which is often difficult to determine. 

One of my goals in writing this book is to help the drafter avoid all of that. As transactional lawyers, our job is to draft agreements that are so clear that litigation becomes very, very unlikely. I believe that contract litigation frequently arises from ambiguity, rather than clearly wrongful behavior, such as a willful contract breach. It seems to me that even clear contract breaches shouldn’t lead to litigation if the contract is clear regarding the consequences for the breach – because the parties will likely prefer a settlement.

MCC: It sounds like there's a certain discipline in avoiding such common drafting mistakes. What assistance does your book offer?

Malven: I recommend having a good set of starting-point forms, and the treatise provides nine standard forms. Once a drafter is educated about the common misunderstandings, the pitfalls of selecting joint ownership or indemnify versus hold harmless will start to jump out, resulting in better drafting choices.

In some ways, that discipline needs to come from the top, especially in a law firm environment. Associates will be loath, and rightly so, to change language that a partner has given to them, so it’s really up to the partners to provide good templates. For an in-house department, that may be less of a problem. Once an inside lawyer is taught what to watch out for, he or she has a freer hand to do what's “right.”

Fundamentally, this discipline applies to all good writing; you have to pay attention to what you're saying, and your audience matters. In the context of risk avoidance, when there’s a dispute, the audience is a mediator, an arbitrator or a judge. The audience is broader than that, however. In the context of license provisions and statements of work for services, it's important for the legal drafter to write not only with judges in mind, because hopefully it never comes to that, but also with the technical and business people in mind so that they understand their rights. Good drafting also serves an important diligence function because it can uncover, at the negotiations phase, any disconnects between the parties. That is a huge value-add that lawyers can provide to their clients; it's much easier to fix problems at these initial stages.

MCC: Obviously, drafters have to understand their own business and the related technical and legal issues. Is it important to understand a counterparty's business?

Malven: It’s safe to say that the more context the drafter/negotiator has, the better. A lot of grief flows from not understanding what is considered “market” in a particular industry, especially when it comes to customer-vendor agreements. By market, I mean the typical provisions in the particular kind of agreement you're negotiating.

As an example, software companies generally include a fixed-dollar liability cap in their contracts. If counsel on the other side doesn’t understand this context, there will be a lot of unnecessary back and forth in trying to push that provision off. But the simple fact is that most software vendors won't concede; therefore, by understanding what’s market, you can put your time and efforts to more fruitful use in improving your position. Within a given industry, these issues tend to evolve over time. There are a few that I think are odd, but they are what they are, and that’s how the software business has evolved. I address these kinds of issues in different chapters of the book, noting for example which disclaimers are typical in one context but not in another, depending on the topic within that chapter.

MCC: Would you please summarize the discussion in Part Two of your treatise?

Malven: Part Two covers IP basics and a number of regulatory- and privacy-related areas that broadly pertain to technology transactions. So within the privacy discussion, there are chapters on Gramm-Leach-Bliley for the financial industry, on HIPAA for healthcare, and on the EU rules for international data transfers. 

There’s a chapter on the history and context of the Internet and how the domain name system came to be. In the area of copyright and technology licensing, there's a chapter on the Digital Millennium Copyright Act, including a discussion of “traps for the unwary” (a common thread throughout the book) that hosting providers face in determining how to handle copyright infringement claims. In essence, these chapters provide background knowledge that helps across the board in drafting contracts for different kinds of technology transactions.

MCC: In addressing common issues for different types of transactions, each chapter is designed to be comprehensive, with no need to search through indexes to find compartmentalized information. How does that play for your readers?

Malven: There is a significant amount of overlap in, let’s say, how to structure an agreement for software licensing as opposed to IT services. The book is designed so that readers who are working on a transaction related only to software licensing can find everything they need in one or at most two places. And this proved beneficial, not only in eliminating lots of messy cross-referencing, but also in allowing me to expand on the common knowledge with topic-specific details, such as the appropriateness of including a consequential damages waiver in a given transaction agreement.

There are several segments of users of the book, and each can derive value, for example, corporate counsel or other non-specialists in handling somewhat routine but important technology transaction agreements, law firm associates using it as a reference, and law firms themselves in training associates. Even experts like me need a checklist to make sure nothing is missing, or sometimes just a reminder of certain details to support what we already know, perhaps regarding technical intellectual property, privacy or contract law principles.

Further, companies on both the customer and the technology vendor sides are now using non-lawyer contracts managers as a way to reduce the cost per contract, especially given a large volume of agreements to negotiate. These managers will find the treatise very useful in improving their knowledge and in working toward operating more and more independently of the busy in-house lawyers.

MCC: It sounds like you’re passionate about this work, Mark. Please give us some closing thoughts and tell MCC readers where they can find your book.

Malven: I was an engineer prior to being a lawyer and was trained by some of the founding thought leaders in the technology transactions space. Over the past 20 years, I have handled more than 1,000 transactions, so it’s no surprise that I’m a contract nerd who insists that agreements be written tightly and with a mind toward avoiding traps and foreseeable mistakes. As an author, I brought a heart to serve what I know to be a huge need and provide value to my readers, even if it means that they won’t end up calling me for every agreement. Your readers can find my book here.

Please email the interviewee at mmalven@dykema.com with questions about this interview. For further information on Mr. Malven’s book, please visit www.pli.edu/Content/Treatise/Technology_Transactions_A_Practical_Guide/_/N-4lZ1z12687?ID=232694