Category Archives: Contracts

Pointing fingers

Resurrecting a Contract After You Reach an Impasse

Negotiating business contracts is as much an art as it is a science.  It requires thinking strategically, figuratively putting yourself into the shoes of the other party, and even keeping your human emotions in check.  But what happens when you hit a brick wall with the other side and the deal goes sideways?  Here are a few suggestions for getting your deal back on track when you reach an impasse:

  1. Ask questions instead of drawing hard lines. If you reach an impasse on any issue, ask lots of questions. It’s amazing how much you learn when you ask questions.  Think about this from a personal perspective:  How often have you assumed that your partner/ spouse/ friend undoubtedly was thinking one thing when…..much to your surprise you find….. they were thinking something completely different?   . . If the other side says “No” or “We don’t agree”, always ask them why.  Questions such as “Why is this a problem?”, “Would you give me an example of your concern?” and the like often have the effect of bringing to the forefront,  the frequently under discussed concerns of the other side
  2. Consider your style.  Some negotiators have success with the ‘just folks’ act asking the other party to explain everything, by mentioning how they graduated with an English major, or can barely add numbers above three figures.  Be cautious however, this type of act can be transparent.  My advice is to be yourself during negotiations. If you’re not a forceful personality, don’t pretend to be so.  If you need to take your time responding to a question, take that time.  Negotiating means obtaining information about the other side’s wants and concerns. And voicing your needs and concerns. Every one of us has our own unique style of eliciting this information and negotiating a deal with the other side.
  3. Change it up. If you have been negotiating over the phone, consider meeting via video conference or in person.  If you have been meeting in a conference room setting, consider meeting over lunch, or taking a walk outside while you talk.  Changing the venue, especially moving to neutral territory, can often completely shift the dynamics of the negotiation, and break up the log jam.
  4. Don’t take ‘best and final’ at face value. If you have the time, and can hold out, it is often strategic to reject even what the other side calls their ‘best and final offer’—if this were truly the case, they would not still be at the negotiation table.
  5. Consider walking away. Letting a deal go is never easy, especially if your job is to negotiate contracts on behalf of your company.  You might be under pressure to meet sales goals, have other departments relying on you getting the deal done, or be under specific orders from supervisors or company owners to ink the deal.  However, sometimes walking away can be the most strategic thing you do.  A break in the negotiations can often be the best thing to happen to both parties.  Many a contract has died and come back after a break, change in personnel or shift in management direction with either party.  It is also important to keep in mind that ultimately if a potential vendor, supplier or customer cannot deliver the goods and services at the right price, or is unreasonable during negotiations, perhaps the contract with this particular company is not worth the time, money, and hassles.

If you have questions about negotiating agreements for your business, attorney Leslie S. Marell can help.  Leslie has more than 25 years of experience as in-house counsel and as a legal adviser working with businesses, business people, and business contracts, in the technology, manufacturing, software, and medical device industries.  She understands the real-world practicalities of what it takes to draft, review, and negotiate corporate contracts, and has presented her dynamic seminars to Fortune 500 companies and small to mid-sized businesses across the country.  Leslie specializes in helping contract analysts, project managers, and department leaders work better with their own internal legal departments and outside counsel.  To learn more about Leslie’s seminars, or get expert advice on contracting matters, contact Leslie at (310) 372-8663, or visit her online.

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Contract Negotiation Tips from a Professional Negotiator

Whether you have been negotiating contracts for years, or this is your first go around, it is helpful from time to time to go back to the basics.  As a professional negotiator and trainer, here are a few of my basic contract negotiation tips:

  1. Prioritize what is most important to you. Not all parts of the contract are equally important, so one of the best ways to begin contract negotiations is to prioritize what is most critical to your company, and determine your bottom line.  Write these down so that you can keep your eye on the prize.
  2. Address the “what can go wrong” issues.  When lawyers discuss the “legal” clauses such as limitation of liabilities and indemnity, we’re really talking about what might go wrong and who will be responsible if it does.  Address these issues with your counterpart in a real world fashion.
    • For example, once you agree upon lead times, tell the supplier about the negative consequences to your company should they be late. Ask them how they intend to handle that potential (advance notice?) and what work around alternatives would be available, If you do an up-front real world risk assessment of the “what could go wrong issues” , you will gain the confidence of your lawyer.  Plus, your future legal reviews will be greatly expedited.
  3. Understand the other party. As is often said, knowledge is power.  Do your research on the other party.  If you can track down information on the other company’s suppliers, vendors, prior large orders, determine what their needs are, or otherwise research the backgrounds of the principals and the person you are negotiating with, it may provide a competitive advantage in negotiations.  If nothing else, you can build bridges with the other party over the difficulties in working with Russian distributors, or your shared love of the San Francisco Giants.
  4. Find some mutually agreeable points to start. With all negotiations, find common ground at the start, however small that common ground might be.  If you can frame each one of these ‘agreed upon’ points at the beginning of negotiations on other provisions, it might benefit the negotiations as a whole. Look for any excuse to say things like, “it’s great that we agree on the delivery date” or “now that we’ve got agreeable terms for the production specifications, let’s talk about price per unit.”
  5. Avoid emotions, instead focus on the facts. Successful negotiators don’t take the negotiation personally.  Instead they are motivated to ‘win’ the chess match that is a successful contract negotiation.  Many negotiators refer to their company or the other side using impersonal contract language—even during the verbal negotiations.  For example, instead of saying things like, “I think you and I can agree to a termination clause we both like,” say, “If both parties can agree to a termination clause, it will benefit everyone.”

If you have questions about negotiating agreements for your business, attorney Leslie S. Marell can help.  Leslie has more than 25 years of experience as in-house counsel and as a legal adviser working with businesses, business people, and business contracts, in the technology, manufacturing, software, and medical device industries.  She understands the real-world practicalities of what it takes to draft, review, and negotiate corporate contracts, and has presented her dynamic seminars to Fortune 500 companies and small to mid-sized businesses across the country.  Leslie specializes in helping contract analysts, project managers, and department leaders work better with their own internal legal departments and outside counsel.  To learn more about Leslie’s seminars, or get expert advice on contracting matters, contact Leslie at (310) 372-8663, or visit her online.

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Battle of the Forms

If you work for a company and have any involvement in contracting for goods, you are familiar with the dreaded ‘Battle of the Forms.’  Both your company and the company you are contracting with have their own standard contracts, RFP terms, purchase orders, or conditions of sale.  Perhaps the advice you’ve received from your own in-house legal department is to ‘use our standard contract/form.’  The problem is, your customer or supplier is getting the same advice from his or her own corporate attorney.  So what are you to do? Can you still do the deal? And which terms and conditions prevail?  Here are a few general tips:

  1. Neither document prevails. So long as the parties each had good sets of terms and conditions on their respective forms and the forms generally comply with Uniform Commercial Code (U.C.C.) requirements of taking exception to the other’s terms, where the forms are in conflict, neither document supersedes the other.
    • Professional Tip: Your purchase order forms should include standard language that meets the U.C.C.’s requirement of taking exception to the seller’s terms along the lines of Section 2-207 of the U.C.C. “This purchase order is limited to terms and conditions contained on the face and the reverse. Any additional or different terms proposed by Seller in any quotation, acknowledgement, or other document are hereby deemed to be material alternations and notice of objection to them is hereby given.  Any such proposed terms shall be void.”  Of course, the Seller’s documents should include the same sort of language which objects to the Buyer’s additional and different terms.
  2. The U.C.C. will fill in the gaps. In situations where your company issues a purchase order/quotation without negotiating terms other than the most important terms (such as product, price, delivery), and without requiring the other party’s signature, if there was a dispute, the court would look to the U.C.C. (for the sale of goods) to fill in the gaps of the terms that have not been agreed to. For service type contracts, general contract law says that when the forms do not agree, no contract has been formed. Of course, the parties rarely read those forms and proceed with business. The contract is formed when the parties proceed with the work.
  3. Agreed upon terms prevail. Where the buyer’s and seller’s terms are in agreement, those terms apply.
  4. Focus on the front of the forms. Frequently, a dispute originates because the parties have not agreed to an essential deal term. For example, how many times have you seen the Seller’s quote with 30 day Net payment terms, but the Buyer’s P.O payment terms are 60 days? Make sure that the face of both the Buyer’s and Seller’s forms are consistent with respect to description of product/ service, delivery terms, price/payment terms, service levels and other key deal points.

If you are involved in corporate purchasing or sales, or have questions about standard form agreements for your business, attorney Leslie S. Marell can help.  Leslie has more than 25 years of experience as in-house counsel and as a legal adviser working with businesses, business people, and business contracts, in the technology, manufacturing, software, and medical device industries.  She understands the real-world practicalities of what it takes to draft, review, and negotiate corporate contracts, and has presented her dynamic seminars to Fortune 500 companies and small to mid-sized businesses across the country.  Leslie specializes in helping contract analysts, project managers, and department leaders work better with their own internal legal departments and outside counsel.  To learn more about Leslie’s seminars, or get expert advice on contracting matters, contact Leslie at (310) 372-8663, or visit her online.

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Sellers: Limiting Your Liability for Damages in Contracts

There are four major ways to reduce your risk and limit liability in contracts—disclaimers, limitation of liabilities, indemnification, and “Entire Agreement” clauses.  These are discussed in more detail below:

  1. Disclaimers. Shrewd contract negotiators live by the rule of disclaiming responsibility for anything beyond the specific commitments listed in the contract.  The only way a seller can disclaim implied contract warranties is by adding clear, specific language in BOLD, CAPITALIZED TYPE disclaiming the implied warranties.
  2. Limitation of Liabilities. Breaching parties are automatically liable to the other party for damages as a result of the breach unless the parties have specifically agreed to limit their liabilities.  Consider just what you want to limit.  For example, a Seller may negotiate that it will not be responsible to the Buyer for incidental or consequential damages.  As another example, you might also choose to negotiate your company’s maximum dollar limit on liability.
  3. Indemnification. Indemnification shifts the responsibility from one party to another in a contract.  Indemnity clauses can be drafted to protect your company from any acts, misrepresentations, wrongdoing, or omissions of the other party. 
  4. “Entire Agreement” Provisions. “Entire Agreement” or “integration” provisions in a contract limit the seller’s warranty liability to exactly what is written into the agreement.  In other words, adding this type of clause negates any other prior verbal agreements or commitments between the parties.  Put yet another way—if it is not in the agreement, it is not agreed to!

If you have questions about limiting liability in your business agreements, attorney Leslie S. Marell can help.  Leslie has more than 25 years of experience as in-house counsel and as a legal adviser working with businesses, business people, and business contracts, in the technology, manufacturing, software, and medical device industries.  She understands the real-world practicalities of what it takes to draft, review, and negotiate corporate contracts, and has presented her dynamic seminars to Fortune 500 companies and small to mid-sized businesses across the country.  Leslie specializes in helping contract analysts, project managers, and department leaders work better with their own internal legal departments and outside counsel.  To learn more about Leslie’s seminars, or get expert advice on contracting matters, contact Leslie at (310) 372-8663, or visit her online.

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How to Prevent a Breach of Contract—Contract Warranties

Along with poor contract drafting, warranties are the most litigated issue in business contracts.  Typically the parties have different expectations, especially when the buyer claims that the goods or services did not meet the promised expectations.  Here are a few tips on warranties to protect your company from unnecessary disputes:

The importance of the description

The statement of work/specifications/scope of the product or service is key to a meaningful warranty. The more vague, subjective, or general the description, the greater likelihood of misunderstanding and conflict between buyer and seller. Even if you are not the subject matter expert, review your internal customer’s description.  Phrases like “target goal”, “if feasible”, or “to be determined” are seemingly innocuous but can cause stalemates down the road.  It’s in both the buyer’s and seller’s best interest to take as much time as possible and to ensure specificity in the contract description of the product/ service.

A promise is a promise

Buyers should ensure that all promises made by the Seller – in its proposal, advertising material, emails, and verbal discussions with internal customers – is included in the warranty provision. If you don’t, you risk the possibility of that particular promise not becoming part of the contract.

Sellers should make sure they do not over promise, especially promising generic things like, “this product will work for all buyer’s [fill in the blank] purposes.”  This is setting your company up for trouble—regardless of how useful your product might be you cannot possibly anticipate all of the buyer’s potential networking/animal husbandry/cosmetic purposes that he or she could use your product in or for.  The best way to prevent overpromising is by including all specifications,  plans, detailed requirements, , and the like in your contract, so that those specific purposes and promises (and those only!) become binding warranties.  Attaching these items as appendices to the contract is sufficient.

Be clear about the remedies

Whether drafted by the buyer or seller, the typical warranty states that the buyer’s remedy for failure of the product to meet the warranty will be seller’s obligation to repair, replace or issue credit.  Since these clauses are generic, they frequently do not specify the time period by which the “fix” should be accomplished.

While business people are skilled at negotiating the “deal”, they often do not discuss the “what if something goes wrong” issues. When lawyers discuss this issue, we discuss it in terms of Limitations of Liability and assume the parties are going into court and obtaining a million dollar verdict.

As we know, however, there are thousands of steps between the initial dispute and the time where the parties go to court.  Give thought to and discuss “what happens if” the seller doesn’t fix the problem within the defined time period.  Those guidelines identified upfront can help to avoid a major dispute if the parties

If you have questions about contract warranties for your business, attorney Leslie S. Marell can help.  Leslie has more than 25 years of experience as in-house counsel and as a legal adviser working with businesses, business people, and business contracts, in the technology, manufacturing, software, and medical device industries.  She understands the real-world practicalities of what it takes to draft, review, and negotiate corporate contracts, and has presented her dynamic seminars to Fortune 500 companies and small to mid-sized businesses across the country.  Leslie specializes in helping contract analysts, project managers, and department leaders work better with their own internal legal departments and outside counsel.  To learn more about Leslie’s seminars, or get expert advice on contracting matters, contact Leslie at (310) 372-8663, or visit her online.

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Drafting Binding and Non-Binding Provisions in Letters of Intent

Understanding binding and non-binding provisions in a Letter of Intent (LOI) is important for anyone who works with business contracts.  Here, we will review some of important information on LOIs and what you should look for when you are negotiating, drafting, and otherwise working with LOIs.

1.  Ensure everyone is on the same page. The first important thing to determine is whether you are working with a binding or non-binding LOI.  The United States, much of the EU, and many other countries around the world only recognize non-binding LOIs where both parties expressly agree to them.  But what does this mean really?  In practical terms, if you are negotiating or discussing a LOI with a potential supplier, distributor, or customer, you should always spell out that you intend the letter to be non-binding, and make sure you put this in writing (e-mail is fine!).  In many cases, you and the other party will want some of the provisions to be binding, while others will be non-binding.  Again, make sure everyone is clear, and put this in writing.  Consider specifically including language that states, “The parties agree that the following provisions shall be binding” and “the parties agree that the following provisions shall be non-binding” directly in the LOI.

2.  Use the mutually understood language. One of the best ways to make sure everyone understands which clauses are binding, and which are not, is to use the right kind of language that is understandable for all parties.  Words like ‘shall’ or ‘require’ conveys a binding requirement, while words like ‘will’ or ‘may’ convey a future intent.  Be cautious, however, that everyone understands this language.

3.  Consider how you frame obligations to negotiate in the LOI. For example, if the LOI ‘requires’ or otherwise obligates the parties to negotiate the proposed terms in good faith, then arguably the entire LOI is binding. Carefully consider the language you use in the LOI with regard to negotiations, and what would happen if the parties fail to reach an agreement on the substance of the bargain.  Could one have a claim against the other for bad faith or even breach of contract?

4.  Consider your leverage when adding binding or non-binding clauses. On many levels, negotiating a contract can be a head game, but many parties to LOIs don’t place the same emphasis on them as they do on “real” contracts.  For this reason, you might consider using binding and non-binding clauses in your LOI to your strategic advantage when you are negotiating the underlying contract itself.  The other party may not review an LOI to the extent that you have, and you may have much better leverage on terms that were listed as binding in the LOI when you are negotiating the deal itself.

5.  Finally: And from the Buyer’s Perspective:  Consider the impact of issuing an LOI on your future leverage. I’ve had seller clients who have told me that once they receive an LOI from their customer, they don’t have the same sense of “urgency” to finalize the contract as they did prior to the LOI. In other words, they know that their customer has “skin in the game” and is unlikely to pull out unless a major problem occurs.  Leverage is an important issue in LOIs!

Leslie S. Marell has more than 25 years of experience as in-house counsel and as a legal adviser working with businesses, business people, and business contracts, in the technology, manufacturing, software, and medical device industries.  She understands the real-world practicalities of what it takes to draft, review, and negotiate corporate contracts, and has presented her dynamic seminars to Fortune 500 companies and small to mid-sized businesses across the country.  Leslie specializes in helping contract analysts, project managers, and department leaders work better with their own internal legal departments and outside counsel.  To learn more about Leslie’s seminars, or get expert advice on contracting matters, contact Leslie at (310) 372-8663, or visit her online.

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Technology Agreements: License Grants

DEFINING USERS
A Licensee (one who pays for the right to use, access and benefit from some type of technology) should ensure that the license grant is broad enough to allow all necessary members of the Licensee’s organization to use, access and benefit from (“Use”) the technology licensed. This group of users should be determined early in the process to ensure that the license negotiated and paid for is broad enough to include all contemplated users.

DANGERS OF A NARROW DEFINITION
Failure to have a broad enough license grant is the number one reason Licensees get sued by Licensors.

Mistakes made in this early evaluation of who the potential users are can also be very expensive. Often, the Licensee determines after the agreement is signed that some of its necessary users were left out and now need to be added in to the agreement. Such additions cannot be accomplished by just buying more “seats” or “users” if the definition of who can be a user does not include the right people. Therefore, broadening who are authorized users becomes very expensive after the agreement is signed.

DON’T FORGET AFFILIATES
One thing for a Licensee to consider is whether the organization is owned by a parent company or has subsidiaries commonly called Affiliates. A license grant that is “to Company X” is not sufficient if Company X has Affiliates that will need to Use the technology licensed.

NON-EMPLOYEES AS USERS
Additionally, the Licensee should ensure that all types of workers, not just its employees can Use, the technology licensed. A license grant to “Company X and its Affiliate’s and their employees” is not broad enough if Company X has contingent or contract employees, consultants, suppliers, vendors, third party sales networks, or customers (commonly defined collectively as End Users) who need to Use the technology licensed.

LOCATION, LOCATION, LOCATION
Furthermore, the Licensee should ensure that its End Users can Use the technology licensed wherever the company has locations. A license grant to “Company X and its Affiliate’s and their End Users located in the United States” will not be broad enough to allow End Users located outside the United States to Use, the technology licensed.

Additionally, the Licensee should be careful that the license grant is broad enough to accommodate how the Licensee’s End Users currently work and how that may change in the future. Does the Licensee have End Users who travel, or work remotely, that will need to Use, the technology licensed? If so, a license grant to “Company X and its Affiliate’s and their End Users located at any of Licensee’s or its Affiliates worldwide locations” will be too narrow to allow employees to have remote access while traveling or working from home.

TERM AND LICENSE KEY
Finally, the Licensee should ensure that the term of the license granted, and any license keys received, are sufficient to cover the time period contemplated and paid for. License keys are a device used by software vendors to activate licensed software for a set period of time. If the Licensee has negotiated and paid for a perpetual license, the license grant and any keys issued should be perpetual. If the Licensee has negotiated and paid for a five year license, the license grant and any license keys issued should be good for five years to avoid any issues around not receiving a new or updated license or license keys.

RECOMMENDED GRANT LANGUAGE
For a Licensee, good language in a perpetual license grant would be “to Company X and its Affiliate’s and all of their End Users a perpetual, worldwide, fully paid up license to use, access and benefit from the technology licensed” provided “Affiliates” and “End Users” are defined broadly enough to encompass the Licensee’s intended use. A license grant like this provides the Licensee the best chance to avoid litigation, or threats of litigation, from the Licensor.

ABOUT OUR LAW FIRM AND WORKSHOPS
Leslie Marell is a business and commercial law attorney with over 25 years of experience in business contracts, purchasing and sales law, technology law & day to day business legal matters. She heads her own Los Angeles firm which specializes in providing legal services to the manufacturing, industrial and high technology industries. For more information about the firm, click here. If you’d like a complimentary consultation, call Leslie at 310.372.8663.

Leslie’s workshops are a blend of lecture, dynamic coaching, and audience participation. She brings her contract knowledge to the corporate classroom in lively and valuable workshops, translating “legal mumbo jumbo” into understandable, useful concepts in an entertaining way.

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Independent Contractor or Employee?

A ROSE BY ANY OTHER NAME……..
Just because a company calls a worker an independent contractor does not make him or her so. For clarification purposes, I’m using “independent contractor” as a synonym for the terms “consultant”, “contractor” and any individual your company retains whom you don’t consider an employee.

If your company classifies a worker as an independent contractor, the company does not have to withhold or pay state or federal payroll taxes such as including Social Security, Medicare, disability, unemployment, and income taxes.

However, if that person is an employee, the company must withhold and pay these taxes. Thus, it’s often in a company’s financial interest to call a worker an independent contractor.

SHOW ME THE MONEY
Misclassification results in lost payroll taxes and tax revenues to both the state and federal governments.

A 2009 report prepared by the U.S. Government Accountability Office concluded that worker misclassification is a “significant problem” with “adverse consequences” because it reduces tax revenues flowing to the government. The report estimates that the misclassification will cost the Treasury Department more than $7 billion in lost payroll tax revenue over 10 years. And, it is estimated that states lose about $198 million each year in unemployment insurance funds.

EXPENSIVE MISTAKE
It’s no wonder that the states and feds view the independent contractor status with a critical eye.

The misclassification can be expensive: the imposition on your company of fines, penalties, and back taxes by both the state and IRS.

IT’S EVERYONE’S CONCERN
Employers and workers are both interested in proper worker classification.

Workers want to ensure they are paid as required by law, and are protected under federal and state employment laws (eg: Fair Labor Standards Act, Age Discrimination in Employment Act, and laws prohibiting discrimination in the workplace). These law don’t apply to independent contractors. Workers also want to preserve their eligibility for social security and receive employer benefits (health insurance and 401K contributions).

Employers need to ensure they are properly paying payroll taxes and complying with the minimum wage or overtime, and other wage-and-hour law requirements such as providing meal periods and rest breaks.

THE TYPICAL SCENARIO
This is how it often begins: Company engages the services of an independent contractor, subsequently terminates those services, and the independent contractor files a claim for unemployment insurance benefits. The company responds to the unemployment insurance claim by stating that the individual is not entitled to benefits because he or she is an independent contractor.

The state unemployment insurance division begins an investigation into the claim and, often, commences a full audit into the company’s payments to all independent contractors.

Another way in which a classification may be challenged is when the independent contractor fails to pay the double rate of social security taxes due as a result of the “self-employed” status.

That’s what happened in a case decided by the federal tax court. In that case, the individual taxpayer was responsible for managing a group home for adults. The company issued him a Form 1099 reporting the compensation, which the taxpayer filed with his tax returns. On audit, the IRS determined there was a deficiency because the taxpayer did not remit the self-employment taxes.
The “independent contractor” challenged the classification. The tax court found that he should have been properly classified as an employee, and therefore was not responsible for the (double) self-employment taxes.

CRITERIA ESTABLISHING INDEPENDENT CONTRACTOR STATUS
According to the IRS, the question of whether an individual is an independent contractor or an employee is determined upon both: a) consideration of the facts and b) application of the law and regulations (both state and federal) in a particular case.

Previously, IRS Revenue Ruling 87-41, more commonly known as the IRS Twenty Factor Test, was often used to determine what type of relationship existed. Although this ruling remains valid, the IRS has grouped the more relevant factors into three main categories:
1. Behavioral: An employer-employee relationship exists when the employer has the right to control and direct the worker not only as to the results to be accomplished but also as to the details and means by which the result is accomplished. The three indicators of financial control include financial investment of the contractor, opportunity for profit or loss, and method of payment. This includes factors such as a) when and where to do the work; b) what tools or equipment to use, c) degree of instruction; d) type of evaluation system; e) whether there is on-the-job training or ongoing training,
2. Financial: The three indicators of financial control include financial investment of the worker, opportunity for profit or loss, and method of payment. Are the business aspects of the worker’s job controlled by the company? These include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.
3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue for a long term, and is the work performed a key aspect of the business?

Here’s the IRS link for further explanation: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-Self-Employed-or-Employee

The criteria in these categories are many, nuanced and dependent on the specific fact situation. They are often difficult to apply. It’s advisable to consult with a knowledgeable labor/ employment attorney if you have any doubt about whether the individual is an employee or independent contractor.

ABOUT OUR LAW FIRM AND WORKSHOPS

Leslie Marell is a business and commercial law attorney with over 25 years of experience in business contracts, purchasing and sales law, technology law & day to day business legal matters. She heads her own Los Angeles firm which specializes in providing legal services to the manufacturing, industrial and high technology industries. For more information about the firm, click onto http://www.marell-lawfirm.com. If you’d like a complimentary consultation, call Leslie at 310.372.8663

In addition to her legal practice, Leslie has presented contracting and business law seminars and workshops throughout the country since 1990 to thousands of sales, marketing, and purchasing professionals. She has given in-house presentations to companies such as Applied Materials, Eastman Chemical, FMC, Goodrich, Hanes, Hewlett Packard, Hitachi Data Systems, John Deere, Northrop, Texaco, Unum Insurance, University of California, 3M, Unocal, and Verizon. She is a frequent speaker at the Institute of Supply Management International Conference, the Electronics’ Independent Sales Representative’s Association, Manufacturer Agents’ National Association (MANA), and local purchasing and sales trade associations.

Leslie’s workshops are a blend of lecture, dynamic coaching, and audience participation.  She brings her contract knowledge to the corporate classroom in lively and valuable workshops, translating “legal mumbo jumbo” into understandable, useful concepts in an entertaining way.

Leslie’s workshops will enhance your purchasing and sales organizations contracting and negotiating skills and ensure more effective contracts.

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Importing & Free Trade Agreements: What You Should Know

IMPORTING FROM A FOREIGN SUPPLIER

You are buying a product from a foreign supplier and will be importing the product into the US. You learn that the US has a free trade agreement (FTA) with that country. Under the FTA you can import the article free of duty. Properly done, your company can save money. However, what concerns should you address?

KNOW THE APPLICABLE FREE TRADE AGREEMENT (FTA)

The US has free trade agreements with many countries. The best known FTA is the North American Free Trade Agreement (NAFTA) with Canada and Mexico. There are other agreements in place with countries including Korea, Australia, Singapore, Israel and many other countries. All FTAs provide duty free entry for qualifying imports. However, all of the agreements also have many rules and requirements associated with imports and exports.

Example: A US company wants to import a product from Canada. The product would ordinarily take a duty of 5%. If it qualifies for NAFTA benefits the product is duty free. Should the US company pursue NAFTA benefits? If so, how do they determine whether the product qualifies?

Each FTA has its own rules, but there are many similarities between them. Most call for the importer to either obtain a certificate of origin from the producer or exporter (as with NAFTA), or provide a certification signed the importer that the article meets the rules of origin (as with the Australia and Korea FTAs). In the example above, the importer would need to require that their Canadian supplier provide a NAFTA Certificate of Origin. The importer would need to keep the certificate for 5 years and present it to US Customs on request.

CONSEQUENCES OF NON-COMPLIANCE 

US Customs & Border Protection (US Customs) takes a strict enforcement view of FTA claims. If an importer cannot produce the required certificate or certification on request it will – at a minimum – be subject to paying additional duties and fees. If the importer makes repetitive unsupported claims, it may be subject to stricter enforcement actions, such as an audit or assessment of a penalty for gross negligence. Under most FTAs US Customs also has the right to audit the foreign supplier that provided the certificate of origin or certification.

RECOMMENDATIONS

Our advice to importers contemplating claiming benefits under FTAs is:

  • Educate yourself on FTA eligibility and requirements. Many of these are found at the US Customs website: cbp.gov
  • Make it a purchase order requirement that the non-US supplier provide a certification or certificate of origin, depending on the FTA being claimed, and additional supporting documents as required.
  • Do not allow customs brokers to make automatic FTA claims (e.g., if a shipment comes from Canada or Mexico they automatically claim NAFTA benefits). Instead require that the customs broker may only claim FTA benefits if sufficient documentation is available to support the claim.
  • Keep all certificates or origin, certifications and other documents supporting FTA claims for five years from the date of import so they may be provided to US Customs on request.

Claiming FTA benefits is an easy way to save money, but it is also an easy way to get in trouble.

ABOUT OUR LAW FIRM AND WORKSHOPS

Leslie Marell is a business and commercial law attorney with over 25 years of experience in business contracts, purchasing and sales law, technology law & day to day business legal matters. She heads her own Los Angeles firm which specializes in providing legal services to the manufacturing, industrial and high technology industries. For more information about the firm, click onto http://www.marell-lawfirm.com. If you’d like a complimentary consultation, call Leslie at 310.372.8663

In addition to her legal practice, Leslie has presented contracting and business law seminars and workshops throughout the country since 1990 to thousands of sales, marketing, and purchasing professionals. She has given in-house presentations to companies such as Applied Materials, Eastman Chemical, FMC, Goodrich, Hanes, Hewlett Packard, Hitachi Data Systems, John Deere, Northrop, Texaco, Unum Insurance, University of California, 3M, Unocal, and Verizon. She is a frequent speaker at the Institute of Supply Management International Conference, the Electronics’ Independent Sales Representative’s Association, Manufacturer Agents’ National Association (MANA), and local purchasing and sales trade associations.

Leslie’s workshops are a blend of lecture, dynamic coaching, and audience participation.  She brings her contract knowledge to the corporate classroom in lively and valuable workshops, translating “legal mumbo jumbo” into understandable, useful concepts in an entertaining way.

Leslie’s workshops will enhance your purchasing and sales organizations contracting and negotiating skills and ensure more effective contracts.

 

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Understanding Intellectual Property Indemnity

INTELLECTUAL PROPERTY INDEMNIFICATION – A LICENSEE’S PERSPECTIVE

One provision that a customer, or Licensee, should look for in technology agreements is the intellectual property indemnification clause.  This is true whether obtaining a license for software or hardware, or professional services to create a product or process.

What is the purpose of IP Indemnity?  If a company (Licensee) acquires a license for a supplier’s (Licensor’s) intellectual property, like software for example, and a third party claims that the software infringes its copyright or patent, that third party will likely name the company as a defendant in a lawsuit.  This can be true even though the company merely obtained a license to the software and had no involvement in the design or development of it.

If a company is sued merely because it obtained a license to intellectual property, it is reasonable for the company to expect to be reimbursed by the Licensor for the cost of defending the suit and any damages awarded.  This is commonly referred to as intellectual property indemnification (IP Indemnity).

DEFINE AUTHORIZED USERS

A Licensee should look for IP Indemnity to provide protection against claims of infringement for anyone authorized to use the intellectual property, usually defined as Authorized Users.  The Licensee should consider who in the organization needs to use, access or benefit from the intellectual property and that the definition of Authorized User includes all potential users.  Does the Licensee’s organization include affiliated companies?  Does the organization use consultants?  If the IP Indemnity only provides protection to the “employees of Licensee,” the Licensor could refuse to cover claims involving such parties.  The Licensee should always ensure the definition of Authorized Users is: (1) broad enough to cover all potential users and, (2) that all Authorized Users are covered by IP Indemnity.

LOCATION OF AUTHORIZED USERS IS IMPORTANT

The language should provide for IP Indemnity wherever an Authorized User is licensed to use, access or benefit from the intellectual property.  In other words, if a Licensee has Authorized Users in multiple countries, then the IP Indemnity should cover more than just “Authorized Users located in the United States.”  If not, the Licensor may refuse to cover a claim of infringement in the country where the Licensee’s Authorized Users are located.  The Licensee should always request IP Indemnity at least as broad in geographic terms as the license granted.

ENSURE COVERAGE OF ALL TYPES OF IP

A Licensee should also ensure that the language provides protection for any claims of infringement of any type of intellectual property that the Licensee might encounter.  Does the technology contain something that may be patented, copyrighted, trademarked or that the Licensor considers a trade secret?  If the IP Indemnity only protects against a claim “of infringement of any patent” and the Licensee is facing a claim that its use of the intellectual property constitutes copyright infringement or trade secret misappropriation, the Licensee may be stuck paying the bill.  The Licensee should request IP Indemnity for all types of IP.

ENSURE REIMBURSEMENT OF ALL DAMAGES

A Licensee should also ensure that the language protects against all types of damages that occur due to claims of infringement.  Damages should include not just the damages awarded to the intellectual property owner, but the costs paid to the court or to the attorneys to defend such a claim.  If the Licensor’s language provides only for “indemnification from any damages finally awarded” some of the biggest costs, the attorney fees, are left out, leaving the Licensee to pay.

THERE SHOULD NOT BE A DOLLAR CAP

A Licensee should ensure that damages for any intellectual property indemnification claim are uncapped, meaning unlimited in dollar amount.  Frequently, the parties agree to a limitation of the Licensor’s liabilities that sets a cap at the value of the agreement, or some fraction or multiple of that.  This can create a problem for the Licensee if the amount paid for the license is a few thousand dollars, and the Licensee receives a claim of patent infringement.  Considering that the typical cost to defend a claim of infringement on a single patent is approximately five million dollars, the Licensee would find itself paying most of the defense cost.  There should be no cap on damages in the IP indemnity language itself.  If there is a Limitation of Liability clause, that clause should be written to exclude applicability to the IP indemnity clause.

INDEMNITY IS ONLY AS VALUABLE AS THE COMPANY STANDING BEHIND IT

The Licensee should always consider the Licensor’s ability to pay an infringement claim.  What if the Licensor is a small startup with little capital and barely enough cash flows to meet its payroll?  If the Licensor has insurance to cover such claims, then the Licensee has assurances that the Licensor will be financially able to stand behind its IP Indemnity obligation.  If not, the Licensee may find itself footing the bill.  The Licensee should always request insurance.

FINAL NOTE

It is appropriate for a Licensee to expect protection for any intellectual property that it licenses. However, it is unrealistic to expect IP Indemnity for any modifications, or combinations, the Licensee makes to, or with, the licensed intellectual property.  Licensors will usually refuse to cover such modifications or combinations of their intellectual property with that of others.  One caveat, however:  No technology exists, or can be effective, in complete isolation.  Therefore, a Licensee should request that such combinations or modifications still be covered by the IP Indemnity clause if such modifications or combinations: i) are described in the Licensor’s documentation or ii) have been discussed and approved by the Licensor.

About Our Law Firm and Contracting Workshops

Leslie Marell is a business and commercial law attorney with over 25 years of experience in business contracts, purchasing and sales law, technology law & day to day business legal matters. She heads her own Los Angeles firm which specializes in providing legal services to the manufacturing, industrial and high technology industries.

In addition to her legal practice, Leslie has presented contracting and business law seminars and workshops throughout the country since 1990 to thousands of sales, marketing, and purchasing professionals. She has given in-house presentations to companies such as Applied Materials, Eastman Chemical, FMC, Goodrich, Hanes, Hewlett Packard, Hitachi Data Systems, John Deere, Northrop, Texaco, Unum Insurance, University of California, 3M, Unocal, and Verizon. She is a frequent speaker at the Institute of Supply Management International Conference, the Electronics’ Independent Sales Representative’s Association, Manufacturer Agents’ National Association (MANA), and local purchasing and sales trade associations.

Leslie’s workshops are a blend of lecture, dynamic coaching, and audience participation.  She brings her contract knowledge to the corporate classroom in lively and valuable workshops, translating “legal mumbo jumbo” into understandable, useful concepts in an entertaining way.

Leslie’s workshops will enhance your purchasing and sales organizations contracting and negotiating skills and ensure more effective contracts.