Technology in the UK is booming. According to London and Partners, London technology firms secured more than $1.35 billion in venture capital financing during 2014. Research from Dow Jones reported that UK startups received 25 per cent of all European equity funding deals in the first quarter of 2015.
With the financial winds at their backs, many UK startups are considering expanding their business to the US. Whether or not actually on the ground in the US, UK technology companies looking stateside will need to deal with US contracts that may contain unfamiliar terms and concepts.
This article addresses five pitfalls UK companies should avoid when entering into technology contracts with US-based companies. These risks can be mitigated, but only if your company is sensitive to them during negotiations.
All US laws are not created equal
Although for simplicity’s sake this article will refer to “US law,” for the most part there is no single body of US contract law. Rather, each of the 50 US states has its own contract law, and your US partner likely will insist that the contract be governed by the laws of a US state with which that company is familiar. The larger US commercial centers, such as the states of New York and California, tend to have better-developed contract laws.
The contract laws of the various states generally adhere to common themes, but each state’s laws have their own idiosyncracies. For example, New York state law allows parties to select New York law to govern commercial contracts that bear no relation to New York, but only if the contract is worth more than $250,000.
As another example, California state law offers broad protection to technology developers, in some circumstances interpreting IP transfer language in a manner that recognises a potentially unintended employment relationship between California technology developers and companies commissioning technology development.
Indemnification is expected
US commercial litigation is relatively common, in part because unsuccessful US litigants usually are not required to pay the prevailing party’s legal costs. Accordingly, there is a particular focus in US contracts on obtaining financial protection against litigation claims.
When contracting with a US company, your company most likely will be asked to defend the US company against certain types of claims and indemnify it for related losses. Common topics for indemnification include breach of confidentiality obligations, violations of law, damage to property, and personal injury.
Indemnification for intellectual property infringement claims asserted by third parties is a key provision in technology contracts, as US intellectual property litigation is particularly widespread and costly. Technology recipients typically will ask for an IP infringement indemnity from their providers, but the provider may seek to limit, eliminate or even reverse the indemnity obligation when the alleged infringement was the recipient’s fault (such as where the alleged infringement was caused by the recipient’s unauthorised use or modifications of the provider’s technology, the recipient’s failure to implement a work-around, or the provider’s compliance with recipient’s instructions).
Ensure appropriate confidentiality protection
US laws governing confidentiality obligations can be tricky. Your company should carefully consider the ramifications of any proposed limit on the duration of your partner’s obligation to protect your valuable confidential and proprietary information (characterised as “trade secrets” under US law).
Trade secret protection exists indefinitely under US law unless the information is disclosed without a duty of confidentiality or independently discovered; the long-secret Coca-Cola formula is perhaps the best-known example. Agreeing to term-limited confidentiality obligations for your company’s trade secrets creates a significant risk that your company will lose the ability to protect the information.
Beware joint ownership
Joint ownership of technology commonly is viewed as an efficient way to avoid difficult negotiations over intellectual property rights. However, joint ownership can result in uncertainty at best and, at worst, hinder your company’s ability to use and commercialise the jointly-owned technology.
The rules of joint ownership vary not only among the different types of intellectual property (e.g., patents, copyrights, trade secrets and trademarks), but also among various countries. Under US law, each joint copyright owner may commercialise the copyrighted work without the other joint owners’ consent, but must account for licensing royalties received and may not destroy the value of the work. This is different than English law, which states that joint copyright owners cannot exploit their rights in the work without the other joint owners’ consent. It also is different than the US rule on joint patent ownership, which is that joint patent owners have no duty to account to the other joint owners for licensing royalties.
Joint owners can agree to modify these rules in their contract, but they likely will apply by default if the contract specifies without further elaboration that the parties are “joint owners” of developed technology.
Use the present tense
Language intended to assign rights to your company should reflect a present transfer of rights (e.g., the counterparty “hereby assigns” its rights), not a future promise to transfer (e.g., “will assign” or “agrees to assign”). Under the latter formulation, your US partner’s failure to deliver the promised assignment may result in a breach of contract claim, but not necessarily ownership of the relevant IP rights.
This distinction figured prominently in a case recently decided by the US Supreme Court, which found that the “agree to assign” language was merely a promise to assign – a promise that the inventor could not keep due to his subsequent present assignment of rights to a competitor. Although this is clearly a worst-case scenario, it highlights the importance of drafting the transfer of rights in a manner that will withstand scrutiny under US law.
Business moves quickly in the digital age, and there is understandable reluctance to potentially lose a deal crucial to US expansion due to an excess of caution over legal terms.
However, as the saying goes, an ounce of prevention is worth a pound of cure. Having a qualified US technology lawyer conduct at least a brief review of your company’s agreement ultimately can make all the difference.