Prior Art Discussion

Week 5 Discussion: Prior Art

For this discussion, we will be focusing on the relationship between contract law and intellectual property law. Read through the assigned chapters for this week in a Manager’s Guide to IT Law. The reading provides an overview of the process of writing a contract. Sometimes when it comes to intellectual property ownership of a produced work may be split between multiple entities in proportion to their contribution towards the work. The “work” can be any type of patent or
In the scenario for this discussion, you will be reviewing a sample intellectual property contract between a university employee and the university regarding ownership and rights of an intellectual-property work. The contract lays out four different types of scenarios regarding how the work was created and you are asked to fill in the blanks for each scenario regarding who and how the work should be owned. In particular, read through the contract and focus on the yellow highlighted portion in each section and answer how you would fill in the blank.

1.      Independent Work
a.       ____ year(s) following the termination of Creator’s employment with the University.
2.      Work Created with Minimal University Support
a.       ____ year(s) following the termination of Creator’s employment with the University.
b.      During employment, ownership equity of the Work shall be shared between the University and the Creator with ___% possessed by the Creator and ___% possessed by the University
3.      Work Created with Substantial University Support
a.       In exchange for the substantial support provided by the University it is understood and agreed that the University and Creator shall share equally in the ownership of such Work for a period of ___ years.
4.      Work Commissioned by the University: (pick one)
a.       (___) 100% ownership and equity to the University for the life of the copyright or patent protection provided by law, or:
b.       (___) ____% ownership and equity to the University and ___% ownership and equity to the Creator for ___________ (period of time).

After filling in the blanks to describe how you would divide up the work and for how long in each scenario explain why chose to divide it up in the way that you did. In your two responses to your peers, respond to your peer’s analysis and response, and discuss how they are both similar and different from yours. Follow up with your own post regarding the same.

A Manager’s Guide to IT Law, Second Edition

Chapter 1 – IT Contracts

Chapter 1: IT Contracts

Jeremy Holt

This chapter outlines the contents of a contract and lists the matters that should be covered by different types of contract. If you do not have time to read all of the chapter, the appendix to this chapter lists the main points that you should consider.

INTRODUCTION

Pity the unfortunate manager. It has been bad enough trying to get the computer project organised. Now, possibly at the last moment, the contracts have arrived, some with print small enough to make the reader go blind. The manager suspects (rightly) that these contracts are one-sided in favour of the supplier, but knows that the project will only proceed if those contracts (or something similar) are signed. How does the manager work out what needs to be done and from whom advice can be obtained? This chapter provides a practical framework of help in this situation. If you are looking for an academic guide to computer contracts, you must look elsewhere.

PARTS OF A CONTRACT

The first point to consider is the form that contracts normally take. At its simplest a contract consists of:

• •

• • • •

the date on which the contract was entered into;
the names and addresses of those entering into the contract; a short description of what the contract is about (generally entitled ‘Background’, ‘Recitals’ or even, regrettably, ‘Whereas’);
definitions of terms used in the contract;
what the supplier is going to do for you;
what you must do for the supplier;
what you must pay the supplier.

Do not
to do for you and what you are expected to pay. Standard terms that are not specific to this individual contract (what lawyers call ‘boilerplate’) are generally grouped together at the end of the contract. A list of the more important boilerplate clauses is shown in the box.

IMPORTANT BOILERPLATE TERMS

Force Majeure – this says that neither party shall be liable for any failure to perform the contract because of circumstances beyond its control such as an Act of God, fire, flood etc. This is likely to be invoked by the supplier more than the client. This clause effectively absolves the supplier from responsibility, so the

forget we are engaged in contract first aid here. If all else fails, concentrate on what the supplier is going

 

circumstances in which it can be invoked should be checked carefully to ensure that they are no wider than is reasonable.

Entire Agreement – this says that the entire agreement between the parties is set out in the written

WHO ARE YOU GOING TO CALL?

You are not going to be able to do all this on your own. You are going to need professional advice. Computer law is a specialist area, and a rapidly changing one (it did not even exist as a field of legal practice 25 years ago). The correct advice from a lawyer experienced in this field can save a great deal of trouble later. The function of a good lawyer is to assess risk, help the client to understand the level of risk and then reduce it.

There are two directories of lawyers that you might like to consult: Chambers’ Guide to the Legal Profession and The Legal 500. New versions are published each year and each has sections on lawyers who specialise in computer law (sometimes called ‘information technology law’). These two books can generally be found in the reference section of a public library, and can also be searched without charge on the web. Alternatively, you can ring the Law Society or the Society for Computers and Law for suggestions of lawyers who work in this field and who could help you.

CHECKING OUT THE SUPPLIER

It may seem like an obvious point but make sure that you know who you are dealing with. This will mean, at least, doing a company search. A credit check would do no harm. As the Army maxim has it ‘time spent on reconnaissance is seldom wasted’. If you discover that the supplier company was set up last year and has an issued capital of £1 you may like to consider asking for a guarantee of the contract from a more substantial body. Business is not all about making a rational decision on paper. Do you get good vibes from the supplier? On small things, do they do what they say that they will do? If, for whatever reason, you do not trust them, do not go ahead with the contract under any circumstances because this will only lead to worry and tears later.

LETTER OF INTENT

The supplier may ask for a letter of intent from you because it may need to start work on your project before contracts are signed, and because the negotiation and agreement of the contract terms may take a little while. Alternatively, you may like to suggest one so that you are not pressurised into signing the contracts before you have gone through them properly. A letter of intent is no more than written confirmation from you of your intention to enter into a contract with the supplier. What is critical, however, is that the letter of intent from you to the supplier must contain a statement that the letter is not intended to be contractually binding, otherwise you may unwittingly enter into a contract earlier than you intended. Where there is a non-binding letter of intent and the supplier, at your request and to save time, starts work on the project, it is reasonable for the supplier to ask to be paid for this initial work carried out regardless of whether the project proceeds or not. There are two important matters to agree. The first is the rate for the job (e.g. a daily rate – work normally starts under a letter of intent on a time and materials basis; the definitive contract may include a fixed price for a specified deliverable). The other is an overall cap on your liability to the supplier for this work. This obligation to pay the supplier should be contractually binding (unlike the rest of the letter of intent).

THE SUPPLIER’S TERMS

There is, of course, no obligation on you to accept that you will purchase a new computer system on the basis of the supplier’s terms.

You could propose your own terms entirely – this is certainly an approach taken by large organisations with extensive experience of computer contracts. However, it is generally better to use the supplier’s contract terms (unless they are completely unreasonable) as a start and amend them to your satisfaction. It is a good idea to ask for the supplier’s proposed terms at as early a stage as possible. Do not wait until you have told them that they have been awarded the contract.

WHAT CONTRACTS ARE THERE LIKELY TO BE?

Any computer system will require the purchase of hardware (e.g. servers, PCs, printers etc.), software (the application software and the operating system software) and services (such as support and maintenance). When computers first started to be widely and routinely used in business life about 30 years ago the emphasis was very much on the hardware, which was comparatively unreliable. Nowadays the emphasis is much more on the software and services. It is normal to decide upon the software first and then to choose the appropriate hardware. If the contract relates to the procurement of a new system, the reader is referred to Chapter 2. The rest of this chapter deals with the purchase or licence of individual services or components.

Contracts for Consultancy Services

Long before the order for a new system is placed, the client may enter into a consultancy contract, perhaps relating to a feasibility study, analysing requirements, recommending a system to meet those requirements, helping select the appropriate suppliers, or assisting with preparation of an invitation to tender. A large part of the work carried out in the computer industry is under consultancy contracts. The client may need help on a one-off basis or require skills that do not exist within the client’s workforce, so there is a need for an outside consultant to carry out the work. Sometimes the consultancy arrangement is dealt with by means of an exchange of letters; a formal consultancy agreement, however, is a better option for both parties.

• Defining the deliverables One of the most important issues that must be dealt with in such a contract is a detailed description of what the consultant is expected to do. If the description is loose or inexact, this can give rise to differences between what the client is expecting to receive and what the consultant is expecting to deliver. This can, predictably, lead to disputes. So defining the nature and quality of the deliverable is particularly important.
• Payment arrangements The payment to the consultant by the client may be on a time and materials, fixed price or estimated maximum price basis. It is an aspect of consultancy that the amount of work required will be uncertain. The disadvantage of a fixed price payment mechanism (as with any other contract) is that the consultant will inevitably include a contingency element in the price quoted. If the consultancy can be broken down into a series of stages, payment against milestones will allow each party to gauge how the work is going.
• Copyright and confidentiality Copyright will almost always be an issue. Broadly speaking, there is a simple choice as to how the parties deal with ownership of copyright in the consultant’s work. Either the consultant can assign to the client all intellectual property rights in whatever is produced (provided that the consultant has been fully paid) or the consultant can grant a perpetual licence to the client to use such intellectual property rights for the purposes of the client’s business (see Chapter 4 for more details). It goes almost without saying that the consultant should be obliged to keep confidential any information given by the client about its business. It is important to note that if there is no agreement with a

 

consultant about copyright the client does not automatically get ownership of such copyright. It stays with the consultant (although there may also be an implied licence for use of the copyright by the client).

The problem is that once a consultant has carried out an assignment for one client in an industry, the consultant may be ideally placed to carry out assignments for other clients within that same industry. Sometimes, therefore, clients go further and stipulate in the contract that not only must their own information be kept confidential, but also that the consultant must agree not to carry out projects for the client’s competitors for a period (perhaps a year) after the work is completed.

• Insurance In order to provide peace of mind to the client, the client may require the consultant to take out professional indemnity insurance. This is still relatively inexpensive because, in practice, it is rare for claims to be made under such policies.
• Key personnel The client will want to know the identity of the staff who the consultant will be using to carry out the work. It is normal for the client to be able to veto any staff members of whom they disapprove for whatever reason.The client will want to retain the right to terminate the consultancy contract if the consultant is guilty of serious misconduct or any other conduct likely to bring the client into disrepute.Contracts for Hardware PurchaseComputer hardware is much more reliable than it used to be, so contracts for the supply of hardware are not generally contentious. A hardware purchase contract requires the following details:
• A detailed description of the hardware (this is likely to be in a schedule).
• A warranty about the quality of hardware (normally this warranty applies for a year after acceptance ofthe hardware by the client).
• Delivery dates.
• Price.
• Acceptance testing.
• Future maintenance.
• Training.Problems can arise if the hardware is not large enough for anticipated demand, and with the integration of hardware (such as servers and printers), which may have been supplied by different suppliers. In many cases the cost of the hardware is not a large percentage of the total system cost. Profit margins on hardware are relatively low, so the software supplier may be relaxed about whether the client obtains the hardware from the software supplier or from a third-party supplier. It is always worth asking the software supplier to quote for supplying the hardware because they may have better bargaining power than you would have on your own. At the end of the day, the two most important matters in a contract for hardware are to check that there is an exact description of what you are buying and that there is an obligation on the supplier to repair or replace it if it does not work properly.Contracts for Hardware MaintenanceHardware maintenance is more of a commodity than software maintenance and there are likely to be more alternative suppliers for the maintenance of hardware (and so prices are keener). There are two different types

of hardware maintenance: preventive maintenance and corrective maintenance. Preventive maintenance covers the regular testing of the hardware (e.g. once every six months) before any problem is reported. Corrective maintenance deals with faults as and when they arise, normally in response to a service call from the client. With corrective maintenance the key element is the response time: how quickly will the supplier start to respond to the problem once it is reported? This is generally within a fixed number of working hours. For example, an engineer may have to arrive at the site no more than eight working hours after the problem has been reported by the client. This does not mean that the engineer will solve the problem within eight hours, merely that a start will be made to try to solve it. Sometimes online diagnosis is used: the client’s hardware is linked by telecommunications to the supplier who can solve the fault at a distance. (The impetus for online diagnosis came from the USA where the distances were so great it was often not practicable to send an engineer in person.) Payment for hardware maintenance is generally made in advance on a monthly or quarterly basis. The annual amount varies but can often be between 10 per cent and 15 per cent of the list price of the hardware. Other points that will normally be covered in a hardware maintenance contract include a right for the supplier to:

• make an additional charge for frivolous or unnecessary call outs;
• increase the charges from time to time, perhaps in accordance with a recognised index (such as theConsumer Price Index); and
• refuse to cover equipment that is more than five years old or which is past its reasonable working life.The client will be under an obligation to:
• pay for corrections that are not caused by the equipment itself (e.g. faults arising from electrical fluctuations);
• notify the supplier of problems promptly after they arise (so that time does not make them worse); and
• allow the supplier reasonable access to the equipment.Contracts for Software LicencesAt its simplest, any contract for software should allow you to use the software in the way that you envisaged without the risk that anyone can come along later and say either that you can not use it any more or that you have got to pay more money. It follows, therefore, that one of the first checks that you should do is to confirm that the software supplier either owns the copyright in the software or has the right to license it to you. It is a feature of the computer industry that software is often licensed to end-users by organisations other than the actual owner (for example it may be sub-licensed by a distributor or channel partner). You should not put up with oblique answers to your demand for evidence that the supplier can license the software to you. They should be able to produce it immediately.At this point you may wonder why a licence agreement is necessary at all. Why can the supplier not simply sell you the software? The supplier is not actually selling you ownership of the software (because they would like to continue to license it to other people). The licence is only a permit for you to use the software for your own purposes. This leads onto the next important point. You must check in the licence agreement to whom the software is licensed and for what purpose. Is the software to be licensed to your particular company or can it be used by the whole of your group (in which case the software supplier will want more money)? Alternatively, is the software to be restricted to a limited number of users and, if more than that number use it, then do you have to pay an additional licence fee? This is one of the oldest tricks in the software supplier’s book. They allow the client to sign up for a very limited number of users and then the supplier makes a considerable profit from the

additional users who will almost inevitably be required by the client later. The supplier, of course, responds that this simply reflects the extra use (and, as a result, commercial benefit) that the client is making of the software.

It is also possible that at some time in the future the client may want to outsource its computer operations (see Chapter 6). Consequently, provision for the transfer of the licence from the client to an outsourcing company should be made in the original software licence agreement.

Contracts for Software Maintenance

No software of any complexity is ever free from errors. The older the system the more likely that it will need maintenance. Furthermore, if a system is installed in a rush (e.g. to meet a particular deadline), then it is likely not to have been tested properly and so require more attention after it has been installed. In some ways, future charges for maintenance are the icing on the cake for software developers. If they can generate sufficiently wide sales of the software, then support fees can be guaranteed for years to come. It is important for managers to be aware of this as three-quarters of a budget for software may be for future software maintenance. The client is well advised to check how wide the maintenance supplier’s client base is (the wider the better) and to look at the offices from which the supplier will be providing the support (and how many people will be providing such support). The maintenance contract will almost certainly be prepared by the supplier. Some of the most common provisions are discussed below.

• Charging arrangements – Sometimes the cost of the software licence is bundled with the first year’s maintenance charges. One interesting point is from when the support charges should run. Some clients argue that they should start from the end of the warranty period for the software. However, it is now generally accepted that they should begin from acceptance of the system because warranty and support are separate matters.
• Scope of maintenance services – Maintenance or support will normally cover the investigation by the supplier of errors in the system reported by the client as well as updated documentation and telephone or, more frequently nowadays, online advice. It will, in most cases, cover updates to the software (but not necessarily new versions of the software). The client may want to categorise different kinds of problems into those that could be critical for its business and those that are no more than an irritation and could be dealt with next time a new version of the software comes out. The supplier’s response time will be different depending on the severity of the problem. The supplier will not normally commit to a fix within a particular period, only that they will start to fix it within a particular time.
• Exclusions from scope – The maintenance supplier will also be keen to list in the contract what maintenance does not cover. Most of these exceptions are reasonable. They generally include problems arising from changes to the software made by people other than the supplier, incorrect use of the software by the client or events beyond the control of the maintenance supplier such as hardware failure, fluctuation of electrical supplies or accidents. Normally, the maintenance supplier will still seek to help the client where the exceptions apply (indeed there should be a contractual obligation to do so). However, the supplier may want to make an additional charge for such work and will not guarantee any particular recovery time. From the supplier’s point of view it becomes difficult to manage support if the client base is using a number of different versions of the software. Consequently, the supplier normally restricts support to the latest two versions of the software and will refuse to support earlier versions.
• Charge increases – The client will want to ensure that the maintenance charges will not rocket up. One means of doing this is to tie the maintenance charges to a percentage of the list price of the software (e.g. 10–15 per cent), but of course the supplier has control over the list price. Alternatively, any increase in maintenance charges can be tied to a recognised index. Clients sometimes suggest the Consumer Price

Index. However, suppliers (who know that increases in salaries are generally greater than increases in retail prices) prefer to tie them to an earnings index. There is some logic in this because the bulk of the supplier’s expenses are salaries.

• Payment arrangements – Payment is almost invariably made in advance. In the past, it was for a year, but now it is more commonly paid three months or a month in advance. This is so that if the supplier goes into liquidation the client will not have overpaid very much and the client can also swiftly withhold the payment of maintenance charges if there is a problem with the service provided.
• Termination – It is important for the client to look at the termination clauses of the contract offered by the supplier. The client will want to know how much notice they have to give to end the maintenance contract. This is often three or six months. It is a good idea for the client to ask the supplier to commit on its part to supply maintenance (if the client wants it) for the potential life of the software (e.g. five years).Contracts for Software DevelopmentSoftware will often need to be customised for the client by the supplier. However, this is really only a tinkering with the main programs. In certain circumstances, it may be necessary for the client to commission new software because there is no existing software that meets the client’s needs. Contracts for software development are complex and it is wise for the client to seek professional advice both about the specification for the software and the contract under which the software will be written. This is all the more important because software development projects have a reputation for taking longer, and for costing more, than originally forecast. Consequently background research by the client into the proposed supplier is particularly worthwhile. Pricing for the project will be either fixed price or time and materials. Payments will normally be made conditional upon project milestones being reached. The client will seek to ensure the quality of the software product delivered by the supplier by requiring acceptance tests of the software and a warranty from the supplier that the product will be in accordance with the agreed specification. A thorny question is whether the client should own the copyright in the software program produced. At first glance, it might be thought that this should obviously belong to the client who has paid for it. However, all the client needs is to use the software; the client needs neither to own it nor to develop it further. There is a benefit to the client in the supplier having an incentive to carry out further development of the software program and license it to other clients. The original client does not then pay the total cost of all the subsequent fixes and has the benefit of the faults reported by other users. If the supplier becomes insolvent, then the client needs access to the source code of the software in order to maintain it. For this reason the client should require the supplier to put a copy of such source code in escrow with an independent third party so that it is available if required (see Chapter 5). The supplier will normally provide a warranty that defects in the software reported within a particular length of time after the start of its use will be rectified. This is frequently 90 days after acceptance of the software by the client.Service Level AgreementsService level agreements (SLAs) are critical to the computer industry, but they are rarely fully understood. Under an SLA, a supplier undertakes to supply a service to a client at a particular level.Perhaps because so few lawyers have a reasonable working knowledge of the computer industry, SLAs are often drawn up by the participants without legal advice.A service level agreement should cover the following:

• The service required (i.e. what the client wants and what the supplier is prepared to commit to supply).
• Quality standards (i.e. the standards or levels the supplier must achieve), such as host/terminal responsetimes, batch processing times, ‘uptime’ or processor availability, by specifying what? when? how? andby whom?
• Deliverables (e.g. regular reports).
• The consequences of failing to meet service procedures or standards (e.g. compensation in the form ofservice credits).
• Procedures for the client to monitor performance of obligations by the supplier.
• Procedures for change control (i.e. changing part of the service that is being provided by the supplierunder the agreement).
• Terms dealing with access to, and security of, the client’s site and data.
• A procedure for disaster recovery (either upon a system failure or a catastrophe).
• The agreed frequency of meetings between the client and the supplier to review the supplier’sperformance of the agreement, properly minuted with subsequent action plans and awards of priority.Ideally, an SLA should be a self-enforcing agreement within a continuing relationship. There should be no need for either side to litigate and changes required should be dealt with through a change control procedure. In some ways, the process of creating the SLA is as valuable as the agreement itself. SLAs can be between different businesses or between different parts of the same organisation (such as the IT department and its users). Facilities Management Agreements, Software Maintenance Agreements and Managed Data Network Agreements are all examples of SLAs. Alternatively, the SLA may be one aspect of a larger agreement for services, that is it may be the schedule that stipulates how well the services have to be provided and what happens if the supplier does not provide this.What Form should a Service Level Agreement Take?At its weakest, an SLA may be a simple oral understanding, documented by an exchange of letters. The best form is a formal legal agreement with the technical procedures and specifications annexed as separate schedules.What Happens if the Terms of a Service Level Agreement are Broken?If the breach is fundamental, the party not in breach will be entitled to terminate the agreement and sue for the loss suffered as a result of the breach. In other circumstances there will be a system for measuring breach and apportioning cost. These systems range from an event-based system (i.e. if… then…) to a more sophisticated system of ‘failure points’ (i.e. if there are more than five examples of… then…). The functions of such compensation systems vary from simply drawing attention to a problem to compensation for loss. Compensation for loss is difficult to quantify and, if it is excessive, will be
  

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