Sunday, December 30, 2012

Intellectual Property Infringement Remedies

Frequently there may be a number of remedies for intellectual property infringement that get negotiated in addition to the intellectual property infringement.
a. Obtain the right the use Procure a license to use the Intellectual Property.
b. Modify their product or service so it is non-infringing.
c. Replace the product or service with non-infringing products or service.
d. Allow cancellation of open orders without liability.
e. Refund the amount paid for any all inventories of infringing product.

The key issue in negotiating these remedies is cost. For the supplier, the lower the remedy they have to provide on the list normally represent a lower cost to them. As such they may want the right to pick which remedy they want or they may want to limit their potential cost further by placing a limit on their liability or decreasing the amount they have to pay. For example, they may want to pay a refund on a depreciated basis taking into account the buyer’s use of the item. For the buyer the lower the remedy is on the list the higher the buyer’s potential cost. Obtaining the right to use the infringing item costs the buyer nothing. Modifying the product or service, even if the supplier came to the buyer or buyer’s customers location, has a cost in that you will lose the use of the item while it is being modified. If it needed to be returned for rework the costs go up substantially. Replacing a product or service with a non-infringing one can have a cost, especially if you had the item integrated with other products or software which now need to be compatible with the new item. The ability to cancel open orders without liability can have a cost as you purchased the item for a specific need and now that need may not be met or it could take some time and have losses as a result. For example it you had a single sourced item that was determined to be infringing cancellation doesn’t provide you with the product or service you need and it could require you to re-design your product to use another company’s product. Providing you with a full refund of the price you paid may not make you whole, especially if you invested money to integrate that product. For example, if you license a piece of software and then developed additional software to fully integrate it into your systems and have it play with other software, getting a refund of the license price doesn’t compensate you for those other investments.

As a buyer if you weren’t the cause for the infringement, why should you be forced to pay more because of it? As a buyer, you want to either limit the remedies to only those that are acceptable to you or better yet, require the supplier to perform the first remedy they can perform. I’ve seen language that said that the “Supplier shall provide first of the following remedies that is practicable. "Practicable" means able to be done, used or put into practice successfully). In establishing that, the supplier would need to be able to show that what are higher cost remedies for them couldn’t be done before moving down the list to provide another remedy that may have a cost for the buyer.

Monday, December 17, 2012


If you purchase items for resale, most of the time you will require certain certifications apply to the item you purchase. Certifications are to show compliance with specific laws or standards such as safety or environmental standards. Laws or standards are enacted by countries and other governmental agencies and will vary based upon the type of product or service being sold. For example, medical products are required to meet more stringent requirements than non-medical. Products intended for use by children have higher safety standard than products for adults. Standards may address the raw materials used, such as RoHS that requires certain material may not be used in products because of the environmental impact of their disposal after the product’s useful life. They may control the processes used, or the materials used in processing that are ultimately are retained on the product. Many standards address the product’s safety. Recently standards have begun to address how the product will react with the environment it operates in. For example telecommunications products have certain standards they must comply with to be used in certain countries telecommunications systems, and there are Bluetooth standards.

For compliance there are a number of organizations that publish standards:
IEC (International Electrotechnical Commission)
ISO (International Standards Organization)
CEN (European Committee for Standardization)
CENELEC (International Standards and Conformity Assessment for all electrical, electronic and related technologies)
AAMI (Association for the Advancement of Medical Instrumentation)
ANSI (American National Standards Institute)
ASTM (American Society for Testing and Materials)
NFPA (National Fire Protection Association)
FCC (Federal Communications Commission)
UL (Underwriters Laboratories)
BSI (British Standards Institute)
CSA (Canadian Standards Association)
JSA (Japanese Standards Association)
SAC (Standards Administration of China)
VDE (German Standards)

The U.S. Department of Commerce also publishes a list of standards by country at the following website:
NIST – Standards & Technical Regulations

UL , CSA, VDE, IECEE CB, TUV SUD (America), and TUV Rheinland all maintain certification databases.

There are a number of different companies and organization that provide listing of certifications. For example, Underwriter’s Laboratory issues standards, does certification testing and maintains a database of both UL listed and UL Certified products. A U.L. Listed product is one that has not gone through certification testing whereas U.L Certified has been tested for compliance. U.L has some 62 logos that are used to identify what they have been listed or tested against.

From a contracts perspective, why are certifications important? First, in many situations the failure to meet the applicable an applicable law or standard will prevent the importation or use of a product that is not in compliance. In some situations a certification may be required to show compliance with other laws. For example U.S. OSHA laws require safe materials and products be used by workers. Certifications are use by Suppliers for marketing purposes showing compliance or meeting certain quality requirements such as ISO Quality standards. Buyers may view them as an indication of potential quality in the supplier’s operation. One of the most important aspect of certifications is the management of potential liability. In the event of personal injury or property damage anyone in the sales chain may be sued. In determining whether a company has been negligent, part of the defense would be what the party has done to manage against the potential risk. That helps identify if they were negligent or the degree of their negligence. If the party did nothing, that inaction may make them liable. If a company relied on a supplier representation or warranty of compliance they may have an action against the supplier, but could still be liable to the third party for not doing enough. If the company required independent certification by an accredited agency, that action may show they took reasonable steps to prevent it the injury or damage and were not negligent. What you get as a logo or commitment can make the difference. For example, buying something that has a “U.L. Listed” code shows you provide a lesser standard of care than if you purchased a product that was “U.L. Certified” meaning it underwent testing for the specific certification.

In situations where the government could levy fines for violating certain requirements such as compliance with RoHS environmental requirements, the fact that you had something certified for compliance may not help you avoid the fine. In those situations your recourse would be to claim those fines as damages you sustained for breach of the contract requirement by supplier.

If you write contracts that commonly include requirements that suppliers must meet certain requirements or certifications, get a copy of those documents and read them so you understand what is being required.

Friday, December 14, 2012

Flow-down clauses

In many contracts where the ultimate customer is the government, there are requirements that the prime contractor flow specific clauses down to lower tier contractors and suppliers. There are three basic approaches to
doing flow-downs:

1. Use an omnibus clause that says that everything that should flow down flows down.
2. Use an omnibus clause, but make changes to those that apply to that subcontractor.
3. Prepare a list of all the specific clauses that must be met and incorporate that by reference into the subcontract.
In each of these approaches you also need to address the subcontractor’s responsibility to flow those requirements down to lower tier subcontractors and suppliers.

Omnibus clauses are much simpler to write and are less time consuming to do, but they basically require disclosure of the prime contract to the sub and lower tiers so they are aware of what they are agreeing to. Omnibus clauses with changes also require disclosure of the prime contract and may become a problem in negotiating where the subcontractor may want more of the subcontract terms to be the same as the prime has. My preference is to only flow down the specific required provisions.

While you have a contractual requirement to flow down clauses, you still need to do what is best for your company. If there is a problem the government doesn’t care who caused the problem, their contract is with the prime contractor. As such, the prime needs to both meet the flow down requirements, but also protect themselves against potential problems with the subcontractors. I don’t want a blanket flow down of provisions as I may have something in the prime contract that I would not want to be disclosed to them and have the subcontractor want those terms to be extended to them. I may also want to impose stricter controls or requirements on the subcontractor than are required by the prime contract as my way of managing against potential risks with the subcontractors. In flowing them down, I may also want to establish the government requirements as minimum requirements that must be met. That allows the subcontractor to be able to establish more stricter controls or requirements with their lower tier suppliers or contractors if that is needed.

When you do a blanket flow down of the prime contract terms, or flow down only specific terms, you need to make sure that you do not have conflicts between your terms and the required flow-down terms and also establish a precedence in the event of a conflict. Since you are required to flow-down the required terms the precedence in the event of a conflict shouldn’t be based on the writer. If you gave precedence to your terms and the conflicting term was less than what was required to be flowed-down you would not have met your prime contract obligation.

If you always gave precedence to the flow-down that would override any stricter requirements you may have in your terms. In this case precedence should be given to the term that has the strictest requirement of the conflicting terms. That way if the flow-down term has the strictest requirement, it applies. If your terms are stricter than the flow-down term, they apply.

Monday, December 10, 2012

Understand the real cost.

Many times in a negotiation you may need to decide either to what level you want to negotiate the final price or when a price change should be effective. When that occurs always consider the real cost. What I mean by the real cost is how much more or less will you pay based upon the amount you agree based upon the volume of purchases that will occur. For example one cent (US$.01) may not seem to be a lot of money until you multiple that times the volume that you will be purchasing. If over the period of the contract the volume will be two million units that one cent difference means 2,000,000 x .01 = $20,000.00. While you may not be concerned about a penny, those pennies can add up to amounts that you should be concerned about. For high volume purchases its not uncommon for a buyer to want to negotiate a price down to the mils (1/100 of a cent) so when it’s extended over the volume you buy, you have the lowest real cost.

I can remember a commodity manager who negotiated a price reduction on an item of one dollar and she thought she did a great job. The problem was she negotiated the cost reduction to take effect one fiscal quarter later and didn’t understand the real cost in agreeing to do that. The manager knew that the quarterly volume was 200,000 units so with the agreement to take effect three months in the future it cost $200,000.

There is a real cost with many other contract terms than just price. For example you want a one year warranty on a piece of software you want to license. The supplier only wants to provide your with ninety days warranty. What’s the real cost of that? In effect what that would do is force you to purchase maintenance after the ninety days or 270 days prior to when you wanted to purchase it. If the cost of maintenance is 15% of the purchase price, the real cost of that change is it adds 11.25% to the cost of you license purchase. (15 divided by 365 x 270).

If you make a concession in a negotiation always make it clear what the real cost is for what you are conceding and expect a concession or price reduction of an equivalent or greater value.