Intellectual Property Law

How to Protect Long-Term Investments in Operational Contracts (Technology Law Letter #10)

By Harry Boadwee

In this Newsletter

• How to Protect Long-Term Investments in Operational Contracts
• Cyberspace Primer Recently Released
• Fifth Anniversary Special: My Book, Protect Your Business with Non-Disclosure Agreements

How to Protect Long-Term Investments in Operational Contracts

Consider one of the most difficult issues you?ll ever encounter when negotiating a contract: one party must make a large, long-term investment for the deal to work, but won?t sign the contract unless its investment (and its return on the investment, or ROI) is adequately protected.

I?ve posted an article on my blog (at http://bit.ly/protectlongterm) that explains three key approaches to protect that investment and get your deal done.

The article covers long-term investments made as part of an agreement concerning a company?s operations, such as an independent contractor agreement, technology development agreement, distribution agreement, or purchase and sale of products or services.

Those operational agreements are different from investment contracts, such as stock purchase agreements or loans to a corporation, partnership or limited liability company (LLC). Investment contracts raise additional questions under corporate/partnership, tax and securities laws. For example, long-term cash investments can be protected using preferred stock in a corporation or special provisions for capital accounts in partnerships and LLC?s. Loans may be protected by taking an interest in collateral, such as real estate (e.g., a mortgage on a commercial building). By contrast, my article focuses on provisions of non-financial contracts used in operations.

The article explains three approaches:

1. Match the contract duration to the investment horizon. If necessary, lay out an early exit path that works, considering termination for convenience with a kill fee, a liquidated damages clause, mediation, a management escalation process and a transition process after termination.

2. Focus the relationship by wisely choosing whether to use exclusivity, semi-exclusivity, a Most Favored Nation (MFN) clause, minimum required purchase or recoupment.

3. Finally, look at other contracts between the parties to see if the parties? relationship should be strengthened by cross-collateralization or cross-default provisions.

Of course, the article defines and explains all of the ?shorthand? words above, such as ?semi-exclusivity.? By considering and applying the 3 approaches that I describe, you?ll be far ahead of many other deal makers.

You can read the full article at: http://bit.ly/protectlongterm

Cyberspace Primer Recently Released

On April 21, 2010, the Cyberspace Committee of the California State Bar Business Law Section officially released its Cyberspace Primer, a publication designed to brief California state legislators and others on relevant cyberspace law issues.

The Primer was drafted by various Committee members and advisors and covers topics such as Privacy Policies, Radio Frequency Identification Technology (RFID), Spam and Spyware, Phishing, the Communications Decency Act, Social Networking, and Behavioral Advertising.

As a member of the Committee, I assisted with the Primer and contributed a short piece on the Digital Millennium Copyright Act (DMCA) and User-Generated Content.

A free copy of the Primer is available at http://bit.ly/primer2010

Fifth Anniversary Special: My Book, Protect Your Business with Non-Disclosure Agreements

I?m celebrating the fifth anniversary of my law practice this year. As part of the celebration, I?m offering the ebook version of my book, Protect Your Business with Non-Disclosure Agreements, for free.

The free ebook version is available at www.BoadweeLaw.com/ndabook

Feel free to share the link with anyone who may be interested.

All the best,

- Harry

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Full post as published by AS-IS Blog on June 02, 2010 (boomark / email).