Coaching Program

Do you run a high-tech, Internet or e-commerce business, and find that there is just too much to do? Do you believe your business could be more successful, make more money, or limit its risks better, if you could only find some extremely competent people — who know your business — that you can afford?

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• One 90-minute meeting each week, to review business issues, strategy, goals and objectives.
• 24×7 ad hoc legal assistance and advice, to provide insight and advice when difficult situations present themselves.
• Constant review and advice on the business plan, financials, proforma.
• Advice on a strategic plan to maximize revenues / assets and/or contain costs.
• Operational assistance and advice, including assistance in the institution of corporate metrics and the creation of a culture of accountability.
• Review and feedback sales and business development processes, providing help on standardizing outstanding proposal templates and sales collateral.
• Assistance to establish boilerplate contracts, terms of use, privacy statement, and other relevant legal documents used in the ordinary course of business.

Please contact us today, to see how we can provide outstanding insight and advice, at an affordable price.

Debunking the Wayback Machine

The Internet Archive (www.archive.org) was founded in 1996 by Brewster Kahle, a search-engine whiz and dot-com multimillionaire at the time, with a dream: “He wanted to back up the Internet.” It quickly became the largest publicly accessible, privately funded digital archive in the world. At the same time of its founding, Mr. Kahle co-founded Alexa Internet in April 1996, which was sold to Amazon.com in 1999.

At the time of the founding of the Internet Archive, there were approximately 50 million or so unique URL’s. In July of 2007, Google claimed that it found approximately 1 trillion unique URL’s on the web, with every indication that growth will continue to explode. Over the years, the Internet has become a significant driver of commerce, increasingly the subject matter of litigation. The Wayback Machine has provided evidence, for plaintiffs and defendants alike, in litigation ever since; and has become a very important tool for attorneys and litigants.

The problem is, most attorneys (and even highly paid expert witnesses) don’t have enough technical experience to truly appreciate the limitations of the Wayback Machine, and often misuse or misinterpret the results of the Wayback Machine.

I was recently hired as an expert witness by a small Internet company, to help defend against a lawsuit from a major music publisher. The case looked absolutely hopeless, as this major music publisher spent an exorbitant sum on an expert witness, who appeared to have created a water-tight case against my client using information provided by the Wayback Machine.

As I read the report of the plaintiff’s expert witness, it became clear to me that the expert witness had absolutely no understanding of the limitations of the Wayback Machine, and as a result, completely misinterpreted the results. Within a few short weeks, I was able to completely discredit the expert witness, thereby undermining the plaintiff’s case (This case is still ongoing, and has not yet reached final disposition).

I am currently working on a paper, which I am calling “Debunking the Wayback Machine,” which will detail the advantages and disadvantages of using the Wayback Machine in litigation. This paper will discuss the technical issues, as well as provide easy-to-follow steps and guidelines on how to carefully examine and apply the results of the Wayback Machine for testimonial purposes. And, most importantly, how to discredit anyone that blindly relies on the results of the Wayback Machine to prove or disprove their case.

Consider the issues.

These limitations can have profound impacts on what is delivered from the Wayback Machine, and my paper discusses these impacts in depth. For your consideration, consider these two examples I have personally witnessed in the past year:

• In one example, the Wayback Machine has archived a particular website for years. When referencing that website from several years ago, the Wayback Machine contains all the web pages including a form. The form, however, references an actual script that sits on today’s website (i.e. the script, itself, is not backed up on the Wayback Machine). Therefore, when one accesses the form from the Wayback Machine, it gives the false impression that when you hit “submit,” you’re getting the results from several years ago. This is incorrect, because when you hit “submit,” the Wayback Machine sends the query to the existing website, therefor you’re getting today’s information. This is a difficult concept to grasp, and made all the more difficult in litigation, because most expert reports contain mere screen shots, when a careful examination of the underlying links, data and information provided by the Wayback Machine is needed to properly assess the accuracy and relevance of that information to the case at hand.
• In another example, the Wayback Machine had archived some, but not all, images of a particular website. When viewing a backed up website through the Wayback Machine, you see a complete web page but when you carefully examine the links, you find that not all the images represented have been backed up. A few of the images — and in this case, a very important image — continue to be referenced from the existing website. When you have anything coming from outside the Wayback Machine, it is not archived information. Thus, subject to changes and manipulation over time. In this case, the image in question was key to a case: It provided specific information about the company that a plaintiff attempted to use in litigation.

In conclusion, I believe it’s attorney malpractice to let the opposing side use the results from the Wayback Machine in litigation (or to influence settlement or the outcome of a case) without consulting with an expert who can carefully examine and scrub the results provide by the Wayback Machine.

Stay tuned for my paper. If you have any questions or are dealing with a matter that involves evidence provided from the Wayback Machine, please feel free to contact us at your earliest convenience.

Non-Compete Agreements: They Can Work

One of the biggest concerns I hear from many business owners, is the fear of key employees walking away with customers. I’ve talked with employees at many companies, and it’s clear: These people believe any client they work on is “their customer,” they are free to take “their customers” away from their employer, and they don’t believe non-compete agreements are enforceable.

I just cringe for these business owners, who have such individuals in their employ. Sure, they are busy, but make no mistake about it — they are working for themselves and there is zero loyalty — these employees will leave you in an instant if they think the grass is greener elsewhere.

Aside from being completely wrong on all accounts, these employees have little knowledge or respect for the difficulty and sheer effort it takes to open, run and successfully manage a profitable business. It’s the business owner that invests in marketing and signs the advertising contracts. It’s that same owner who doesn’t sleep at night, trying to figure out how to keep the lights on, the clients coming through the door and the paychecks issued. Client loyalty is key to the success — and long-term viability — of any business.

How can you prevent former employees from stealing your clients? The answer is, a well-crafted non-compete and non-solicitation agreement.

The laws vary from state-to-state, jurisdiction-to-jurisdiction. There are ways to write bad (i.e. unenforceable) agreements, and there are ways to write great (i.e. enforceable) agreements. The best way to obtain a great agreement, is to hire a local attorney familiar with such matters — the money you spend writing such an agreement will pay for itself in dividends.

Do you even have agreements in place with your employees? If not, you have no excuse! Start now!

Don’t give courts reasons to invalidate your agreement. Make it fair and reasonable. This means take ownership of what is yours — the client — and don’t unduly restrict your employees from being gainfully employed elsewhere. Avoid:

• Geographic restrictions - even limited ones can pose problems
• Blanket restrictions - everyone has a right to work, so don’t prohibit someone from earning a livelihood
• Unlimited restrictions - always reasonably time-bound the restriction (i.e. 1 year)
• Non-solicitation only - everyone tries to get around this, by creating the circumstances where “I didn’t solicit them, they called me!”
• Punitive damages - courts seldom award punitive damages, especially for employee contracts; so they just help to instill the belief that your non-solicitation agreement is egregious, unfair and unbalanced

Every good non-compete agreement should, at a minimum:

• Define Confidentiality and require employees to honor the confidential information of your business
• Define “Client” and “Client List,” and make it clear they are owned by company and are to remain Confidential and Trade Secret
• Indicate that employees (including “whether as an individual for its own account, or for or with any other person, firm, corporation, partnership, joint venture, association, or other entity whatsoever, which is or intends to be engaged in the same line of business as YOUR COMPANY, or in such other business competitive with YOUR COMPANY,”) may not solicit, interfere with, or entice away any clients (or employees) of your company, for a reasonable period of time (i.e. 1 year)
• Indicate that employees (with language above) after their employment ends at your company, may not service, or perform services for, any Client, for a reasonable period of time (i.e. 1 year)
• Require employees to acknowledge that the restrictions will not create an undue hardship, not prevent them from competing in an independent business, and agree they are subject to a restraining order and/or injunction if they violate the agreement
• Require “reasonable enforcement costs and expenses” to be paid by employee, if they violate the agreement
• Contain the standard clauses of severability, survival, waiver of breach and assignment

Note that if you are presented with employees who are bringing their own clients, and you want to acknowledge the clients they bring, my advice is to create an “attachment” that has the actual names of the clients you want to exclude from the agreement. The employee should specifically indicate who such individuals are.

If you have an employee who doesn’t want to sign such an agreement, then you have some interesting information: They intend to steal clients from you the minute the relationship doesn’t work for them. Do you really want such employees in your organization?

EBay beats Tiffany, but TM law is very much alive and well …

The Wall Street Journal announced today that EBay Wins in Fight Over Tiffany Counterfeits.

eBay finally wins one, and it’s about time. EBay (and other e-commerce companies) won decisively against Tiffany and other trademark holders, which are trying to hold Internet companies liable for the sale of counterfeit goods. The issue involves burden of policing trademarks on the Internet, and Tiffany argued that eBay doesn’t do enough to police its network. The court held that eBay removes content once notified by Tiffany, which is the extent of its legal burden under US Trademark Law. Tiffany wanted eBay to police its network regarding Tiffany trademarks, much as it does prohibiting firearms.

Technically speaking, it wouldn’t be a problem for eBay to police its network as Tiffany desires. The problem is, it creates a slippery slope for eBay in several ways. First, by doing this for Tiffany, it would create a precedent for eBay to do it for all valid trademark holders (or at least those who requested this from eBay). Additionally, it suggest some form of liability to Tiffany, should eBay make mistakes. Finally, such action would cause a disservice to eBay’s customer base, as there are valid holders of Tiffany products. For example, I happen to have a couple of silver cufflinks from Tiffany, and if I want to sell them, I should be able to do so without seeking some form of permission from Tiffany.

It sounds like Tiffany isn’t going to give up. I expect them (and other significant trademark holders) to seek additional rights at the federal level. The problem is, they are overstepping their bounds, and definitely infringing on my rights as a holder of Tiffany goods should I desire to sell them. If we give rights to trademark holders to hold eBay, Craig’s List and the classifieds liable for counterfeits, I will no longer have an opportunity to sell my old Dell laptop, my Logitech mouse, iPhone, Tiffany earrings, my wife’s Louis Vuitton purse, etc, etc, etc.

Don’t think for a minute, that trademark holders are powerless with this decision. It simply reinforces the burden of policing the trademark (i.e. monitoring where your trademark is being used), and once a trademark holder identifies (or thinks they’ve identified, even if they are wrong) improper use of their trademark, an Internet company would be wise to immediately respond to any notice received by taking down the offending material. Otherwise, it becomes an easy case for contributory trademark infringement against your company.

When I was COO & Corporate Counsel for FatCow Web Hosting, I received numerous trademark infringement claims against our customers. The problem for us, is that our 30,000+ customers hosted their websites with us, some websites having many thousands of pages or products, with only one page or product containing the offending material. As a company, we can’t go in and modify a customer’s database to remove the one row (or page) containing the trademark problem. We have to take down the entire website. Therefore, it was our policy to contact the customer first, apologize about the predicament we were in as a hosting company, and explain the options to our customer. Often, those options were:

• Remove the offending material (usually within 72 hours);
• Resolve the matter with the complaining party;
• Obtain a court-order to keep your website up; or
• Have us take down your entire website.

More times than I can remember, I would receive a call by either the customer or their attorney, demanding that we leave the website up and basically trying to plead their case to me as though I’m a trademark judge. Unfortunately, in US Trademark Law, there is no safe harbor for an Internet company or ISP against contributory trademark infringement claims by a valid trademark holder. This means, as an Internet company or ISP, you must take down any material that is alleged to infringe a valid trademark otherwise you risk exposing yourself to a contributory trademark infringement cause of action, which will be difficult to win given the notice you were provided by the original complaint and the fact that you derive revenue from your customer.

In other words, Tiffany didn’t lose anything in this case against eBay. Trademark law is still alive and well for trademark holders.

Michigan legislators: stupid is, as stupid does

Michigan, without fully appreciating the ramifications to small business, decided to recently join the growing list of states placing restrictions on gift certificates. The justification is always consumer protection. (See Gift Cards and Gift Certificates Statutes and Recent Legislation for more information about various state laws).

Both houses in the State of Michigan approved bills amending Michigan law to (1) limit expiration dates to five years or more, and (2) require unclaimed funds to escheat to the state. See the Senate version of the bills, Bill 387 (S-2) and Bill 388 (S-2), covering Michigan’s Consumer Protection Act and Uniform Unclaimed Property Act, respectively.

They were scheduled to take effect on April 1, 2008, but it doesn’t yet appear (as of the writing of this blog article) that they have been signed by the Governor.

What is truly mind-blowing, and shows the depth of ignorance of Michigan’s legislators, is the fiscal analysis performed. They actually say:

FISCAL IMPACT

Senate Bill 387 (S-2): Any additional costs associated with enforcing the Michigan Consumer Protection Act or promulgating any new rules to implement it due to this proposed change should be absorbable [sic] within the Office of Attorney General’s existing budget.

Senate Bill 388 (S-2): The bill would have no fiscal impact on State or local government.

No fiscal impact??!? From a state with the nation’s highest unemployment rate in 2007??!? They would have looked less stupid by saying “should not have any fiscal impact.” What they missed, is the impact to small business, and the further erosion of the economic viability of that tax base.

Michigan is a state that needs jobs. The residents are leaving in droves, with “the likely consequence of a moribund economy that has pushed thousands more people into poverty.” Consumer protection is always a laudable goal, but laws like this — with no rigor in the financial impact of their legislation — indicate that Michigan will experience a significant, long-term decline in its economic base. I can’t think of a better indicator for businesses and homeowners to sell!

I’m guessing that legislators like to look at the large companies, like Walmart, Best Buy, Circuit City, etc, when constructing consumer protection laws. The problem is, being able to sell, expire, recognize and keep the revenue from gift certificate sales are critical to many groups of small businesses. Their survival depends on it, and it’s the small business that pays an inordinate amount of local taxes and employs a large percentage of the population. It’s small business that struggles to survive, especially in the economically depressed State of Michigan.

France hits E-Bay with steep penalty for contributory trademark infringement

The Wall Street Journal just posted an article entitled EBay Loses Suit Over Luxury Fakes. Apparently, a French court sided with LVMH Moët Hennessy Louis Vuitton and sister company Christian Dior SA, which had accused eBay of not taking the necessary steps to ensure that the accessories sold on its Web site were not counterfeit (despite the fact that E-Bay has a facility where trademark holders can report potential fakes to E-Bay to have the reported auctions shutdown).

The French court ordered eBay Inc. to pay Louis Vuitton and other luxury-goods brands 40 million euros ($63.1 million) in damages for fake goods sold through the online retailer. Givenchy perfumes was also a party to this case, and though the perfumes sold on eBay were legitimate, LVMH strictly limits their distribution to authorized dealers such as perfume chains and department stores.

There are two troubling aspects of this case, aside from the high damages awarded against E-Bay. First, is the increasing willingness to require companies to monitor the activities of their customers, and second, as it relates to the Givenchy perfumes on E-Bay, to hold e-commerce companies to an almost impossible standard for monitoring the “legitimacy” of third-party transactions.

Let me explain: As it relates to US Copyright law, our system has long held a distinction between a publisher and a distributor. A publisher, arguably, reviews their work and is deemed responsible for the works that reach the public. A distributor, by comparison, doesn’t read a magazine or newspaper, and simply delivers it to store shelves. Therefore, if there’s a copyright issue, the distributor is deemed to have no knowledge of (nor the capability to review) material being distributed. This makes sense, if you think about it, because a distributor probably distributes hundreds of magazines, and doesn’t have any subject matter experience in what they deliver to the stores.

In the Internet context, this works well for an Internet service provider (ISP) or web hosting company, because they have potentially thousands or millions of customers, and have absolutely no subject matter or domain expertise regarding their customer’s websites. The mere thought of having your ISP review your Internet traffic inspires Orwellian notions in all of us. The same argument can be made for E-Bay. Millions of transactions occur every day on E-Bay, and I suspect E-Bay doesn’t have a clue about the subject matter of those auctions.

Unfortunately, this publisher/distributor distinction in copyright law hasn’t made its way into trademark law, and this is where many e-commerce companies run into trouble. Trademarks are a completely different aspect of intellectual property, and are treated completely different. The main objective of trademark law is to protect the consumer, not the owner of the mark, from improperly marked products and services. Therefore, a completely different set of laws and risks exist, and if an e-commerce company tries to manage its risk against contributory trademark infringement using the notions of the publisher/distributor distinction in copyright law, they are bound to eventually find themselves in serious trouble.

For example, the safe harbor provisions of the Digital Millennium Copyright Act (DMCA) don’t apply to trademarks, only to claims of copyright infringement. If you don’t have strong procedures and mechanisms to respond to, and deal with, contributory trademark infringement claims, you run the risk of loosing a serious lawsuit. Such claims put the unfortunate e-commerce company or ISP in the role of a judge, trying to ascertain the legitimacy of a claim against one of its customers. Unfortunately, the way the law is written, you should almost always conduct your business assuming the complaining party is correct. In trademark law, e-commerce companies and ISP’s are at risk from the plaintiff of a contributory trademark infringement claim, not the defendant (i.e. their customer).

This E-Bay case ratchets up the risk even further for e-commerce companies and ISP’s, by presupposing E-Bay is somehow able to ascertain which of its customers has the legal right to sell Givenchy perfumes. Note that E-Bay’s Seller’s Rules contains a long-list of what’s acceptable and what’s not, and that it requires sellers to adhere to the intellectual property requirements (i.e. trademark) and restrictions of the products they sell. Therefore, a seller is already violating E-Bay’s terms of use when selling Givenchy perfumes. Apparently, E-Bay is somehow supposed to evaluate the validity of each seller’s licensing arrangement with each of its carried brands, and ascertain who is legally entitled to sell what at what given time.

Obviously, this is an absurd position for E-Bay and any other e-commerce company or ISP. There are ways of handling this, such as banning Givenchy and any other product that claims a right to sue for contributory trademark infringement. Such a heavy-handed approach could seriously undermine E-Bay’s value to consumers (i.e. shouldn’t I be able to sell my bottle of Givenchy perfume, if I purchased it for my wife who turned out not to like it?).

There are two recommendations I have, give this case:

For e-commerce companies and ISP’s: Review your policies and procedures for trademark infringement claims. Are they fundamentally different from copyright claims? If not, you need to change them, and you must unfortunately place a heavy burden on the defendant (i.e. your customer).

For the legal system: Confer some rules and safe harbors for e-commerce companies and ISP’s, regarding actions for contributory trademark infringement, possibly expanding the publisher/distributor distinction to online trademark cases.

E-Commerce can create interesting sales tax liabilities

The Wall Street Journal has an interesting article about Amazon today, entitled Will Amazon Get a Visit From the Tax Man?.

It appears that Amazon has a number of large distribution warehouses in some states, such as Texas, Pennsylvania and Indiana, but doesn’t pay sales taxes in those states. Amazon is trying to skirt the issue by saying the distribution warehouses are wholly owned subsidiaries of Amazon. Amazon’s theory is: The subsidiaries don’t sell products to consumers, so they don’t need to pay sales tax, and since Amazon itself doesn’t own the warehouses (it’s subsidiaries do), it doesn’t need to pay sales tax either.

The article does a good job talking about the issue regarding Amazon, but could go into better detail on the tax issues an e-commerce company must deal with. My standard disclaimer: Please consult with a CPA or tax attorney, as what I am about to discuss may be incomplete or inaccurate for your particular situation.

Note that many e-commerce businesses don’t fully understand The Internet Tax Freedom Act, which doesn’t prohibit all taxing, per se. What it does is prohibit taxing Internet access, imposing discriminatory Internet-only taxes and multiple taxes on electronic commerce. Contrary to popular belief, it does not prohibit state sales or use tax.

Sales taxes can be somewhat complex, depending on the subject matter. The easiest case is a typical product, like a book or DVD. If a business has a “sufficient nexus” within a state, it generally has to collect sales tax from the residents in that state. The “sufficient nexus” requirement is met by physical presence (i.e. the business has an office or warehouse in the state), but “sufficient nexus” can also be met without physical presence. And, this is one area where things can become tricky. The “sufficient nexus” requirement could be met, if a business has a “close relationship” with third-party contractors.

Things become murkier still, regarding some products or services. Let’s look at services for a moment: Instant Gift Certificates are becoming a popular way for service-based businesses to “sell” their services on the Internet. Some states, like New Mexico, charge a “gross receipts tax” (or GRT) on services. If a business in New Mexico sells a dollar-based gift certificate (i.e. a $100 gift certificate), there is no tax to charge until the gift certificate is redeemed. However, if the business sells a service-based gift certificate (i.e. “one Swedish massage”), the purchaser should be charged GRT upon the sale of the gift certificate.

Worse still, some states (like New Jersey) charge a tax on just some services. So, for example, massages are taxed but facials are not (both facials and massages are typically provided by the same business). So, a business selling a service-based gift certificate needs to keep track of what services are taxed and which are not, and make sure the tax is properly applied at the time of sale.

For products, things become murky, depending on the subject matter and location of the consumer. As it relates to location, some major cities have different sales tax rates than the overall state (i.e. Chicago or New York). So, if a business has “sufficient nexus” in the State of New York, it must keep track of all the tax schedules within that state, and know exactly which tax schedule to apply to which consumer in that state. As it relates to subject matter, all sorts of products will suffer various restrictions or tax exceptions. For example:

• Gift cards and gift certificates have various restrictions on maintenance fees, expiration dates (depending on where the consumer sits) and escheatment (depending on where the business sits).
• Wine and other alcoholic beverages have restrictions or varying tax implications, depending on the state, county or city in which the consumer sits.
• Chemicals, paints and industrial solutions have many restrictions, permit requirements and tax implications.

The problem for an e-commerce company, is that it’s sometimes difficult to identify all the tax laws and burdens, create the programming logic to identify which products or services have a sales tax burden to which customer, and then keep the tax schedules (and treatment) up-to-date.

The trick is, to be careful on which state you create a “sufficient nexus” for sales tax purposes, and to do your research BEFORE you start selling your product or service on the Internet, because your business could be liable for back-taxes going back many years.

A Sample Mutual Non-Disclosure Statement (NDA)

This is perhaps one of the more useful documents in my collection: It’s the mutual non-disclosure statement, or NDA. It’s available here as a MS Word document, and I’ve included it below if you’d rather cut-and-paste from your browser.

I have some tips-and-tricks as it relates to NDA’s, that everyone should consider.

• If you’re thinking about signing someone else’s NDA, check for one key ingredient: Is it mutual??!? Mutual NDA’s basically define the parties at the top, then throughout the rest of the document, reference “disclosing party” and “receiving party.” Basically, it doesn’t specifically call-out one individual in the document. If it’s not mutual, my suggestion is to either hire an attorney to review the document for you or just flat-out refuse to sign it. The reason? Non-mutual NDA’s frequently (although not always) include other terms that could bind you, unrelated to disclosure, such as one-sided non-competition or non-solicitation clauses.
• Not sure about their NDA? Sign both! That is, have the opposing party sign your NDA, and you sign theirs. This is a great way to make sure you are both covered.

My attached NDA includes a paragraph regarding non-competition (i.e. neither party can compete against the other party, using the confidential information) and non-enticement (i.e. neither party can raid the employees of the other). Note that the paragraph numbers are auto-updating, if you’re using this in MS Word. If you’re not using in MS Word, and you add/remove a paragraph, you will need to manually update the paragraph numbers.

So, before using my sample NDA, please make sure to:

• Delete the non-compete (paragraph 7) and/or enticement (paragraph 8), if you feel they don’t apply to your situation.
• Do a global search/replace to insert your name. Find: “[Your-Company]”, replace it with your legal name.
• Do a global search/replace to insert your short name. Find: “[Your-Company-Short-Name]”, replace it with the short-name of your company. For example, if your legal name is “ACME Shoe Repair and Lacing, LLC”, but everyone knows you as “ACME Shoe”, search for “[Your-Company-Short-Name]” and replace it with “ACME Shoe”.
• Find “[Your-State]” in Paragraph 13, Governing Law, and put in the State you or your company resides in.

Good luck!

MUTUAL CONFIDENTIALITY AGREEMENT,
NON-COMPETE & NON-SOLICITATION

This Mutual Confidentiality, Non-Compete and Non-Solicitation Agreement (this “Agreement”) is made as of ________________, 20___ (the “Effective Date”), by and between [Your-Company] (“[Your-Company-Short-Name]”) and ______________________________ (“Discussion Party”). Your-Company-Short-Name and Discussion Party are each referred to herein as a “party” and together as the “parties”.

A. Your-Company-Short-Name and Discussion Party are considering entering into a business relationship and/or transaction with each other (the “Proposed Transactions”).

B. In connection with evaluating the Proposed Transaction, each of Your-Company-Short-Name and Discussion Party has and will be furnishing the other with certain trade secrets, technical data, marketing data, and other proprietary and nonpublic information. As a condition to each of Your-Company-Short-Name and Discussion Party furnishing such information to the other, each of the parties is requiring the other to agree to treat the Confidential Information (as defined below) confidentially and in all respects in accordance with this Agreement. For purposes hereof, the party disclosing its Confidential Information to the other shall be referred to as the “Disclosing Party” and the party receiving the Confidential Information of the other party shall, together with such recipient party’s subsidiaries and affiliates, be referred to as the “Receiving Party”.

NOW THEREFORE, in consideration of the foregoing Recitals and of the mutual promises and covenants set forth below, the parties agree as follows:

1. Confidential Information. The term “Confidential Information” includes all documents, materials and other information, whether in oral, written or electronic form, concerning the Disclosing Party that are furnished by or on behalf of the Disclosing Party and identified by the Disclosing Party either orally or in writing as confidential to the Receiving Party at the time of disclosure, and includes, without limitation, all notes, analyses, compilations, materials, products, product information, pricing information, and studies or other documents or materials prepared by the Receiving Party and its agents and employees which contain or reflect all or any portion of the originally disclosed materials. Notwithstanding the foregoing, Confidential Information does not include information that: (i) was or becomes generally available to the public other than as a result of a disclosure by the Receiving Party or its agents or representatives to one or more unauthorized parties; or (ii) becomes available to the Receiving Party on a nonconfidential basis from an independent source without breach of any confidentiality obligations.

2. Covenant of Confidentiality. The Receiving Party covenants and agrees to keep confidential all Confidential Information of the Disclosing Party confidential, with the same level of care accorded by the Receiving Party to its own proprietary information, and the Receiving Party further covenants and agrees not to disclose or otherwise convey any portion of such Confidential Information either within or outside the Receiving Party’s organization, except to those of the Receiving Party’s employees, accountants, attorneys, agents, representatives and advisers who need to know such information for the purpose of the Proposed Transaction (it being understood and agreed by the Receiving Party that such employees, agents, advisers and representatives shall be informed by the Receiving Party of the confidential nature of such information and the Receiving Party shall direct them to treat such information confidentially and to return such Confidential Information to the Receiving Party upon request in accordance with this Agreement). The Receiving Party further covenants and agrees to use the Confidential Information solely with respect to the Proposed Transaction and not to use the Confidential Information directly or indirectly for any other purpose; provided that if any definitive agreement governing the Proposed Transaction (a “Definitive Agreement”) shall permit broader use of any of the Confidential Information, the terms of such Definitive Agreement shall control. The obligations under this Section 2 shall continue for three years from the date of disclosure of the particular information.

3. Return of Materials. The Receiving Party will promptly (but in any event within ten (10) business days) after the written request of the Disclosing Party return to the Disclosing Party (or with the Disclosing Party’s permission, destroy) the Confidential Information (without retaining any copies thereof), together with any notes, discs, tapes and other writings and materials prepared by or on behalf of the Receiving Party based on the Confidential Information.

4. Confidentiality of the Proposed Transaction. The parties covenant and agree not to disclose to any person any terms or conditions, or the existence or status, of any Proposed Transaction except that disclosure of such information may be made when disclosure is required by law upon advice of legal counsel and except as may otherwise be permitted or required by any Definitive Agreement.

5. Permitted Disclosures. Notwithstanding the foregoing provisions, if any court, governmental agency or regulatory body requires that the Receiving Party disclose any of the Confidential Information of the Disclosing Party, the Receiving Party may disclose to such governmental authority that portion of the Confidential Information which the Receiving Party’s legal counsel advises it in writing must be disclosed. The Receiving Party shall, however, furnish the Disclosing Party with prompt written notice of such requests or demands as far in advance of such disclosure as reasonably practicable in order that the Disclosing Party may seek an appropriate protective order, and the Receiving Party shall cooperate with the Disclosing Party in seeking such an order.

6. No Implied License. Neither this Agreement nor the disclosure of the Confidential Information shall be construed as a legally binding obligation of the parties to consummate any Proposed Transaction. No license or right is granted or implied in favor of either party with respect to any intellectual property rights of the other party.

7. Non-Compete. Independent of any obligation under any other paragraph of this Agreement, for a period of one (1) year following Effective Date, neither party shall directly or indirectly, whether as an individual for its own account, or for or with any other person, firm, corporation, partnership, joint venture, association, or other entity whatsoever, which is or intends to be engaged in the same line of business as either party, or in such other business competitive with the other party, solicit, interfere with, or endeavor to entice away from the other party, any person, firm, corporation, partnership, or entity of any kind whatsoever, which was or is a client of the other party for the parties have become aware of as a result of this Agreement.

8. Enticement. Independent of any obligation under any other paragraph of this Agreement, for a period of one (1) year following Effective Date, neither party shall, directly or indirectly, whether individually for its own account or for or with any other person, firm, corporation, partnership, joint venture, association or other entity whatsoever, solicit, hire or endeavor to entice away from the other party any person who is employed or engaged by the other party in any managerial, technical, professional or advisory, without the express written permission of the other party.

9. Remedies. It is further understood and agreed that money damages would not be a sufficient remedy for any breach of this Agreement and that the Disclosing Party shall be entitled to specific performance and injunctive or other equitable relief as a remedy for any such breach without the necessity of posting bond. Such remedies shall not be deemed to be the exclusive remedy for breach of this Agreement, but shall be in addition to all other remedies that may be available at law or equity. Each party agrees to be fully responsible to the other party for, and indemnify such other party against, any damage or harm (including without limitation the legal fees and other costs incurred in enforcing such other party’s rights hereunder) caused to such other party by any breach of this Agreement by itself, its employees, advisers, representatives or agents.

10. Waivers. No failure or delay in exercising any right, power or privilege hereunder shall operate as a waiver thereof, and no single or partial exercise thereof shall preclude any other or further exercise thereof or the exercise of any right, power or privilege hereunder.

11. Severability. In the event any provision of this Agreement is held to be unenforceable or contrary to law then the Agreement shall be interpreted, to the extent possible, without such provision.

12. Entire Agreement; Amendments. This Agreement contains the entire understanding between the parties relating to the subject matter hereof and supersedes all oral statements and prior writings with respect thereto. No modification or waiver of this Agreement or any provision hereof, nor consent to any departure therefrom shall in any event be effective, irrespective of any course of dealing between the parties, unless the same shall be in a writing executed by duly authorized officers of the party whose rights are being waived, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which it is given.

13. Governing Law. This Agreement shall be subject to and governed by the internal laws of the State of [Your-State], without giving effect to conflicts of law principles.

IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first set forth above.

     _______________________     [Your-Company]

By: _______________________ By: _______________________

Its: _______________________ Its: _______________________

Typical Key Terms on Large-Scale Software Contracts

Reviewing a software contract, or just wondering what the key terms of such a contract might include? I had the opportunity to prepare a high-level punch list for a large software deal, that involved a software vendor pushing out software to a large franchise. This makes things complicated, given you have to contract with both the franchiser and the individual franchisees.

The punch list I used is as follows:

• Products & Services of Deal – Define specifically what is being purchased. Include Quantity and version(s) of software. Update privileges (i.e. for how long and how much?). Training specifics. Level of other party’s involvement on implementation and rollout.
• Incorporation by Reference of Support Contract. Provide as attachment. Make sure you define the level of support and service levels, if any. Make that a separate agreement.
• Parties to the Contract – Who is ultimately responsible for paying bills and enforcing the contract??!? Need to think this through. Are the individual locations franchisees or a combination of corporate and franchise locations? If so, need to require the main corporate entity to enforce relevant terms of THIS contract on franchisees, so you have someone to sue if a franchisee decides to make copies of your software (for example).
• Overall Requirements – What specific requirements do you have to make this deal work? For example, must all locations have an Internet connection? An IT person? A firewall? Specific versions of the OS, Computers or other needs? A form they fill out? Must the main corporate entity approve all change requests and/or new locations?
• General Procedures – Who at the other party contacts you? Need to make sure you receive VALID requests (i.e. something the corporate client cannot dispute):
  • How are you notified of a new locations and/or franchisees?
  • How do you want individual locations to contact your support team? Should they go through the corporate IT department first?
  • How are change requests dealt with?
• Pricing and Payment Terms & Schedule – Down payments, installment payments and/or payment schedule, contingencies, penalties for non-payment / delayed payment, etc. Does the price depend on a certain number of units purchased within some time frame?
• Ad Hoc Services and/or Development
  • Procedures – Requesting, approvals, testing, rollouts, warranties / support, etc
  • Conditions – Must every location incorporate a development change to maintain standard software versions throughout? What happens if one or more locations don’t follow the rules? What other conditions do you need to make this manageable and profitable?
  • Defect Resolution – What is your response-time to alleged bugs? (I have an excellent procedure and system for this, if you’re interested. Let me know. Worked well when I was a consultant managing large software development deals).
  • Other stuff: fee schedules, ownership of work product, etc.
• Dispute Resolution – Procedure to resolve disputes between you and individual franchisees, as well as between you and the main franchiser.
• Termination – Under what conditions (if any), what happens, what is returned to you (i.e. equipment, money, software, etc?), potential money refunded, etc.
• Standard Contract Stuff – Limitation of Liability, Warranty, Indemnities, etc.

If you can answer these questions, from a business perspective, you’re quite far in your drafting of a contract. In drafting a contract, these questions need to be answered. Having them answered before you engage an attorney will help you save a significant amount of money.