Three Business Practices For Minimizing Legal Risks to Your Organization

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March 01, 2009
Legal Corner
Lori Pruitt

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© 2009 Hospitality Upgrade. No reproduction without written permission.

As a business professional, it is probably unlikely that you look forward to spending large chunks of your time in meetings with your in-house or outside attorney–time that is often focused on questions like “Can I sign this today?” or “Can you fix this problem?”  By beginning to incorporate a few, simple business practices into your organization’s daily operations, you can move toward an operational model that more effectively uses the time and resources of both the business and legal teams.  Three of these steps focus on creating more effective contracting processes, treating the information that your organization receives uniformly, and consistently addressing the intellectual property ownership in work done by third parties. 

1 BEGIN CREATING A MORE EFFECTIVE CONTRACTING PROCESS
Take the time to request and read all of the agreements that may be required for any acquisition, engagement or other procurement early in the process.  Similarly, your organization should share its documents and agreement terms as early as possible.  As more companies increase their levels of sophistication in the contracting area, frequently, all of the parties in a potential business relationship have developed their own form agreements.  Each of these agreements most likely reflects the ideal terms for that party (arguably, not the best approach for business contracting in the 21st Century, but that point is the subject of another article).  Often, an organization may prefer to wait until the end of the process of establishing a business relationship before looking at any documents.  Given the increased likelihood of multiple and inconsistent documents, a better approach is to actively seek out these documents. 
The earlier in the procurement or engagement process that the paperwork appears, the more likely that the parties can identify and resolve any contractual risks or issues in a way in which everyone is comfortable.  In some situations, the documents may not be negotiable and may contain unacceptable terms.  Your organization should understand those terms and be ready to decide if it is willing either to assume the risks that may be associated with those terms or if, instead, the preferred business relationship has to be rejected in favor of another option that has less risk associated with it. 

Recently I reviewed a set of financing documents for a relatively low-priced piece of hardware that contained embedded software functionality.  The agreements included a provision that permitted the financing company to share all of the customer’s financial information in its possession with any third party that it decided.  In this particular situation, the two parties had a number of other business relationships in which each was a customer of the other.  The broadly worded language in the agreement meant that all of the customer’s financial information, not just that related to this small purchase, could be shared.  The provision could not be modified in a way that the parties could find acceptable, and another alternative financing arrangement with another entity was used instead.  Because the documents were shared early in the procurement process, the customer had time to deal with the issue and find an acceptable alternative solution. 

2 TREAT INFORMATION FROM THIRD PARTIES AS CONFIDENTIAL
Routinely have your employees treat all information shared by another party as if it were confidential.  Most companies now commonly execute confidentiality or non-disclosure agreements before discussing development projects, pricing arrangements, new product information or other sensitive business information.  Most procurement and other information technology agreements now also contain confidentiality provisions as well.  While these provisions may be common, the scope of the confidentiality protections varies drastically among agreements and companies.  Some agreements list the subject of the discussions and limit the agreement to those discussions only.  Other companies will set up an on-going confidential relationship and protect any information that is marked as confidential.  Often a non-disclosure agreement will be much broader, treating all information shared between companies as confidential, with the exception of publicly available information (for example, information on the company’s Web site), while, perhaps, specifically refusing to treat any information received from the other party as confidential.  There are also many agreements that treat the agreement itself and its existence as confidential. 

From a business perspective, it becomes very difficult to manage the various terms of all of these competing agreements.  A better approach for the day-to-day interactions with suppliers, customers, and other third parties is to simply treat the information that you receive as confidential.  Regardless of whether it has been identified as confidential in any written agreement between your organizations, you can greatly reduce potential problems for your company if you simply avoid sharing any information you receive outside of your company without permission.  For example, don’t post another company’s presentation of your company’s Web site; don’t share information with professional association colleagues that work for another organization; don’t include current pricing in an RFP seeking competitive bids.  Understanding that confidentiality agreements are still required and necessary, educating your organization’s employees to be sensitive about freely sharing information from third parties is a good habit to develop within the organization. 

3 INCLUDE INTELLECTUAL PROPERTY OWNERSHIP IN SERVICE AGREEMENTS
Address intellectual property ownership and assignment in all consulting or creative services agreements.  In the information technology area, both technology licensors and licensees often engage professional companies to provide services to the organization.  These services may include the creation of a work product that might also have intellectual property right associated with it (for example, copyrights, trademarks, patents, trade secrets, rights of publicity or goodwill).  Often, a company will assume that, since it paid for the work being performed, it owns the work product and is free to use and re-use it in whatever way it wishes.  However, the intellectual property laws recognize the creator of the work product as the owner of the work under copyright and possibly other intellectual property laws, except in specific circumstances.

It is important to remember that just because your company paid for a particular work product doesn’t necessarily mean that the company owns it.  Problems can arise because either the company paying for the creation has a new idea for expanding the use of the work product, and the professional service provider objects, or the professional service provider wants to reuse the work product, or something very similar to it, with another company, often a competitor of the original client.  An organization should address ownership of work product when it hires a third party to perform services.  While the intellectual property language does not necessarily need to be a multipaged portion of the agreement, it should adequately cover the work and assignment of the appropriate intellectual property rights. 

In those situations in which an organization wishes to own the work product created for it, there should be a signed agreement in place that discusses the ownership of the intellectual property prior to performing the services.  At a minimum, the agreement should include a statement similar to the following:

[Provider] assigns to [Customer] all rights, title and interest in and to all work product created pursuant to this Agreement and all intellectual property rights of any kind in the work product. 

On the other hand, for those instances in which an organization is being engaged to create a work product but does not wish to assign ownership of the work product, it is not necessarily required under copyright law to include a statement retaining ownership rights in created works. 
Nonetheless, it is sometimes advisable to do so to avoid later conflict.  A simple sentence to add would be: 

Title to, and the intellectual property rights in, the work product does not pass to [Customer] under this Agreement.

Because the intellectual property laws may place ownership of a work product with its creator, rather than the one who paid for its creation, companies should adequately address ownership of the intellectual property.  It is also advisable to include statements regarding the originality and non-infringement of the work product and other items that may be relevant or appropriate for each particular situation.

Even if you happen to be a business person who enjoys spending large chunks of your day in meetings with your in-house or outside counsel, implementing business practices that help to minimize possible legal risks is beneficial to your organization, allowing you more time to work with your attorney to identify additional ways to optimize your business practices to minimize legal risks.  

Information provided is general and educational and not legal advice.  Lori Pruitt is an attorney, consultant, and business trainer in private practice.  She can be reached by email at loripruitt@bellsouth.net, by phone at (770) 607-5265.



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