May 26, 201510:38 AMLegal Login
with Mindi Giftos and Andrew Schlidt
Bridging the gap: IT contracting between large companies and small emerging companies
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Large companies may find it advantageous to utilize the innovation and flexibility of a small, emerging company when outsourcing research and development (R&D) of new technology. The large company secures access to new proprietary technology, and the emerging company is able to more rapidly develop its proprietary technology. However, issues often arise when these two very different parties enter into contractual negotiations.
Companies, regardless of size, may not agree on a contract for a number of reasons, but large companies and small emerging companies commonly have their own distinct set of issues due to the different abilities and limitations of each. Following are a few of the legal provisions that can stall negotiations.
Large companies typically want indemnification provisions to insulate themselves from any risk associated with the new technology. When dealing with emerging companies, however, it is crucial to reassess expectations with regard to indemnification. Indemnification is only as good as the financial strength of the indemnitor, and many emerging companies are not financially capable of meeting extensive indemnification obligations. In these situations, consider the use of insurance to cover some of the risk of the large company. Depending on the circumstances, such a policy can be purchased by the emerging company, added to the large company’s policy, or the cost can be split between the two companies. This ensures real protection for the large company, and eliminates the risk of insolvency as the result of an overly burdensome indemnification obligation for the emerging company. It is also important to remind large companies that accepting some risk is reasonable when contracting with emerging companies. It’s a cost of doing business, but if the proprietary technology is good enough it’s a price worth paying.
Representations and warranties — intellectual property
Technology contracts usually include a section stating that the licensor represents and warrants that its intellectual property (IP) does not infringe on any other entity’s IP. An emerging company may only have pending patents, or may only have patents in certain countries. This makes giving the standard IP representation difficult for emerging companies. Some emerging companies will agree to such a provision simply because they want to sign the contract, but there may be no real protection behind the representation. A large company should consider the value of the IP, where the emerging company is at with regard to patent protection, and how important the IP is to the large company. Perhaps most importantly, a large company should be willing to compromise.