How Digital Technology Affects Your Business RelationshipsPosted August 21, 2012 by in Articles & Publications
If you run a business today, you cannot escape the good and bad effects that come from the widespread use of digital technology. This expanding use of digital technology, such as software, the Internet, e-mail and the World Wide Web, in the operation of your business has affected your contractual relationships with your customers, suppliers, employees and independent contractors. This article looks at several different contracts with these business contacts and how the agreements can be written to address different issues which you may encounter due to your use of digital technology.
How to Protect Your Business' Trade Secrets? Whenever your employees or contractors are involved in the creation of any intellectual property such as software or web page development, you must be concerned about maintaining the confidentiality of any special information that gives you a competitive edge. This kind of special knowledge is often referred to as "proprietary information" or "trade secrets." In order to limit what those who come in contact with your special knowledge can do with it, you must take affirmative steps to guard it. One important way to accomplish this end is to require anyone whom you ask to create, adapt or maintain digital products, to sign a confidentiality agreement which spells out your ownership rights in the final product. This further puts the worker on notice that the material is to be kept confidential and that they are not permitted to use the product except on your behalf. Another way to protect your business' special information is to caution your employees against discussing your business in e-mails or chat rooms because access to such forums is uncontrolled.
It is also critical to be sure that the various contracts which you enter into on behalf of your business are compatible. That means that the restrictions you impose in one contract are not cancelled out by the terms of another contract. An example of this dilemma can occur between the limits you impose on the kinds of information former employees can use once they leave your employ and what former customers of your services can do with any information they may have obtained. Without carefully coordinating the different layers of contracts, you could find former employees being able to do work for your former customers. That may not be a good thing.
Who Owns the Digital Work-Product? Whenever you have anyone create any work-product which can be protected by copyright or patent laws, you must take special care to assure that your business is considered theowner of the final creation. In the case of patentable works, the inventor is by law considered to be the owner. In order for your business to exploit the invention, the inventor must assign the patent to you in the form of a writing.
If the subject matter is covered by copyright protection, then it is critical to know whether it was a "work made for hire," as that phrase is interpreted by the Copyright Act of 1976, or whether it was created by an independent contractor. One of the best ways to forestall any disputes about ownership of the digital work-product, is to have a contract in place which specifies, as appropriate, that the work was either created by an employee within the scope of her employment or was of a kind specifically designated in the Copyright Act as a "work made for hire." If your digital work was not created under either of these circumstances, then you must have the creator of the work assign ownership in the work to you by means of a writing.
Carefully drafted employment agreements can eliminate many potential problems about how the digitized information of your business is treated. For example, what happens to your operations when the employee who created a software program for you, changes jobs and takes the rights to the product with him? To guard against your not being able to use or further adapt that product, you should include in your employment agreement a license allowing you to continue to use the software and to be able to maintain it or adapt it, as needed.
Regardless of who comes in contact with your special digital information, you should have in place agreements with them which protect your business' investment in your value intellectual property. So whether it is an employee, independent contractor or customer, consider having them sign an agreement, which, in addition to spelling out the business terms of your relationship, will have provisions to protect your digital content. The kinds of provisions I am suggesting include confidentiality, non-compete and non-disclosure.
What Am I Getting Myself Into? Representations, Warranties and Disclaimers:Representations, warranties and disclaimers are terms which appear in most contracts. However, something undecidedly new for transactions involving digital technology is concern for software or systems being infected by "worms" or "viruses". Therefore, it is important to have warranties from any outside group coming in contact with your in-house software that they will not infect it. You may want to include specific requirements such as before the delivery of any software, that the developer conduct sweeps or use specific programs to be sure there are no imported viruses. If you are the developer, you may want to include disclaimers as to any damages that may be caused to your customer by viruses. Likewise, if you are operating a business on the Internet, you may want to warn your website users that you are not responsible if their software were to become infected.
What Are Some of the New Contracts Which Can Affect Your Business' Digital Content?Some special kinds of contracts come to mind, namely: software development agreements, source code escrow agreements, website development agreements and, website hosting agreements. What follows are some thoughts about the structuring of each of these types of agreements.
Software Development Agreements: Because digital material can be easily duplicated and distributed, if you are in the business of producing software or products that rely on software to operate, it is better to license the product to the customer rather than sell it outright. Under a license, you can set broad limits on the customer's use of the product, whereas a sale means that the customer could acquire more rights in the final product than you really intended. Let's consider some examples. Suppose you write a customized software for other businesses. If you sell the software package, then the customer could go to other developers to modify it or could, in turn, sell the software to third parties. In the latter scenario, you may be exposing yourself to the possibility that the underlying software product, which originated with you, now contains materials for which you cannot vouch. By contrast, with a license agreement, you can limit the customer's opportunities to use the services of others to modify the software and you can also control the circumstances under which any copies of the software may be distributed to third parties.
Source Code Escrow Agreements: Because of the nature of how customized software is produced, this critical business asset requires more specialized treatment. What happens if the developer and/or servicer of the software goes into bankruptcy or is otherwise unavailable to perform in an ongoing relationship? Given the volatility of the industry, such a situation is not unforeseen. Unless, as the customer, you receive the source code to the product, you would not be able to maintain, modify, or assure continued access to the product. Yet the developer may only be willing to license the software to you so as to keep control over it and therefore will not release the source code. In the event of the developer's bankruptcy, as the customer, you would be out of luck unless your contract had provided for a source code escrow agreement. Under that kind of agreement, the source code is deposited with a neutral third party. If certain defined events occur, the agent is permitted to turn over the source code to you. While such an arrangement may not be a perfect solution and will result in increased costs, if the software is pivotal to your business's operations, being able to continue to use and adapt it in the short term until a more satisfactory arrangement is worked out could make all the difference in allowing you to keep the doors to your business open.
Website Development Agreements: Because there are no industry standards for designing websites, the respective responsibilities of the developer and customer should be carefully set forth such as: the statement of the work, specifications as to the deliverable's, standards of performance for the end users, what content will be provided by the customer, identification of procedures for testing, milestones for acceptance, and procedures for resolving ownership questions. As the developer, you may want authority not to use certain customer material you find objectionable or infringing. Alternatively, as the customer, you will want to have enough authority to use the site and maintain, upgrade, modify, and sub-license it even if the developer is no longer available.
Website Hosting Agreements: Most likely, your business will want to have a website that is available on the World Wide Web. That means that another entity will be providing you "hosting" services. Here are some issues that the host will likely want to see addressed in any hosting agreement. As the customer, your material must be in a format that is suitable for the service. The host may not be able to assure 24/7 accessibility of your site to third parties. The host will want assurance that your domain name does not infringe the rights of others. The contract will likely deal with whether your site may need more storage capacity and how updates of the site will be handled. The host will expect you to grant it a license to use the content on your website in order for the host to be able to render the agreed to services. In order to protect itself from claims by third parties for copyright infringement, it may reserve the right to remove content from your site or not authorize you to use chat rooms or bulletin boards.
Although you are operating in the digital age, you still do need to look to contracts to spell out how important issues will be addressed which will likely arise in the course of your business relationships. Although contracts seem to imply an old style of doing business, nonetheless they have been updated to deal with what is new. No matter what kind of technology is involved, taking the time in advance to spell out what is expected of either party in a business deal can only help achieve the bottom line for both parties.