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Drafting OEM Agreements (When the Company Is the OEM)

Checklist

Scope of Engagement

□ Agreement covers all relevant activities

□ NDA prior to substantive discussions

□ Describe coordination efforts

□ Who will contact customers?

□ “Private label”?

Customer Terms

□ Controlling liability

□ Appropriate license

□ Terms and conditions

□ Absolve of liability

□ Appropriate drafting

Territory

□ Geographic restrictions

□ Clear identification of restrictions

Hardware Products

□ How order will be placed

□ How order will be filled

□ Timing of orders

□ Return procedures

□ Warranty claims

□ Nonbinding order projections

□ Price reduction incentives

Exclusivity

□ Address exclusivity explicitly

□ Specific revenue commitments

□ Remedy is not breach of contract

□ Broad termination rights

Supplier Product Changes

□ Obligation to coordinate with company

Support and Training

□ Train personnel adequately

□ Ensure supplier cooperation

□ Specify service levels

Confidentiality

□ Strong clause in agreement

IP Issues

□ Standard commercial licenses

□ Terms and conditions

□ Returning products

□ Reserve rights explicitly

□ No transfer or assignment

Warranties/Disclaimers

□ Authority to enter agreement

□ Noninfringement

□ Free of known defects

□ Unaware of litigation

□ Freedom from viruses

□ Freedom from disabling code

□ Compliance with relevant codes

Limitations of Liability

□ Direct and consequential damages

□ Last three months of fees paid

□ Injury to persons

Indemnification

□ IP infringement claims

□ Supplier violation of applicable law

□ Products liability

□ IP infringement claims caused by OEM

□ Limited jurisdictions

□ Term and termination

Specific Initial Term

□ Agreement to renew company’s option

□ Automatic renewal

□ Company right to terminate without cause

□ Revenue commitments?

□ Breach of agreement

□ Sell-off period

□ Continue to support existing custom

Key Issues and Guiding Principles

This chapter discusses the different topics and issues that should be considered in entering into original equipment manufacturer (OEM) arrangements where the company will be the OEM (i.e., the company will take the software and hardware products of a supplier, combine those products with the company’s own products, and then sell the combination). These types of transactions can take several forms. In some engagements, the supplier’s assistance may be required to integrate its products with the company’s products. In other engagements, the company may want to “private label” the combined product (i.e., market and sell the combined product without identifying the supplier). Still other engagements may require close interaction of the parties in rendering support and warranty service to customers. Depending on the type of relationship, more detailed agreements may be required to fully address the parties’ respective integration and support obligations.

Hie summary provided in this chapter is designed to minimize the time required to negotiate these types of agreements, make the process proceed more smoothly, and ensure the company’s business and legal objectives are achieved.

Determine the Scope of the Engagement

■ As discussed in several other chapters, these types of relationships can take several forms. The first step is to determine the scope of the engagement and to ensure the agreement covers all relevant activities.

■ Depending on the nature of the information to be shared between the parties, a nondisclosure agreement should be entered into prior to commencing substantive discussions.

■ If substantial coordination will be required to integrate the supplier’s products with the company’s products, a detailed description of the coordination efforts should be attached to the OEM agreement.

■ Another preliminary matter is to determine who will have contact with customers for support issues. Hie company can provide “first-level” support directly to customers, with the supplier providing “second-level” support to the company’s own support personnel. In private-label arrangements, the company should have complete control over all contacts with customers.

■ Decide whether the engagement will be “private label” or if the supplier will be identified in some way in connection with the combined product.

Customer Terms

■ Appropriately drafted customer terms will protect both the company and the supplier from liability and minimize the potential for customer claims. Hiis is a key protection that is frequently overlooked or not addressed properly.

■ Since both parties will be providing their products to the ultimate customer, both parties will be concerned with controlling their liability to those customers. This control is achieved by providing the combined product to customers under an appropriate license or other terms and conditions, to be drafted by the company. It is common in the industry for the supplier to request that those terms and conditions protect its intellectual property and absolve it of liability directly to the customer. This can be achieved by the parties specifically agreeing on the terms to be presented to customers. Another common approach is to require the OEM, in this case the company, simply to commit to ensuring the customer terms will protect the supplier from liability, disclaim warranties, and protect its intellectual property.

■ In many OEM agreements, the supplier may request restrictions on the geographic territory in which the combined product can be sold. In general, it is best to seek the ability to sell to the entire world, but this may not be possible in all engagements. The point is to ensure that if there are territorial restrictions, those restrictions are clearly identified in the contract.

 
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