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Original Equipment Manufacturer (OEM) Agreements
Table of Contents:
Key Contractual Concerns from the Perspectives of Both Parties
Scope of Use of Supplier Technology
□ Supplier technology may not be exploited separately from the OEM product
Distributors and Subdistributors
□ OEM’s right to use distributors and subdistributors
□ OEM liability for the actions of distributors and subdistributors
□ OEM’s right to private label
□ Supplier’s right to ensure its intellectual property rights are protected
Source Code Access
□ OEM access to source code
□ OEM’s liability for functionality and other issues resulting from modifications it makes to source code
□ Whether supplier can include open source in its products
□ Viral licenses
□ Protection of OEM proprietary software
□ OEM’s right to sell its products in geographic or industry-specific areas Support Obligations
□ First-level end-user support
□ Second-level support to OEM
□ Supplier training of OEM personnel
□ Protecting supplier from claims and damages from end users
□ Requiring the OEM to protect the supplier
□ Pass-through terms
□ OEM indemnity for failure to protect supplier
□ All you can eat
□ Per unit
□ Percentage of OEM product fees
□ Confirmation of calculation and payment of fees
Expansion of Scope
□ OEM’s rights to expand the scope of the engagement
□ Supplier professional services to modify and integrate its product
□ Professional service terms
□ OEM’s right to sell off products on termination of the agreement
□ Ongoing support
□ Term and termination
- Indemnity for unauthorized warranties
□ Limitation of liability
□ Acquisitions by the federal government
An Original Equipment Manufacturer (“OEM”) Agreement involves an arrangement where one party, sometimes called the supplier, furnishes technology to the other party, the OEM, for combination with other technology for redistribution as a complete product to customers, end users, and so on. The OEM essentially takes components provided by one or more suppliers, combines them with technology of the vendor, and creates a finished product. The OEM’s activity is sometimes referred to as adding value to the components supplied by the supplier(s).
OEM agreements are written from either the perspective of the OEM, the party making the distribution of the finished product, or the supplier, the party furnishing one or more pieces for incorporation into the finished product. The parties frequently have divergent interests. The OEM wants broad distribution rights, strong protections from claims of intellectual property infringement relating to the supplier’s technology, the right to potentially distribute the finished product under a private label arrangement (i.e., an arrangement in which the finished product appears to have been entirely created by the OEM), clear support obligations, and so on. In contrast, the supplier may be concerned about controlling liability for claims from end users or customers purchasing the finished product, protecting its intellectual property from misuse by end users and customers, limiting its responsibility for intellectual property infringement claims when its technology is combined with other technology, and so on.
As an aside, the difference between an OEM agreement and a reseller agreement should be noted. In a reseller agreement, the supplier’s technology is sold or licensed by the reseller as is (i.e., not as part of a larger product, but as a standalone product). In an OEM agreement, the supplier’s technology is never sold as a stand-alone product, but only as part of a larger product. In fact, it would be a breach of the OEM agreement to distribute the supplier’s technology in a stand-alone fashion.
Key Contracting Concerns from the Perspectives of Both Parties
Since a business may find itself serving in either the position of a supplier or OEM, the following provides a discussion of the key issues presented to both parties in these engagements. See Chapter 14 for issues focusing on the perspective of the OEM.
■ Scope of use of supplier technology. As a foundational issue, the agreement should define exactly how the supplier technology may be used. In most cases, that means identifying the specific OEM products or lines of products into which the supplier technology may be incorporated.
As noted above, the supplier will want to make clear that its technology can never be sold or licensed as a stand-alone product, but always as part of the overall OEM product; otherwise, the engagement would be nothing more than a standard reseller arrangement.
■ Distributors and subdistributors. In most OEM engagements, the OEM will require the use of distributors and subdistributors to get their products to market. The OEM agreement should spell out how these third parties may be used and the OEM’s liability for their actions.
■ Private labeling. Depending on the business goals of the relationship, the OEM may want the right to private label the final product. This means the final product will be sold as if entirely created by the OEM, with no mention of the supplier(s).
In private label arrangements, the supplier will want to require the OEM to nonetheless include all notices and references to the supplier as are necessary under the law to protect its intellectual property rights (e.g., copyright notices in the technology identifying the supplier must be retained).
■ Source code access. Apart from requiring the supplier to potentially escrow its source code to protect the OEM in the event the supplier ceases to do business or files for bankruptcy protection, the agreement should address whether the OEM needs access to the supplier’s source code from the outset (e.g., to integrate it into the OEM’s product, create interfaces), and if so, the uses that the OEM may make of the source code.
If the OEM has access to the source code, the supplier will be concerned with operational issues, bugs, and other problems that may result from the OEM’s modifications of the source code. Suppliers should disclaim liability for those issues (both for breaches of warranties and for intellectual property infringement claims resulting from those modifications) and, potentially, charging on a time and materials basis to assist in resolving those issues. Such work would be in addition to the OEM’s standard support obligations.
■ Open-source software. Open-source software is software provided in source code form that is made available under specialized licenses permitting their free and easy copying, modification, and distribution. Hie software is generally provided without license fees. Certain open-source software is provided under license agreements that contain a “viral” aspect. That is, if open-source software governed by a viral license is combined with proprietary software and redistributed, the viral license may require, among other things, that the combined product be provided without charge and that the source code of the combined product be disclosed. The most common viral license is the General Public License (http://www.gnu.org). In the context of an OEM engagement, if the supplier furnishes software to the OEM containing open-source software governed by a viral license, the result could be catastrophic for the OEM. Its valuable proprietary software that it combines with the supplier software could become subject to the viral license, requiring the OEM to essentially give away its software and disclose its source code to end users. As a result, all OEM agreements involving software should contain a strict prohibition on open-source software governed by these types of viral licenses. In most instances, to mitigate risk, OEMs prohibit any open-source software in the supplier’s product.
■ Territory. The agreement should specify the territory in which the OEM may sell or license its products containing the supplier technology. Tire territory may be geographic (e.g., North America) or industry-specific (e.g., healthcare or financial services).
■ Support obligations. The agreement should define the parties’ respective obligations with regard to support. Generally, the OEM is responsible for first-level support (i.e., support involving direct contact with end users or customers), while the supplier provides second-level support to the OEM’s support personnel. The agreement may define how the parties will integrate their support processes and personnel, support service levels, the OEM’s right to updates and enhancements to the supplier’s technology, and so on. The OEM’s concerns about the supplier’s support obligations are similar to those in any license agreement.
■ Training. In addition to support obligations, the OEM agreement may include language requiring the supplier to provide certain training to OEM personnel to ensure they have sufficient knowledge to operate and use the supplier’s technology.
■ End-user/customer liability. Potential liability of the supplier to end users and customers is a thorny problem. Since the supplier generally has no direct contract with the end user or customer (i.e., no “contractual privity”), it cannot limit its liability as it normally would through an end-user agreement.
The supplier is concerned with the possibility that the OEM product malfunctions or otherwise causes damage to the end user or customer; the end user or customer sues the OEM for damages, conducts discovery, and finds out that portions of the product were furnished by supplier; and sues the supplier. In such a case, the OEM will likely have fully protected itself by virtue of its direct contract with the end user or customer, but the supplier has no such protection. The other concern suppliers have with regard to end users and customers is the protection of its intellectual property (i.e., they need limits imposed on the end users and customers so that they do not misappropriate or misuse the supplier’s intellectual property). There are several ways to address these concerns:
In all of the approaches previously discussed, suppliers generally require the OEM to indemnify and hold them harmless from the OEM’s failure to fulfill its contractual obligations to protect the supplier.
■ Fees. Fees payable under OEM agreements can be calculated in a variety of ways. The OEM may purchase an “all you can eat” license permitting them to deploy an unlimited number of copies of the supplier’s technology in the OEM’s products. In other cases, the OEM may be required to pay the supplier a per-unit fee for each OEM product distributed containing the supplier’s technology. In still other cases, the supplier’s fee may be based on a percentage of the fee charged by the OEM for the finished product.
Fees payable by the OEM are frequently paid on a monthly or quarterly basis, with true-ups to reflect product returns, uncollected fees, and other similar adjustments.
■ Audit rights. If fees are calculated on a per-unit basis or as a percentage of the OEM’s product price, suppliers will generally require rights to audit the OEM’s records to ensure all fees have been calculated correctly and paid.
■ Expansion of scope. Depending on the engagement, it may be appropriate for the parties to discuss and prenegotiate terms for expansion of the scope of use of the suppliers technology (e.g., for other OEM products, for other territories).
■ Professional services. In many instances, the OEM may need the supplier to render certain professional services to assist in modifying its products or integrating them with the OEM’s products. The agreement should include appropriate professional service terms (e.g., statements of work, project management and staffing, change orders, professional service rates) to govern those services.
■ Sell-off period. It is common in OEM agreements to include a sell-off period on termination of the agreement. That is, the OEM will have an opportunity for a defined period of time following termination to continue to sell or license the OEM products containing the supplier’s technology and also an ongoing right to support end users who have previously purchased the OEM’s products. In such cases, the terms of the agreement will continue to apply during the sell-off period, provided that the OEM cannot sell or license the OEM products to any new end users.
■ Other issues. Common to any form of technology agreement, the OEM agreement should address the following issues:
■ Acquisitions by the federal government
• To protect both parties’ intellectual property, language should be included that is designed to mitigate any claim by the government that it is obtaining an ownership interest in their intellectual property.
OEM agreements afford suppliers an additional opportunity to exploit their technology and afford OEMs the ability to leverage technology created by others. While those agreements present many of the same issues presented in standard license and reseller engagements, there are issues relating to intellectual property, liability to end users, scope of use, and other issues found in no other type of technology engagement. Depending on your position in the engagement (i.e., OEM or supplier), you must ensure the agreement addresses your specific concerns.