Hardware Products

■ If the supplier will be furnishing hardware products, the agreement should address how the order will be placed and filled, the timing of those orders, return procedures, and handling of warranty claims.

■ To ensure the supplier can satisfy the company’s requirements, it may be appropriate to include the ability of the company to provide the supplier with nonbinding projections of future order volumes.

■ If delivery timing is critical, incentives in the form of price reductions should be included to ensure the supplier delivers on time (e.g., the sales price might be decreased by 3% for each week the supplier is late in delivering its products).

Exclusivity

■ If the supplier is to be exclusive to the company (i.e., the supplier can furnish its products only to the company), the supplier may require specific revenue commitments from the company. The remedy for failure to achieve those commitments should not, however, be breach of contract, but merely loss of exclusivity.

■ If the supplier is seeking exclusivity from the company (i.e., that the company will not buy similar products from another supplier), the contract must have appropriate and broad termination rights for supplier performance issues, product defects, infringement claims, and other similar matters.

Supplier Product Changes

■ If the supplier’s product will be closely integrated into the company’s products, the agreement should impose obligations on the supplier to coordinate with the company in the event the supplier contemplates any changes to its products that could impact that integration. In most instances, the parties will want to agree on joint testing protocols to ensure the combined product works properly.

Support and Training

■ The agreement should require the supplier to train company personnel adequately about the supplier’s products, ensure the supplier cooperates with the company in rendering support and processing warranty claims, etc. If support response time is critical, the agreement should specify service levels for the supplier’s support obligations. The contract may also address the possibility of doing “warm handoffs” from the company to the supplier of certain customers to handle highly unique or complex issues.

Confidentiality

■ Since the parties will likely be exchanging product information, marketing plans, customer names, and other sensitive information, the agreement should include a strong confidentiality clause.

Intellectual Property Issues

■ If the company will be providing any software or other products to the other party for purposes of joint support, product integration, or other activities, the products should be provided under their standard commercial licenses and/or product terms and conditions. Since the products are not being provided as the result of a normal license or purchase transaction, the agreement should make clear the products are provided on an as-is basis. The products should be returned on expiration or termination of the agreement or at any time on the company’s request.

■ The agreement should contain a clear statement that each party reserves all rights in its intellectual property and that neither party is transferring or assigning any rights in its intellectual property.

Warranties and Disclaimers

■ At a minimum, the agreement should contain a range of warranties from the supplier, including the following:

  • - Authority to enter into the agreement
  • - Noninfringement
  • - The products are free of known defects
  • - The supplier is unaware of any litigation, including products liability claims, relating to its products
  • - Freedom from viruses and disabling code
  • - Compliance with all fire, electrical, environmental, health and safety, and other relevant codes, regulations, and laws

■ Unless the agreement includes specific revenue commitments, a disclaimer should be added making clear that neither party is guaranteeing the other party will derive any specific revenue from the relationship.

Limitations of Liability

■ Apart from liability relating to indemnity obligations, breach of confidentiality, or a party’s misappropriation of the other party’s intellectual property, the agreement should disclaim essentially all other liability for both direct and consequential damages. It is common to limit liability to several (e.g., the last three) months of fees paid, if any.

■ If consumer products are involved, another exclusion from all limitations of liability should be added for injury to persons.

Indemnification

■ The supplier should be required to indemnify the company from intellectual property infringement claims (unless a claim arises from the company’s combination of the supplier’s product with something the supplier has not provided), the supplier’s violation of applicable law, and products liability claims (particularly if hardware is being supplied). If the supplier insists, it is common to require the OEM, in this case the company, to provide an indemnity from any intellectual property infringement claims that it causes.

■ If the supplier seeks to limit the jurisdictions in which it will provide an intellectual property indemnity, make sure those jurisdictions include all areas of the territory in which the company has been licensed to sell the combined product.

Term and Termination

■ The agreement should contain a specific initial term. Since the supply of the products may be critical to the company’s marketing plans, the agreement should renew at the company’s option (but not the supplier’s option) for an additional two to three years. Thereafter, the agreement would typically automatically renew for additional one-year terms unless either party gives notice of its intent not to renew.

■ Unless business reasons dictate otherwise, the company should have the right to terminate the agreement for convenience at any time, without cause, on written notice to the supplier (e.g., thirty days’ prior notice). This may not be possible where revenue commitments are required.

■ Either party should have the right to terminate the agreement if the other party breaches the agreement.

■ In the event of a termination, it is critical to include a “sell-off period” during which the company can sell off the stock of combined products on hand. This period can range from six months to a year.

■ Regardless of the reason for termination, the company must ensure it has the right to continue to support the existing customer.

Summary

OEM arrangements where the company is the OEM can be sensitive in terms of protecting all of the company’s interests. The summary included in this chapter should reduce the difficulty of negotiating these agreements, making the process progress quickly and ensuring the company’s business and legal objectives are agreed.

 
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