1 Computer Law Association CyberSpace Camp 2001 Key Elements of Information Technology System Acquisitions Michael J. Silverman, Duane, Morris & Heckscher,

1

Computer Law AssociationCyberSpace Camp 2001

Key Elements of Information Technology System Acquisitions

Michael J. Silverman, Duane, Morris & Heckscher, LLP Chicago

Help

2

Project Failure/Impairment Rates Are Very High

• 16.2% of respondents reported projects on time, within budget, and containing all of the functionality required.

• 52.7% reported projects completed, but impaired by

– cost overruns

– increased time needed to complete the effort, or

– need to slim down the functional requirements.

• 31.1% of projects failed completely.

• The failures do not result from the use of immature technologies.

– Research data shows that immature technologies cause project failures less than five percent of the time.

Source: InfoWorld, January 31, 2000, p. 70 “Technology won’t end project failures; communication is key,” citing reports by the Standish Group and GartnerGroup.

3

From the home office . . . Top 10 Reasons for Failure

• Lack of end-user or customer input

• Incomplete requirements planning

• Mismanagement of requirements changes

• No executive management support

• Lack of skills in required technologies

• Lack of business process knowledge

• Resource shortages

• Lack of ownership

• Unrealistic goals or time lines

• Immature technologies

Source: InfoWorld, January 31, 2000, p. 70 “Technology won’t end project failures; communication

is key”

4

The Project• What are you buying and how did you get there?

• The process

– Client identifies particular software/hardware needed and makes an outright purchase

– Developer responds to RFP or performs an analysis and makes recommendation regarding solution

• In the Contract, describe how the project was initiated and identify the response to the RFP or the recommendation

5

The Analysis by Developer or the RFP

• “At Client’s request and expense, developer conducted an analysis of Client’s business and current and future growth plans relating thereto; the computerized and manual procedures utilized by Client to perform its information processing needs; and the hardware and software associated with the foregoing procedures.”

– OR . . . .

• “Client issued an RFP dated xx/xx/xx detailing certain information regarding the Client’s business and current and future growth plans relating thereto; the computerized and manual procedures utilized by Client to perform its information processing needs; and the hardware and software associated with the foregoing procedures; and terms and conditions relating to the Project. The RFP is attached as Exhibit ___.”

6

• “Based on the Developer’s review and analysis of the [Client’s business] [RFP], Developer delivered a Proposal dated xx/xx/xx setting forth various conclusions and recommendations regarding the Client’s current and future data processing needs and the hardware and software recommended to meet those needs. The Proposal is attached as Exhibit ____.”

The Proposal

This is my bestwork yet!

7

What will Developer Deliver?

• Identify in detail the system/software that Developer will deliver.

– Ambiguity hurts both parties.

– Refer to detailed requirements or design documentation.

– Incorporate the document as an exhibit.

• Developer’s commitment to develop system

– “Developer agrees to develop for Client a computer system consisting of hardware and software (“the Custom System”) capable of providing the data processing services identified in the Proposal . . . .”

• Developer likely to resist the incorporation of the Proposal and RFP.

– Creates difficult standard

• Sounds like Developer agrees to create system that “meets clients needs.”

– Changes during project will make Proposal/RFP obsolete.

8

• “Developer to deliver warehouse management system/software with the functionality described in the XYZ Software User Documentation document dated xx/xx/xx, and attached as Ex. A.”

• Developer will create system documentation during the project.

– Developer can commit to develop a “system which, in all material respects, complies with the documentation developed during the project.”

Other options

9

Developer’s System Development Methodology

• Most Developers apply a structured methodology for developing systems and software.

– Documented, repeatable, reliable standard reduces risk

– Phases

• Requirements gathering

• Planning

• Design

• Documentation

• Development/Construction

• Testing

• Training

• Implementation

• Support & Maintenance

• The methodology is a tool for reducing risk and marketing services.

10

Commitment to apply methodology

• Developer should commit to follow its methodology, modified as appropriate for the project.

– If Developer does materially modify how the methodology is applied to the project, Developer should document its reasons for doing so.

• “Developer shall develop and implement the Custom Application in accordance with

– its SuperFastRapidSpeedy Development Methodology, modified as Developer deems appropriate under the circumstances; the phases, tasks, deliverables, order of performance and completion dates specified in the Project Plan; and Client’s corporate system standards.”

11

Acceptance Process

• Clients want the right to accept or reject Deliverables provided by Developer.

• Developer wants to limit this right so that Client can reject for only material, key issues and so Client does not have an unlimited time to make up its mind.

• Key to the entire acceptance process

– Documentation of the requirements for each deliverable.

It’s alright? It’s OK

12

The Software License

• Identify the software

• Describe the type of license

– Source code or object code

– Non-exclusive, worldwide, perpetual, royalty free

– Include license to use documentation as well

• Describe permissible uses

– “Use, display, transmit the Licensed Software in Object Code only on the computer system designated in Exhibit B and only for use on Client’s XYZ Server.”

• Site license

• Enterprise-wide license

– Any geographic or business field limitations?

– Use of software on the internet limits the efficacy of restrictions on geographic regions or business field.

13

Core Software v. Custom Software

• Where Developer uses and delivers third party software (“Core Software”) as part of the Custom Software . . .

• Client should also receive a license to use the Core Software.

License

14

• Developer creates software for the Client and retains no copyright or other ownership rights in the software.

– “All Developer’s work, including but not limited to, materials, documents, recommendations, studies, plans, drawings, screen designs, screen outputs, and Software, but excluding Core Software, will conclusively be deemed “works made for hire” within the meaning of §101 of the U.S. Copyright Act, 17 USC 101 et seq, and Client will be the sole copyright owner thereof . . .”

• Include a provision in which Developer assigns all rights to the work in the event it is not deemed a work for hire.

– “To the extent any of the Work does not qualify as or is not deemed a “work made for hire”, Developer hereby irrevocably grants, conveys, assigns, transfers, and delivers to Client, all right, title and interest in and to the Work and the copyrights and all U.S. and foreign copyright registrations . . . and other intangible intellectual property embodied in or pertaining to the Work, and all goodwill relating thereto . . . .”

Work for Hire

15

Warranty of Performance of System/Software

• What is the scope of the warranty?

– Warranty that the Software will be free of material defects, frequent errors.

– Warranty that the software conforms to

• RFP/Proposal

• Specifications

– Business design

– Technical design

• Documentation

– Warranty that the Software will work on the recommended hardware

– Warranty that the Developer followed its system development methodology

– Warranty response time

– Warranty of limited down time

16

Warranty terms

• Length of warranty period

• When does the warranty begin?

– Upon delivery

– Upon completion of certain phases of testing

– Upon commercial use

• Measurement of warranty obligations

– Clearly identify the standard against which the operation of the System will be measured.

– Good specifications are vital to determining whether a problem is covered by warranty.

Fix It Now! AndStop Groveling

But what’s wrong with it?

17

Disclaimer of Warranties

• Implied Warranties - UCC provides for certain standard warranties which must be CONSPICUOUSLY modified or excluded if Developer does not wish to be bound by them

– Merchantability

– Fitness for particular purpose

– Ownership

– See, UCC 2-312, 2-314, 2-315, 2-316.

• Example– “OTHER THAN AS SET FORTH IN THIS AGREEMENT, THE LICENSOR

MAKES NO REPRESENTATIONS OR WARRANTIES OF ANY KIND CONCERNING THE LICENSED SOFTWARE, UPGRADES, CUSTOM APPLICATIONS AND DOCUMENTATION OR THEIR USE, FUNCTION OR OWNERSHIP, AND SHALL NOT BE LIABLE IN ANY MANNER FOR ANY REPRESENTATION OR WARRANTY OF ANY KIND, WHETHER EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABLE QUALITY OR FITNESS FOR A PARTICULAR PURPOSE OR THAT THE LICENSED SOFTWARE, UPGRADES, CUSTOM APPLICATIONS AND DOCUMENTATION WILL BE ERROR FREE.

18

Remedies

• Remedies for breach of warranty

– Repair/replacement

– Termination of contract

– Return of fees

• Participation in a gradually escalating, internal dispute resolution process

– Process

• Disputes are brought to internal dispute resolution group composed of representatives of Developer & Client.

• Parties try to resolve dispute and progressively escalate to higher level personnel to resolve.

– Why bother?

• Long term relationship

• Termination would be very harmful to both parties

19

Limitation of Liability

• Types of liability

– Direct damages vs. consequential, punitive, exemplary damages

– Breach of contract, fraud, negligence, gross negligence, intentional misconduct.

• Limitation of amount of damages

– Amounts paid under the contract

– Amounts paid under the contract for the 12 months prior to event giving rise to the claim.

• Example

– “In no event shall Developer be liable for any special, indirect, consequential, punitive or exemplary damages of any nature, even if Developer has been advised of the possibility of such damages. Notwithstanding the foregoing, Developer’s liability arising out of this Agreement shall not exceed the fees paid by Client to Developer during the 12 months prior to the occurrence giving rise to the claim.”

20

Enforcement of damages limitations varies

• Where the default or failure is so severe that the contract fails of its essential purpose, some courts may be willing to avoid the damages limitations clauses. RRX Industries v. LabCon, 772 F.2d 543 (9th Cir. 1985) but see Kearny & Trecker v. Master Engraving, 107 NJ 584, 527 A.2d 429 (NJ 1987).

21

IP Delivered by Developer

• Warranty of title & non-infringement

– Client wants assurance that the Developer/Licensor actually owns the copyright to the software; otherwise, Client will be buying an infringement lawsuit.

– Examples:

• “Licensor owns all right, title, interest and copyright rights in and to the Licensed Software delivered pursuant to this Agreement.”

• “ The Licensed Software does not infringe upon or violate the U.S. copyrights, patents, trade secrets, trademarks, or other intellectual property rights of any third party.”

22

Licensor Indemnification for IP Claims

• Client will want to be indemnified if it gets sued for infringement arising out of the Licensed Software

• Example

– “The Licensor hereby agrees to indemnify, defend and hold harmless the Licensee from and against any and all losses, expenses, claims, actions, proceedings, damages or liabilities based upon any claim that the Licensed Software, as used pursuant to this Agreement, infringes any U.S. patent issued as of the Effective Date or any copyright, trade secret, or trademark (“IP Claim”).”

Hey! Wake up! He’s almost done

23

• Infringement arises out of unuathorized combination or use of Licensed Software

– “This Section shall not apply if the alleged infringement is due to combination, operation or use of Licensed Software with other software that does not originate from the Licensor.”

Exclusions from IP Indemnification

Who writes thisguy Silverman’s

material?

24

• Client requires Developer to design a system which infringes on Amazon’s “One-Click” patent.

• Example language

– “This Section shall not apply if the alleged infringement arises out of the use of technology, business methods, trade secrets, know-how, or copyrighted material provided by Licensee to Licensor and used or incorporated by Licensor in a Custom Application in accordance with Licensee's instructions (“Non-Indemnified IP Claims”), even if the Licensor has been made aware of the occurrence of the foregoing. Provided, however, if Licensor is responsible for developing, identifying, or creating the manner in which the technology or business methods are incorporated in the Custom Application, and such manner of incorporation gives rise to the alleged infringement, then such alleged infringement shall not be deemed a Non-Indemnified IP Claim.”

Infringement arises out of Developer’s use of materials or information provided by Client

25

Ownership and Confidentiality

• Developer will want to protect its ownership rights and the trade secret nature of its Licensed Software

– “Licensee acknowledges that [Licensor claims that] the Licensed Software being provided by the Licensor hereunder, and any Updates, Upgrades, and Custom Applications made by or on behalf of the Licensor or Documentation provided by the Licensor with respect thereto, are the sole and exclusive property of the Licensor and that the Licensee acquires no right, title or interest therein, except the limited rights to use the Licensed Software as set forth in this Agreement.”

• Client will want to protect its business information provided to Developer

– “The Developer acknowledges that the Client’s business plans, customer information, designs, know-how, specifications and other information related to Client’s business or prospective business are also confidential and contain valuable trade secrets of the Licensee.”

26

Both parties to be required to maintain confidentiality

– “Each Party agrees to maintain the confidentiality of and not to release, disclose or divulge the other Party’s Confidential Information or any part thereof to any person without the prior written consent of the disclosing Party.”

27

Prohibition against modifying, reverse engineering

• Client shall not modify, decompile, or reverse engineer the object code or otherwise attempt to derive the source code.

Where’s my secret decoder

ring?Why am I

always last?

28

Claims

• Breach of contract

– Likely to be subject to damages limitations

• Fraud

– Knowing misrepresentation of material fact with the intent to deceive and reasonable reliance by the other party to its detriment

– Likely to be subject to damages limitations in contract and under state law (The Moorman Doctrine)

• Negiligent misrepresentation

– Intent to deceive not required

– Likely to be subject to contractual damages limitations and state law damages limitations

• Magnuson Moss Act - Suppliers and warranties regarding consumer products 15 USC 2301.

• State Consumer Fraud Statutes

29

Defenses

• Client failed to perform its obligations

– Subject matter experts

– Staff needed to perform testing

• Client failed to disclose vital information necessary to develop the system

• Client caused scope creep

• Client accepted the System

30

Thank you!

Michael J. Silverman, Partner, Telecommunications & Information Technology Practice Group

Duane, Morris & Heckscher LLP

227 W. Monroe St., No. 3400

Chicago, IL 60606

312.499.6707

[email protected]

68496.1

31