Buyer Beware IP Issues in Corporate Purchasing

Every year, large multinational corporations purchase billions of dollars of goods and services for both internal use and for resale. While seemingly unrelated to traditional disciplines of patent, trademark, trade secret and copyright law, corporate purchasing is surprisingly replete with a myriad of intellectual property related issues. Such purchasing can include a combination of goods and services. For example, computer hardware and software may be purchased/licensed in conjunction with professional services, such as software consulting. While corporate purchasing has been relegated traditionally to the back burner, especially when considering issues related to intellectual property, the purchasing of goods and services does involve significant issues in all the major intellectual property law disciplines.

Generally, in any purchasing engagement, there will be an exchange of company and third-party supplier information, materials and data. Ideally, the purchasing company should take as many measures as possible to protect as much of its own information and, conversely, as little of a vendor's information as contractually possible. During the course of establishing contact with a vendor and making an actual purchase, the vendor will invariably be exposed to sensitive company information while, for example, making on-site sales calls, performing system or software maintenance, conducting demonstrations, and/or implementing the purchased goods. In some situations, a nondisclosure agreement between the company and supplier executed prior to any purchase may provide the necessary protections or, alternatively, the actual purchase agreement may incorporate confidentiality provisions.

By way of example, a clause such as the following may be used to protect company information:

As a result of Supplier's anticipated or actual performance under this Agreement, Supplier may receive or become exposed to (a) Company's intangible information expressed in the form of ideas, data, programs, technical, business or other types of intangible information, or (b) Company's documents, prints, tapes, discs, or other types of tangible information (such tangible and intangible information hereinafter called “Information”). Supplier agrees to (1) keep all such Information confidential and use such Information only for performing under this Agreement; (2) inform Supplier's employees, contractors and agents of their obligations to keep such Information confidential and require those employees, contractors and agents to honor such obligations by written agreement; and (3) promptly surrender or destroy such Information, and any copies thereof, free-of-charge, when requested to do so by Company.

Conversely, a corporate purchaser should strive to agree to as little protection for the vendor's or supplier's information that can be negotiated, so as the company will have little or no obligation to treat information from the vendor as confidential. The following clause is representative of such a position:

No specifications, drawings, sketches, models, samples, tools, computer or other apparatus programs, technical or business information or data, written, oral, or otherwise, furnished by Supplier to Company under this Agreement, or in contemplation of this Agreement shall be considered confidential or proprietary.

Of course, it may be necessary to carve out certain types of supplier information, such as in a software-related agreement where the vendor would be providing information to the company with some expectation of confidentiality in the software's use and dissemination. Additionally, suppliers typically and reasonably seek to carve out information related to their product/service pricing so that this information cannot be shared with competing suppliers and other third parties.

Aside from the supplier information provision, the most often negotiated issue in a typical purchase agreement revolves around indemnification. Generally, the Uniform Commercial Code's warranty against infringement provides a warranty that the buyer's use of the product will not cause the buyer to infringe an intellectual property right of any third party. However, a contractually negotiated clause should seek protective and compensatory measures that go well beyond such a fallback protection. For example:

Supplier agrees to indemnify Company, its affiliates, its and their customers and each of their officers, directors, employees, successors and assigns (all hereinafter referred to in this clause as “Company”) from and against any proved or alleged claims, demands or suits, or any losses, damages, liabilities, fines, penalties and expenses (including attorney's fees) that in any way arise out of, relate to or result from this Agreement, or the items, tangible or intangible, furnished or Services performed under or in contemplation of this Agreement including, but not limited to actual, alleged or adjudged infringement of any patent, copyright, trademark, trade secret or other intellectual property right. Supplier agrees to defend and hold harmless Company, at Company's request, against any such claim, demand or suit. Company shall have no indemnity obligations to Supplier.

Clearly, while this one-sided provision glaringly favors the purchasing company, the realities of each negotiated transaction result in a number of carve outs, which are routinely demanded by suppliers.

Typically, these supplier-demanded carve outs relate to either modifications or combinations of the goods/services being sold. For example, suppliers will routinely seek to be relieved of their indemnification obligations where modifications to their goods/services are made either by the purchasing company, so-called nonauthorized third parties or by the suppliers themselves where such modifications are made under the specific authority and direction of the company. With respect to combinations, suppliers will often demand that their indemnification obligation be relieved where their supplied goods/services are used in combination with other goods/services, which are not furnished by the supplier. While seemingly reasonable, as is often the case with software-related purchases, it may be impossible to use the software in an environment where only the sole supplier's goods/services interact with the software.

Accordingly, if such a carve out is agreed to, purchasing companies should seek to further qualify the language so that the supplier will not be relieved of its obligations under the clause, so long as the software is being used for its intended purpose or for a reasonably contemplated manner under the agreement. For example, it may be proposed that:

Supplier will indemnify Company except where such infringement or misappropriation arises solely from Supplier's adherence to Company's written instructions which are so specific as to directly cause such infringement or misappropriation, in which case Company shall so indemnify Supplier; provided, however, if such instructions specify (a) products or services available on the open market or the same as such products or services or (b) products or services of Supplier or of Supplier's designated origin or design or selection, and the adherence to such instructions results in such infringement or misappropriation, then Supplier shall indemnify Company for any such infringement or misappropriation.

Less prominently negotiated, but no less important in a purchasing agreement, is the publicity or identification clause. In all purchasing arrangements, the purchasing company should rightfully impose strict guidelines and controls on the use of its name by the vendor so that such name or corporate designation is not used without consent in, for example, a sample customer listing or other advertisement that may not reflect advantageously on the corporation. It is somewhat expected and common that without the proper protections, a vendor will openly reference the company as being associated with the vendor in advertisements, or orally through salespeople touting its existing relationships to other potential customers.

Corporations thus should insist on language that protects them from having a vendor unceremoniously and flagrantly using their names or identities in any context without at least prior written notice and permission, such as the following:

Supplier/vendor shall not, without Company's prior express written consent, engage in advertising, promotion or publicity, or make public use of any trademark, tradename, corporate name, insignia, designation or other identifying indicia related to Company in any circumstances related to this Agreement.

From the vendor's perspective, in light of recent increasing corporate reporting and accounting burdens, it not uncommon to see requests from vendors for certain carves outs, such as to permit disclosure to accounting and legal representatives of the vendor.

Finally, an important and ever more present consideration in a purchasing arrangement is to seek a trade balance between the purchasing company and supplier, especially in situations where the company may be acting as a supplier to certain of its own suppliers. For example, a company may be purchasing products from a vendor who, in turn, is purchasing services from the same company. In this scenario, the values of the existing relationships on each side, both political and economic, must be considered and the business repercussions evaluated during negotiations to address such concerns. So-called balance of trade considerations is becoming more the norm as corporations diversify and expand their range of goods and services. Inevitably, one who was once only the customer now also becomes the supplier and vice versa. Thus, it not uncommon for the so-called purchasing agreement to evolve into a more collaborative agreement that can and will implicate serious intellectual property concerns as ownership and protection of each side's information is addressed.

Every year, large multinational corporations purchase billions of dollars of goods and services for both internal use and for resale. While seemingly unrelated to traditional disciplines of patent, trademark, trade secret and copyright law, corporate purchasing is surprisingly replete with a myriad of intellectual property related issues. Such purchasing can include a combination of goods and services. For example, computer hardware and software may be purchased/licensed in conjunction with professional services, such as software consulting. While corporate purchasing has been relegated traditionally to the back burner, especially when considering issues related to intellectual property, the purchasing of goods and services does involve significant issues in all the major intellectual property law disciplines.

Generally, in any purchasing engagement, there will be an exchange of company and third-party supplier information, materials and data. Ideally, the purchasing company should take as many measures as possible to protect as much of its own information and, conversely, as little of a vendor's information as contractually possible. During the course of establishing contact with a vendor and making an actual purchase, the vendor will invariably be exposed to sensitive company information while, for example, making on-site sales calls, performing system or software maintenance, conducting demonstrations, and/or implementing the purchased goods. In some situations, a nondisclosure agreement between the company and supplier executed prior to any purchase may provide the necessary protections or, alternatively, the actual purchase agreement may incorporate confidentiality provisions.

By way of example, a clause such as the following may be used to protect company information:

As a result of Supplier's anticipated or actual performance under this Agreement, Supplier may receive or become exposed to (a) Company's intangible information expressed in the form of ideas, data, programs, technical, business or other types of intangible information, or (b) Company's documents, prints, tapes, discs, or other types of tangible information (such tangible and intangible information hereinafter called “Information”). Supplier agrees to (1) keep all such Information confidential and use such Information only for performing under this Agreement; (2) inform Supplier's employees, contractors and agents of their obligations to keep such Information confidential and require those employees, contractors and agents to honor such obligations by written agreement; and (3) promptly surrender or destroy such Information, and any copies thereof, free-of-charge, when requested to do so by Company.

Conversely, a corporate purchaser should strive to agree to as little protection for the vendor's or supplier's information that can be negotiated, so as the company will have little or no obligation to treat information from the vendor as confidential. The following clause is representative of such a position:

No specifications, drawings, sketches, models, samples, tools, computer or other apparatus programs, technical or business information or data, written, oral, or otherwise, furnished by Supplier to Company under this Agreement, or in contemplation of this Agreement shall be considered confidential or proprietary.

Of course, it may be necessary to carve out certain types of supplier information, such as in a software-related agreement where the vendor would be providing information to the company with some expectation of confidentiality in the software's use and dissemination. Additionally, suppliers typically and reasonably seek to carve out information related to their product/service pricing so that this information cannot be shared with competing suppliers and other third parties.

Aside from the supplier information provision, the most often negotiated issue in a typical purchase agreement revolves around indemnification. Generally, the Uniform Commercial Code's warranty against infringement provides a warranty that the buyer's use of the product will not cause the buyer to infringe an intellectual property right of any third party. However, a contractually negotiated clause should seek protective and compensatory measures that go well beyond such a fallback protection. For example:

Supplier agrees to indemnify Company, its affiliates, its and their customers and each of their officers, directors, employees, successors and assigns (all hereinafter referred to in this clause as “Company”) from and against any proved or alleged claims, demands or suits, or any losses, damages, liabilities, fines, penalties and expenses (including attorney's fees) that in any way arise out of, relate to or result from this Agreement, or the items, tangible or intangible, furnished or Services performed under or in contemplation of this Agreement including, but not limited to actual, alleged or adjudged infringement of any patent, copyright, trademark, trade secret or other intellectual property right. Supplier agrees to defend and hold harmless Company, at Company's request, against any such claim, demand or suit. Company shall have no indemnity obligations to Supplier.

Clearly, while this one-sided provision glaringly favors the purchasing company, the realities of each negotiated transaction result in a number of carve outs, which are routinely demanded by suppliers.

Typically, these supplier-demanded carve outs relate to either modifications or combinations of the goods/services being sold. For example, suppliers will routinely seek to be relieved of their indemnification obligations where modifications to their goods/services are made either by the purchasing company, so-called nonauthorized third parties or by the suppliers themselves where such modifications are made under the specific authority and direction of the company. With respect to combinations, suppliers will often demand that their indemnification obligation be relieved where their supplied goods/services are used in combination with other goods/services, which are not furnished by the supplier. While seemingly reasonable, as is often the case with software-related purchases, it may be impossible to use the software in an environment where only the sole supplier's goods/services interact with the software.

Accordingly, if such a carve out is agreed to, purchasing companies should seek to further qualify the language so that the supplier will not be relieved of its obligations under the clause, so long as the software is being used for its intended purpose or for a reasonably contemplated manner under the agreement. For example, it may be proposed that:

Supplier will indemnify Company except where such infringement or misappropriation arises solely from Supplier's adherence to Company's written instructions which are so specific as to directly cause such infringement or misappropriation, in which case Company shall so indemnify Supplier; provided, however, if such instructions specify (a) products or services available on the open market or the same as such products or services or (b) products or services of Supplier or of Supplier's designated origin or design or selection, and the adherence to such instructions results in such infringement or misappropriation, then Supplier shall indemnify Company for any such infringement or misappropriation.

Less prominently negotiated, but no less important in a purchasing agreement, is the publicity or identification clause. In all purchasing arrangements, the purchasing company should rightfully impose strict guidelines and controls on the use of its name by the vendor so that such name or corporate designation is not used without consent in, for example, a sample customer listing or other advertisement that may not reflect advantageously on the corporation. It is somewhat expected and common that without the proper protections, a vendor will openly reference the company as being associated with the vendor in advertisements, or orally through salespeople touting its existing relationships to other potential customers.

Corporations thus should insist on language that protects them from having a vendor unceremoniously and flagrantly using their names or identities in any context without at least prior written notice and permission, such as the following:

Supplier/vendor shall not, without Company's prior express written consent, engage in advertising, promotion or publicity, or make public use of any trademark, tradename, corporate name, insignia, designation or other identifying indicia related to Company in any circumstances related to this Agreement.

From the vendor's perspective, in light of recent increasing corporate reporting and accounting burdens, it not uncommon to see requests from vendors for certain carves outs, such as to permit disclosure to accounting and legal representatives of the vendor.

Finally, an important and ever more present consideration in a purchasing arrangement is to seek a trade balance between the purchasing company and supplier, especially in situations where the company may be acting as a supplier to certain of its own suppliers. For example, a company may be purchasing products from a vendor who, in turn, is purchasing services from the same company. In this scenario, the values of the existing relationships on each side, both political and economic, must be considered and the business repercussions evaluated during negotiations to address such concerns. So-called balance of trade considerations is becoming more the norm as corporations diversify and expand their range of goods and services. Inevitably, one who was once only the customer now also becomes the supplier and vice versa. Thus, it not uncommon for the so-called purchasing agreement to evolve into a more collaborative agreement that can and will implicate serious intellectual property concerns as ownership and protection of each side's information is addressed.