E-commerce: Legal finesse, 02/28/00

Your company just finished developing a hot product, and the directive to sell it over the Web has come from the top. You’ve done your research and know that to reap the benefits of e-commerce fully, you’ll need an extranet. Just as you’ll sell your product online, you’ll order materials and conduct business with distributors via the Web. You’ve got the technology — but hold on. A great extranet means more than an unstoppable IP network. At least as important is the contract with your extranet business partners.

When hashing out an extranet contract, you and corporate counsel should start with the usual legal points — terms and termination, indemnification, liability limits, nondisclosure and exclusivity. But an extranet contract has a unique take on “representation and warranties,” a common contractual term that means the parties involved have the authority to enter into the contract. Likewise, you should understand the technical ramifications of the legal issue “source-code escrow” and be able to advise the lawyers on who should be responsible for site maintenance, availability, security and backup.

Before agreeing to share data over an extranet, you should first know what it is you’re showing and to whom — in other words, protect your intellectual property. This is the concept of “zones” used by carriers, says David Lafferty, president of Scientific Technology Services, a systems integrator in Anchorage, Ala. Lafferty breaks extranets into four zones: private (data you never intend to share); company (your company owns this data, but shares it with business partners); shared (your company doesn’t own the data, but needs access to it); and public (any data you freely display).

Zone provisions may be laid out in a contract’s representation and warranties section. In addition to declaring that those who sign the contract have the right to do so, this section dictates exactly what the parties guarantee.

For an extranet, warranties are the hot spots. Partners should commit to what material is being shared, nondisclosure on that material if it is in the company or shared zones, and, in the case of software, who will warrant the shared material’s performance. For instance, if applets or servlets are being shared for order entry or back-end processing, a contract needs to address performance. This section of the contract might include language such as: “Company A will ‘represent and warrant’ that any bugs to said software will be repaired within 24 hours.” Of course, acceptable response times, ongoing maintenance and the distribution of upgrades are all areas to dicker over and agree upon contractually.

Nondisclosure should get more than a cursory glance from you and your counselor. Must your partner stay mum over sensitive issues for the life of the contract? Forever? Or sometime in between? Spell it out, Lafferty says. Sensitive issues could include research and development news, product information and technological details — information that would be considered private, company or shared.

With these ducks in a row, it’s time to establish the business contract, outlining joint goals, advises Marilynne White, vice president and general counsel at Logical Design Solutions (LDS), an e-business consulting firm in New York. “One hurdle of an extranet contract is matching business styles,” she says. The contract should establish what each party expects to receive and contribute in demonstrable terms.

Extranet go-getter
K. Hawk

Site maintenance was a big contractual issue for iGo Corp., the cellular accessory supplier for Dell and one of the online sellers in Ariba’s e-marketplace. “You need to make it clear who’s responsible for what. Accountability simplifies things,” says Ken Hawk, founder of iGo, in Reno, Nev.

Because the Dell and Ariba sites act as front ends to iGo’s parts catalog on the Web, its extranet contracts specify that iGo must maintain this parts catalog site. iGo guarantees that the Dell and Ariba sites can access all order information 24-7. Likewise, Dell’s field personnel can order directly from iGo within Dell’s site via the extranet connection.

Source-code escrow was one of the contractual issues to determine between IBM Global Services and its extranet partners, says Jim Chester, vice president for strategic initiatives at the company. Source-code escrow gives one company the right to maintain software developed by another following a contract’s end.

IBM Global Services obtained the rights to maintain software at the dissolution of a contract with Aventail and Security Dynamics. The two companies provided engineers for IBM Global Services’ extranet architecture design and review process. They are also involved in ongoing decisions related to upgrades, patches and other system changes. But when the companies’ involvement ends, under the terms of the contract, Chester’s team has the right to maintain the software. Chester says he didn’t want to risk owning obsolete software in a few years and putting his extranet through an infrastructure change.

Owning up
Extranet contracts will also venture into familiar ground for network managers: service-level agreements (SLA). These might be covered under “responsibility,” legal jargon that means liability and indemnification or risk, explains Ieuan Mahoney, partner and co-chair of the intellectual property group at Holland and Knight, a law firm in Boston.

Like an SLA, your contract should include strict responsibility guidelines, preferably in measurable statistics, such as Web site availability and response time, advises David Liederbach, vice president of e-commerce marketing at IBM. The contract should state “this site will have 99% uptime” or the responsible company must pay a specified amount for the time and potential money lost during that period, he says. (For more guidance on acceptable statistics, see NW, Sept. 27, 1999, page 45). The difference between a regular SLA and an extranet contract is that “responsibility” can be a matter of negotiation.

When developing a traditional buyer/seller extranet, responsibility usually falls to the seller to assure high availability, Mahoney says. iGo had to commit to availability, service and performance levels in its contract. The company promised its partners 24-hour extranet access, meaning there are penalty terms in place for iGo if it can’t meet that level. But for development partnerships — say R&D folks in two different companies working over an extranet — responsibility needs to be agreed upon.

Another point to hammer on while negotiating a contract is ownership of intellectual property. Your company should retain power over its corporate name and brand names, Mahoney advises. Should an extranet site create new brand names or modify existing names, contract for their ownership — unless you sell them to your partner. “You want to have control over what a partner can do with the value you are providing,” he says.

Similarly, think about how this extranet contract might affect other partnerships you’ll want to create during its term. “Exclusivity” is the legal term for selling an offering to only one party. Does this contract promise one business partner private reign of your product? Does it promise exclusivity on the systems put in place for this partnership — or can you use them for other extranets?

Specify to the smallest imaginable degree how your business partner can use your product, Mahoney says. By doing this, multiple partners can use your offering in different ways.

And you also must determine the length of time you and your partner work together, says David Lintz, partner at Mintz Levin, a Boston law firm. He recommends a two- to three-year contract to start. One year is not long enough to prove success, but more than three years may be financial suicide. A contract should also cover “dissolution,” meaning when a partnership will end or what would cause a partnership to end prior to a contract’s expiration.

“If you don’t entirely know the business and what can go wrong, at the very least, understand your level of comfort with risk, what you are willing to give up in order to get a deal done,” Lintz says. By combing through the technical and business details of your extranet partnership, and chiseling them into writing, you’ll find that you’re risking less and reaping more.

Related links

Newsletter: Dedicated Internet access SLAs…again
Network World, 01/17/00

The SLA angle
Network World, 10/25/99

SLA savvy: Five secrets for making sure you get the most from your service-level agreements
Network World, 09/27/99.

SLAs: Avoiding loopholes
Network World, 09/27/99

Crafting an SLA - important facts to consider
Network World, 09/22/99

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