INFOTECH AND THE LAW

Buying IT Products, Services: Buyer Beware

Sooner or later, nearly every business will find itself acquiring information technology products or services. This is true whether you are a government contractor or provide purely commercial services, or both.

While most contractors are diligent in understanding the terms of their federal government contracts, many companies pay far less attention to the acquisition of IT tools necessary to the performance of their businesses.

Before you execute your next contract for IT products or services, consider the following points. Our experience shows improper handling of these issues could result in costly mistakes for your company.

Have a clear understanding of what you are buying from the IT vendor. If you are buying consulting services, consider whether the consultant will be modifying an existing IT product. Make sure that you own the modifications the contractor will be making ? to the extent that you own the underlying IT product. If you don't own the product, consult the terms of your license to be sure you can modify it without violating that separate license.

If you are having a firm develop an IT product for you, make sure your contract specifies that you own whatever is developed. Get the developer's warranty that he can transfer to you clear ownership rights in the IT product. If you are merely buying a license to an existing product, consider the term. Many vendors will provide you with a license containing evergreen provisions. Realistically consider how long you will use the product. Don't sign an agreement that will require you to pay license fees long after you have stopped using the product.

Make sure you can live within the terms of the license. Typically, a vendor license will limit the parties who may use the product to your company and, perhaps, its affiliates. Consider carefully how the license defines affiliates. If it limits use to affiliates that are 100 percent owned by your company, you may breach the license if you sell even a small part of your affiliate to a third party. For example, your affiliate's decision to sell 5 percent of its business to raise capital may suddenly place you in breach of the license if that affiliate continues to use the licensed product.

Be certain the agreement clearly delineates among acceptance, warranty period and maintenance period, if there are any. It's surprising how many IT development contracts fail to articulate clear acceptance criteria. Don't sign an agreement that lacks definite criteria for your IT product.

Following acceptance, make sure the vendor warrants its product for a reasonable period consistent with your business needs. Many contracts indicate the vendor will warrant the product for a set period of time, but require that you begin paying a maintenance fee immediately following acceptance. Warning: This is not a warranty.

You are best protected by a vendor contract that provides the following chronology: product acceptance, a warranty period, and then commencement of maintenance services at an acceptable price.

Check if the vendor will have access to your customer's confidential data. Almost every vendor agreement will contain provisions protecting company confidential information. To the extent that your vendor will have access to personal information of your customers, you must require the vendor to protect that information as it would other confidential information.

Your agreement also must provide that the vendor's disclosure of confidential personal information shall constitute a breach of the agreement and entitle you to injunctive relief. In order to keep track of what your vendor may be doing with confidential personal information, you also should consider an audit provision.

Think about how much business you intend to do with this vendor. Will this contract be a one-time deal, or do you foresee hiring this vendor to perform other services? If you foresee future work, you should consider executing a master contract that includes all important terms and conditions to protect you. With these important terms firmly in place, you may then allow your business team to negotiate work statements for each discrete project with the vendor.

Master agreements go a long way toward balancing the needs of your business team, which is eager to execute agreements promptly, with the need to protect against vendor contracts with unfavorable terms.

Sheila Stark is a member of the government contracts group of Piper Marbury Rudnick & Wolfe LLP, Washington. She can be reached at sheila.stark@piperrudnick.com.

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