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Success on the Web requires sophisticated, quick-responding computer systems and software that are flexible enough to respond to the increasing capabilities of technology and the rapid changes in business models. To minimize costs and maximize efficient provision of the latest technology, many companies outsource to third-party vendors some or all of the services and functionality needed to create and maintain an e-commerce web site. The availability of high speed Internet access recently has facilitated the rise of application service providers (ASPs), enabling software or application distribution over the Internet on a per transaction or “rental” basis and potentially reducing up-front expenditures for hardware, software, tech support and upgrades. The obvious benefits of outsourcing are that businesses will not need the amount of capital or skilled personnel normally associated with buying and building applications from scratch. The risks, however, may be less apparent to a business eager to get its products to the e-commerce market. A company that outsources critical components of its e-commerce capability will be placing tremendous reliance on vendors to do what they say they can do in a timely fashion, which can make the difference between a company’s e-commerce success or failure. The company should first identify the nature and scope of services it needs to determine which type of vendor it should seek. For example, outsourcing relationships might include computer systems integration, web site design and hosting, ISP or ASP services, server farm maintenance or, more likely, a combination of these services. It should then thoroughly check out the reputation of any vendor it is considering. How long has the vendor been in business and does it have a track record of successfully serving other businesses? Does the vendor have the resources, both financial and technical, to complete the job in the desired time frame? If multiple vendors will be used, will their respective products be compatible in an integrated e-commerce system? After satisfactorily answering these and other questions, the company should closely scrutinize the vendor’s proposed contract. It should not assume that the vendor’s form agreement adequately describes the services the company requires or protects the rights and interests of the company. The discussion below highlights a few of the contractual issues that a company may encounter when outsourcing all or part of its e-commerce capability. VENDOR DUTIES & RESPONSIBILITIES While it may seem self-evident, the vendor’s responsibilities should be described in detail. Often, the contract presented by the vendor describes its responsibilities only in general terms, making it difficult to determine what the vendor is required to provide. The contract should detail performance requirements and time frames pursuant to which each performance milestone must be completed. The company should also expect to describe in the contract what it will need to provide to the vendor (in terms of staff, equipment, and know-how) to enable the vendor to perform its services. INTELLECTUAL PROPERTY RIGHTS Web sites are essentially bundles of intellectual property, including copyrights, trademarks, patents and trade secrets. Ownership of components of the Web site design and functionality and permitted use of such components are critical issues to be addressed in any e-commerce agreement. � Ownership of Intellectual Property. Payment to a vendor for the customized software or Web site design does not automatically mean that the company will own the customized product. U.S. copyright law dictates that if the vendor is the “author” of the content, it owns the copyright for the content unless the contract between the parties provides otherwise. If the company expects to own the software modifications or the “look and feel” of its Web site, the contract must assign that work product to the company. If the company cannot obtain ownership, a clause prohibiting the vendor from providing certain customized services to a competitor may be appropriate. In addition, the data obtained from the company and its customers collected and organized by the Web site will have significant value. The ownership and use of that data should be carefully documented in the contract. � License Grant. The license grant is a core element of the contract between the company and a vendor, which establishes how the company will be authorized to use the software, or content the vendor is providing. The company should ensure that the e-commerce use it is contemplating is allowed by the terms of the license, which may include, e.g., allowing company modifications, customer downloading and worldwide online distribution. It may also be necessary to license some of the company’s intellectual property to the vendor. The license should be limited to the work being performed by the vendor pursuant to the contract and require the vendor to abide by the company’s IP usage guidelines. If the vendor will be using the company’s trademarks to co-market or promote the vendor’s own products, the contract should detail whether the company will require pre-approval of any such use. REPRESENTATIONS AND WARRANTIES Among the representations and warranties the vendor should provide are that its end product will satisfy the performance requirements of the company and will not infringe or misappropriate a third party’s intellectual property rights. If the vendor is displaying company content, it will likely ask for similar assurances from the company. The vendor also should represent that the software (and any hardware) incorporates no disabling devices and contains no viruses. If the company expects that sensitive information will be posted on the Web site by its customers, it should require its Web-hosting vendor to provide assurances regarding the protection and privacy of the data, the security of the Web site and the type of encryption technology the site will use to prevent hacking. SUPPORT SERVICE RESPONSE TIMES The contract should describe how quickly the vendor would respond to any request for support services and how long it will take to initiate the corrective action. Business will be lost if the Web site is not available or its response time to customer inquiries is slowed by recurring technical problems. SERVICE LEVELS If the vendor is hosting the company’s Web site, the company should ensure that the vendor can accommodate the fast-paced needs of an e-commerce business by clearly stating the required hours of the Web site access (e.g. 24/7) and the expected response time for an inquiry. If service levels are not met, the company should receive some form of compensation from the vendor, such as credits against future Web site hosting fees or reduction of fees for additional services. FEE STRUCTURE Fees for the license, support services and software upgrades or new releases will be detailed in the contract. Software license fee arrangements are shifting from those based strictly on the number of copies, users or physical restrictions to payments based on a measure of the software’s value to the licensee or the number of transactions performed by the software. If access to the software is being provided over the Internet by an ASP, the fee for access to the software will likely include any upgrades, bug fixes or other modifications. Web-hosting fees can be a flat monthly rate or tied to Web-site hits, transactions conducted or revenues. The company should use the payment structure to enhance its ability to manage the project. For instance, tying payments to vendor performance milestones can be a useful management tool. Also, a certain amount of the vendor’s total compensation should be retained until it is certain that the product works as expected. If the vendor fails to timely or properly perform specified elements of the contract, the company may be able to obtain compensation for an agreed-on level of damages. The primary benefit of liquidated damages is not the compensation per se, but the fact that the vendor may give the project a higher level of attention and priority. A liquidated-damages clause is the best way to gain timely implementation of services and functionality. In the world of e-commerce, this is critical to success. LIMITATION OF LIABILITY AND INDEMNITY A vendor usually attempts to limit its liability by, e.g., disclaiming consequential damages, capping the damages it will pay (usually to the total fees collected under the contract), or disclaiming implied warranties of merchantability or fitness for a particular purpose. While such limitations are common, they are always subject to negotiation. A company should not allow a vendor to limit its indemnity to defend and hold the company harmless from any third-party claims that the vendor’s services infringe or misappropriate a third party’s patent, copyright, trademark or trade secrets. This clause is important, particularly because the increase in patents has caused many vendors to avoid offering any indemnity for patent infringement claims. CONFIDENTIALITY In the process of providing services for the company, the vendor will have access to proprietary information about the company. The contract should require that the vendor keep confidential the information not only about the company, but also about its customers. This is particularly important if the company is in a regulated industry, such as securities, insurance or banking. PRIVACY The company should assume that ASPs and vendors hosting its Web site will have access to data about the company and its customers. Privacy is one of today’s hottest topics. In some locations, such as the European Union, the use that a Web site can make of personally identifying information is strictly regulated. Even though the United States has generally embraced a self-regulatory approach, most successful Web sites include a privacy statement. If the company has made any promises to its customers in an online privacy statement detailing what information the company collects and how it will (or will not) use such information, it should ensure that vendors will abide by the same standards. Even in the United States, the company could be liable if it fails keep the promises contained in its own privacy statement. INSURANCE Depending on the nature of the services to be provided, it may be appropriate to require the vendor to carry certain types of insurance, such as commercial general liability insurance, commercial automobile insurance, employer’s liability insurance and workers’ compensation insurance, with minimum amounts of coverage specified in the contract. This requirement is important because many vendors do not own enough tangible assets to support a meaningful adverse judgment. With respect to Web site security, antihacking insurance has started to become available, although the cost may be prohibitive for many vendors. TERMINATION The contract should contemplate the effects of termination. For example, will the company be able to transition the Web site design and the data that resides on it to another vendor? Company ownership of the key elements of the Web site design and critical data will facilitate the transition process. Outsourcing agreements are highly complex and heavily negotiated. The issues discussed above are only a few of the important considerations in the relationship between the vendor and the company. The nature of the company’s business, the intended geographical reach of its e-commerce initiatives, the scope of its e-commerce services and the need to integrate the vendor’s services with the capability and functionality provided by the company or other third parties will determine many of the agreement’s requirements. One thing is for certain: An outsourcing agreement that works will blend business, legal, technical and operational considerations to reach a fair balance of risk and reward between the parties. Deborah Smith Frisone is a partner in Connecticut-based Shipman & Goodwin’s E-Business Practice Group. Her practice focuses on e-commerce, technology and intellectual property law transactions. the firm’s Web site can be found at Shipman & Goodman

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