First Sale Doctrine

As esoteric as the subject matter of this blog can be, I tend to stay away from the really, really, really nitty-gritty legal discussions for fear that most of you don’t really care.  Heck, I barely care sometimes.

But the first sale doctrine is an important aspect of the Copyright Act.  Basically (and over-simplistically), it says that once you “buy” a copyrighted work, you can sell it to someone else however you wish.   In other words, if you’ve purchased a copy of the Software Licensing Handbook (hint, hint)… you can resell it to someone else for whatever you can get for it.  So while you may have paid $44.95 to me, if you were able to get someone to pay you $200 for it, good for you.

Within the software licensing realm, this is a little more tricky.  Most business-to-business software licenses specifically prevent you from transferring, assigning, or otherwise divesting yourself of the rights you have, unless all you’re doing is terminating the license (in which case, the license goes away).  But what about commercial, off-the-shelf (COTS) software?  Something like, say, Microsoft Office.  If you buy it from PCWarehouse for $300… can you resell it on eBay?

Well… someone is testing the waters against a company called Autodesk.

Michael Madison over on Madisonian has a great summary.

Pay attention to the results on this one.  It might not affect the bulk of us on the software side of things, as our negotiated software licenses already deal with all of this minutia)… but the music and movie industry-related impact could be significant.

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Templates

In the last decade or so, I’ve written dozens of contract templates.  Software Licenses, Services Agreements, Consulting Agreements, Amendments, NDAs, Affiliate Agreements, etcetera.  Some of the templates are born from scratch, some are amalgams (the combination and smoothing of many other documents – ie: not reinventing the wheel), and some are minor tweaks from things I’ve done before.

But I have a love/hate relationship with these templates.  I love them and my vendors hate them.   With vendors who have a large presence (like Microsoft), it can be even more difficult to start from my paper – if for no other reason than they can simply respond “Look, if you want to do business with us, you’re going to use our document templates.”  And, as you might imagine, there’s not much wiggle room in that statement.

What bothers me more, however, is the internal debate. If my vendors don’t like starting from my template (they’re small, they’re vocal, or they’re already embedded in my organization) not only do I have to convince my vendor to use them, I also have to sell their use to my business owners, too.  Usually this isn’t too difficult, but it’s more than just saying “we’re going to use my document.”  My business owners like to keep up a great relationship with their vendors – and I like to help them do that, too.  But I’m not willing to sacrifice the deal simply for the sake of the relationship.  Which means that I sometimes find myself doing more internal convincing to help my business owner feel comfortable that I’m not trying to single-handedly destroy the relationship by the use of my behemoth template (my Software License and Services Agreement is about 60 pages long once you add in all of the exhibits).

There are even a few business owners who take the next step and want me to draft a custom agreement every time we have a new deal.  They may understand that we don’t want to sign the vendor’s paper – but they don’t want to force the so-called round peg into a square hole.  They believe that each relationship is unique enough to demand a custom document.  Perhaps removing acceptance language… or tweaking the confidentiality provisions… or removing insurance requirements, etc.

But frankly, I’m more of a kitchen-sink kind of guy.  My going-in position is that I wrote my templates to cover every conceivable related activity (ie: if the vendor is selling us software, it’s likely that they’re going to be also selling us consulting for installation/setup/training, maintenance on an annual basis, and will probably also need our travel and background check/drug screen policies as a result).  I try very hard to make sure that I start from the correct template (if they’re a services provider, but not providing us software code, for example, I have a Services Agreement that doesn’t include code-development-related language) – but I have neither the time nor the desire to customize the agreement more from the get-go.

Rather, I believe that I drafted my templates from experience.  And experience made me include each and every section in the agreement because either it’s contract boilerplate (stuff you find in every agreement, like governing law) or it’s important to the type of deal at hand (ie: acceptance testing for software agreements).  So I toss my raw template over the fence to the vendor and ask them to review it and make comments.

Guess what.  Most of them don’t have as much of a problem with my language as my business owners expect.  And what’s really interesting is that when they do have problems with certain sections or particular phrases, it’s almost never what the business owner expects the problem to be.

Now, if I was a bit more arrogant, I would say that it’s simply because I’m awesome at my chosen profession. 😉

But I’m not arrogant (ok, at least not too arrogant) – I’ve just got experience doing this sort of thing and I know how to write an agreement that is pretty balanced.  I do not like to write one-sided agreements as I  believe that both parties must have skin in the game to make the relationship work.  So I’ve got a pretty good idea that most vendors aren’t going to take huge exception to my template.  It’s long because it’s thorough, not because it’s onerous.

I also know that vendors are as unique as the buyers.  They have their key terms and conditions that they want written in a specific manner and they have certain terms and conditions that they barely read.  For me to try to guess what each of those will be before hand is time consuming and ultimately not worth the effort.  So my kitchen-sink approach allows me to save my time and only respond to those areas that the vendor finds problematic.

What do other people do?  Are you using templates?  Do you just review vendor paper?  Do you try to “build” a new document from scratch every time you have a relationship (the Chinese-menu approach)?  Perhaps you have some sort of document-creation tool (Ariba, Nextance, Emptoris)?

Do the Unthinkable

In the movie version of negotiation, Party A makes an offer, Party B makes a counter offer (rejecting the first offer). The first set of offers are the extremes, say for example, really low for Party A and really high for Party B. Then, through a series of back and forth discussions, each party slowly moves towards the other in measured, predictable steps. Finally, there’s some huge heroic leap made by one party to accept the other’s “final offer” to successfully conclude the negotiation – both parties smiling as they walk away from the table, arms around each other, glad that they were able to come to terms.

The reality is a little more tricky – and a lot less “clean” in terms of where offers come in relative to what their opponent has proposed. It’s hard work to predict the future, even if you’ve done all of the Information Gathering and Strategic Thinking in the world. And when you have a feeling that you’re really far apart from the start, it can even be worse. So, I’m going to suggest a tactic that you may have considered but never used – one designed to help bridge the initial gap to get both sides thinking about “real” numbers (while I’m a huge fan of negotiating the language of a contract and spend a lot of time doing it, this is really a tactic regarding money).

Let’s set up the problem. First, we have two parties; Buyer and Seller. Buyer wants to potentially purchase a set quantity of licenses. Seller, of course, wants to sell Buyer a much larger quantity of licenses. Thus, there will be two numbers that factor into how much the Buyer pays the Seller: the number of licenses and the cost per license. Buyer believes that they need X quantity of product at Y cost per item. Seller thinks it’s M quantity of product at N cost per item.

To get the negotiation started, Buyer could do one of two things: make an initial offer, or request the Seller to make an initial offer. Most negotiators suggest that you always let the other side go first. In this case, it might be better for the Buyer to go first based on the strategy I’m going to propose. So the Buyer needs to come up with the first offer. Lowballing (or coming up with a ridiculously low offer) isn’t the goal in this strategy. Rather, come up with a “reasonable” offer – one that is based on logic and some consideration to the other party’s beliefs. In our problem, this would mean calculating a dollar value based, perhaps, upon the X quantity but somewhere closer to the N cost. In other words, you already concede a point. (This, by the way, would initial have the appearance of a win-win strategy. In fact, it has the side-effect of testing to see if the other side is going to play that way, too.) So the Buyer’s first offer is $P. (X times N).

$P isn’t a great first offer from the Seller’s perspective. In this particular example, the quantity numbers are where the “real” action is – so the Seller is most likely going to respond with a calculated offer based on the M quantity (regardless of the cost per item). And, in fact, the Seller even thinks that the cost per item is probably too low, too, as it’s based on some discounted amount, not the current retail cost of the item. So from the Seller’s perspective, they have a few choices: 1. They can accept the offer. 2. They can counter with a new calculation by using M times N (their preferred numbers). 3. They can counter some other combination of quantity/cost with numbers between X – M and Y – N.

Or they can try to gain leverage and choose option 4: They can try to highball (take their preferred quantity M times the retail cost). This would create their highest calculable dollar amount and is probably an order of magnitude (add a zero) higher than the M times N number. Remember when I was talking about win-win? If the Seller believes that the Buyer’s first offer was completely unreasonable, there’s a good likelihood that they’re going to respond in kind – and this is the flip-side of that coin. If, however, the Seller believes that the Buyer’s first offer was made in good faith, they’ll mostly likely start with M times N.

So as a negotiator who is properly doing Strategic Thinking, you’re hoping that M times N is the Seller’s highest choice. But what if they come back with M times 10N? How do you respond? You do the unthinkable and LOWER your next offer.

Yeah, you heard me. LOWER it. Your next offer will be X times Y (your preferred numbers from both categories).

But wait! you say. Isn’t that being unethical? uncooperative? unproductive?

No. It’s not any of those things. As I said before, you tried acting in a win-win model. You calculated your price based on part of your preferred position and part of your opponents (based on a reasonable estimation of what that position would be). You presented an offer that, while lower than what the other side would want, was reasonably calculated. But the response you got back was not. Thus, to reset expectations and bust through the unreasonable highball offer, you have to lower your current offer to your best-case position.

The likely result is that the other side will panic. It’s quite rare for a second offer to go DOWN. They’ll accuse you of being uncooperative and unreasonable. They might even say that you’re not operating in good faith (ignore the comment). But a highball offer is a ploy, just as much as your actions are tactics (for a discussion on ploys versus tactics, see The VMO-Blog). You simply need a way to get to the real numbers and doing the unthinkable will help.

Confidentiality Disclosure Exception Issue

So I’m talking with a potential vendor who has asked for the ability to disclose confidential information for a reason I’ve never heard of before (at least not quite in this manner): they want either party to have the ability to disclose the other party’s confidential information if such party reasonably believe that the other has violated any criminal law.

Well, at least it was mutual.

But it’s a request I simply can’t agree to because it’s an exception that I think you can drive a truck through. More specifically, there are two key phrases in this exception: “reasonably believe” and “violated any criminal law.”

Reasonable belief
My first question is one of practicality. Who is the person who gets to “reasonably believe” that the behavior of the other is violating any laws? Bill down in sales? Carol in legal? And upon what grounds does this belief have to be based? Reasonableness is a test that judges and legislators like to use – but I’m simply not convinced that a reasonableness standard is appropriate here.

Violated any criminal law
This question is bigger for me and, for whatever reason, I have a more visceral reaction to this. I guess I just have some level of faith in our criminal justice system and in criminal procedure laws. It offends me that these laws would somehow not apply to this type of situation – that the other party simply wants to be able to hand over our confidential information without limitation and without the protections afforded under our criminal procedure processes.

Related to this is the fact that I already give a standard exception for “disclosure pursuant to legal process” which allows for disclosures (with notice and with help in the obtaining of a protective order) if so required by a court of competent jurisdiction (ie: through a subpoena appropriately requested by a prosecutor and authorized by a judge). Apparently, however, this isn’t good enough and the vendor states that there are laws (which they haven’t provided citations for) that would require them to disclose confidential information immediately and without limitation. Heck, even the Patriot Act is bound by some modicum of criminal procedure.

But I’m willing to be wrong. So, thoughts from the rest of the world on this? Would you allow your opponents to have this exception? How would you modify it?

And people think I am hard on them

My business owners tell me on a fairly regular basis, both in words and in their facial expressions, that they believe that I’m pretty tough on their vendors. Sticking to my position isn’t stubbornness – it comes from conviction. I believe that I am correct and I support my belief with factual statements, real-life examples (and analogies where necessary).

Maybe I need to show these folks what some other industries do with their suppliers. [Link courtesy of E-Sourcing Forum]

In the article, it’s suggested by one organization that

“Honesty, fairness and truthfulness …. can lead to you being punished during negotiation … This is where behaviour such as being inconsiderate, selfish and unfair can be required .. During the negotiation you take on a new persona, someone who wants to get the best deals possible, who will not back down, will be aggressive, selfish, even rejecting.”

But they go on to make a point that I’ve been singing about for the last several years regarding my fellow buyers:

“A lot of producers only have themselves to blame because they are prepared simply to kow-tow to the supermarkets. If more people stood up to them, they might think more carefully about how they treat people.”

One week left on special offer!

A month ago, I offered owners of the Software Licensing Handbook, the opportunity to get a free copy of the Software License Risk Matrix. At the time, I said that I was graduating in 30 days that that this was my gift to you! Well, graduation is tomorrow… and the special offer is about to come to an end as well.

I want everyone who has purchased the SLH to get your free copy! Just send an e-mail to: offer@licensinghandbook.com , with a subject line that is simply the first italicized word or phrase on page 119. I’ll send you a pdf back within 24 hours.

Easy enough? Great. This special offer ends on May 17, 2008. Come get while the gettin’s good!

Seriously, I got in?

Alltop has honored the licensinghandbook blog with inclusion on its list of the top law-related blogs around!

Thanks to the folks at Alltop! And thank you, readers, for sticking with me!

Harry Potter

The vast majority of software is protected under the Copyright Act as a work “fixed in a tangible medium of expression.” Some is patented, but copyright automatically affixes itself to any software as it’s being written – and it’s cheap (currently $30) to obtain a registered Copyright. So it’s important sometimes to watch what litigation is going on in the non-software copyright world – because until there are separate laws governing what’s going on with software, the interpretation of existing Copyright laws can have a significant impact on how it “works” with software. One such case will be interesting to watch (even if short-lived) because of the potential impact it would have on the ability to use/reuse “ideas” from someone else.

I’m guessing that some of you have heard about J.K. Rowling’s copyright infringement suit against Steven Vander Ark. Mr. Vander Ark wrote “The Harry Potter Lexicon” – basically a HarryPotter encyclopedia. She’s upset because he’s making money off her characters. Never mind the fact that she loved the online version of the Lexicon so much that she admitted to using it while writing several of the subsequent novels when she needed to quickly look up facts and info about her own series.

Well – before there was Harry Potter, there was EndersGame by Orson Scott Card. If you’re not into speculative science fiction, you may not have heard of the book… suffice it to say that it’s good – and popular.

Mr. Card recently wrote an article addressing, in plain terms, the issues at hand… and taking Ms. Rowling to task for her hypocrisy. As the saying goes, “daaaaaang!”

Loss of Credibility

As predicted, Microsoft’s behavior with respects to Yahoo! over the last few weeks was mere posturing.

In negotiation, however, posturing can lead to a loss of credibility, when you can no longer believe that a party will actually do what they say they will do.

So let’s review:

First, Microsoft offers a price. (1/31/2008).

Yahoo! responds. (2/11/2008).

Then, Microsoft says: take the price we’ve by a specified date or we’ll tattle on you to your shareholders. (4/5/2008).

Microsoft affirms that they won’t increase the offered price. (4/24/2008).

The date passed (4/26/2008).

Now it appears that the price has increased.

This is the point, if I was Yahoo!, where I would just sit back and remain silent.

Microsoft is negotiating with themselves to some degree (even if Yahoo! is at the table). By Ballmer’s own admission: “I know exactly what I think Yahoo is worth to me, exactly,” Ballmer told the employees, according to a transcript filed with the Securities and Exchange Commission. “I won’t go a dime above, and I will go to what I think it’s worth if that gets the deal done.”

However this plays out, I hope Yahoo! already realizes that as a result of this behavior, Microsoft (in addition to being the 8,000,000,000 lb gorilla) is eroding any customer/employee/shareholder good will that may have previously existed. Sure, we see power plays like this all the time… but not in public and not on this grand of a scale. Ballmer comes across like a kid throwing a tantrum – and the best thing to do for that situation is to just ignore it.