Careful Planning Yields Dependable Results

Rapid growth in the high-tech sectors, specifically regarding the Internet, mobile computing and related software and hardware, presents complex issues for small-business owners and their lawyers. Not surprisingly, many issues arise in contract negotiations between Web site or Application owners and their contracted developers.

Application development and hosting contracts are at the core of today’s new media practices. With the exponential growth of ecommerce and mobile computing, these agreements are tailored to cover all critical aspects of the online experience for all involved parties.

Negotiated poorly, contracts can open a Pandora’s box of unintended, unforeseen and unfortunate consequences. Negotiated wisely, Application development and hosting agreements provide predictable boundaries in a medium in flux. Risks, rights and responsibilities are constantly being redefined.

Well-drafted licensing agreements address both today’s realities and tomorrow’s possibilities.

Spell it out:

1. Deliverables
2. Project Schedule
3. Intellectual Property Rights
4. IP Registration
5. Confidentiality
6. Disclaimers
7. Warranties

Once design and functional elements of an Application or web site have been defined, some businesses develop the Application internally with full-time programmers and project managers. However, the vast majority of small business owners hire third-party Application or software development firms to refine their visions into an interactive, reliable online entity.

An Application development agreement is used to define the development, performance, ownership and service expectations of the parties. Critical issues include understanding by both sides of short- and long-term expectations, designers’ proficiency with technical issues such as software and hardware interoperability, and ensuring project goals are clearly stated.

Key elements include:

Deliverables. The agreement must set forth, in as much detail as possible, deliverables expected to result from the developer’s efforts.
This includes, but is not limited to, a description of functional and design specifications; user interface requirements; operational flowcharts; software descriptions; training materials and documentation; network accessibility information such as passwords; interactive elements; information-capturing capabilities; browser and platform compatibilities; electronic commerce requirements; audio/video format requirements; linking structures; database structure requirements; code standards; screen and file layouts; general “look and feel” elements.

Project schedule. After the scope of the project is defined and mutually understood, parties need to address the schedule. This schedule should set forth development milestones, testing and acceptance periods, and payment timelines.

For example, the first phase usually entails completion of the coding of an Application or Web site’s basic functional components. After coding, the parties test the functional components for defects or errors. If the product thus far is accepted, then either the developer is paid for the completed portion or the client pays a deposit toward completion of the next phase.

The Web site owner needs to be realistic when establishing a schedule for milestones and testing, and acceptance procedures. Time periods for defect corrections need a built-in payment reduction component. In other words, if certain functional aspects do not test properly and the site owner provides written notification to the developer of the defect, the developer shall have a specified time — for example, one week — to correct the defect. If a correction is not made, total development costs will be reduced incrementally.

Intellectual property. Creation of an Application or Web site typically involves a variety of intellectual property rights issues. From purely aesthetic design elements to the structure, sequence and organization of database systems, user interfaces and graphics, the rights are ultimately very valuable. For this reason, ownership must be clearly established in the development agreement.

Although developers prefer contract language that exclusively grants them ownership rights to their creations, the Application or Web site owner should secure ownership of most of these rights through negotiation. Notably, under 17 U.S.C. Section 101 (Copyright Act of 1976), project deliverables can be designated “works for hire” in the Web development agreement. The Application or site owner may acquire rights to all customized creations, while the developer receives a license to use certain scripts and/or tools developed that are likely to be reused on future projects.

In addition, development also often involves the third-party intellectual property rights. In these circumstances, the site owner’s legal counsel should seek to secure the broadest possible scope of the license grant. In particular, the owner should seek a license grant that won’t create restrictions concerning how, where and by whom the licensed rights can be used. Licenses to software updates released during a specific period of time should also be sought.

On a related note, if a site owner obtains a license to use particular software, a source code escrow should be secured from the licenser. This enables the site owner to access the source code under certain defined circumstances, such as the licensor’s failure to perform or the licensor’s bankruptcy. Source code escrows ensure the site owner can correct and/or modify the software under circumstances in which the licensor itself is unable to do so.

Brand/Trademark/Domain name  registration. If the developer will register the domain name, the site owner should insist on being identified as owner of the domain name. In addition, the owner should be designated as administrative, technical and billing contact. If the application will be “branded” or if it the owner feels the name should be protected, the owner should consult with a qualified lawyer to determine whether the name can be protected and the requirements of securing the broadest range of protection.

Confidentiality. Development of an Application or Web site is integral to an ecommerce business, and the process involves an exchange of confidential information between the Application or Web site owner and the developer. Confidential information should be defined. The agreement should set forth the obligations of the receiving party not to disclose or otherwise use the specified information.

Disclaimers and limits of liability. Developers often demand extensive liability disclaimers and/or limits. For example, a developer might disclaim liability for failure to protect credit card or other sensitive user information. A developer can also seek to limit total liability under all circumstances to the amount paid under the development agreement for any damage resulting from the developer’s negligence, intentional acts and/or omissions.

These disclaimers are usually one-sided and overly broad. Therefore, legal counsel should scrutinize these provisions to ensure the Application or Web site owner is not exposed to unfair risks.

Disclaimers or liability limits for intentional conduct — as well as broad disclaimers regarding permanent data loss — should almost never be accepted.

Warranties. Both parties should be required to warrant that content used, including software, links, meta tags, frames and business models, does not infringe copyrights, trademarks and/or patents of any third party.

Regarding this, the developer should specifically warrant that all necessary third-party licenses in third-party products incorporated into the Application or Web site have been secured.In light of recent patents for business models — such as Amazon.com’s one-click buying method — this warranty provision should be carefully examined. In fact, where appropriate, the Web site owner should seek patent counsel advice to ensure third-party patent rights are not infringed.

No surprises

A savvy Application or Web site owner will ask the developer to warrant that the Application or Web site or specific applications will operate “free from any substantial defects” for a specific period of time, such as 90 days after final delivery. In such cases, the developer should be required to warrant that any additional efforts to correct the problem will not materially alter the Web site owner’s original goals.

The developer should also be required to warrant that industry “best practices” have been followed in development, safety and security measures and performance criteria — for example, optimal loading time of Web pages.

Finally, as with all services contracts, the developer should warrant that:

• The services will be performed in a professional and workmanlike manner and that none of such services or will be inconsistent with any obligation the developer might have to others.
• The developer will employ adequate personnel and deliver the services in accordance with the specifications set forth in the agreement.
• All work shall be the developer’s original work, and none of the development, use, production, distribution or exploitation thereof will infringe, misappropriate or violate any intellectual property or other right of any person or entity.
• The developer has the authority to provide the Web site owner with the necessary assignments and rights.
• The developer is duly-organized, fully-licensed, validly exiting and “in good standing” in the jurisdiction of its operation and every jurisdiction within which it provides services.