Tal Itzhak Ron and Ben Shalom, Tal Ron, Drihem and Co. Law Firm
If you wish to set up your own online trading business, a plethora of trading systems, platforms and applications is available. Whether you choose your technology provider or if you are the technology provider to others, you need to make sure the contract fits your business and legal needs.
You can save a lot of time and money if you rely on proven technologies instead of developing your own systems. You can also make good money if you have solid technology to sublicense to others. Even if you operate your own R&D department, the online trading business is teaming with new technologies and innovations, and sooner or later you may want, or need, to use someone else’s technology, either for information feeds, liquidity, customer relations management, risk management, mobile access, special features, social trading and so on.
Here’s a tip: If your agreement with a technology provider states that the provider “has or will obtain” all rights required for licensing the technology, this may imply it needs to obtain the technology you wish to license from another person or provider. Here’s another tip: If the Force Majeure clause of your agreement includes “third party injunction”, you better double check if this is just prudent legal writing (which is perfectly legitimate, but should be omitted nonetheless, since a third party injunction is not necessarily force majeure) or maybe you need a clarification on the exact rights the technology provider has in the system he is giving you a license for, because it might be expecting a contender for the same rights to get an injunction.
Here are a few points to consider when engaging in a new technology agreement, whether you are the provider or the client:
1. Time and Delivery: This is mostly a matter of definitions. Time is a key issue in almost any project, and time-to-market is a key factor for your venture’s success. A good agreement defines well what will be considered due “Delivery” and what exactly are the deliverables, both legally and technically.
If you are the technology provider, you will want to make sure payment obligations are enforceable and clear as day (including elaborate examples is highly recommended), and that you will not be held in breach for something beyond your control, including delays that result from the clients’ acts or omissions.
Our recommended good practice is to make sure it is clear when it is too late, beyond doubt, to uphold a party’s obligations. This is because even if things go wrong, it’s important to know where to draw the line, terminate the engagement and start a new (or cut you losses). In most cases, this promotes and encourages parties to uphold their obligations and better meet deadlines.
2. Scope of License: Licensing Software instead of selling it means that the Licensee has a right to use the technology, but no ownership rights (which are regularly explicitly excluded). A Software-as-a-Service is another way to distinct the rights granted from more extensive rights associated with purchasing the technology. These are technical and semantic distinctions, but they make a huge difference when breach is discussed: If you use proprietary technology without license, you are in breach of law, not only the agreement, and your entire usage (or worse, separate and severable instances of the usage, such as each workstation, server or even client), may be deemed in contradiction to law. There is a material difference between selling books and having a legal dispute with the supplier on their price (which means the legal exposure is limited to what you set in the agreement or what you profit from the books), and selling books while having a legal dispute on the actual copyright (which means the legal exposure is much more imminent for punitive and exemplary damages, statutory compensation, injunctions and other adverse outcomes).
If you are a technology provider, on the other hand, you want to make sure your technology is licensed within the scope you intend, to include or exclude sublicensing, white labeling or the operation of a service bureau, and make sure that such infringement shall not be dealt effectively, especially if you can’t pull the plug on the client’s systems or otherwise suspend the services effectively.
3. Protect your Intellectual Property Rights: Both Licensor and Licensee need to define the perimeter between their Intellectual Property Rights. If the technology provider needs to interface with your systems, it is clear to protect their confidentiality and define where each party’s responsibility ends.
Custom development of any kind raises questions that need to be clearly answered beforehand: who will pay, own and use the new or derivative functionality.
As mentioned, if the Licensor represents that “it has or will obtain” all rights required in order to license the technology, and the Force Majeure clause of your agreement includes “third party injunction”, you better double check both the delivery issues and ask for clarifications on the status of rights.
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Technology providers everywhere, from Google to Facebook, legally standardize their APIs (application protocol interfaces) as they develop, harmonizing the legal aspects of privacy issues with access to personal information and protection themselves and their clients from specific forms of abuse, such as unauthorized automated access. There are many benefits to open APIs, both legally and conceptually, but from the merely legal point of view, APIs are a very good way to maintain a “caveat emptor” policy, meaning that the risk lies with the user and not the API provider. This is only true when the API is well defined and structured, including logging and monitoring functions.
4. Applicable Legislation: In the worldwide online FX/CFD’s/Binary Options businesses, the relevant legislation is always changing, and spans across a multitude of regulators, authorities and jurisdictions. When writing contracts, relying on the legal foundations of others is both enticing and effective. It is sometimes easier to push through an agreement a section applying a relevant law rather than restating whole sections of the law itself, especially if it is long, cumbersome, frequently changing and disheartening for the business. This is why many agreements include a clause to allow parties to implement such applicable legislation, especially at the sole discretion of the technology provider.
Recently, some of our clients in the gaming industry saw some court verdicts implicating technology providers (and hands-on programmers, personally) with breach of anti-gambling laws, and regulation on the gaming industry has been extended somewhat to apply to technology providers, up to the point of requiring in certain jurisdictions a special license and full regulation. In these circumstances, it is clear to see why technology providers are clever and want their agreements to be subject to “Applicable Legislation”, to demonstrate they are turning a blind eye or otherwise avoiding their duties. Technology providers also reserve the right to change or reduce the services, but this should only be done in response to actual and directly relevant legislation (or court order). It is our position that securing too much discretion with regards to these issues undermines the purpose – to put a barrier between the technology provider and the jurisdiction and law under which the Licensee operates.
If you are the Licensee, you ought to make sure the provider cannot use legislation as an easy way out from every situation – it needs to be applicable (and properly defined), but also mandatory and relevant. It may be prudent to set prohibited territories, for many reasons, e.g. exclusivity, but any vagueness is unnecessary for both parties, if they wish to effectively enforce their rights in the future. Additionally, both sides may consider Alternative Dispute Resolution schemes (e.g. arbitration according to ICC rules), instead of the conventional courts of law.
5. Understanding the Technology: You should make sure you know what you give and what you take. You need to understand what technological alternatives are available, the entailed strengths, weaknesses, opportunities and threats involved (SWOT) and how to word the agreement and avoid the pitfalls and loopholes. Many agreements elaborate on a multitude of forbidden types of malware, viruses, Trojans and other threats, but if you don’t know what a “transparent pixel” is, you will never think of including a provision referring to the use thereof (transparent pixels are simply empty picture files embedded in messages and websites in order to facilitate tracking and analytics). You cannot make yourself 100% free from legal exposure, but with dedicated legal advice you can maximize your protection.
A Service Level Agreement usually refers to “uptime” standards and commonly sets sanctions if breached. This is a good way to externalize technical breaches of the agreement and distinct them from other disputes. This is also a way to coordinate expectations on a technical level, which is another easily overlooked issue, and is important especially when doing international business, in different time zones and markets, and when a standard of performance is required to be negotiated, instead of subjectively construed.
If you are a regulated brokerage – you may need to comply with your regulator’s instructions and regulations, and you may need your technology provider to be compliant also. This specifically refers to record-keeping obligations, and required you to also mind post-termination issues, such as the export of your database by the Technology Provider, for record keeping purposes or for migrating to a new technology or service. Specifics includes data file formats (generally speaking, tab- or space-delimited files, such as .CSV, are the easiest to handle).
6. Be Reasonable: If your entire business lies on the licensed technology, and your agreement prevents you from obtaining similar technology for the term of the agreement and for some time afterwards, this means that you may not be able to get another license instead of the terminated one, while your business may not be able to survive without alternative technology solution for even one day. Another not too rare and unreasonable provision is such that would allow one party to force (or prevent) a contractual engagement of the other party with a third person.
It’s not advisable to be blatantly uncompetitive or have a biased and one-sided agreement. Think of jus primae noctis, the right of the first night of the feudal lord. Even if the privilege will not be exercised, it still clouds the relations.
For the technology provider, these kind of provisions may be too excessive to be easily enforced legally, especially if the other party adheres to the agreement. Being too strict is unwise to both parties. Remember, sometimes better terms are not necessarily the best terms. It may scare off potential business, harm your reputation and may be less viable, effective or enforceable than more moderate measures.
After all, the point of a good agreement is to circumvent trouble and facilitate solutions in many contingencies (good or bad) in an efficient, consistent, clear and fair – so that it will easily promote both parties’ naturally amicable and cooperative success.
Tal Itzhak Ron is Chairman and Ben Shalom is Head of Corporate at Tal Ron, Drihem and Co., Law Firm. Tal Ron, Drihem and Co., Law Firm is a Financial High-Tech Boutique law firm which advises both technological providers and brokers in all aspects of their businesses, including contracts, incorporation, banking, regulation and litigation.
Disclaimer: This article does not constitute and should not be relied on as legal advice of any sort.