Stay Afloat During the

Tidal Wave of FCPA Cases

INSIDE:Canadian

Briefings

January/February 2011

Multijurisdictional Practice

Teaching Compliance

Transnational Joint Ventures

Compliance Management

GC Roundtable

ACC Docket 16 January/February 2011

HEARSAY

FRANK FLETCHER is general counsel for Nero AG, headquartered in Karlsbad, Germany, with subsidiaries in Hangzhou, China; Yokohama, Japan; and Glendale, CA, where he usually can be found. Fletcher can be contacted at ffletcher@nero.com.

A licensing attorney tends

to remember the first time

they come across a feed-

back clause. In the stan-

dard form, these clauses tend to be

contracts of big companies (BigCo)

covering discussions of their new

technologies with a smaller company

(SmallCo). In short BigCo asks for

perpetual, royalty-free rights to use

without limitation the ideas, sugges-

tions or comments (feedback) that

SmallCo provides regarding the BigCo

technology.

Upon calm reflection, and per-

haps after consultation with a senior

attorney, either on your side or the

other side, it is explained that such a

feedback clause is reasonable. BigCo

needs to make sure that it does not

become contaminated simply by

discussing its products in development

with SmallCo. Doesn’t the feedback

clause simply protect BigCo from

SmallCo initiating a lawsuit claiming

that BigCo stole its ideas? Isn’t this

the same reasoning venture capital-

ists use when saying they don’t sign

nondiclosure agreements? There are

also less persuasive arguments, such

as providing feedback is voluntary

or optional. Sure, it is optional but

feedback is largely what BigCo says it

is, so to not provide feedback means

SmallCo can’t talk to BigCo. If this

is the situation, then why enter into

the agreement? Also, how are you to

instruct your people not to talk to the

other side? Your engineers will look

at you as yet another attorney who

doesn’t “get” the business. So after

some deliberation, you learn to live

with the feedback clause. If you are

SmallCo, then you will most definitely

need to live with it, particularly if you

intend to work with BigCo and don’t

have the negotiation leverage.

Recently, however, there seem to

be variations of this clause developing,

which make it something SmallCo re-

ally shouldn’t live with. Specifically, the

“we own whatever you tell us” feedback

clause, and the feedback warranty.

With the “we own whatever you tell

us” feedback clause, you are expected

to transfer BigCo full ownership of

your feedback. Taken literally, this

would mean that whatever you suggest

to BigCo is owned by BigCo — you

can never use this idea internally un-

less BigCo were kind enough to grant

back a license to your idea. If you men-

tioned that same idea to another party,

thinking it was a fairly obvious thing

to do and not recognizing that you

previously gave ownership of the idea

as feedback to BigCo, then you might

be in a position where BigCo might ac-

cuse SmallCo of theft of their IP. After

all, BigCo now owns your feedback. I

have seen this “we own whatever you

tell us” feedback clause recently in a

click-through agreement that one of

my engineers sent me. Fortunately,

this engineer understood that a click-

through agreement is an agreement.

Not every employee understands this.

Is the “we own whatever you tell us”

feedback clause legally enforceable?

I certainly don’t want to pay the legal

fees to find out.

I call the second new variation of

the feedback clause the feedback war-

ranty. SmallCo agrees not to provide

feedback that is subject to (a) IP

rights, (b) open source obligations or

(c) a third-party license fee, or some

derivation thereof. Again, SmallCo is

told that it is not required to give any

feedback. Looking at the language

literally, is SmallCo expected to have

every communication with BigCo

vetted to the same extent that prudent

SmallCo would do when releasing

its own products? It would seem so

because if (a), (b) or (c) is violated,

SmallCo has now breached their

agreement with BigCo. By agreeing

to a feedback warranty, SmallCo is

taking on many of the same risks as it

does when putting a product into the

market. While SmallCo is not as vis-

ible because its name does not appear

on BigCo’s product, the risks might

be magnified as BigCo may distribute

more products than SmallCo. While

this potential risk is taken on, Small-

Co does not have the potential ben-

efits of sharing in revenue generated

by the products. Would the feedback

warranty be enforceable? I wouldn’t

want to discuss this with a diligent

outside counsel who found the clause

in an agreement after BigCo has been

sued by a patent troll.

SmallCo needs to read each clause

as if they are seeing it for the first time;

further analysis might be warranted.∑

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Beware of the Evolving Feedback ClauseBY FRANK FLETCHER

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