Win-Win Contracting

Let me begin by stating the obvious, namely, that these are my personal views, and not those of any employer, past or present.  

This is part 5 of what was originally planned as a 3-part series on contracting best practices. Part 4 is Principled Contracting: https://johnpavolotsky.com/2021/08/10/principled-contracting/ There, you will find links to parts 1-3. 

Before we dive into our topic of the day, let’s take a brief detour. Happily, recently I met my annual quota (1) of self-improvement books. Not that there’s limited room for self-improvement; to the contrary, there is still plenty. But, there a lot of books to read, and when you boil it down, self-improvement books consist mostly of prescriptions rooted in common sense and are unnecessarily bloated. The 7 Habits of Highly Effective People (Covey) was, in my estimation, not bad. Elucidating core principles to guide decision-making and life choices is a worthwhile exercise. So is creating a personal mission statement.  Engaging in more planning, preventative maintenance, and effective delegation to help avoid crises and spend more time in quadrant 2 (important, but not urgent activities) is salutary.  So are rescripting and developing a family strategy.  Perhaps the best is yet to come, is another interesting idea.  Listen to understand, not to reply. Invest time and energy to renew and recharge (sharpen the saw), to increase longer-term effectiveness.  Win-win is a possibility in human interactions and should be actively pursued. 

As a transactional lawyer, over the past 20+ years, I have worked on thousands of contracts. Win-Win is nice, but usually not one of the primary goals of a transaction. The other possibilities, described in some detail by Covey, are win-lose, lose-win, lose-lose, and no deal. I have seen win-lose, lose-win, and no deal. In lose-win, one of the parties caves, just to get the deal done. There would be no logical reason to agree to a lose-lose deal. Win-Win assumes, in Covey’s terminology, the Abundancy Mentality; i.e., there is more than enough of the pie to go around for both of us. In some deals, that may be the case. Let’s say you need some work done around the house. You have a budget, and a contractor gives you a bid. There’s probably a number where you can meet your budget and the contractor can make a reasonable profit on the project. 

Contrast with a negotiation of a contractual provision where a technology vendor is asked to indemnify (cover the losses of) the customer from and against any third-party claims alleging that the customer’s use of the technology violates that third party’s intellectual property rights. The indemnity is a benefit to the customer and a cost to the vendor. Arguably, there is probably a negotiated indemnity which will give reasonable assurance to customer and still allow the vendor to make a reasonable profit, but, typically, the customer will ask for an uncapped indemnity (which, theoretically, could wipe out all of the vendor’s profits on the deal in question and in extreme case severely hobble the vendor financially).  The customer may ask the vendor the indemnify it for risks that it cannot fully control (e.g., certain combination claims or open source components). Is there a win-win scenario here? Maybe. 

First principles are helpful. If the vendor and customer can agree on first principles to frame the discussion, theoretically negotiations can be more productive and less adverse. What would these be? Consider the following: 

• Each party should achieve a reasonable return on investment (ROI) on the transaction.
• Technically, a vendor is not obligated to offer an indemnity, but as part of the overall risk allocation for a transaction, an indemnity could be appropriate.
• A customer should expect reasonable indemnity coverage, commensurate with what it is paying for the technology. A vendor should expect to make a reasonable profit on the licensing or other transaction. 
• The scope of the indemnity should be guided by what the vendor can reasonably control. Where it is unclear how a customer will use a given technology or where the technology will be used with other technology not under the vendor’s control, the vendor should not be expected to indemnify the customer against claims arising from that use. 
• There are areas (e.g., open source components) where the vendor and customer will have equal visibility. As such, each can evaluate the risk and decide whether or not these components create significant risk. 
• Neither vendor nor customer should be the insurer for the other. If insurance is indeed sought, traditional insurers will be happy to provide that kind of coverage. 
• A thoughtful discussion on the indemnity cap should be tied to data, not to anecdotal information. A customer or a vendor can (and should) do some research and create low, medium, and high cases for payouts.  This will give you realistic, risk-optimized targets. If the licensed technology is mature, proprietary software (which, of course, will contain some open source components), an uncapped indemnity is definitionally unrealistic. An indemnity capped at the deal value may be unrealistic as well, given the relative risk of a claim (which would be further mitigated if the software is only used internally) and the typical payout matrix. Indemnity for patent claims is usually the primary concern. Understanding, at least holistically, the patent landscape in the technology space (software vs. hardware, standards heavy or standards light, etc.) is helpful and again is tied to a data-driven approach here. 
• Infringement claims cost money, and if a vendor is not willing to provide a sufficiently broad, deep, and useful indemnity, it needs to identify other ways to compensate the customer.  
• Win-Win sometimes assumes that I have my solution, you have yours, and rather than meet in the middle (and thus make neither of us happy), there may be a third solution. This is Covey’s idea, not mine, but certainly one that I have seen in practice. That said, it should, like the other concepts, be driven by first principles. 
• Packaging is usually helpful, i.e., I have something you want, you have something (different) that I want, so a trade is possible. Understanding needs is critical to determining whether is a trade to be made (e.g., a more robust IP indemnity for a cap on damages), and whether or not the trade makes sense for the parties. 
• Meeting your opens or accepts for a given deal should not be your only success metric. How long did it take to close the deal? To what extent did executive management need to be engaged (and perturbed) to help close the deal? What was the tax on the deal team? Many years later, I am still reminded by my spouse of time unwisely spent on my Blackberry when much more important life events were in close proximity. Put otherwise, the view of win-win, at least in the deal setting, needs to be more holistic. 
• In closing, win-win contracting is possible, but, practically, difficult, especially in areas where, on the surface, there appears to be a zero-sum game. Still, it is worth the effort, especially in the context of a broader, longer term business (or other) relationship. In the meantime, I have started my next reading project, The Stuff of Thought: Language as a Window into Human Nature (Pinker). Summary to follow (and comments on this post welcomed).