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Saturday, May 25, 2019
Call: 917.596.1917

Call: 917.596.1917

INTRODUCTION

Third-party vendors typically provide products and services that enable an investment firm to plot a trading strategy and conduct daily operations. Typical engagements include, but are not limited to, subscription agreements, trading and risk management systems, software licenses, and risk management tools. The contracts that govern the terms and conditions of these transactions are not particularly sexy or exciting, but potential land mines within the documents can trap unsuspecting firms by locking them into unfavorable terms. This article hopes to inform and educate a consumer of vendor services of 13 common traps that may lock an investment firm into an unfavorable legal position.

AUTOMATIC RENEWAL

Vendors love nothing more than to keep clients on the hook for services or licenses based on an automatic annual renewal, particularly if that client agrees to pay the vendor’s fee in full and in advance. Though vendors do provide clients with an opportunity to cancel the automatic renewal provision, they generally require the client to provide notice of cancellation between 60 and 90 days prior to the commencement of the renewal term (the “Notice Period”). Unfortunately, an operations manager may be so busy with other issues related to the firm’s growth and management needs that he or she forgets to comply with a Notice Period notification requirement, missing the opportunity to cancel the renewal for services the client no longer intends to use. The failure to give notice results in the client’s obligation to pay the vendor another annual fee. Gotcha!

FEE INCREASES

Vendors occasionally insert language that imposes automatic fee increases on a firm that may be extraordinary or contrary to the firm’s interests. Specifically, vendors may try to trap managers by (i) automatically increasing fees pursuant to a specific stated annual increase or a predefined metric such as 5 percent over the CPI for the most recent 12 months, (ii) retaining the right to increase fees at the vendor’s sole discretion (sometimes citing “in conjunction with increased costs to the vendor”), or (iii) having the right to increase fees more often than once per annum. Gotcha! Though a firm may intend to renegotiate the fee for a renewal term at a later date, a vendor may be disinclined to renegotiate if its customer is locked into a specific renewal price.

INDEMNITY

The specter of patent trolls remains ever present. Trolls are third parties that obtain the rights to a patent in order to profit through licensing or litigation, rather than through a company that produces its own goods and services. More than threats of actual operating companies that make a claim against a competitor and its clients for infringement, patent trolls are a threat to any investment firm or hedge fund that licenses technology. Because patent trolls view these businesses as cash cows, they will not hesitate to send a firm a demand letter seeking compensation for the alleged use of its technology, which the firm had licensed or purchased from a third party vendor. Firms can protect themselves by demanding that vendors insert comprehensive indemnity provisions in all vendor agreements, requiring the vendor to “indemnify, defend, and hold harmless” the firm from any third party claim alleging infringement of the third party’s intellectual property rights. Without the indemnity clause, investment firms and hedge funds would have no recourse against a third party claim of intellectual property infringement. Gotcha!

LIMITATION OF LIABILITY

Clients should be concerned with two separate issues with respect to limitation of liability: (1) whether liability should be restricted to a specific strategy within an investment firm, and (2) how much of a cap should the client accept on a vendor’s limitation of liability, if any. In the first instance, a firm may license an electronic trading system to execute transactions at the investment level, rather than by and among the firm’s different managers and strategies. Although each individual manager must have rights to use the platform, the contract should also specify that liability should be restricted to only the specific strategy responsible for a particular trade, isolating liability from the rest of the firm. Second, vendors generally try to impose a very limited cap on liability for their breach of the vendor agreement. Gotcha!

TERMINATION

Many vendors don’t include a client’s right to terminate for any reason or for no reason, holding the client hostage through the entire term regardless of whether the client is satisfied with the vendor’s service. Gotcha! A firm’s right to terminate an existing contract for convenience is a powerful incentive to get the vendor to perform its duties. Unfortunately, the majority of vendors will not permit a convenience clause to be inserted into their agreements. As a result, managers should focus their attention to clauses that provide the right to terminate for a vendor’s breach of its obligations. Depending on the type of service being provided, a firm should have the right to terminate the agreement for an uncured breach of contract 30 days after notice is given to a vendor, specifying the breach. Upon termination for breach, the vendor should be obligated to provide the firm with a pro rata refund of any prepaid fees from the date of the claim.

LIQUIDATED DAMAGES

Vendors may try to slip a clause into their agreements obligating a firm to pay a specific fee if the firm terminates the contract for any reason other than for the vendor’s breach. Gotcha! By requiring a firm to pay a negotiated, set amount upon termination, a liquidated damages clause acts as a deterrent to a firm’s termination options. For example, should a firm wind down operations, a vendor should not have the right to profit off the firm’s investors by claiming a right to a portion of the firm’s fees through the end of the term. But if the vendor will not relent, a manager should ensure that the amount being claimed has a legitimate basis with respect to the overall fees being paid to the vendor rather than an amount that is extravagant or unconscionable.

INTELLECTUAL PROPERTY

Vendors rightfully claim ownership of the proprietary tools used to create deliverables for their clients. But managers should be wary of the following issues: (1) entering into a license that is overly restrictive; (2) ownership of the firm’s proprietary information used by the vendor to develop its own charts and analytical tools; and (3) rights to customized deliverables created by the vendor. In some cases, vendors overreach on ownership of intellectual property assets. Gotcha! On the first issue, managers should fight for the right to distribute vendor output internally or in excerpts in reports, presentations and graphs to current and prospective clients. For fund data used in the creation of a new vendor product, managers should specifically retain the rights to the information and state that a license is being granted to the vendor to use the data, even if such usage is to be perpetual and irrevocable. Finally, to the extent that a firm hires a vendor to create a specific, customized deliverable, the firm should acquire all rights, title and interest in and to such deliverable.

REPRESENTATIONS AND WARRANTIES

Vendors generally disclaim (or would prefer to disclaim) any and all liability related to all of their products and services, (Gotcha!) and furthermore, they disclaim liability for trading decisions based on their products and services. While we are not opposed to the disclaimer of liability for a fund’s trading decisions based on information from a vendor product, we think vendors should stand behind their products and services, at least for some defined term. In the absence of a tight indemnity provision, a comprehensive representations and warranties clause is the best possible defense to a claim against the originality of a vendor’s products and services.

CONFIDENTIALITY

Proprietary business information containing highly sensitive data is one of the most important assets that a firm owns. As a result, extra attention should be given to confidentiality provisions both within vendor agreements and in stand-alone non-disclosure agreements. Agreements submitted by vendors may omit specific types of business information such as strategies and investor lists that a firm should lock down. Gotcha! In addition a confidentiality provision within a vendor agreement may not cover clients’ non-public information; therefore, the firm should insert appropriate language if the vendor will have access to investor information. Another Gotcha! Finally (and this recommendation may seem counterintuitive), investment firms should consider inserting an expiration of its confidentiality obligations. Generally, the value of confidential information erodes over time in comparison to the resources that are needed to maintain the confidentiality of that information; therefore, depending on the information being exchanged with a vendor, the firm should consider whether an expiration date for its confidentiality obligations after termination of the vendor engagement is appropriate.

PUBLICITY

The issue of publicity goes hand in hand with confidentiality, though the issue is tangential in nature. Generally, a firm prefers to conduct its business practices under the radar. In many vendor agreements, though, the vendor desires visibility and may insert a provision in its contracts enabling the vendor to publicize the relationship with its client, particularly on the vendor’s website. Gotcha!

BARRING A CLAIM

In some agreements, vendors impose a time limit on a firm’s ability to prosecute a claim against the vendor. Gotcha! If the firm cannot negotiate a deletion of this private “statute of limitations,” the firm should extend the time period in which it can bring a suit against the vendor for as long as the parties can agree.

GOVERNING LAW AND VENUE

Each vendor agreement should include a clause covering the law and venue governing the resolution of disputes. Firms should review the clause to ensure that the governing law and venue are fair for both parties. For example, a contract for services to be performed in New York should probably use the laws and courts located in New York, rather than the law of some far-flung city or country (Gotcha!) that disproportionally favors one party over the other or uses a different legal system entirely.

ASSIGNMENT

A vendor can make life difficult for a firm if it retains the right to assign the agreement to third parties without the firm’s consent. Gotcha! Third party assignees may not have the expertise or the financial backing to service the client adequately. Clients should negotiate the assignment provision by including any or all of the following concepts: (1) retain the right to require consent to any assignment of the contract by the vendor, (2) require the vendor to guarantee third party obligations, and/or (3) permit the firm to terminate the agreement immediately.

CONCLUSION

Paying attention to detail when reviewing a vendor agreement should enable an investment firm or hedge fund to avoid any of the vendor traps presented above. As a general recommendation a firm may may be able to avoid being tied to unfavorable terms with the insertion of a “Most Favored Nations” clause.” A Most Favored Nations clause enables a client to take advantage of the best terms a vendor has to offer to its clients. The insertion of such a clause rarely happens, but when it does, the benefit to the firm is substantial in that many of the Gotcha! issues go away. Some investment firms and hedge funds have the mistaken impression that the large vendors are not willing to budge on terms, citing that they cannot deviate from standard provisions. We have had contrary experiences on this issue, negotiating vendor agreements with Thomson Reuters, Bloomberg, Moody’s, MSCI Barra and many, many others. But it is a truth that if a firm doesn’t request a concession, it will definitely not get one. So negotiate terms in order to avoid Gotcha! situations.

 

You have spent valuable time and money to create the perfect name and logo (“marks”) to be the face of your business. They are the first ambassadors that a customer, lender, or investor will see. These marks create goodwill and represent a standard for the quality of goods and services that your business offers to the public. This Firm believes that, if you have not already done so, your business should protect these assets by filing a trademark application with the United States Patent & Trademark Office. Please find below the top reasons for securing trademark registration of your marks:

  • Registration of the marks creates an intangible asset that will increase in value over time, recognized on your balance sheet as good will.
  • Courts can impose statutory damages against a party infringing upon your registered marks, which is in addition to the common law remedy of an injunction.
  • Protection of the marks may be achieved, not only on a national level, but also internationally.
  • Registered marks offer an effective defense against another company challenging your use of the marks.
  • Registered marks shall be protected forever as long as they remain in use by your business.
  • Registered marks enable your business to communicate to consumers a standard of quality that may be attributable to your goods and services.
  • Registered marks can drive sales through advertising and social media platforms.
  • Registered marks can be an effective tool to hire and retain talented employees.

Asset Creation

Registered trademarks can appreciate in value over time as your business reputation grows. Think of the value inherent in names such as Amazon, Google, or Mercedes-Benz or in logos such as Nike Swoosh, Mickey’s ears, or the iconic Coca-Cola bottle, all of which are recognized on the company’s balance sheet as good will. Trademarks also enable a business to break into industries that are not a part of its original mission (think about Apple entering the music business) or trigger a sale to a larger firm (Vans sneaker company purchased by VF Corporation).

Remedies Achieved Against an Infringing Third Party

If you have not registered your marks with the United States Patent and Trademark Office, under common law, you still have the right to seek an injunction against the offending party. Registration of the marks, though, provides an additional remedy of statutory damages against the aforementioned third party.

Comprehensive Geographic Protection

Registration with the United States Patent and Trademark Office provides nationwide protection of your marks against third party claimants, and registration under the Madrid Protocols can provide worldwide protection. Knowing that your marks can be employed in foreign areas can enable your business to expand nationally and globally.

An Effective Defense Against Third Party Infringement Claim

Cease and desist letters from third parties claiming infringement of a third party name or logo can be accompanied by a demand for thousands of dollars in damages in addition to changes to your business’s website, marketing materials, and social media platforms. If your business holds a registered mark, such claims and threats can be easily dismissed.

Protected Forever

Patents and copyrights receive limited temporal protection under the law. Trademarks, on the other hand, remain valid in perpetuity as long as the firm remains in business and files the occasional renewal form. A registered mark could be the longest surviving single asset that a business owns.

Communication Tool

Over time as the business grows, your name and logo begin to hold meaning beyond the goods and services that are being sold. Over time, consumers equate the name and logo with an emotional connection to quality and service that keeps them returning time and time again, or your business may have created an aspirational brand which drives consumers to work harder to afford your goods and services over those of lesser brands. Apple, Tiffany, and Ferrari are some of the businesses that have leveraged their trademarks to inspire customer loyalty and provide an aspirational goal that will attract new customers.

Effective Advertising and Social Media Tool

Trademarked names and logos can cut through the clutter of a crowded marketplace due to brand recognition. Moreover, an effective trademark can drive higher rankings of your products and services on various search engines, resulting in higher traffic to your website and social media platforms.

Attract Talent

When a business communicates a positive brand image to the public, which can be identified by a trademarked name and/or logo, the positive image of that brand can enable a business to hire and retain more talented candidates and enhance employee loyalty, thereby lowering turnover and training costs.

Enforcement on the International Scene

In an article published by Pension & Investments, titled “Citadel Sues Like-Named Firms in Far-Flung Places”, the hedge fund Citadel has pursued legal action against several third parties using the “Citadel” name to raise investment capital, in order to take advantage of investors that think they are dealing with the hedge fund giant. Lawsuits filed by Citadel in federal court claim that these third parties have caused “consumer confusion and to profit from the goodwill and value associated with the Citadel trademarks generally, and especially within the world of financial services". Citadel has also filed suit against firms in Austria and Bulgaria that have caused confusion from investors seeking access to and hoping to profit from Citadel’s investing expertise. Citadel has requested both permanent injunctions and substantial monetary damages from the infringing parties, in addition to the reimbursement of its legal expenses. Though these cases have not yet been decided, it is important to note that forums do exist both nationally and internationally that offer remedies to aggrieved plaintiffs.

Conclusions

Trademarks offer an inexpensive and long-lasting asset that grows with your business and reputation. This Firm has filed hundreds of trademarks over the years and can assist you with this endeavor. Happy Holidays, and best wishes for a successful 2019!

In February of 2018, the Law Office of Laurence Beckler, PLLC (“Firm”) represented the sellers of 3,800 Antiminer 59 Bitcoin miners to Riot Blockchain, Inc., a publicly traded company in a deal worth between $25 and $50 Million Dollars. Cash, stock and royalties were all components of the transaction. This deal places the Firm in a unique position of putting itself squarely in the forefront of crypto currency transactions. For more information about this transaction, please see the press release referenced below.

Is your firm restructuring? Does it want to extricate itself from an onerous lease? Assuming that you have not negotiated an early buy-out or break lease clause, here are some tips that may enable you to walk away from pricey office space without paying the remainder of the rent or incurring termination charges.

On June 12, 2013, Mr. Beckler spoke in front of approximately 35 advertising agencies and marketing firms on the subject of drafting and negotiating agency of record and other types of service agreements in conjunction with a seminar hosted by the American Association of Advertising Agencies. Mr. Beckler explained the dynamic between the client and agency and covered key legal issues including indemnity, extended payment terms, termination, ownership, exclusivity and warranties.

Third party vendors typically provide products and services that enable an investment firm to plot a trading strategy and conduct daily operations. Typical engagements include, but are not limited to subscription agreements, trading and risk management systems, software licenses, and risk management tools. The contracts that govern the terms and conditions of these transactions are not particularly sexy or exciting, but potential land mines within the documents can trap unsuspecting firms by locking them into unfavorable terms.