DOT.COM Shake Out; ASPs, Exchanges, the FTC, and Content Management

DOT.COM Shake Out
ASPs, Exchanges, the FTC, and Content Management

Lack of easy money and increased sophistication of business customers in the B 2 B market is driving a new round of Dot.com consolidation, alliances and increased scrutiny by the Federal Trade Commission. The following business and legal issues are important to providers of e-commerce services:

1. ASP Business and Legal Issues. The Application Service Provider (ASP) model is booming. By some projections, the ASP market will reach $4.85 billion by 2003. Currently, the most popular software hosted by ASPs are enterprise resource planning (e.g., J.D. Edwards), e-business relationships, and supply chain applications. Most companies which perform ASP services will need to form relationships with other companies and should consider the following:

Choose your partners well. An ASP combines hosting, communications and application software. An ISP turned ASP needs software. A software company needs hosting and communications capabilities. An ASP targeted at a certain industry may need to acquire additional software or partner with an exchange.

Get your house in order. Whether a company forms a strategic alliance, acquires another company or wants to be acquired by another company, it needs to get its house in order. Unwritten or ill-defined stock option plans for current employees, computer code that has not been transferred from consultants or employees to the company, inadequate registration of domain names, service marks, copyrights and patents can prevent a new relationship from occurring or reduce a company’s leverage in negotiating a new relationship.

Choose the correct relationship. Cross-service level agreements between the alliance entities may be a preferable strategy to forming a separate entity such as a corporation or LLC. Whether the relationship exists by contract or a separate entity is formed, plan the “divorce” now. Buy-out agreements and ownership of computer code, copyrights and customer lists should be negotiated up front. Who will own what upon merger or break-up?

2. Exchange Business and Legal Issues.

Business to business digital trading exchanges have invaded almost every industry. Over the past 18 months, approximately 500 - 600 exchanges have emerged. Exchanges lower procurement costs by enabling just-in-time ordering, on-line tracking and access to multiple sources of supply through reverse auctions. Companies establishing exchanges should consider the following:

All of the issues relating to ASPs apply to exchanges.
The FTC is watching. The FTC is concerned about monopolies, collusion, price fixing and other anti-competitive behavior. All documents should be reviewed by anti-trust counsel.
Understand the increased liability. Exchanges seek to outsource substantially all IT needs of a company - from procurement to human resources to accounting. If an exchange breaks down, its customers will be crippled. The exchange and its customers need to minimize risk by agreeing on best standards (standard of care), warranties, limits on remedies, ownership of copyrights, patents and other intellectual property. New e-commerce insurance policies can help shift the risk.

3. Who Owns the Store? Content Management and Intellectual Property.

Consolidation is bringing together companies by merger, partnering and strategic alliances. But relationships end. Avoid litigation by addressing break-up issues in formation documents.

Document which company will own software enhancements to software and customer lists after the breakup.
Ensure all work is performed by consultants under “work for hire” agreements.
Document who owns domain names, copyrights, patents, logos, servicemarks and trademarks.
Limit the scope of licenses. Term, geographic area and scope of media are critical to define. Broad license grants will hamper future business goals and relationships. A license of “digital rights” means on-line, CD ROM and any other digital methods invented in the future.

This Article is published for general information, not to provide specific legal advice. The application of any matter discussed in this article to anyone's particular situation requires knowledge and analysis of the specific facts involved.

Copyright © 2000, Fairfield and Woods, P.C.,
ALL RIGHTS RESERVED.

Comments or inquiries may be directed to:
John A. Leonard.