As discussed in Part I of this series, independent contractor agreements contain a number of key protective provisions, the majority of which are driven by the type of services/work to be performed and the relative risk to each party. These provisions tend to be highly negotiated between the parties, in part due to the fundamental differences in the objectives of each party. While the company engaging the IC seeks to protect its assets and minimize liability, the consultant needs to protect its position vis-à-vis the company, while also maintaining enough control and flexibility to meet the needs of its other clients.
Keeping this in mind, below is an overview of the most common protective provisions found in IC agreements:
- Intellectual Property Rights and Licensing
In some IC relationships, the deliverables may include valuable intellectual property rights. As one would expect, each party wants to retain rights to the deliverables. The IC does because it created them, and the company does because it paid for their creation. When companies have a stake in the creation of such deliverables, they should be certain to include an ownership provision in the agreement. For example, if a company hires a consultant to develop training materials for its specific use, the company can reasonably argue that the deliverables resulted from services it paid for. In this case, the deliverables are considered “works for hire,” and the company will want to preserve its ownership by including a provision which not only affirms its ownership of the deliverables, but also requires the IC to assign all of its rights (including moral rights) to the deliverables in the event a court determines that such deliverables are not a “work for hire.” Going a step further, a company also may require the IC to disclose and assign any patents or other IP that the IC creates while engaged by the company.
On the other hand, if the engagement will involve use of the consultant’s pre-owned and/or pre-existing intellectual property rights, which will be incorporated into the deliverables (such as a training program designed by the IC for repeated use with various clients), the IC will want to include a provision which affirms its rights to such material. In such a case, the company will expect to receive a license to use such intellectual property to the extent contained in the deliverables, as more fully discussed below. If the deliverables are owned by a third party, and the IC has purchased/leased/licensed the right to use them, then it is reasonable to expect the IC to grant the company a license to use these materials in order to ensure that the company’s use is protected from claims of infringement.
Regardless of who owns the deliverables, the IC agreement must include a license for use granted by the owner of the IP; and the scope of this license is typically a point of considerable negotiation. While the IC tends to favor a limited license, the company often seeks an unlimited, fully transferable license to use the IP as it sees fit. Further, if the deliverables are specifically developed for the company, there is normally an expectation that the company will own them without any limitation. A key factor in negotiating this provision is the nature of the deliverable itself. If the IC uses the deliverable in other customer engagements, it will be important to preserve its rights by negotiating a limited license, which may include such restrictions as non-transferability or limited use within a specific geographical area, or requiring that mandatory royalty payments be paid by the company as licensee. Likewise, to protect the owner’s rights, whether it be to certain intellectual property or the deliverables, the agreement should contain a provision which guarantees the owner’s right to confidentiality with respect to its owned material.
- Non-competition and/or Non-solicitation
Non-compete clauses are typically included in commercial contracts to prevent one party from providing the same services to certain third parties, which are usually the industry competitors of the other party. Although the level of enforceability of non-competition clauses varies from state to state, generally speaking, in states which allow non-compete clauses, a determination on enforceability is generally based upon whether the provision is found to be reasonable in duration, scope and geography. However, given the nature of an IC arrangement, it happens more often than not that the consultant is providing the same or similar services to other customers, and sometimes even simultaneously. In situations where there is no exclusivity, the company should (again, if enforceable under the laws of that state) seek a non-compete provision which at least prohibits the IC from servicing the company’s competitors in order to protect itself from potential disclosures of confidential information or any loss of competitive advantage. Meanwhile, the IC will want to protect itself by narrowing the scope of this prohibition through explicit language which allows the IC to work with non-competitor third parties.
Another negotiated aspect of a non-compete clause is its duration. The hiring company tends to prefer restrictions which extend well beyond the termination of the agreement; while an IC must seek to avoid unnecessary restrictions on its ability to work with other customers in order to ensure the future viability of its business. Leveraging standards of reasonableness, an IC should insist on a duration which eliminates its risk of going out of business due to the non-compete provision.
Another way both parties can protect their on-going business concerns is through a detailed non-solicitation clause, which essentially discourages the theft of employees or customers. An IC can manage the risk of losing its employees to the company by requesting a non-solicit clause which prohibits the company from hiring or engaging its employees or consultants for a certain period of time. The company will most often request that this obligation be mutual. Meanwhile, most companies will seek to prevent their ICs from stealing customers or business relationships by adding a non-circumvention clause to the IC agreement, which essentially prohibits the IC from using any information and/or relationships gained through the engagement for its own financial benefit. Non-circumvention clauses are only warranted in certain circumstances, which depend on the industry, business model, and whether the services of both parties are similar enough to necessitate its inclusion. With each of these provisions, the parties should seek a reasonable term.
- Indemnification Obligations and Insurance Requirements
Indemnification provisions allocate risk between the parties. Naturally, each side would like the other party to shoulder the majority of the risk. When negotiating this provision, it is important to consider the entirety of the agreement in order to understand the full scope of each party’s responsibility, including the representations and warranties, covenants and limitations on liability. However, because indemnity obligations may be included in other provisions, a review of the entire agreement is always recommended.
Most indemnity provisions include an obligation to “defend and hold harmless” the indemnified party in the event of litigation. However, an IC may seek to eliminate this additional responsibility, especially if the IC is an individual or small entity. With respect to the scope of an indemnity clause, an IC will typically agree to cover any third party claims arising in connection with the death or injury of a person, damage to property, or breach of the agreement as a result of the actions or inactions of the IC or its representatives and employees. Likewise, ICs usually protect the company against IP infringement claims arising out of the company’s use of the deliverables or its receipt of the services. However, because indemnity obligations are typically excluded from any cap on liability, it is good practice for the IC to seek to limit the scope of its obligation, covering only: (1) claims resulting from gross negligence or willful misconduct, (2) in the case of infringement, violations arising under US law, and (3) damages awarded by a court of competent jurisdiction in a final, non-appealable judgment. Unless the IC is in a similar position of power to that of the company, it is likely that the company may balk at any effort to narrow the indemnity.
Finally, it is in the best interests of the company to ensure that the IC maintains adequate insurance to cover potential liabilities and indemnity obligations. In many cases, the IC may not have enough assets to meet its obligations under the agreement; therefore, requiring insurance gives the company further assurances that the IC’s obligations can be met. The most common policies required in an IC arrangement are commercial general liability, workers’ compensation, commercial auto, and professional liability or E&O policies. If the engagement involves access to personal data by the IC, or access to the company’s IT systems, the company also should request that the IC obtain cyber and privacy insurance. Of course, such insurance policies are expensive, which may place an undue burden on some ICs. Therefore, levels of insurance are often negotiable, as are other aspects such as which insurers are acceptable and what should be included on the certificate of insurance. Although insurance is typically an obligation imposed on the IC, in the event the IC will be working onsite at the company and/or leaving items of value onsite, it should request reciprocity of the insurance obligation from the company.
Ultimately, the resolution of all issues relating to the negotiation of these provisions will come down to the relative risk and power of the parties, but having a good argument in hand will benefit the parties and help to successfully attain the best protections possible when entering into an IC relationship.
Kristin Kreuder is a Member of our NY-area team with over 20 years of legal and business experience in both public and private corporations and in major NYC law firms. Kristin handles a wide range of legal matters, including mergers and acquisitions; commercial transactions; technology, media, licensing and sponsorship; capital markets, venture capital and private equity transactions; and a variety of general corporate and governance matters.