Doing the Deal: What CIOs Should Know About IT Legal Specialists

CIO CANADA: Why should CIOs and their organizations consider using the services of a law firm with a well-established IT practice when undertaking large IT transactions or tackling other important IT issues that may require legal input?

CARD: Whereas CIOs and other executives might face a large IT transaction – such as the building of an electronic commerce business – maybe once or twice in a career, law firms specializing in this area may be involved in several such transactions in any given week. So they have an accumulation of experience, both in recognizing problems before they happen and in solving them as they come up. By using the services of such a firm, you end up not only with specialized legal practitioners but also with people who can provide a lot of added value to the transaction.

HAYES: The IT field is becoming so vast that it’s no longer possible for the CIO, in-house counsel or outside counsel to have the specialized expertise of devoted practitioners. Just to get to the point of knowing whether a proposed deal makes sense, you have to have access to very specialized legal knowledge – you have to know whether the rights are available, what the licensing situation is, how it works internationally, and so on. I don’t think there’s a law firm these days that doesn’t say they have a technology law department. But the fact is, when you drill down to assess the true expertise of a technology law department, you may find corporate lawyers that do financial deals and who only spend 10 or 15 per cent of their time putting together deals that may have some aspect of technology to them. There are relatively few specialist groups that do this, so you have to be careful when selecting a firm.

CORLEY: I think it’s helpful to put this in the context of the rapid rate of technological change, and the challenges that this change represents to the CIO. CIOs are now being expected to deal with computing and telecommunications technologies that are converging on many different levels. In many areas, there are alternative business models and challenges relating to intellectual property, business process and various other sorts of things that CIOs historically have not been required to deal with. They’re dealing with very complex network relationships, and in the event that a problem arises in the operation of that network, risk must be properly allocated among the various suppliers. Those are the kinds of risk management issues today’s CIOs are facing on a daily basis, which five to 10 years ago were not part of the environment in which they were operating. And these kinds of issues require expert legal help.

CIO CANADA:Where can specialized law firms provide the most valuable input in large IT transactions?

CARD: For many different types of companies, it’s important to address regulatory and commercial issues at the outset of the transaction. IT legal specialists can provide valuable input with respect to structuring the transaction and avoiding problems from the outset, before the deal goes too far down the road. If it’s an international transaction, cross-border jurisdictional issues have to be addressed. Probably the most important issues arise in articulating the transaction, such as the risk-management provisions: limitation of liability provisions, exclusion of liability provisions, insurance provisions, etc. Lastly there is the negotiation and documentation of the arrangements.

CORLEY: The network nature of technology and commerce means that many things are now done as joint ventures. A variety of legal issues are magnified and multiplied when you have a number of entities working together cooperatively using the Internet to develop new intellectual property and new technologies. And due to the interdependent nature of these relationships, when problems arise the alternative of going off to court and suing one another is not really viable. Therefore it’s critical to develop an efficient, effective and appropriate dispute resolution process. Many arbitration models are just not appropriate because they don’t address the issues in a timely fashion. So it’s important to get experienced legal help in structuring these models.

HAYES: Any good legal team in the IT area will play an important role in preventing problems before they start, and that can be done in a number of ways. But even more value can sometimes come from having short consultations in advance – before the problems occur, before the transaction occurs – to discuss establishing procedures to allow things to happen efficiently as the business grows.

CARD: Another “value-add” of experienced IT legal counsel that may not be fully appreciated by the business community is transaction management. One example would be the coordination of all of the client resources that are needed to do a transaction. On any given large IT transaction we know that many different specialized contributions must be made. As the hub of transaction negotiations and documentation, we often serve as the focal point for all of those resources.

CIO CANADA:What about input into other types of IT-related issues?

CORLEY: Another area where specialized law firms can make an important contribution in is the development of Internet, e-mail, and computer-use policies. The recent denial-of-use cases over the Internet highlight the extent to which the information and telecommunication resources of different businesses can be subverted and used in ways that could give rise to legal liability. Specialized law firms can help companies develop and implement policies that go all the way from addressing how employees are to interact with and use the technology that’s made available to them, right through to the management of intellectual property that’s developed by the company.

CARD: Proactively managing intellectual property assets can be very important. We often see problems arising from the hiring of independent consultants or contractors by people who aren’t specialized in IP asset management. If the contract doesn’t expressly transfer the intellectual property that the consultant has created for its client, the IP will be owned by the consultant as the original author of the work. Companies are often surprised to discover a year or two after the work is completed that they don’t own that intellectual property. It’s the kind of thing that if it is not identified on the radar screen at the time the contract is being negotiated, it could have devastating effects for the company down the line.

CIO CANADA:What are some of the most important legal aspects involved in the development of e-commerce businesses?

CARD: In the new economy, there’s a whole new sense of flexibility that’s needed commercially. Clients are asking, “What happens a year from now? Are we still going to want to be in a commercial arrangement with these people? What do we do now when we don’t know what’s going to happen in the future?” Often, we advise our clients to build change management strategies and processes into the transaction to make it flexible, and to allow them to adapt to change. We ask the client about the term of the contract. How long should it go for? If the deal demands it, maybe instead of five years, it should only go for six months, with the option to renew if the other side hits certain performance targets. That allows the arrangement to keep going if it’s working. If it isn’t, it’s not a termination per se; the contract just doesn’t continue. Clients also build in a transition period, where the other side cooperates and assists as a new vendor comes in to provide those goods and services.

HAYES: I do a lot of deals between traditional media and new media. The most important parts of those deals are often the parts that can’t be answered. What’s going to happen one, two or three years from now? There are no answers to those questions today because the business is developing so quickly, and the laws are still developing. But rather than leaving those questions unanswered, which is often the way in which parties try to deal with them, there are methodologies for establishing ways that the parties will move forward as the economy moves forward. You have to make a conscious decision as to your strategy for dealing with the future in a quickly changing environment. If you don’t deal with it, or deal with it in a very loose way, you stand to lose a tremendous amount of value.

CIO CANADA:From a legal perspective, what are some of the common mistakes or pitfalls that firms encounter when undertaking large e-commerce transactions?

CARD: There are many pitfalls and they stem from the fact that a digital business is very different from a bricks-and-mortar business. For example, an e-commerce business is instantly international, and a litany of legal issues flows from that. There are electronic document issues. If all of your documents will be in electronic form, are you maintaining them in a manner that satisfies the business’s regulatory requirements or that will permit those records to be admissible in a court of law? The way you structure e-business transactions is often very different. If you have various vendors selling things on your Web site, you must have common standards of performance, a common return policy, common warranties. And, how will you coordinate the use of everyone’s brand? How do you protect your brand in that sphere? When a business is thinking of going this route, their law firm should be able to prepare for them, suited for their specific vertical industry, a checklist of the legal issues that will arise for their e-commerce business.

CORLEY: The establishment and protection of identity on the Internet is a whole new area, which starts with traditional trademark law and goes far beyond that. And flowing out of the interdependence of networks, there are important liability considerations that companies often don’t think about. They will contract with another organization to provide services without realizing that they have an interest in the manner in which that party is contracting with its ultimate customers. They may in fact want to have limitation of liability provisions that flow through the agreement and take into consideration the allocation of liability to the customer, to the intermediary, and to the ultimate provider of services. That’s another one of those issues that tends not to appear on the radar screen without the guidance of experienced counsel.

HAYES: A lot of businesses don’t understand why they are getting into an e-commerce transaction. Is it to expand the current business, is it to establish a new business, is it to take advantage of relationships, is it to establish new markets? A lot of those questions are often not asked, or not asked in sufficient detail or with sufficient sophistication. So sometimes you have to challenge those assumptions with a client and point out that maybe this transaction is something that requires restructuring to achieve the client’s commercial objectives. Maybe they should be looking at alternative strategies, depending on what their goal is.

CIO CANADA:How do you see Canada in terms of its position in the e-commerce realm? Are we holding our own, especially against the American e-commerce juggernaut?

CARD: We are ahead in some respects and behind in others. When it comes to technological infrastructure – the prominence of technology in our economy – we are probably ahead. For example, all the banks in this country, including some of the virtual banks, appear to be very technologically savvy, sophisticated and integrated. As for our education system, our universities are under-funded in comparison to the U.S., but I think they produce outstanding technology and business leaders. We appear to be lagging quite far behind the U.S. when it comes to e-tail or on-line retailing, and we don’t seem to have the same government leadership as most other jurisdictions. For example, most other nations have got an electronic commerce tsar or senior cabinet portfolio that is devoted to this sector. Industry Minister John Manley has done an outstanding job of championing the new economy, but not one of his 20 or so “direct reports” deals specifically with e-commerce. Based on the deals that we are continually involved with, Canada seems to be on the fast track to catch up to the U.S. – for e-tail fulfilment services, B2B exchanges, the incubation of dot-com start-ups, and in many other areas as well.

HAYES: The U.S. has been in a unique situation for the past 10 years in the way they incubate and grow small businesses into large businesses. But we may be starting to see the large convergence companies, media companies, and so on taking over more of the e-commerce space. If that is the case, Canada is relatively well placed. We have a more centralized and compact economy than the U.S., and it may be that some of our integrated e-commerce businesses will be able to assert a worldwide position. There are some structural problems in terms of taxation, but overall we are in reasonably good shape to develop those kinds of large-scale businesses.

CORLEY: We have a number of advantages – even relative to the U.S. – in the regulatory areas. Whereas we have a single regulator of the telecom market, companies in the U.S. have to deal with a much more complex framework involving federal, state and in some cases municipal regulators. Competition and antitrust laws are other areas in which we have a comparative advantage. We have one federal statute in Canada, whereas in the U.S. there are two federal agencies, state agencies and also private plaintiff litigation. So in that space, the Canadian model is superior in a number of respects.

CIO CANADA:What would be the most important legislative changes that you would like to see in the area of e-commerce?

CARD: I think we need to undertake a very broad across-the-board analysis of all of our laws and policies in this regard. Should they go beyond consumer protection mechanisms, which have a lot to do with trust of the Internet, privacy policies and other things, or should they also enhance e-commerce with an aim to resolve the legal ambiguities in this area? Should there be legislation that fosters the development and protection of business knowledge assets in Canada? What about people policies, which could have to do with immigration, taxation incentives, and education? There could be a wide range of new policy initiatives that could contribute greatly to the expansion of our high-technology and e-business sectors.

CORLEY: It’s generally accepted, though, that domestic and international legislation is going to solve a lot of the problems in e-commerce. One of the things that Canada has always historically supported is multilateral and regional treaties. Canada has always been in the forefront of proposing them, executing them, and brokering deals to make sure treaties happen. Over the next five to 10 years Canada must continue to support these kinds of efforts to solve problems on a multi-jurisdictional basis. Being adjacent to the U.S., we are well positioned to take a leadership role, because we understand the U.S. issues but are also sensitive to the European prospective.

CIO CANADA:What are your final thoughts for CIOs on retaining expert IT legal counsel?

CARD: The objective of expert IT legal counsel is to simplify transactions, make them efficient, shorten timelines, and add value. If the CIO doesn’t have the authority to retain outside legal counsel, then it’s up to him or her to knock on the door of their company’s CFO or General Counsel and say, “We’ve never done this before. We need specialized counsel.” That specialized counsel may or may not reside within their existing corporate law firm. The message to CIOs is that specialized legal counsel has a lot of experience and strategic value to add toward improving the chances for the IT transaction’s success.

HAYES: I’d like to try to dispel the notion that we are there just to solve isolated little problems – perhaps to get the wording of a particular clause right. There are many people you can get to do that. That’s not really the role that specialized IT counsel should fill. We see ourselves very much as partnering with the business people to produce the best transaction and the best business results possible. Depending on the circumstances, that may mean we have a more wide-ranging role to play at the side of the CIO or the General Counsel. I think the most difficult thing for us, as lawyers, is dealing with the perception that we are a “necessary evil”. We are there to play a uniquely qualified role to assist in building the business and can work very much in partnership with the business people.

CORLEY: One can’t overemphasize the importance of early involvement of legal counsel before the deal has fully crystallized, both to help provide the value add and also to make sure that things are clearly understood and the parties can quickly and efficiently reach a final agreement. This avoids continuing the negotiation in the final agreement stage, something that happens far more frequently than it should. We should be called upon for the proactive assistance we can provide.

Davies, Ward & Beck is one of the preeminent IT and e-business law firms in Canada. Their firm has written over 200 articles and papers on IT and e-business topics and is represented on the editorial boards of three of the leading e-business law journals in North America. Both Duncan Card and Mark Hayes are cited among the top 200 Internet lawyers in the world by the 1999 and 2000 editions of the International Who’s Who of Internet and E-Commerce Lawyers. Card is also cited as one of the top 500 of all lawyers in Canada in the 2000 annual ranking by LEXPERT-American Lawyer.