SPEAKERS:

1. David vs. Goliath: How to Overcome Obstacles From All Sides in Your Supply Chain NegotiationsSession #911 - Wednesday, October 19, 2016(9:00 AM - 10:30 AM)Presented by ACC Small Law Department Committee SPEAKERS: Paul Cotton Senior Office Partner Eversheds LLP Geoffrey Brow Executive Director – Senior Legal Counsel AT&T Inc. Allen Peters Corporate Director & Division Counsel Northrop Grumman Corporation Mary Delahunty Vice President & General Counsel Invocon, Inc.

2. SHOW OF HANDS Large companies? Medium companies? Small companies? Working with U.S. government contracts?

3. PRESENTATION ROADMAP • Goliath’s (Big Company) Perspective • David’s (Small or Medium Size Company) Perspective • The Art of Negotiation • Standard Terms - Overview • Key Terms & Best Practices • Ethical Concerns • Appendix – Helpful References

4. Goliath’s Perspective - Terms • Goliaths place thousands of orders yearly for billions of dollars • Volume requires standard terms • Terms try to anticipate every issue • Terms are “one size fits all” • Values of a few thousand to hundreds of millions • Same terms for big and small companies • Same terms regardless of risk on what’s purchased

5. Goliath’s Perspective - Supplier Size • Large companies want a diverse body of suppliers, but…. • Smaller companies perceived as more innovative, nimble, responsive • Smaller suppliers sometimes more eager for the business and flexible on meeting requirements • Large suppliers can be more entrenched in negotiations, slow responding, more costly • Most Goliaths have socio-economic goals • Small, minority, disadvantaged business goals

6. Goliath’s Perspective (But…) • Small suppliers perceived as more risk • Less resources available if performance issues or changes are required • Possibly insufficient track record • More impacted by management/personnel changes, financial setbacks, cash flow • Use outside counsel with no business perspective • Goliath less likely to consider changes to contract terms because of perceived risks

7. David’s Perspective - Terms Typically small suppliers don’t have as many “required” provisions because they don’t have as many bureaucratic interests being protected Smaller suppliers are less able to absorb losses so they will want to limit their liability to the greatest extent possible

8. David’s Perspective – Buyer Size • Large buyers are typically perceived as inflexible and “bullying” • Modifying a large buyer’s standard terms often requires the procurement manager to get internal sign off from various stakeholders (Tax Department, Finance Department, Risk Management, etc.) • This often leads to delays and frustration

9. David’s Perspective – Buyer Size • Smaller or equal sized buyers are often easier to deal with, bargaining power is more equal • That having been said, agreements with smaller buyers are often less lucrative, and expose small sellers to considerable credit risk • In such cases, it may be worth getting some kind of financial protection (i.e., a letter of credit, a guarantee from a parent company, or short payment terms)

10. THE ART OF NEGOTIATION

11. Goliath’s View-Negotiations • Big suppliers can be more difficult than small suppliers in negotiations • Insist on using their terms, or many changes to Goliath’s standard terms • Trade off if a big supplier is perceived as less risk • Small suppliers get overwhelmed by scope and length of Goliath’s terms • Misunderstand the application of some clauses • Don’t address Goliath’s underlying concern of clauses they want changed or provide rationale

12. David’s View-Negotiations • Large buyers typically have more resources to negotiate purchase agreements • Large companies often have a procurement organization which is staffed by professionals who have a lot of experience negotiating agreements (not uncommon for some of them to be non-practicing JDs) • Large companies also tend to have procurement lawyers who are very knowledgeable about contract law and what their client can and cannot accept

13. Understanding Goliath’s Organization • Data on Goliath’s structure, review process, and authority helps with negotiations and timelines • Is the buying organization centralized, or part of the business unit with the requirement? • If centralized, likely more rigid and less knowledgeable about the purchase • If part of the business unit purchasing, likely more familiar with what’s needed and why • Is the customer’s buyer a contracts professional or a lawyer? • If a lawyer, acting in a non-legal contracts role?

14. Understanding David’s Organization • Negotiations for small suppliers are typically led by members of the company’s sales organization • For obvious reasons, they are often very eager to conclude a purchase agreement (their compensation may even be impacted) • If you are representing a small supplier, you should manage expectations with your client at the onset of negotiations • The client needs to understand that some provisions such as indemnification could actually put the future of the company at stake

15. Goliath’s Review Process • What clause changes can the customer’s buyer approve? • Some companies authorize buyers to accept changes on payment, shipping and delivery method, inspection, warranty length • What’s the review/approval process for changes to standard terms? • Higher levels of buyer management, Goliath’s law department?

16. David’s Review Process • David’s review process is likely to be quicker than Goliath’s review process • Smaller organizations need less buy in from various stakeholders in the bureaucracy • On the other hand, smaller organizations have less resources and the sales organization, legal department, etc., may be overwhelmed • Also, if the organization is very small, even a moderate sized contract may need CEO/CFO/Board/Investor approval

17. An Ounce of Prevention Goliath sends David a proposal request to design and make a solar-powered sling shield. The RFP has detailed requirements but contains no reference to incorporating terms and conditions. Do you advise your Contracts Manager to: • be grateful that Goliath is as dumb as it is big, and remain silent • bury in the fine print of your proposal an incorporation by reference of David’s terms, because that’s what Goliath does • include a copy of David’s terms with your proposal and an explanation of why they are included • contact Goliath’s buyer by email and ask about the omission

18. A Pound of Cure . . . David is about to submit its final proposal when its Contracts Manager comes to you with “great news.” Goliath’s buyer emailed a question on David’s preliminary proposal, but attached the proprietary pricing from a competitor. David’s Contracts Manager sent the pricing to the proposal team, which confirmed that David’s final proposal is well priced and will win. What actions should you take? a) Slap your Contracts Manager silly for not coming to you before distributing to your team. b) Notify everyone receiving the email to delete it and not discuss further, as David is not using the information to change its final proposal c) Issue direction to delete immediately, not discuss the content, and contact Goliath’s counsel to disclose Goliath’s mistake and David’s mitigation d) Dream of doing (a), but do (c) instead.

19. What do you do when . . . David’s Contracts Manager conferences you (David’s in-house counsel) in with Goliath’s buyer (a non-lawyer) for you to explain a clause David wants. You know Goliath has a Law Dept. that participates when supplier’s counsel is involved. Do you: • Take the call and use your Contracts Manager’s wonderful surprise to argue David’s position • Take the call, ask Goliath’s buyer whether its lawyer should join, and if buyer says no, proceed • Suggest postponing the call until Goliath’s counsel is available

20. STANDARD TERMS OVERVIEW

21. “Standard” Terms Can’t Fit All • Starting point: Goliath’s standard terms have clauses not applicable to David’s sale • Meant to cover a huge range of goods, cleaning supplies to robotic production machinery • Some clauses really for big dollar orders, when small dollar orders might be lower risk • Confirm with Buyer those inapplicable to your sale, such as: • Data clauses where no data’s delivered • Hazardous materials disposal when none exists • Warranty periods for expendable supplies

22. Everything’s Negotiable, Almost • Goliath’s Buyers will consider changes backed by good rationale • Goliath’s “what we require” will clash with David’s “not what we accept” without more from David • Goliath’s Buyers usually time constrained, and appreciate help from David’s Contracts Manager • Narrowing differences to a few key terms will get it to Goliath’s Legal faster • David’s Contracts Manager should confirm Goliath’s Buyer is transmitting to its Legal David’s rationale for changes and contact info for David’s attorney

23. Maintaining Negotiation Records • Both parties will maintain prior orders with revised terms; however, circumstances may arise in which either side • has not maintained detailed negotiating histories, rationales, even who reviewed; or • has personnel changes resulting in new people with no historical knowledge • Suppliers and Buyers should retain the history, including record of prior reviewers • Goliath will usually place subsequent orders based on previously negotiated terms • If Goliath later revises its standard terms, note differences from what was previously accepted • Tell Goliath what can be used from terms previously negotiated, and provide positions on any revised clauses • David should leverage good performance record for better terms on subsequent orders

24. Strategies for Suppliers • Since a small supplier is less able to absorb losses, do whatever possible to manage company’s risk • Consider insurance coverage for risks such as IP infringement and data breaches • But these policies are costly and narrowly tailored • Make sure the payment terms align with your company’s cash flow needs, consider third-party financing options • Some large companies have vendor financing programs for their small suppliers

25. KEY TERMS & BEST PRACTICES

26. Insurance Clauses • Values and kinds Goliath lists are usually overkill for small orders • Workers comp and CGL coverage always required • David should ask to delete unnecessary ones • Auto, hazardous waste, aviation, when none involved • Values usually negotiable • Tell Goliath levels David maintains • Rationale for why higher values aren’t needed • Explain costs higher premiums will add to order

27. Limitation of Liability Clauses • Davids love them, Goliaths hate them • If performance problems, usually David benefits • If misuse of IP, lost profits, Goliath benefits • Overly broad clauses likely rejected • David’s maximum liability for all claims is order value • More balanced clauses have a better chance • Mutual, both parties taking on some risk • Consider exclusions: claims for IP infringement or misuse, non-compliance with laws • Fallback: maximum is a multiple of order value (2X)

28. Indemnification • In purchase agreements, the most contentious clause is often the indemnification clause • Indemnification can be viewed like an insurance clause, who bears the risk if a certain event happens • BUT, don’t engage in overkill; evaluate what you are purchasing and what are the risks: • For purchasers, particularly of technology, IP infringement indemnification is essential • If you are purchasing a product like CRM software that processes/handles/stores personal information, you will want indemnification for data breaches

29. ETHICAL CONCERNS

30. Ethical Challenges for In-House Counsel Who is my Client? Model Rules of Professional Responsibility Conflicts of Interest Data Protection Bribery Independence Integrity Contractual obligations Whistleblowing Violations by team members Champions of corporate ethicality? Risk of professional misconduct Dealing with non-lawyers Lawyer vs Business Partner Insider Trading Confidentiality

31. In-House Counsel – Ethical Identities Champions Coasters Morally Engaged Morally Attentive Capitulators Comfortably Numb Ethical Pressure

32. Ethical violations: What do you do when… You have just landed a big order. MoUs agreed to but contract is to be finalized. You have now discovered that an employee who has led the negotiations has an undisclosed relationship with the buyer’s main decision maker. Do you: • Remove the employee from the deal • Come clean • Allow the deal to continue but record your decision-making process • Worry about it only if the buyer notices • Something else?

33. Ethical Violations: What do you do when… Your firm is in the middle of a competitive procurement. You have been informed that an employee has improperly obtained trade secret information about the other competitors. Do you: • Remove them from the deal • Destroy the information obtained and remove from your systems • Instruct outside counsel • Introduce information barriers • Withdraw from the procurement process • Something else? • What if this comes to light after work has been won?

34. Navigating the ethical landscape • No agreed model for In-House Counsel role: dynamic and adaptive • Corporate profitability v Ethical rules • Clear internal policies and procedures – raise awareness • Prompt response to suspected breaches • Keep clear audit trail of investigations and decisions • Ethics committees

35. APPENDIXHelpful References

36. References - Privilege & Communication • Attorney-Client/Work Product Privilege • Contracts Manager’s emails to vendor disclosing in-house counsel's advice constituted waiver. While manager did not have actual or apparent authority to waive, in-house counsel was copied on emails and failed promptly to assert privilege. In-house counsel was responsible for safeguarding the privilege. Court held company ratified waiver by not timely asserting privilege. Business Integration Services vs. AT&T Corp., 251 F.R.D. 121 (2008) • http://www.leginfo.ca.gov/cgi-bin/displaycode?section=evid&group=00001-01000&file=950-962 (CA Priv. statute) • http://rules.calbar.ca.gov/Rules/RulesofProfessionalConduct/CurrentRules/Rule3100.aspx (CA Priv. Bar Rule) • http://www.leginfo.ca.gov/cgi-bin/displaycode?section=ccp&group=02001-03000&file=2018.010-2018.080 (CA WP) • https://www.acc.com/vl/membersonly/InfoPAK/loader.cfm/?csModule=security/getfile&pageid=19656&page=/legalresources/resource.cfm&qstring=show=19656&title=InHouse%20Counsel%20Ethics&recorded=1 (ACC In-House Counsel Ethics InfoPak) • https://www.acc.com/vl/membersonly/Article/loader.cfm/?csModule=security/getfile&pageid=1350496&page=/legalresources/resource.cfm&qstring=show=1350496&title=Legal%20Privilege%20Handbook%202013&recorded=1 (Intl. Legal Privilege Handbook) • Attorney Communication to Represented Party • CA rule: http://rules.calbar.ca.gov/Rules/RulesofProfessionalConduct/CurrentRules/Rule2100.aspx • FL rule: https://www.floridabar.org/divexe/rrtfb.nsf/FV/D9F2CB6782C1A3A585257171006BBE07 • ABA Model Rule: http://www.americanbar.org/groups/professional_responsibility/publications/model_rules_of_professional_conduct/rule_4_2_communication_with_person_represented_by_counsel.html

37. More Privilege References • General Criteria for A/C Privilege (U.S.) • the asserted holder of the privilege is or sought to become a client; (2) the person to whom the communication was made (a) is (the) member of a bar of a court, or his subordinate and (b) in connection with this communication is acting as a lawyer; (3) the communication relates to a fact of which the attorney was informed (a) by his client (b) without the presence of strangers (c) for the purpose of securing primarily either (i) an opinion on law or (ii) legal services or (iii) assistance in some legal proceeding, and not (d) for the purpose of committing a crime or tort; and (4) the privilege has been (a) claimed and (b) not waived by the client. In re Grand Jury Proceedings, 517 F.2d 666, 670 (5th Cir.1975); AHF Development, LLC v. City of Dallas, 258 F.R.D. 143 (N.D. TX 2009) Cases on Top Ethical Issues for In-House Counsel: http://www.acc.com/legalresources/publications/topten/ethical-issues-for-in-house-counsel.cfm