Doing Business with the State of California: New IT Model Contract Terms

1. Doing Business with the State of California: New IT Model Contract Terms Allen Samelson Rogers Joseph O’Donnell & Phillips 311 California Street, 10th Floor San Francisco, California 94104 Phone: 415.956.2828 E-mail: asamelson@rjop.com Robert S. Metzger Gibson, Dunn & Crutcher LLP 333 S. Grand Avenue Los Angeles, California 90071 Phone: 213.229.7924 E-mail: Rmetzger@gibsondunn.com

2. The Problem • California posed excess risk, complexity and controversy to many IT firms: some stayed away • Examples: • Limitation of Liability: “cost of cover” outside cap • Indemnification not limited to negligence or willful acts • State acquired “rights in data” to work under contract • Generally, the State refused to negotiate exceptions • Firms reflected high perceived risk in pricing • Bid protests were frequent and customer relationships often were contentious

3. The Premise • Industry Believed There Was Mutual Advantage in Procurement Reform: • A Faster Procurement Process with Fewer Protests • Less Risk And Fewer Unknowns In Bids & Performance • Less Controversy After Award • The State Became Convinced That “Lowered Barriers” To Commercial Terms Would Produce “Best Value” Industry believed California would realize more effective competition and better value in procurement with terms more aligned with commercial norms

4. The Process • ITAA Formed a Group of Interested Companies • A Consensus of Issues And Priorities Was Developed • The State Agreed to A Formal “Working Group” • The State Procurement Director Committed to the Project • The State Hired Outside Counsel* to Add Expertise (* several) • ITAA Developed And Refined its Positions Internally • Comparisons Were Offered to Other States & to Commercial Transactions

5. The ITAA – DGS Negotiation • Model IT Contract: 12/01- 12/02 • New General Provisions and IT Modules published January 22, 2003. • Current DGS version dated March 1, 2003. • CMAS effort is on-going.

6. The Record: • The “Before”: • http://www.documents.dgs.ca.gov/pd/modellang/gp2001.pdf • http://www.documents.dgs.ca.gov/pd/modellang/itgtc.pdf • The “Issues”: • “Bridging the Great Divide: State Governments Lag Behind in Streamlined Commercial Contracting Initiatives” -- Samelson and Silberman, Contract Management, July 2001 • “When More Produces Less: California’s IT Terms and Conditions Produce Less Competition and Lower Value” -- Metzger, Richard & Figueiras, Procurement Lawyer, Fall 2001 • The “After”: • http://www.documents.dgs.ca.gov/pd/modellang/GeneralIT.pdf • http://www.pd.dgs.ca.gov/modellang/ITModules.htm

7. Limitation of Liability (GP 26) • Removed State’s “cost of cover” exception. • LoL = two times purchase price. • Separate LoL for each purchase order issued under CMAS or MSA. • Disclaimer of consequential damages now expressly covers all indirect and punitive damages. • Exceptions limited to IP infringement, liquidated damages, attys' fees and any specific damages stated in Statement of Work (SOW).

8. Limitation of Liability (cont.) • LoL carve‑outs: • (i) IP infringement; • (ii) liquidated damages; • (iii) bodily injury or damage to realortangible personal property caused by negligence or willful misconduct; and • (iv) attorneys' fees.

9. General Indemnification (GP 28) • Before: indemnity exposure to “intangible injury”claims • Now: • Limited to 3d party claims due to death or injury and loss or damage to real or tangible personal property • Before: broad exposure to liability irrespective of fault • Now: • Limited to “willful misconduct” or “negligent acts or omissions” • Contractor has control over defense • With State participation in limited circumstances, e.g., “when substantial principle of public law” is present • State participates at its own expense and must cooperate

10. IP Indemnity (GP 39) • Separate IP infringement indemnity at GP 39 • Allows for pass-through of software vendor indemnity • (Prime to “back up” if software vendor fails to honor) • Infringement remedies separately stated: • Contractor may procure for the State the right to use the allegedly infringing deliverable or software, or • Replace or modify the deliverable or software to become non-infringing, or • If none of these succeed, or if use is enjoined, the Contractor shall take back the deliverable or software and assist the State in procuring substitute performance • If return renders performance impractical, the State may terminate

11. Warranty (GP 18) • Deliverables and services warranty: • substantial conformance to contract requirements, including descriptions, specs and drawings identified in the SOW, and • free from material defects in materials and workmanship. • Deliverables will provide “all material functionality” required by design specifications, only if they are agreed upon in the SOW. • Duration = one year after acceptance.

12. Warranty (cont.) • Disclaimer of all other warranties, including warranties of merchantability and fitness for intended purpose. • Software is not warranted to run “error free” or without “material interruption.” • Commercial software warranted to perform in accordance with its license and documentation. • Pass‑through of third party product warranties for items sold by contractor, if more advantageous to State.

13. Warranty (cont.) • New warranty of no “harmful code” (viruses, etc.) at time of delivery. • No warranty as to modifications or misuse by State, or use in combination with products not specified by contractor. • Exclusive remedy clause: re‑perform, repair, replace or, if State consents, refund price paid by State plus pay any costs to cover.

14. Acceptance (GP 16) • Maintains “reasonable time” standard for State to reject deliverables and services. • State is deemed to accept deliverables and services if State does not notify of rejection within 60 days. • Rejection notice must explain how product or service fails to “substantially conform” to specifications. • Acceptance is final except as to latent defects, fraud or gross mistakes amounting to fraud.

15. Acceptance (cont.) • Custom Software (Software SP 5): • Same rejection/deemed acceptance process. • Contractor to use reasonablebestefforts to remedy deficiencies. • If deficiencies not corrected, State may accept substitute or terminate the contract in part or entirely. • Commercial Software accepted per license agreement governing such software. • Parties may modify these procedures in the SOW.

16. IP Rights (GP 37) • Before: IP developed under contract “shall be the property of the State”. • Now: State acquires “Government Purpose License Rights” Contractors retain ownership (Federal model adopted) • All IP used in performance is “Work Product” • State acquires GPLR in the Work Product • includes right to use outside the state for “governmental purposes” • excludes rights to use, disclose for commercial purposes • Pre-existing materials are explicitly contractor’s property

17. Termination for Default (GP 23) • Before: State could terminate for default for failure to make schedule without notice • Now: • Right to terminate for default for all causes -- including schedule – is subject to a “cure notice” of not less than 15 days unless the SOW calls for a shorter period • State’s right to terminate in all cases arises where failure of performance constitutes a “material breach” of the contract • State’s right to damages for excess costs of reprocurement now are subject to the Limitation of Liability • Rights and procedures in the event of termination are clarified

18. Other Features • “Time is of the Essence” -> DELETED • Termination for Convenience (GP 22) • Clarifies State’s obligation to pay for accepted work and • for costs incurred in performance terminated • for initial costs and preparatory costs • for costs of settling and paying subcontractor claims, and • for “winding down” costs including unamortized overhead • Follow-On Contracts (GP 43) • Waiver authorized to extent permitted by law • Restrictions inapplicable • to vendors’ advice for commercial OTS products on operation, integration, repair or maintenance after sale • where master agreement calls for future recommendations among the contractor’s own products

19. California Procurement Reform - what was a “hostile environment” now may be a model for other states ... Our goal in California was to make the State more attractive to IT firms, to reduce their risk of doing public sector business, and to improve competition for the State’s needs for IT supplies and services

20. Doing Business with the State of California: New IT Model Contract Terms Allen Samelson Rogers Joseph O’Donnell & Phillips 311 California Street, 10th Floor San Francisco, California 94104 Phone: 415.956.2828 E-mail: asamelson@rjop.com Robert S. Metzger Gibson, Dunn & Crutcher LLP 333 S. Grand Avenue Los Angeles, California 90071 Phone: 213.229.7924 E-mail: Rmetzger@gibsondunn.com