This Wisdom of the Crowd (ACC member discussion) addresses how to negotiate a limitation of liability clause in a consulting agreement to sufficiently protect your company's confidential information and intellectual property, under US law. This resource was compiled from questions and responses posted on the forum of the Intellectual Property Committee and Corporate and Securities Law Committee ACC Networks.*
*Permission was received from ACC members quoted below prior to publishing their forum comments in this Wisdom of the Crowd Resource.
Question:
I'm currently negotiating a consulting agreement that contains a limitation of liability clause tied to fees paid. The consultant will have intimate access to our client info and intellectual property, so I attempted to carve out an exception as it related to a breach of confidential information and IP. The potential damages resulting from a breach in these areas would far exceed the amount of fees paid to the consultant. The consulting company says it cannot have unlimited liability in any area and we are at a stalemate. I can add the ability to obtain an injunction but that only potentially mitigates the damage; it doesn't compensate us. The consulting company's insurance does not provide coverage. Does anyone have any ideas of how to break the stalemate so we can move forward? I cannot get my head around the idea that allowing this provision is tantamount to permitting a third party to purchase our confidential info and IP for a song.
Wisdom of the Crowd
Response #1
This is one of these recurrent questions where it is difficult to balance risks and rewards. I only see four possible options for you to solve the deadlock:
- raise the cap (the consultant may not wish an unlimited liability but he may accept a higher liability than the mere contract value) provide for a limitation of liability only where the consultant can prove that specific safeguard measures have been taken (e.g. you may accept that the consultant has a limited liability where, despite the safeguard measures, a disgruntled employee intentionally discloses the confidential information in order to harm the interests of his employer, but NOT accept a limited liability where confidential information is stored on a shared server without firewall protection) rely on legal exceptions to argue your case when worse comes to worse (e.g. plead that the consultant was grossly negligent and that the limitation of liability does not apply) do not enter into a business relation with a consultant where you do not have a full "commitment of faith" of the latter.In any case, depending on the identity of the consultant (one man shop or institutional service provider) a chain is as strong as its weakest link so even if you succeed in obtaining an unlimited liability, a company with a net worth of $100,000 will never be able to pay your loss of $10,000,000. Sometimes you have to put these issues in perspective in order to get to a mutually acceptable compromise solution.1
Response #2
It's not unusual for the consulting firm to require a limitation of liability. My firm always did so. However, when it came to the protection of intellectual property rights we were sensitive to the situation. Typically what we did, and you should ask for, is a (i) higher limit of liability on IP breaches (say double the value of the services) and (ii) a clear statement that any exclusion of liability for consequential damages does not apply to a breach of the IP clause. What you need to consider is that the consulting firm cannot bet the company on any single deal, but you need to make the penalty high enough that they will have a genuine incentive to be vigilant in protecting your rights. If need be, you might sweeten the pot by making the provision mutual, recognizing that they may have some IP of their own that they want to protect.2
Response #3
Most consulting agreements I've seen have a limit of liability clause; however I've usually been able to get an exception for breach of confidentiality, with IP info included as confidential info, where appropriate. And, sometimes, we've agreed to limit it to insurance when that existed and was high enough.
If you are at a stalemate, perhaps the next question to ask is whether you really want to work with this company. It's hard to imagine there isn't another one out there.3
Response #4
If this consultant is skilled but not flush with money, in which case as previously pointed out your contractual remedies are limited anyway, you could investigate the procedures and tools the consultant has to safeguard information, such as using encryption, password protection on laptops and the like. The procedures should be as good as your own employees use. You could have specific reps and warranties that the consultant is using those procedures, then maybe you'd have a fraud claim if it turns out he lied to you. If he has better procedures than your own employees, then I'm not sure you have much more risk than you are currently living with even without an exception to the limit of liability.
You might be able to have some language that tends to bolster a claim to trade secrets, as well, then allow him to limit the remedies for breach of contract as he wants to, which arguably would not limit your claims against him (including, maybe, criminal penalties) for trade secret misappropriation or other non-contract claims. I have to admit it seems unlikely in the abstract that a consultant could be criminally liable for trade secret misappropriation.4