Car contracts: Advice for tech companies entering the auto space
As the automotive and technology industries collide, many tech companies find themselves in an exciting but daunting position: having to contract with established auto makers. These contracts can have long-lasting effects on how the technology is built, on how risk is shared between the tech company and the parts manufacturer, and on who owns any data collected by the end product.
Contractual choices that appear to give an inch may, if handled poorly, give a mile and can condemn even the most promising unicorn. So here is some strategic advice for companies entering negotiations with established manufacturers in the automotive space:
Preparing for when things go wrong
Contracting is about risk — agreeing in advance as to what will happen if it all goes right, if it all goes wrong, or if results fall somewhere in between. For tech companies contracting with auto manufacturers, the end calculus is no different. The two industries, however, have developed largely opposite contractual defaults as to who is liable and who must indemnify whom with regard to a composite product.
Traditionally, auto makers have been able to secure indemnification commitments from component suppliers for harm traceable, in whole or part, to the supplier-generated product used in a composite vehicle. Technology makers, however, generally allocate this liability in the reverse direction. In the software licensing context, for example, liability is often disclaimed outright, requiring the licensee to agree that the supplier of the license cannot be held liable for damages resulting from use of its software.
In terms of contractual strategy, this has a number of consequences for the tech company. First, the company should expect this divergence and be prepared for it. This includes being particularly attentive to liability-shifting and indemnification provisions the auto maker may insert into a draft agreement; similarly, the tech company should expect the auto maker to show some resistance to language it inserts wholly disclaiming supplier liability or indemnification duties at the outset of negotiations.
Perhaps more importantly, the tech company should craft liability and indemnification language that is nuanced enough to be enforceable. Don’t rely on the traditional liability, indemnity, and warranty provisions that work for software. They’re unlikely to be enforced in a context where system failure could result in the loss of human life. Any agreement by which a tech company is supplying software or hardware for use in a passenger vehicle meets this criteria, regardless of whether or not the vehicle is autonomous. That said, tech companies operating in the autonomous vehicle (AV) space must be particularly careful in crafting this language given society’s extreme distaste for harm seen as “caused,” even in part, by AI.
Preparing for when things go right
Allocating risk properly is equally imperative when everything goes right and the value of a composite product and/or its outputs (namely, data) increases.
A significant amount of the value of a composite, tech-equipped vehicle will be in the associated IP. Auto manufacturers, while highly sophisticated, have historically been much less focused on IP and, where owned, have “played nice” with cross licensing. Tech companies, on the other hand, knowingly manifest the bulk of their value in their IP portfolios (purchased, generated, and protected) and, for this reason, are generally sophisticated when it comes to protecting these rights.
This presents tech companies with an opportunity when establishing the relationship: Give the auto maker reign over any hardware it brings to (or develops during) the relationship, but ensure ownership of the IP associated with the higher-margin electronic components (also known as the “brains”) and system-oriented IP. Tech companies should use their knowledge advantage in this area to protect rights to both IP brought to, and developed during, the relationship.
Further, tech companies should take particular care in negotiating any provisions relating to ownership of the “outputs” of the composite vehicle: namely, any data generated. Vehicles are becoming connected devices that serve as commerce and data platforms and, for AVs reaching for true L5 autonomy, the data generation will be significant. When negotiating provisions with manufacturers, tech companies should thus be very careful to: (1) protect against provisions that implicitly or explicitly allocate data ownership to others, (2) add provisions that protect against such allocation in the future, and, where possible, (3) affirmatively state their ownership of future data. Note that provisions relating to data are often implicit and can trickle through an agreement and its ancillary documents, so be sure to negotiate all relevant provisions to your satisfaction.
As the automotive and technology industries continue to converge, not only new products but new contractual norms are being created to govern the resulting relationships. The advice here covers some strategies for handling them. While tech companies are well placed to successfully engage auto makers, they must ensure they are protected if it all goes wrong and, equally, if it all goes right.
Philippa J. Balestrieri is an attorney in the San Francisco office of Holland & Knight LLP, an international law firm known for its expertise in the transportation and technology industries and their intersection.