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An Original Equipment Manufacturer (OEM) agreement in the context of software licensing typically involves an arrangement where a software developer (the licensor) licenses its software to a hardware manufacturer (the licensee) to bundle and resell with the hardware manufacturer’s products. This kind of agreement is common in the technology industry, and it’s used to establish mutually beneficial relationships between software developers and hardware manufacturers.
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For example, let’s consider a company that manufactures computers—let’s call them CompTech. CompTech produces a wide range of laptops but doesn’t develop its own operating system or other software for the computers. On the other side, we have a company named SoftWork that has developed a popular operating system and a suite of productivity tools.
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In this case, CompTech and SoftWork might establish an OEM agreement. Under this agreement, CompTech would license SoftWork’s operating system and software to pre-install on its laptops before selling them to consumers. This way, CompTech can provide a full solution to its customers—hardware plus software—while SoftWork benefits by broadening its user base and gaining additional licensing fees.
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In another scenario, imagine a gaming hardware company called GameMakers that creates high-end gaming consoles. GameMakers might enter into an OEM agreement with a company called PlayWrite that develops a popular game engine. GameMakers could license the PlayWrite game engine, allowing game developers to create games for the GameMakers console more easily.
An Original Equipment Manufacturer (OEM) agreement and a Value-Added Reseller (VAR) agreement are both common types of business partnerships in the tech industry, but they operate differently.
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As I’ve mentioned above, an OEM agreement involves a software developer licensing their software to a hardware manufacturer, which then bundles the software with their hardware products.
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On the other hand, a Value-Added Reseller (VAR) agreement typically involves a company (the VAR) that adds features or services to an existing product, then resells it (usually to end-users) as an integrated product or a complete “turn-key” solution. You can view our comprehensive guide on VARs here.
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Let’s consider a scenario involving a company that develops accounting software, which we’ll call AccSoft, and another company that specializes in custom solutions for the retail industry, named RetailSolutions. Under a VAR agreement, RetailSolutions would license the AccSoft software, add its own custom features or enhancements (like inventory management specific to the retail industry), and then sell the integrated product to retail businesses. The value-added here is the specific customization and integration that RetailSolutions provides to make the AccSoft software more suitable for a specific industry.
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Key differences between OEM and VAR agreements include:
Level of customization: In an OEM agreement, the software is generally used as-is. The hardware company doesn’t modify the software; it simply bundles it with its own products. However, in a VAR agreement, the reseller often adds substantial value by customizing or integrating the software with other products or services.
Target market: OEM agreements often target consumers directly. For example, when you buy a laptop with pre-installed software, you’re the end consumer in an OEM agreement. However, VARs often sell to other businesses, providing customized solutions that meet their specific needs.
Support and maintenance: In an OEM agreement, the software developer often provides direct support and updates for the software, while in a VAR agreement, the reseller usually handles support and maintenance, as they have customized the product.
Business model: An OEM focuses on manufacturing and hardware bundling, while a VAR focuses on offering complete solutions, often involving multiple products and services, to its customers.]
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Also, under an OEM agreement, the integrated product is generally sold under the brand of the OEM. The OEM incorporates the licensed software (or hardware) into its product and sells the combined product under its own brand name. For example, consider a computer manufacturer like Dell that pre-installs Microsoft’s Windows operating system on its computers. When you buy the computer, you’re buying a “Dell” computer, not a “Microsoft” computer, even though it includes Microsoft software. This is because Dell, as the OEM, has licensed the Windows software from Microsoft to include with its computers under the Dell brand.
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In contrast, under a VAR agreement, the final product, which includes additional features or services, is typically also sold under the VAR’s brand, even though it contains elements from another brand. This branding strategy emphasizes the added value and customization that the VAR provides. For example, suppose a VAR integrates Salesforce’s customer relationship management (CRM) software with custom features tailored to a specific industry, like healthcare. The VAR might sell this integrated product under its own brand, emphasizing the custom healthcare features. But they will likely also highlight that their product is “powered by Salesforce” to leverage the credibility and recognition of the Salesforce brand.
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It’s essential to note that specifics can vary widely based on the individual agreement. Some agreements might permit or require the licensee to use the licensor’s branding in certain ways. For instance, a VAR might be allowed or required to display the original software company’s logo alongside their own. These details would all be laid out in the terms of the licensing agreement.
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In general, the OEM model leans more towards a white-label approach, with the final product bearing the OEM’s branding, while the VAR model often involves a co-branding approach, with the final product reflecting both the VAR’s value-add and the original product’s branding. However, the specifics can vary widely and would be dictated by the terms of the individual agreement.
In an Original Equipment Manufacturer (OEM) Agreement, there are primarily two parties involved:
Licensor (Software Developer): This is the party that has developed the software and owns the rights to it. The licensor grants a license to the licensee (OEM) to include its software with the OEM’s hardware products. The licensor retains ownership of the software and its underlying intellectual property. For example, Microsoft, as a software developer, would be the licensor in an agreement where it licenses its Windows operating system to be pre-installed on laptops.
Licensee (OEM – Original Equipment Manufacturer): This is typically a hardware manufacturer that wishes to bundle software with its hardware before selling it to end consumers. The licensee obtains a license from the licensor to use and distribute the software, but does not gain ownership of the software or its underlying intellectual property. In the above example, a computer manufacturer like Dell would be the licensee, receiving the rights to pre-install Windows on its machines.
Preamble sections provide insight into the context and objectives of the Original Equipment Manufacturer (OEM) agreement. While they’re not a legal requirement and do not have direct legal implications, they can be incredibly helpful in clarifying the interpretation of the agreement’s operative provisions in the event of a dispute.
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OEM agreements generally outline essential preamble elements relevant to any software licensing arrangement for hardware bundling. Considering the unique nature and terms of the agreement, the parties may choose to incorporate more comprehensive details or opt to exclude some of the basic preamble elements.
There are several integral components that form the backbone of an OEM agreement. These components include –
[View detailed guide on limitation of liability provisions ↗]
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With Original Equipment Manufacturer (OEM) agreements, limitation of liability blocks play a critical role for both software developers and OEMs. These clauses provide a method to manage risk and limit potential financial exposure that could emerge due to the execution of the contract. Let’s delve into why both parties might want to include these clauses in their OEM agreements:
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Why Software Developers want Limitation of Liability Clauses in OEM Agreements:
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Why OEMs want Limitation of Liability Clauses in OEM Agreements:
[View the detailed guide on indemnities ↗]
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In the realm of Original Equipment Manufacturer (OEM) agreements in the tech industry, indemnity clauses play a key role. They manage risk, offer protection against potential liabilities, and lay the groundwork for handling unforeseen issues during the bundling and sale of technology products. Here’s a high-level overview on why an OEM would want to include indemnity clauses in their agreements:
[View the detailed guide on termination provisions ↗]
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Including detailed termination provisions in Original Equipment Manufacturer (OEM) agreements in the tech sector is crucial for a host of reasons. These sections provide a clear structure for addressing potential issues, safeguarding the interests of all parties, and ensuring a smooth and orderly end to the business relationship. Here are the key reasons to include termination provisions in tech OEM agreements:
[View the detailed guide on warranties ↗]
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Incorporating warranty sections in an Original Equipment Manufacturer (OEM) agreement in the tech industry is essential for numerous reasons. These provisions are pivotal in establishing a solid foundation for the business relationship, protecting the interests of all parties, and ensuring the effective provision of tech products and related software services. Here are several reasons why warranty provisions are critical in an OEM agreement:
[View the detailed guide on intellectual property ↗]
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Incorporating an intellectual property (IP) block in an Original Equipment Manufacturer (OEM) agreement is essential for several key reasons. This block provides clarity on IP ownership, protect the interests of all involved parties, ensure the proper use and governance of the IP, and establish a structure for resolving any potential disputes.
[View the detailed guide on confidentiality ↗]
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Including a confidentiality block in an Original Equipment Manufacturer (OEM) agreement is paramount for an array of reasons. This block safeguards sensitive data, maintains a competitive advantage, protects intellectual property rights, and nurtures trust and collaboration between the involved parties. Here’s why confidentiality blocks are integral in an OEM agreement:
[View the detailed guide on dispute resolution ↗]
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Incorporating a dispute resolution block in an Original Equipment Manufacturer (OEM) agreement is essential for a variety of reasons. This provision establishes a clear framework for resolving potential disagreements that may arise during the course of the agreement, ensuring that all parties understand their rights and responsibilities if disputes occur. Here are the principal reasons why including a dispute resolution block is crucial in an OEM agreement:
[View the detailed guide on force majeure ↗]
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Including a force majeure clause in an Original Equipment Manufacturer (OEM) agreement is significant due to a number of reasons:
Business continuity: Force majeure provisions also offer a roadmap for maintaining business continuity during and after the force majeure event. For example, the block may provide for a suspension of delivery schedules during the force majeure event with a commitment to resume as soon as practicable thereafter.
Legal safeguard: In the absence of a force majeure block, an OEM unable to fulfill its obligations due to extraordinary circumstances could be liable for breach of contract. The block protects the parties from such legal repercussions. For instance, if political unrest disrupts the supply of a crucial raw material, the OEM would be protected from liability for non-delivery of products.
Contractual flexibility: The force majeure clause can provide options for modifying or even terminating the agreement if a force majeure event occurs and persists. For example, if a new government regulation bans a particular manufacturing process, the clause could allow the OEM to revise the production methods or even terminate the contract without penalties.
Reducing disputes: By identifying and agreeing in advance on how to manage force majeure events, these clauses can reduce the potential for conflict and legal disputes. For example, if a severe cyber-attack disrupts the OEM’s operations, a well-drafted force majeure clause can provide clarity about each party’s obligations, reducing the potential for litigation.
[View the detailed guide on source code escrows ↗]
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Original Equipment Manufacturer (OEM) agreements may involve a substantial degree of interdependence.
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If the OEM agreement incorporates a source code escrow provision, it provides an extra level of protection for the OEM. In this scenario, the software’s source code would be deposited with a neutral third-party escrow agent. Should the software provider cease operations or fail to fulfill its contractual obligations—events usually defined as triggers in the agreement—the escrow agent would release the source code to the OEM. The OEM could then employ other software developers to maintain and update the software, thereby ensuring the smooth continuation of their operations.
[View the detailed guide on non-solicitation of key employees ↗]
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A non-solicitation of key employee block incorporated into original equipment manufacturing (OEM) agreements aims to deter one party from trying to hire or recruit the other party’s essential personnel during the contract period or for a predetermined time following its conclusion. These provisions aim to safeguard the interests of both parties involved in the software development project and ensure the continued stability of their respective businesses.
[View the detailed guide on sub-contracting ↗]
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This block outlines the terms and conditions under which a party can engage third-party contractors or subcontractors to perform specific obligations under the agreement. It may include requirements for notifying and obtaining approval from the other party and may define the primary party’s liability for the work of the subcontractor.
[View the detailed guide on financial stability ↗]
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This block refers to the financial health of the parties involved in the original equipment manufacturing (OEM) agreement. It may require each party to maintain a certain level of financial stability to ensure the project’s successful completion and mitigate risks associated with insolvency or financial distress.
[View the detailed guide on audits ↗]
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An audit block allows one party to inspect and review the other party’s records, processes, and systems related to the contract. This is done to ensure compliance with the agreement, identify issues or discrepancies, and verify the quality of work. The block may specify the frequency, scope, and requirements for conducting audits.
[View the detailed guide on insurance ↗]
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This block requires the parties to maintain adequate insurance coverage to protect against potential risks and liabilities arising during the course of the agreement. It may specify the types and minimum amounts of insurance, such as professional liability, general liability, or cyber liability insurance.
[View the detailed guide on compliance with laws ↗]
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This block requires the parties to adhere to all applicable laws, regulations, and industry standards related to the original equipment manufacturing (OEM) agreement. This may include data protection laws, intellectual property laws, and employment laws.
[View the detailed guide on boilerplate ↗]
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Boilerplate bocks, while often considered standard, play a vital role in shaping the overall legal framework of a contract. As such, it is imperative to give these provisions careful consideration and ensure they align with the parties’ intentions and objectives. Neglecting the importance of boilerplate block can lead to unforeseen consequences and potential litigation.
The fees and payment schedule details the various commercial aspects surrounding the OEM Agreement. The schedule will generally deal with the following-
Fee structure: The fee structure in an OEM agreement can take several forms. It might be based on a flat fee, per-unit fee, tiered pricing, or royalty-based fee. Flat fees are a set amount regardless of the volume produced. Per-unit fees are based on the number of units manufactured. Tiered pricing provides volume discounts, meaning the cost per unit decreases as volume increases. Royalty-based fees involve paying a percentage of the revenue generated from the sale of the product.
Changes to fees and notification requirements: OEM agreements often include a provision that allows for changes to the fee structure. The changes could be due to inflation, or changes in market conditions. There are usually notification requirements included, requiring the party altering the fees to provide the other party with advance notice of such changes, often 30, 60, or 90 days in advance.
Reporting obligations: Reporting obligations in an OEM agreement require the OEM to regularly report on the sales to enable to the Parties to calculate the fees due to the Software Provider.
Payment obligations: The OEM agreement will outline when and how payments should be made. This often includes details on acceptable payment methods, currencies, payment due dates (e.g., net 30 days), and what constitutes a complete payment. The agreement may also stipulate penalties or interest for late payments.
Credits and Returns: This provision covers returns of the Integrated Product, credits, and refunds and how this impacts on the Software Provider.
[View the detailed guide on service levels ↗]
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Error correction service levels are critical in original equipment manufacturing (OEM) agreements because they establish a clear process and timeline for addressing and rectifying any defects or malfunctions in the software product.
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The nature of software is such that even with rigorous testing and quality assurance, errors can still occur once the software is in use. These errors can disrupt the OEM’s operations, resulting in potential financial loss and damage to their reputation.
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By establishing error correction service levels, both parties agree on the expected response times and corrective actions, thereby minimizing the impact of any software issues on the OEM’s operations.
Often a then current EULA relating to the Software is attached to the agreement. This is the EULA contains the terms that the end-users agree to when using the Software.
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