This morning a friend of mine who runs a small
electromechanical design and development service company asked me for my advice
on customers who demand exclusivity in their contracts. In his case he was asked by a prospective
customer whether he would grant the customer exclusivity, i.e. to not work for
other customers in this particular product area. My friend asked me whether I had run into
this type of request before, either at my current firm, MIE Labs, or previously
at ICD, and if I had ever considered accepting this type of restriction.
I told him yes, and yes. While in general you should do your best to
avoid this type of restriction, there are cases where this is a truly a valid
concern of the customer and should be addressed with understanding. In most cases the concern is in relation to
the possibility of a customer’s IP ‘leaking’ to a competitor. Sometimes the customer believes that they are
‘investing’ in you and therefore want to insure that you will be working for
them when they need you and not a direct competitor. Others are simply concerned about losing your
bandwidth. These are all common concerns
among those outsourcing product development tasks. The first step is always to try to understand
the customer’s concerns and see if they can be alleviated short of a contractual
agreement (in my experience, the vast majority of my customers over the past 17
years did not in the end need this type of restriction). If that is not possible, the next step is to
limit the scope of the restriction to the greatest extent; if one particular
competitor is a concern and they are not currently a customer or seen to be one
in the near future, perhaps that specific restriction would be acceptable. Or if the specific product area can be
narrowed to the point that it is unlikely you will see a similar opportunity - that
might work. In either case there should
be some valuable consideration in return.
In my case, there were two main instances I can recall where
we ended up accepting this type of limitation.
On one occasion, a Master Services Agreement was negotiated with a large
semiconductor manufacturer who wanted us to do power management products
exclusively for them. In that instance,
the mutual intention was that there would be a steady stream of business that
would consume the majority of our staff doing power management designs. We limited this restriction in our agreement
by a) noting a short list of specific competitors the customer was concerned
with and b) stipulating that if a certain level of business was not maintained,
the restriction would be relaxed. As it
turned out, due to the downturn in 2001 the customer was not able to maintain
the prescribed level of business we ended up removing this restriction,
although it was a bit of a hassle getting them to first admit that the level of
business was below the threshold and not coming back and then get the lawyers
to implement modifications to the contract.
The lesson here is to be VERY SPECIFIC and as in all contracts consider
well l the situation that you don’t want or expect.
In another case, the customer became a significant investor
in our firm in order to secure a certain significant level of our bandwidth for
their product developments. There was
not a specific contractual restriction involved however the investor was a
Japanese company and made it clear that they would want to vet and approve any
potential Japanese competitor that we might want to do business with. In this case it was not a big problem to
accept the restriction as they owned a significant portion of our company and
their interests were therefore well aligned with ours. Also the restriction was in practice not
very limiting (they were our only Japanese customer) and they did provide us
with a significant stream of work. As
our key investor of course I preferred not to antagonize them.
So in conclusion, do your best to try to understand your
customer’s concerns and hopefully avoid this type of restriction in the first
place, but if that is not practical, consider exclusivity restrictions, along
with all other contract provisions that favor the customer, as a benefit you
are providing and should be well compensated for in return.
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