Message-ID: <22926643.1075842020115.JavaMail.evans@thyme> Date: Sun, 20 May 2001 16:29:43 -0700 (PDT) From: tstockbridge@velaw.com To: travis.mccullough@enron.com, andy.zipper@enron.com, michael.bridges@enron.com Subject: V&E Comments on TSH License Agreement, draft May 1, 2001 Cc: bhattacharya@enron.com, rbhattacharya@velaw.com Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit Bcc: bhattacharya@enron.com, rbhattacharya@velaw.com X-From: "Stockbridge, Edward T" @ENRON X-To: McCullough, Travis , Zipper, Andy , Bridges, Michael X-cc: Bhattacharya, Rasmani X-bcc: X-Folder: \ExMerge - Zipper, Andy\TSS X-Origin: ZIPPER-A X-FileName: andy zipper 6-26-02.PST Travis: Here are my general comments on the May 1st draft of the TSH License Agreement between Enron and Accenture. I have not tried to provide detailed drafting comments, but there are many, many problems with the draft. I have limited my comments to what I consider the bigger issues. Some of my comments may have already been addressed by Andy, but since I am starting fresh on this, I thought that I would just comment on everything. I look forward to talking with you further about this. 1. Which is the correct Enron entity? I assume that this should be an agreement with Enron Networks. Does Accenture expect a parent guaranty? Does Accenture expect a broader exclusivity that binds Enron Corp. and its affiliates? I assume that we want to limit the scope of the exclusivity to Enron Networks. 2. The description of EnronOnline is much too broad "various goods and raw materials". This needs to be limited to certain products. 3. I don't understand why Accenture is licensing aggregate data. I thought the service to be established was to provide re-formatted data to individual Enron customers. That would require only customer-specific data. 4. Will Enron be receive "real time" data transfers? Will this be true in the sense that it will be the same time as Enron transmits information to the customer? I assume that there may be a lag in time between the completion of a transaction and the transmission of the transaction data. 5. In Section 2.1(a), the scope of the "exclusive" license needs to be carefully thought through and narrowed as much as possible. What is "post-transaction data", and why does Accenture need/want an exclusive license on aggregate data? Also regarding the exclusive license, we need to consider all necessary exceptions to the exclusivity, such as Enron's internal use, transmission to the customer, etc. Also, all transmissions of customer-specific data require the customer's prior consent; the exclusivity should apply only if that consent is obtained by Accenture, and only for as long as that consent is valid. 6. One key aspect of an exclusive license is how it is terminated. Normally there are increasing minimum royalties associated with the licensee's continued exclusive rights. Often the licensee has the right not to pay the minimum royalties, in which case the license can convert to a non-exclusive or the license can terminate. 7. In Section 2.1(a), there is a reference to Accenture's right to sublicense. This right needs to be carefully narrowed and clearly stated. Can Accenture remarket the data to anyone other than the customer? 8. The term "Customer" is confusing. In Section 2.1(b), it would seem to relate only to EnronOnline customers, but later in that section it speaks of "its [Accenture's] customers. In the definition schedule, the term is not limited to EnronOnline's customers. 9. In Section 2.2, the same comments in points 5 apply to the exclusive license of the software. 10. There is a reference in Section 2.2 to "updates and revisions." Will Enron be responsible for these? What continuing services will Enron be obligated to offer for the software? Will Enron be entitled to receive and use any improvements or updates that Accenture may make to the software? 11. Should the scope of the license be limited geographically? Why is it worldwide? If it is worldwide, what happens if Accenture does not market in some countries? Is Enron excluded from using or licensing the data in those countries? 12. In Section 2.3, I assume that Enron will dictate the format of the data to be received, and that Enron may revised that format from time to time. 13. Section 2.3(a) has some language that says that Enron will provide... the interface between Accenture and Enron?... and "any other software developed by or on behalf of Enron necessary for Accenture to perform its obligations to its Customers? That is ridiculously broad. What obligations to Accenture's customers? I can't imagine that Enron would give Accenture additional software for "free", especially if Enron spent considerable amounts developing it. Additional software may require additional license fees, etc. 14. The concept of service levels and service level credits (in Section 2.3) is typical in service agreements. I wonder what Accenture has in mind. They certainly resist any meaningful service levels or credits when they are providing service. 15. Section 2.4 is truly amazing. It is so broad that Accenture could argue that anything Enron does adversely affects Accenture and that Enron has to pay Accenture... If Enron is willing to provide Accenture with a non-compete in addition to the exclusive license, then these provisions need to be harmonized and carefully limited. Perhaps Accenture thought that this provision was for the benefit of Enron, in that it enables Enron to complete potentially competitive transactions without violating the exclusivity license (although in my view the language of the license doesn't really reach this point). We need to discuss the business points that Accenture is trying to address in this section and start again with the drafting. 16. Section 2.5 is yet another twist on exclusivity. This also needs to be tied into the scope of the exclusivity provisions. If an Enron Customer hates Accenture and refuses to do business with them, then what happens? Can Enron provide the service to that customer? If so, what is the effect of the exclusive right in Section 2.5? 17. Section 2.5 also contains a reference to "co-branding marketing" activities, and requires Enron to support and assist Accenture. This is much too broad. Enron may or may not wish to engage in "co-branding marketing" activities, and if so they need to be narrowly defined at the time. 18. The exception in Section 2.5 to Enron's provision of the data services is very troubling, as it would appear that Accenture is trying to limit Enron's discretion in establishing its own pricing. If Accenture really wants this type of protection, we need to review it with antitrust counsel. 19. The payment terms seem extraordinarily generous for Accenture. It would be highly unusual in my experience to have license fees paid only once per year. 20. Not that I would know, but the minimum payments seem very low to me. The minimum payments is the best way to establish whether Accenture has met its obligations to market, etc., so that it can keep its exclusive rights. I would think that the minimum fees would be significantly higher. They could be indexed to the number of transactions, customers or transaction value of EnronOnline, so that if EnronOnline grew faster than expected, Accenture would have to keep pace or loose its exclusivity. 21. The use of "Gross TSH Revenues" as part of the formula for royalties is typical, but it presents a very significant challenge because Accenture will have other relationships with its customers and may under price this service (e.g., as a loss leader), and try to make their money on consulting services. It would be better for Enron if we could come up with a transaction fee, that Accenture would have to pay Enron for each transaction/transmission of data to a customer (indexed appropriately), and then let Accenture worry about how it makes money. 22. We need to consider the tax issues further. I think that the fees paid to Enron for data transmission/resale and for the software may be subject to state sales tax. Accenture should be responsible for at least the taxes related to the data transmission/resale. If it is reselling these services to its customers, it can provide Enron with a resale exemption certificate. The license of software is probably not subject to the same exemption and may be taxable in any event. That would require us to split the revenue stream between the two types of services (data and software), or run the risk that the whole stream is taxable regardless of the resale certificate. We need to consider these issues further with tax counsel. 23. [I'll skip commenting on the IP provisions of Article IV for now. Suffice it to say that they need work. But we need to work out the business deal before worrying too much about these provisions. But they will be critical to our agreement with Accenture.] 24. The Term is another amazing provision. First, five years is a very long time in my view to have an exclusive license for this type of new/evolving business. Second, Accenture's proposal for a unilateral option to extend it for five more years is a bold move. But it seems ridiculous to me that the minimum annual payments for those additional years (of exclusive rights, I assume), would be fixed at $1 million. Surely they jest. 25. Enron needs a way to terminate this license early, either through a buy-out right or a termination for convenience with a payment. Also, if Accenture is violating the terms of the license or otherwise violating "material" terms of this Agreement (which we may have to identify), Enron should have the right to terminate. I have often used the approach that the licensor should not be permitted to terminate except in the event of a payment default, but we should seek much more. Especially if Enron only gets paid once a year. 26. I noticed that Accenture did not offer any representations. Some would be appropriate. 27. The liability/indemnity section is interesting in that it lacks any indemnity by Accenture to Enron's benefit. I would think that Accenture would indemnify Enron for all claims by customers relating to Accenture's service (e.g., mapping errors, translation errors, etc.), except if directly related to Enron's error. We need to discuss this risk model. We have to assume that EnronOnline's customers would come after both Accenture and EnronOnline, and we need to consider how these claims should be handled. 28. The limits of liability are interesting. I wonder what the story is behind the $25 million limit for us, and the $5 million limit for them. 29. We would not accept the exclusions to the consequential damages as drafted; and we would want to exclude claims related to Accenture's breach of Enron's IP rights from any consequential damage limitation. [That will get their attention.] 30. The "worldwide license" provisions of Section 9.1 require some discussion. I doubt that Enron intends to get consents for and make all filings in countries where Accenture wants to sell these services. See you on Monday at 9:30am. Feel free to call me earlier on Monday or at home tonight (713 661-3279). Ted Stockbridge Vinson & Elkins L.L.P. (713) 758-1032