THE STRATEGIC ALLIANCE

IVAN HOFFMAN, B.A., J.D.


        It has become quite fashionable for new media and Internet companies to form “strategic alliances.”  The parties often talk about this relationship as though there were actually some legal validity to it.  It makes for wonderful cocktail party talk until there is a problem and then the parties may come to find out that they have created not a “strategic alliance” but a monster. What is clear is that there is simply no legal relationship called a “strategic alliance.”

        Having now said that, let me explain further.  The law does not recognize the term “strategic alliance.”  The term merely is lay talk for describing some form of relationship but is not, in itself, a legal relationship.  It is not like a partnership or a joint venture that has a long standing history in both statutory and case law.  If you describe a relationship as a partnership, for instance, not only do people understand what this means but, more importantly for the purposes of this article, the law understands it.  It is not like a license which also may have legal history to fill in the blanks.  The term “strategic alliance” has no self-defining qualities that tell the law what it is standing alone.

        Thus, what the parties must do is to specifically define the legalities of their relationship by contract since there is no body of law to which they may turn to do so that would fill in the gaps left unsaid by the contract.  While the agreement may refer to the relationship as a “strategic alliance,” the terms of the agreement must cover the specifics of the respective rights and obligations of the parties within that relationship.

        The convergence of technologies and the opening wide of new forms of relationships bred by the Internet and the like has made it all the more essential that the parties spend the time being very clear about what they intend in their relationship.  Trying to “save” a couple of words or trying to make a “simple” agreement and in the process omitting essential provisions that the law will not fill in, may be very short-sighted and in the end, may cause the relationship to get into legal problems that might have been avoided had the parties truly understood their relationship.

        This, after all, the day of the deal and it is up to the parties, acting within their own personal responsibility, to protect themselves within the parameters of the contract.  The law may not be of much help and indeed may actually hurt.  Read “Private Laws” on my site.

Some Provisions

        The following are some, but certainly not all, of the provisions that must be spelled out in order that the “strategic alliance” actually has legal meaning:

        1. The actual nature of the relationship.  Is it a partnership? A joint venture (which is essentially the same as a partnership but for a more limited purpose)?  Is it in reality some form of licensing or cross-licensing agreement whereby one or both parties provide proprietary and other materials to the other?  Is it some other variation on the type of deal?  The differences among these relationships are potentially very substantial.

            a) For instance: if the “strategic alliance” is in reality a partnership or a joint venture (or is deemed to be so by a court), the parties are each deemed to be equal owners as what the law refers to as “tenants in common,” in all of the assets of the partnership or joint venture.  By “deemed,” what this means is that the law of partnership will assume that they are equal partners unless the parties spell out something else in express terms.  By “tenants in common,” the law means that all parties have equal rights to the assets of the partnership or venture.  Therefor, merely calling something a “strategic alliance” may be contrary to what the parties actually intend and this can lead to litigation if the project becomes valuable.  Thus, to the extent that the partnership or joint venture creates new works and materials, each party to the “strategic alliance” is deemed to be an equal owner of all rights in perpetuity in those works and materials.  Further, if each party has contributed some of its previously created and perhaps proprietary materials, the status of those materials is thrown into substantial doubt since if those materials are used to create new works done by the “strategic alliance,” some or all of the rights to the prior materials may now be owned by the “strategic alliance.”  Those rights will almost certainly be clouded.  Therefore, unless the written contract specifies otherwise and takes pains to define the true nature of the relationship, the parties may end up with unintended results.

            b) For instance as well: if the “strategic alliance” is determined to be a partnership or joint venture, the parties have certain rights and obligations with regard to survivorship, inheritance, dissolution, liabilities to third parties for the debts of the relationship or even the debts of the partner or joint venturer incurred during and related to the partnership or venture.  This is because even if the agreement does not spell these issues out,  the overarching law of partnership will fill in these gaps.  If this is not what was intended, then the bare use of the term “strategic alliance” without more may create significant legal issues.

            c) On the other hand, if the “strategic alliance” is determined to be some form of license, is it exclusive or non-exclusive?  What is the scope of the license?  What is the territory?  What is the term?  What are the rights of the parties to the materials created as a result of the license, perhaps called “derivative works?”  Who owns what rights and has what obligations with regard to these works so created?  Here too, there may be significant legal issues that may be interpreted by the law of contract, copyright, trademark or other law that may not be what the parties intended in their “strategic alliance.”

        2. What is the term of the relationship?  As indicated above, a partnership or joint venture goes on for a very long time unless there is a contract provision dealing with the rights of the parties to terminate the same.  Issues arise regarding the continuation of the “strategic alliance” if one or more of the parties wishes or is caused to pull out.  Partnership law says one thing; a license or the copyright and trademark law may say  something else, for instance.  If the parties merely call something a “strategic alliance” what is the term?

        3. Participation Rights.  Without more definition, if the “strategic alliance” is a partnership, each partner has equal rights to management decisions, licensing and other exploitation rights of the partnership assets as well as net profit as discussed above.  This may not be to the parties advantage and therefor, the agreement should cover which party has which rights and obligations with regard to the conduct of the affairs of the “strategic alliance.”  Moreover, if the “strategic alliance” is intended to limit the rights of the parties in terms of what they can and cannot do with the assets, such as would be more likely to be covered in some form of license arrangement, then without more specifics a court might decide that it was a partnership and therefor, partnership law would control with regard to these issues.

Conclusion

        There are clearly many, many other points that need to be covered in any “strategic alliance” agreement.  The important point here, and in contract drafting in general, is that you never want to put yourself in a position to have a contract interpreted by a judge or jury in any way other than the way you intended.  Vagaries hurt all parties since they cast doubt on the substance of the relationship and actually make it more likely that a litigation will follow.  Say it.  Say it clearly and precisely.

        Spend the extra words now or you may find that you will be spending the extra money later.

© 2000 Ivan Hoffman

****************

This article is not intended as a substitute for legal advice.  The specific facts that apply to your matter may make the outcome different than would be anticipated by you.  You should consult with an attorney familiar with the issues and the laws.
****************
No portion of this article may be copied, retransmitted, reposted, duplicated or otherwise used without the express written approval of the author.

FOR MORE INFORMATION:

MAIL

Where Next? 

Ivan Hoffman Attorney At Law || More Articles About Being An Entrepreneur || More Articles About Venture Funding|| Home