How to prepare for the "collision" between technology companies and the automotive industry

The two industries have diametrically opposed attitudes on who is responsible for the product and who must compensate whom.

As the automotive and tech industries increasingly collide, many tech companies find themselves in the exciting but daunting position of having to sign contracts with established automakers.

The power of these contracts is that they can have a lasting impact on how technology is built, how risk is shared between tech companies and component manufacturers, and who owns the data collected by the final product.

If not handled properly, what appears to be a “one inch” concession in a contract may result in a “one mile” gap, which could be a fatal blow to even the most promising unicorns.

So here are some strategic suggestions for tech companies to consider when negotiating with established manufacturers in the automotive space.

Prepare for the worst

Contracts are about risk, to put it bluntly. There is no question of agreeing up front what the consequences of everything will be. For a tech company contracting with an automaker, the final calculus will be no different.

However, the two industries have largely given opposite contractual breach terms regarding who is responsible for the combined product and who must indemnify whom.

Traditionally, automakers have been able to obtain damages-tracking commitments from parts suppliers to compensate for losses caused by all or part of the products produced by the suppliers for use in vehicles.

However, technology vendors often assign this responsibility in the opposite direction.

In the case of software licenses, the licensor usually denies liability entirely, while the licensee is often required not to hold the supplier liable for damages resulting from the use of the software.

This has a number of consequences for tech companies in terms of contracting strategies.

First, companies should anticipate such divergences and prepare for them. This includes paying special attention to liability-shifting and indemnification clauses that automakers may include in draft agreements.

Likewise, tech companies should be prepared for the fact that automakers will be resistant to using language that completely exempts suppliers from liability or indemnity at the outset of negotiations.

Perhaps more importantly, tech companies should craft liability and indemnity language that is nuanced and enforceable, rather than relying on traditional liability, indemnity, and warranty language in software, which is unlikely to be enforced in situations where a system failure could kill someone.

Any agreement for a tech company to provide software or hardware for a passenger car should meet this standard, regardless of whether the vehicle is driving autonomously .

That is to say, technology companies serving the field of autonomous driving must draft documents with particular care, because society is deeply averse to the harm "caused" by (some) artificial intelligence.

Prepare for smooth progress

When all goes well and the value of the product and/or its output (i.e. data) increases, it is equally necessary to allocate risk appropriately. After all, a considerable value of a complex, technologically advanced vehicle will be embodied in the associated intellectual property.

Although the automotive manufacturing industry is highly mature, historically it has paid much less attention to intellectual property rights and has not been very good at cross-licensing.

On the other hand, technology companies consciously derive much of their value from a combination of IP investments (purchase, generation, and protection) and are therefore typically sophisticated in protecting those rights.

This presents an opportunity for technology companies as they build relationships.

That means giving the automaker control over any hardware it brings in (or develops in the meantime), but securing ownership of the higher-margin electronic components (called the “brains”) and system-oriented intellectual property associated with them.

Technology companies should use their knowledge advantages in this area to protect the intellectual property introduced and developed during the relationship.

In addition, technology companies should be particularly careful when negotiating ownership terms regarding any data generated by vehicles. This is because cars are becoming connected devices as a service businesses and data platforms, and the data generated will be critical to achieving true Level 5 autonomous driving.

Therefore, when negotiating terms with manufacturers, tech companies should be mindful to: 1) prevent certain clauses from implicitly or explicitly assigning data ownership to others; 2) add clauses to prevent such assignments in the future; and 3) add affirmative statements about future data ownership when possible.

Note that data-related terms are often agreed upon in parts but can be worked out gradually through the agreement and its ancillary documents, so be sure to negotiate all relevant conditions until you are satisfied.

As the automotive and technology industries continue to merge, not only are new products being introduced, but new contract specifications are being created to govern the resulting partnerships.

While tech companies are well-positioned to successfully woo automakers, they must ensure they are protected should any situation arise.

Philippa J. Balestrieri is an attorney in the San Francisco office of the international law firm of Holland & Knight LLP, known for her expertise in the transportation and technology industries and their intersection.