15 IT Business Legal Mistakes That Will Damage Your Company

Categories: Business

IT business law is an area of specialism that ORJ Solicitors can provide for.  Our commercial and litigation teams act for some of the country’s largest IT businesses’ as well as some of its most innovative firms.  This has enabled us to develop bespoke legal services for the IT sector.   Nevertheless we see examples of opportunities missed in the instructions we receive.

In the end, avoiding legal mistakes limits risk and adds value to an IT business. In a sector undergoing significant consolidation, mistakes can cause serious destruction of shareholder value.   The cost of avoiding mistakes is fractional by contrast.

Here is a list of 15 of the most common legal mistakes in the IT sector listed by category.

IT Business Legal Mistakes: Staff Contracts

The facts are simple. Most disputes in the IT business arise out of staff transition.

Key personnel in IT businesses are more likely to hold definitive customer relationships than in many other industries. Our first four most common mistakes occur when IT businesses fail to define staff obligations post termination.

• Mistake 1: IT businesses fail to use contracts that prevent departing staff from taking their customers or staff
• Mistake 2: IT businesses fail to prevent departing staff working for customers
• Mistake 3: IT businesses fail to prevent departing staff working with existing suppliers
• Mistake 4: IT businesses don’t use sufficiently well drafted garden leave clauses

If you don’t define the post termination restrictions of your staff they will be free to take customers, suppliers and other staff when they leave. A word of warning – make the contractual restrictions too onerous and they will have no effect at all.

One employment contract may not fit all, but staff can be categorised into only a small number of groups. We categorise key staff in three ways – senior managers; technically able and/or accredited, and potential rising stars. The law is reasonably stable in this area so terms should last a number of years before needing review.

The most damaging form of staff transition occurs when more than one member of staff leaves at the same time and for the same destination.

Failing to have proper employment terms for your staff could be the biggest mistake you ever make. Are you and your staff working hard to build someone else’s new business?

IT Business Legal Mistakes: Staff Hand Over

• Mistake 5: IT businesses fail to deal with hand over and the return of hardware and data rigorously enough when staff leave

Hand over is a key time for protecting customer lists, confidential know how and confidential information, yet many IT businesses seem more eager to clear a member of staffs desk that to protect what belongs to them. IT businesses must receive written assurances they have all their property returned when staff leave.

Go carefully, you may not know what is happening until it has happened.

IT Business Legal Mistakes: Standard Terms

• Mistake 6: IT businesses fail to use properly drafted standard terms.

The cost of having these drafted and prepared is modest and ensuring their incorporation is largely process driven, yet they can cover millions of pounds of business and need only be reviewed occasionally. Most importantly standard terms limit liability, but they also provide a legal framework entirely complimentary to the way you do business.

Standard terms act as the insurance your business just can’t buy. In most businesses they are capable of covering a substantial proportion of trade.   Failure to use and incorporate properly drafted standard terms is a very significant mistake.

IT Business Legal Mistakes: Errors in Customer Contracts

Where your IT business is asked to agree suppliers bespoke terms take care to avoid mistakes 7-11.

• Mistake 7: IT businesses allow delivery to be defined by subjective outcomes; use more certain references such as to hardware, licenses and/or hours of service wherever possible.
• Mistake 8: IT businesses sell their Intellectual Property. They should retain Intellectual Property at all costs, licencing its use where necessary and selling it only in exceptional circumstances for a significant reward.
• Mistake 9: IT businesses agree to allow customers to recruit their staff. If you are a recruitment business this is fine. If you are not, then recruitment of your staff should only be permitted at your discretion.
• Mistake 10: IT businesses accept too much risk. Most IT firms have much smaller balance sheets than their clients. Much of what they do may be innovative and new to their customers yet in bespoke agreements they accept all the risk.
• Mistake 11: When deploying significant resources to a customer or contract IT businesses fail to establish sensible notice periods or terms defining termination leaving them with risk of covering a large overhead with no income.

Remember your standard terms will be designed to be entirely complimentary to your business and deal with mistakes 7, 8, 9, 10 and 11. Where they don’t apply, don’t make the mistake of failing to deal sensibly with bespoke agreements, if necessary use your standard terms as a prompt for important legal issues or take advice.

IT Business Legal Mistakes: The Meaning of Sole & Exclusive

• Mistake 12: Many IT suppliers in a channel fail to appreciate the significance of sole and exclusive agreements.

If you are a sole agent, your supplier can still supply direct to the channel. If you are exclusive you have exclusive rights to supply in the territory. Always seek exclusive sales rights in a restricted channel and use the word expressly.

IT Business Legal Mistakes: Failure to Protect Databases

• Mistake 13: Many IT businesses fail to take steps to protect their database of clients, which may be misused or sold on. This is not about encryption.

Databases can be protected effectively and cheaply by using sensible processes.

IT Business Legal Mistakes: Failure to Register a Trade Mark

• Mistake 14: Many IT companies fail to register their Trade Mark

Many SME IT providers work hard to differentiate their offering from the market. This effort is largely invested in their Trade Mark, but they don’t register it and may not even own the exclusive right to use it.

IT Business Legal Mistakes: Act Fast

• Mistake 15: Many IT companies delay taking advice

If things go wrong (such as when staff purport to leave and take other staff or customers, or data is lost or other IP is misused), when invited, courts will often make very significant orders to protect an IT business at short notice. These are likely to have the effect of preserving significant shareholder value. You may be making a big mistake if you delay taking advice.

Call Patrick Tedstone, Lorraine Smith or Mike Smyth today on 01785 223440 or email patrick.tedstone@orj.co.uk  – we will be happy to give a view without financial obligation and are likely to have all the answers.