What is an Evaluation Agreement?
The purpose of an evaluation agreement is to allow the parties to evaluate or assess, without the worries and expense attendant to a full blown due diligence review, the possible business opportunity by each side to determine if they want to proceed further with the project and possible transaction. The evaluation agreement will establish the terms of the evaluation period, specify how long the parties have to conduct the assessment of the business opportunity and set out any requirements for keeping the assurance of confidentiality .
Confidentiality is usually required of one side to evaluate the business opportunity. A party giving a presentation or allowing a tour of its facilities will generally use a confidentiality and non-disclosure agreement to protect its proprietary information. The receiving party will usually not be concerned about the protection of its information, as it does not yet have any confidentiality worthy material to protect, but will use the evaluation agreement to protect its present and future information. It may also use the evaluation agreement to protect its customer information.
Evaluation Agreements: What’s Inside?
As has been discussed in earlier posts, a common type of compliance research for law firms is the "evaluation agreement." Evaluation agreements are a type of contractual retainer agreement between the qualified individual and the law firm regarding the provision of legal research services. In this blog post we discuss some key components of evaluation agreements.
Confidentiality clauses – All law firms understand that protecting client confidentiality is essential. This concern is increased for research on living individuals and/or confidential matters. Confidentiality clauses and requirements should be addressed up front and included in evaluation agreements. To supplement these evaluation agreements, referral agreements can be employed.
Duration – Some evaluation agreements are open-ended, running from the date of execution until terminated. Other evaluation agreements are limited term agreements. If a matter is being evaluated for policy or precedent purposes, a limited term may be appropriate. If the legal research project involves multiple issues or is multi-jurisdictional, an open ended evaluation agreement may make more sense.
Scope of evaluation – The scope of the evaluation to be performed should be addressed, whether by area of law, geography, or type of search. An evaluation agreement covering pre-litigation research may have a broader scope, so that the review of records can be applied in any later litigation.
Return of materials – Return or destruction of materials after the conclusion of the matter should be addressed.
The Perks of Evaluation Agreements
For businesses, evaluation agreements are a positive way to vet new products. However, they can be undermined if key employees share confidential information without realizing the terms of the agreement. After completing a product trial, you may want to purchase the product. An evaluation agreement gives you the opportunity to purchase an interest in a product or to purchase the product without paying an expiration fee. They allow clear guidelines to be put in place for when companies want to test certain products without having to approve and sign a purchase agreement. Evaluation agreements are also beneficial to inventors, as they protect their intellectual property. Because no information will leave their premises, valuable details about the product will not be shared elsewhere. Because of this, both parties have room to negotiate on the terms of the agreement. The company that agrees to the evaluation will have just enough time to consider the product without either party having to act hastily.
Legal Aspects of Evaluation Agreements
Evaluation agreements typically are governed by state contract law and are enforceable only to the extent they do not violate applicable law. Often these agreements identify the jurisdiction, venue and choice of law applicable to disputes under the agreement.
Limitation of Liability Provisions Many state courts have found that the limitation of liability provisions in evaluation agreements are unenforceable on the ground of unconscionability where the provision allows for no liability whatsoever for a defendant’s negligence if the defendant gave an appraisal of real estate that was relied upon by the lending person or entity. See e.g., Smith v. Moser, 80 P.3d 525 (Idaho 2003). Courts have been more receptive to limitation of liability provisions that limit the appraiser’s liability to the amount of the evaluation fee. See, e.g., Stark v. Jennifer Jackman Revocable Trust, 909 N.W.2d 144 (Minn. Ct. App. 2017). For a discussion of limitation of liability provisions in evaluation agreements, see Practice Guide: Limitation of Liability Provisions .
Indemnification Provisions Courts generally uphold broad indemnification provisions providing for the indemnification by the lender of the appraiser of errors or omissions in the evaluation, and have held the appraisal firm may rely on the indemnification when relying on information provided by the lender. However, courts have refused to enforce reciprocal indemnification provisions in which the appraisal firm is indemnified by the lender only for its gross negligence or willful misconduct. See, e.g., Moore v. Dale McIntyre & Associates, Inc., 92 P.3d 737 (Or. Ct. App. 2004). Courts generally uphold equitable subrogation and contribution claims so that lenders do not have to bear the entire loss caused by appraisal negligence.
Requirements in All States Evaluation agreements should be tailored to the nature of the transaction and the due diligence responsibilities of the parties. The critical provisions should address: The agreement should also include or reference the evaluation scope to be performed, a MAP, and the form of the evaluation. In addition, the evaluation agreement can specify the remedies of the lender in the event the evaluation fails to conform to the scope of services or evaluation guide.
How to Make the Best Evaluation Agreement
Negotiating an evaluation agreement can be a task fraught with tension. A clinical trial sponsor or other sponsor of an evaluation may have its own form or proposed terms for evaluation agreements. An investigator, institution or service provider may have its own form or proposed terms for agreements. Once both parties to an evaluation agreement are on the same page regarding material terms, the agreement can often be reduced to a standard format. It is well worth the effort on the part of the parties to reach agreement on the essential material terms at the beginning before substantial time and money is invested by both parties in negotiating other terms (e.g., IP ownership, publication rights, costs and funding, warranty and indemnification terms, representations and warranties).
The following terms are generally viewed as "material terms" and should be considered up front: (1) the scope of the testing or evaluation; (2) the intended use of the evaluation or test results; (3) the form of feedback and/or report that will be provided upon completion of the evaluation; (4) the restrictions on the use of any non-public information (e.g., background IP, confidential information, pre-clinical data) and feedback and/or report provided to the sponsor; (5) the desired timing and form of the feedback and/or report; (6) the anticipated study duration and timing of the complete delivery of the results; and (7) any required obligations on the part of the third party to provide the sponsor with updates, information, reports or deliverables. Additional material terms specific to the applicable clinical research context may also need to be considered (e.g., enrollment goals, timeline for enrolling subjects, patient population, patient incentives, sample size).
Avoiding Evaluation Errors
One common mistake is failing to prioritize the company’s interests in the negotiations. Rather than focusing on what your company needs – like reasonable protection of your intellectual property – it is all too easy to make concessions to get the deal signed. Dodging concession making forever after may be impossible, but do your best to delay. If you give in on issues important to your company at the outset, it becomes exceedingly difficult – if not impossible – to get a corrective agreement in place if the Invention Assistance Provider doesn’t live up to its contractual obligations. Companies may also undermine their interests in other ways by:
Failing to adequately define invention ownership: Evaluation Agreements too often look like an award of rights (a license) rather than an initial stage, which might include non-compete and invention assignment provisions. Make sure that the agreement makes clear that the company owns the inventions that arise out of the funding and set out the rights the Evaluation Assistance Provider will receive in those inventions – if any .
Failing to build in friendly exit provisions: The Evaluation Assistance Provider may make an unsatisfactory effort that results in no new inventions. Frustrated, either of the parties might want to exit the relationship. Either party should have the option of terminating the agreement after a certain period has passed, or should have a mechanism for early termination if they find that the expectations expressed at the outset are not being met.
Failing to engage in an early analysis of effective patentability: It is critical that the company understand the patentability of possible inventions before committing significant financial resources to a joint project. Some "Invention Assistance Providers" make a practice of not addressing patentability until a funding commitment has been made. A company may find itself with a press release announcing a deal, which turns out not to provide patentable inventions at the end of six months.