Bankruptcy Affects Technology Contracts
January 25, 2011 By Marc Fabito, Esq. - Protect Law Group
With business bankruptcy filings jumping, people will see an increase in Chapter 11 for Silicon Valley companies incorporated in California.
The Silicon Valley/San Jose Business Journal reported on May 26, 2010 in “Bankruptcy filings in Silicon Valley surge 40 percent this quarter over last year” that business and personal bankruptcy filings are on the rise in the Silicon Valley area in CA. The San Jose Division of U.S. Bankruptcy Court, Northern District of California had around 3,400 bankruptcy filings in the first quarter 2010, including about 2,000 for Chapter 7, liquidation compared to 1,500 in 2009.
Most Silicon Valley companies are in the technology sector. When negotiating technology transactions, a technology provider filing for bankruptcy could affect business operations for the customer. For instance, companies have been selling software as a service (SaaS) instead of a product. Software sold as a service may not be protected under bankruptcy laws, as compared to software being licensed.
Technology companies have been selling software as a service because it allows customers to sign up to a subscription versus licensing a product outright. When a customer subscribes to a service, where the technology company hosts the application versus the customer installing it on its own systems, the technology company provides technical support and software updates for one price. This differs from a license model, where the customer pays separately for licensing, technical support, and maintenance. In licensing software as a service, the technology company is better able to predict revenue, collecting accounts receivables monthly or yearly as opposed to upon delivery when software gets sold.
When licensing software from a SaaS provider, the customer should check the supplier’s and its service providers’ credit. For example, a cloud computing supplier relies on hosting services so even if the technology company is in good financial health, the customer’s operations could be affected if the technology company’s hosting services cannot find funding.
In bankruptcy, a debtor has the right to reject, assume, or assign executory contracts. Executory contracts are continuing contracts where performance remains due by contract parties. A non-debtor must perform post-petition agreement obligations, though a debtor may not be able to perform. The non-debtor is not able to get out of the contract because of a debtor’s bankruptcy. A customer that wants to stop paying a supplier who cannot perform might make a personal service agreement. Personal service agreements are easier to get rid of because they are unlikely assignable. Make contracts personal by naming personnel to do the work.
ABOUT THE AUTHOR: Marc Fabito, Esq. - Protect Law Group
Some of ProTecT Law Group’s Attorneys are admitted to multiple state bars throughout the U.S., to the United States Tax Court and to the United States District Court. ProTecT Law Group Attorneys have honed their skills and competence by obtaining advanced degrees, serving on arbitration panels, and receiving special training in litigation, tax, negotiations and restructuring.
Copyright Marc Fabito, Esq. - Protect Law Group
More information about Marc Fabito, Esq. - Protect Law Group
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
Most Silicon Valley companies are in the technology sector. When negotiating technology transactions, a technology provider filing for bankruptcy could affect business operations for the customer. For instance, companies have been selling software as a service (SaaS) instead of a product. Software sold as a service may not be protected under bankruptcy laws, as compared to software being licensed.
Technology companies have been selling software as a service because it allows customers to sign up to a subscription versus licensing a product outright. When a customer subscribes to a service, where the technology company hosts the application versus the customer installing it on its own systems, the technology company provides technical support and software updates for one price. This differs from a license model, where the customer pays separately for licensing, technical support, and maintenance. In licensing software as a service, the technology company is better able to predict revenue, collecting accounts receivables monthly or yearly as opposed to upon delivery when software gets sold.
When licensing software from a SaaS provider, the customer should check the supplier’s and its service providers’ credit. For example, a cloud computing supplier relies on hosting services so even if the technology company is in good financial health, the customer’s operations could be affected if the technology company’s hosting services cannot find funding.
In bankruptcy, a debtor has the right to reject, assume, or assign executory contracts. Executory contracts are continuing contracts where performance remains due by contract parties. A non-debtor must perform post-petition agreement obligations, though a debtor may not be able to perform. The non-debtor is not able to get out of the contract because of a debtor’s bankruptcy. A customer that wants to stop paying a supplier who cannot perform might make a personal service agreement. Personal service agreements are easier to get rid of because they are unlikely assignable. Make contracts personal by naming personnel to do the work.
ABOUT THE AUTHOR: Marc Fabito, Esq. - Protect Law Group
Some of ProTecT Law Group’s Attorneys are admitted to multiple state bars throughout the U.S., to the United States Tax Court and to the United States District Court. ProTecT Law Group Attorneys have honed their skills and competence by obtaining advanced degrees, serving on arbitration panels, and receiving special training in litigation, tax, negotiations and restructuring.
Copyright Marc Fabito, Esq. - Protect Law Group
More information about Marc Fabito, Esq. - Protect Law Group
View all articles published by Marc Fabito, Esq. - Protect Law Group
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
