To keep up with the accelerating pace of digital transformation, companies increasingly rely on third-party providers of digital platforms. These platforms automate and streamline transactions, creating better customer experiences, more efficient product delivery, rich pools of data and powerful network effects. There are, however, also reputational, operational, security and various other risks for a company that depends on a third party for connections with customers. This article identifies key issues that tend to arise for companies in contracting for digital platforms and suggests approaches to resolving them.
What is a Digital Platform?
Broadly defined, a digital platform is an integrated framework of digital tools and services that runs in a SaaS model and facilitates exchanges between companies and their customers. Put more simply, it is the technological foundation on which a digital business is built. Digital platforms are not simply cost-saving technology for companies’ back-office functions; instead, digital platform technology is transforming customer-facing, revenue-generating functions.
There are many types of digital platforms across a variety of industries and use cases, including media, collaboration, search engine, social media, e-commerce and marketplace, and payment, lending and other financial services platforms. Across these variations, what digital platforms have in common is the competitive advantages they confer on companies that successfully adopt them: speed, convenience and other improvements in customer experience; insights and efficiencies mined from the masses of transaction data that a digital platform generates; and the opportunities to sell to mobile and other digital-only consumers. Faced with the risk of ceding these advantages to rival businesses, the question for most is not whether to acquire access to a digital platform, but how?
Why Enter into Digital Platform Arrangements?
Companies generally have three paths to digital transformation: (1) they can build the necessary digital platform themselves (for example, using licensed or custom-developed software); (2) they can buy a business that has already built or acquired a digital platform; or (3) they can enter into an agreement with a digital platform’s owner for the necessary access, to be provided by the platform owner as a service. While for some companies the advantages in building or acquiring a digital front-end outweigh the typically considerable costs, companies often find that a platform-service agreement is a good option. Some of the advantages of using an already existing platform through a service agreement, as opposed to building or buying a digital platform include: (1) relatively small investments; (2) entering the market faster by not “reinventing the wheel”; and (3) digital platform arrangements usually allow for scalability. Some well-established digital platforms offer the opportunity to participate in a standardized platform with standardized terms and conditions. However, in many industry sectors, such as financial, insurance and healthcare, there are newer market entrants into the digital platform space, and contracting arrangements with these newer entrants tend to be more flexible than their more-established competitors.
Contracting with a digital platform provider, however, is not without risks. The next section of this article explores those risks and some options for addressing them in negotiating a digital platform agreement where the company has the ability to negotiate terms for the relationship.
Key Issues in Digital Platform Agreements
In negotiating a digital platform agreement, companies will find it helpful to draw on their experiences with providers of SaaS, ERP, IT infrastructure and other back-end technology services, because many of the concerns in those types of arrangements are also present in digital platform arrangements. However, there are also unique issues in digital platform deals. These issues arise primarily from two key aspects of most third-party digital platform providers: they are in direct contact with the company’s customers in ways that other technology service providers are not, and they are often highly leveraged startups seeking rapid growth.
Compliance with Laws. A company entering into a digital platform agreement may have a legal obligation to cause the services and the platform to comply with all laws and regulations that apply to the company when the digital platform provider is acting for the company. This is an especially thorny issue for companies in highly regulated industries such as financial services, health care or transportation. Digital platform providers typically try to limit their obligations to complying with laws applicable to a digital platform provider in its provision of the services. That universe of laws is generally small. The parties will therefore need a resolution that provides adequate protection for the company and is feasible for the platform provider. One compromise for the company to consider is to require the digital platform provider to bear responsibility for (a) complying with laws applicable to the provider in its provision of the services and (b) violations of other laws caused by the provider’s failure to follow the company’s written instructions with respect to such other laws. Another compromise is to require the digital platform provider to bear responsibility for complying with (x) laws applicable to the provider in its provision of the services and (y) any laws that are applicable to the company (but not to the provider as a technology provider of the services) provided that the company informs the provider of such laws in advance.
Antitrust. One compliance area that may need special attention is antitrust. In digital platform deals where both the company and the digital platform provider (and potentially other businesses) are able to market their products through the digital platform to the company’s customers, the parties will have to take care to craft the platform agreement to prevent or prohibit (and to avoid any appearance of) collusion around pricing, services and other terms offered to customers and potential customers. Non-compete and exclusivity provisions that may be included in the agreement between the company and the digital platform provider should undergo this same scrutiny.
Customer Contact—Reputational and Regulatory Issues. Direct interaction between the digital platform provider and the company’s customers requires additional contractual protections from both a reputational and regulatory perspective. For example, the digital platform provider may find itself handling complaints received directly from the company’s customers. For operational simplicity, it may make sense to have the provider handle those complaints. The company will need to ensure, however, that the contract contains complaint-handling obligations that are consistent with both (1) the company’s complaint-handling policies and (2) any laws and regulations that may apply to the company (for example, if the company is subject to consumer protection regulations). The company may also want to include, as an option of last resort, a right to terminate the agreement if the provider behaves in a manner likely to adversely affect the company’s reputation.
Intellectual Property—Trademarks and Branding. Another thorny issue in digital platform agreements is intellectual property. Digital platform services are often customer-facing and either white-labeled or co-branded (e.g., in a “Powered By” arrangement). Given these circumstances, the company should reserve quality control and approval rights over the digital platform provider’s use of the company’s trademarks and branding, including by requiring the provider to comply with the company’s branding guidelines as they may change from to time.
Intellectual Property—Ownership of Developed IP. In traditional back-office managed service or SaaS agreements, companies are typically less concerned with the allocation of intellectual property rights (e.g., because they are not outsourcing delivery of core functions and products offered to the company’s customers). In a digital platform agreement, the provider is likely to be integrating its digital platform technology with one of the company’s core product offerings and related intellectual property.
For example, in the case of a fintech lending platform agreement, the developed IP may combine the fintech platform provider’s fraud detection models and the bank’s underwriting criteria and credit policies. The provider may be able to readily monetize the developed IP in other deals, if the company grants sufficient IP rights to the provider. However, the company may believe that it can achieve a competitive advantage by owning that developed IP and having a customized part of the digital platform. If there are practical challenges in separating that combined, developed IP upon termination of the contract, the parties have a range of options—from requirements to provide copies of related IP to allow both parties to effectively leverage the developed IP to a “walk-away” structure with requirements for one or both parties to delete or destroy that IP upon termination. The parties, however, will need to assess the IP issue on a case-by-case basis depending on the IP rights involved, the potential market opportunities and the other circumstances of the deal. There is no single right answer.
Agency. Digital platform providers may have additional marketing, promotion and reselling responsibilities to promote the platform that go beyond the operation of the platform. The company must ensure that such activities are undertaken pursuant to clear rules of how the platform provider may promote, market and represent the services and offerings of the company. The company should also establish clear limits on what the platform provider is not authorized to do (for example, the platform provider should not have the authority to bind the company to any agreement except as expressly permitted in the agreement). While the contract should make very clear the scope and existence of any representative or agency authority granted by the company to the platform provider, additional “rules of the road” are often set out in operating documents that are typically incorporated by reference into the platform agreement. These may cover concepts such as permitted operating territories and countries, marketing channels, permitted publicity statements and other similar operating rules that govern the relationship.
Data Security and Privacy. Data security and privacy specialists are vital to any digital platform deal because of the digital platform’s access to customer data. In addition to standard data security and privacy protections for a company’s data (including personal information of a company’s customers), companies may need to impose data security and privacy protections on the provider’s use of the data generated by the digital platform. If, for example, the provider has the right to use the company’s data to improve the digital platform and the services provided thereunder, the company may seek an obligation to use such data only if anonymized and aggregated.
Control over the Digital Platform. In a company’s arrangement with a digital platform provider, the company may have very little control over the direction of the digital platform. The parties need to consider each party’s right to make or request changes to the platform. The platform provider is not likely to agree to give the company approval rights over all changes to the digital platform. The parties may compromise on giving the company approval rights over certain changes to the platform (especially with respect to changes that are customer facing or that impact the cost of services under the agreement) and giving the digital platform provider flexibility to make changes to the platform that are minor or that the digital platform provider implements for all of its customers. The company should also consider negotiating for an obligation that the digital platform provider implement all changes requested by the company that are required by applicable laws.
Digital Platforms Hosted on Cloud Infrastructure. Unlike more established technology companies, startup digital platform providers will typically own very little of their own IT infrastructure, instead subcontracting for it with cloud-based infrastructure providers such as Amazon Web Services. Companies should work to understand which agreement provisions the platform provider can realistically flow down to those subcontracted providers and, if necessary, contract around any gaps.
Protections against Digital Platform Provider Financial Difficulties. Lastly, as mentioned in the beginning of this article, digital platform providers are oftentimes highly leveraged startups. Thus, companies must consider the financial stability of the platform provider and include adequate protections in the contract. These protections may include rights to terminate if the provider has a substantial reduction in its credit rating. If no credit rating is available for the provider, the company may seek rights to (a) receive regular financial reports and (b) terminate if a particular financial metric (such as current ratio) drops below pre-defined thresholds.
Additionally, the company should always negotiate for rights to (1) retrieve its data in a usable format at any time upon request and (2) receive termination assistance to facilitate a smooth transition to an alternative digital platform upon any termination or expiration of the agreement.
Companies can reap tremendous rewards from commercial agreements with digital platform providers, but these agreements require careful planning to mitigate associated risks. Understanding the reputational, regulatory, IP and other risks unique to these transactions will help companies (1) successfully contract for digital platform services and (2) digitally transform the customer experience they can offer.