OEMs, are used by companies that take portions of products from one or more companies to build a separate product that they then sell as its own brand. Value-added resellers, or VARs, are the outside companies involved, since by incorporating the components and amplifying the product, the original product’s value is raised.

“Original equipment manufacturer” is a broad term that describes the relationships among the following parties:

• Component markers, such as software vendors and microprocessor manufacture;
• Channel partners, such as distributors and resellers; and
• Information Technology, IT, hardware vendors.

OEM agreements have been prominent for years in many other industries

In many industries retailers engaged prominent manufacturers to build a version of their standard product, specifically for the OEM reseller. Years ago, Sears engaged Maytag to build many appliances for them that was sold under the Kenmore brand name, they did the same thing with Weather Beater Paint, the Die-Hard battery, Craftsman tools. They were not actually the manufacturer of those items, they just created the specifications and the marketing/sales vehicle behind those brands, but that is a good example of an OEM relationship. Now many of those brands have been sold to other retailers, but at their core they are OEM Agreements.

What is a software OEM and How Does It Work?

An OEM license agreement is established between multiple parties to address issues of confidentiality, branding, quality assurance, payment, and timeframes.

The original equipment manufacturer is the company that produces products to be used and marketed to another manufacturing company. For instance, when Company A produces a cord designed to be used as a phone charger and Company B makes cell phones that include the cords manufactured by Company A, then Company A is considered an OEM. The company that manufactured the cords will use Company B’s branding when producing the cords. Although Company B will be primarily focused on building a relationship with their customers, Company A’s main focus will be to build a business-to-business relationship, or B2B. As an OEM company, Company A’s focus is a different customer altogether, Company B.

For the most part, OEMs are often primarily concerned with the relationships they have established with their business clients. However, they may have a nice market expertise and leverage that special knowledge with various modifications that help adapt that general purpose software to address an industry-specific need or requirement. With that said, it is sometimes possible that individual parties purchase products directly from the original equipment manufacturer. When those OEM product distinctions are significant, they effectively expand the market for the initial software product, they effectively add that industry- specific market, to the vendors addressable market. A customer of navigation software might not consider buying a general-purpose computer, however once the logistic programming is added it can become a very attractive new car option. Today, consumer relationships are a rapidly growing area for businesses that would have otherwise been considered an OEM and two of the largest industries where an OEM applies are the auto and tech industries (that’s why COVID 19 chip shortages and delayed new car deliveries so significantly).

OEM relationships allow market-focused companies to concentrate their  investment and operational energies in that customer relationship side of things; i.e. the best use for that resource. They then can surveil the market and see how they might embellish standard products to address what they see as recurring needs in their customer market. Conversely, an OEM relationship allows the Software developer to focus their investment and energy in that actual development and support of Software, the core of their business. When executed properly, OEM Agreements can be a win-win proposition for the Software developer as well as the OEM.

What are common down-falls in an OEM Agreement?

OEM Agreements can make tremendous business sense, but they are also much more commonly linked with unrealistic expectations on both sides. OEMs demand long-term, exclusive territories. Software developers demand large pre-paid royalties and minimum sales quotas to justify their investment in developing the OEM Version of the software product. If the OEM not only sells, but also develops and markets software of their own, they might promote their own products over the OEM product. They might shift deal discounts disproportionately to the OEM product, particularly if it is one application in a suite of applications. Or they might just use the OEM product to test the market’s demand for that OEM functionality and then replace it with their own product, or an OEM product from a competitor. I have often seen parties close elaborate OEM Agreement and 2 years later have very little on either side to show for it. It is extremely important that the OEM and software developer do their due diligence on the market opportunity; that they are both committed to a long term investment in the success of that OEM relationship and that they engage in regular on-going status reporting, so that they remain coordinated and on-track.

What an OEM License Agreement Should Include

Properly executed OEM license agreements can be valuable in business relationships. An OEM license agreement can not only protect a brand but can also help a business grow. When entering into an OEM license agreement, the following factors should be considered:

Product Branding: Many companies struggle with the power dynamic inherent to a B2B. Determining what company’s branding will be reflected on the product may be a challenge. For example, it may be very important to the OEM to present the OEM Software with a similar user interface that the OEM features with their other products.

Marketing: The idea is you want to “stretch the brand” so that the new customers view the OEM product as being of similar quality and reliability. In the same way the OEM may want to sublicense the OEM software under the standard OEM license they use with their other software products, rather than a different form of EULA. In some cases, the customer might not even be aware that the OEM product is based on the underlying software product. Depending upon the market segment, this can drive a lot of private-label (white-label) marketing and branding issues that must be properly reflected in the terms.

Warranty and Support: The OEM might very well take the 1^st call on support issues, and the support might be offered under the OEM Service Level Agreement, for the same reasons. The Software developer might contractually require the OEM have staff attend the software developer’s technical training. While we are speaking about Support, you also need to address how support will be provided to customers in the event the OEM Agreement lapses, with the OEM still be permitted to provide support, or will the software development company demand a direct relationship.

 Forms of Payment: Under an OEM license agreement, it is imperative that a payment plan be established. It is important to clearly define whether the OEM will be compensated per piece manufactured or by piece that has been sold with the complete product. When the latter has been chosen, it is worth considering if the company will have the means to provide compensation even if the merchandise is not sold.

Duration of the Contract: Given the complexity of OEM agreements, it is fair to say that no business wants to move from one manufacturing company to the next. This can quickly result in unnecessary challenges along with a loss of time and money. In general OEM agreements represent a fairly significant and long-term commitment from both parties. Generally, an OEM will require at least 2 or 3 years, as the initial term, together with an option where they are entitled to renew; they need that assurance to ensure that they can recoup their significant investment in developing market awareness, training their staff and monetizing on that market awareness to share in some of the rewards.

Further, customers may sometimes notice when there is a change in the product they use. Changing the manufacturer of a product can ultimately lead customers away. The OEM agreement should stipulate the duration of the relationship.

Confidentiality Clause: When it comes to intellectual property, it is important to discuss confidentiality in an agreement. The OEM should know whether or not they are allowed to promote that they have produced a product for X company. In addition, the OEM should also understand how much access they will have to the other company’s intellectual property. The OEM licensing agreement should state whether any additional steps will be taken to protect the intellectual property.

Product Exclusivity: Through an OEM agreement, the companies can establish the nature of exclusivity of the product. For instance, will the company have exclusivity to the product for a limited amount of time, or whether the exclusivity will be limited to a certain territory. The companies can also establish whether exclusivity is dependent on the fulfillment of certain sales objectives.

How Attorney John P. O’Brien Can Help

OEM licensing agreements should consider a variety of important elements. Like every contractual agreement, the parties involved in an OEM licensing agreement must reach a mutual understanding of what their rights and responsibilities will be once the contract has been established. Unfortunately, OEM agreements can be highly complex, and establishing a mutually fair agreement can be difficult. If you are seeking to enter into an OEM agreement, speak to an attorney who has the experience needed to ensure your rights and interests are protected.

Attorney John P. O’Brien has vast experience drafting and negotiating OEM licensing agreements that work to protect the companies’ interests, all while optimizing their revenue. Attorney O’Brien works diligently to find creative ways that will leverage the agreement for your benefit. If you would like to learn more about how you can retain control over who uses, makes, or sells your product, consider obtaining the support of Attorney John P. O’Brien. Schedule a complimentary initial consultation by contacting Attorney O’Brien today.