Assignment Clauses in Technology Agreements: Customer and Vendor Perspectives

The shortest clauses in technology agreements can be among the most important. This article considers one such clause that appears in most technology contracts: the assignment clause. It appears in a broad variety of contracts: Software-as-a-Service (SaaS) agreements, mobile app terms of use, Data Processing Agreements, Master Service Agreements, Statements of Work (SoWs), and more. Both customers and providers have legitimate—and often competing—reasons to negotiate how this clause is drafted.

What is an assignment clause, and what happens if the contract does not include one?

The assignment clause addresses whether a party to the agreement can assign its contractual rights to someone else. “Assignment” is the legal term for transferring one’s rights under a contract to a third party, called an “assignee.”

Where a contract says nothing at all on the topic of assignment, most state laws provide a general rule that they may do so without the other party’s consent. But that rule has exceptions: Party A still usually needs Party B’s permission if A’s assignment would materially change B’s obligations or risks or violate public policy. These exceptions apply so often and leave room for so much argument that the default rule is not especially helpful. A better approach is for the parties to simply agree by contract how they will handle assignments. Courts generally enforce those assignment clauses as written.

How does an assignment clause read?

Assignment clauses usually read in one of the following ways, ordered from least to most permissive of assignment:

Complete prohibition on assignment

Sometimes the parties agree that one of them simply cannot assign the contract, period. An example is Mailchimp’s Standard Terms of Use, where “you” means the user:

“You may not assign any of your rights under the [Terms of Use] to anyone else.”

The party favoring this approach in a technology agreement is usually the provider of the service or intellectual property. This protects the provider from having to provide its service to a new company that it never vetted and may not want to work with. This clause is especially valuable if an assignment could significantly change the provider’s compliance burden. For example, consider a U.S.-based data lake or data warehouse company that provides vast data sets to U.S. customers. Compliance burdens are known and manageable when large datasets circulate purely within the United States. If the provider allows any person or company outside the U.S. to access its data, the provider’s compliance load increases. The incremental burden increase may be large or small, but it is never zero. The no-assignment clause spares the provider from having to service a contract that later turns out to be more expensive or risky than it bargained for.

The provider is not the only party that may want protection against assignment, however. In many business-to-business (B2B) deals, the customer spends significant time and money selecting a provider before contracting with it. This is especially common in regulated industries. In financial services, education, and healthcare, for example, privacy laws require customers to vet vendors before hiring them.

Assignment only with consent

Another common approach bars a party from assigning except with the other party’s consent. This gives the party whose consent is requested a chance to vet the potential assignee before continuing to do business with it.

The party that holds the veto power over the assignment often promises that it will not wield that power “unreasonably.” This is because courts in some states invalidate these clauses entirely if they do not allow for assignments in reasonable cases. Arguments can still ensue over whether any given veto is reasonable, but this approach retains value because it creates a presumption that consent will be granted.

A technology agreement taking this approach is the Slack User Terms of Service:

“You may not assign any of your rights … under these User Terms… without the prior written consent of us (not to be unreasonably withheld).”

Free assignment in a change of control

In many assignment clauses, Party A generally bars Party B from assigning its rights but makes an exception for a change of control at B. That is, B may freely assign its rights in the contract to another company that buys B or its assets in a merger, acquisition, or other restructuring.

In practice, this means that if Party B ever wishes to be sold to another company, the potential buyer knows that it may keep B’s contract in place after the deal closes. B’s buyer may not choose to take that assignment; in fact, the buyer often does not know until after the deal closes which existing contracts it will keep or terminate. But the option to keep B’s contracts is what the buyer values. Put differently, Party B is less valuable to a buyer who knows that it must renegotiate Party B’s contracts after buying the company. In the best-case scenario, there may be a disruption to business operations while the buyer works to secure new contracts. In the worst case, the buyer may not be able to get the other parties to those contracts to deal with the buyer at all.

This is why we often advise our clients to insist on having at least the right to assign a contract in a change of control. Whether a company is actively considering a future sale or not, this language helps preserve its options.

An example of this approach is in the Salesforce Main Services Agreement:

“Neither party may assign any of its rights… without the other party’s prior written consent… provided, however, either party may assign this Agreement… without the other party’s consent… in connection with a merger, acquisition, corporate reorganization, or sale of all or substantially all of its assets.”

(Ellipses above indicate heavy editing for the sake of illustration. The full clause found at the link above includes other exceptions.)

Free assignment without limitation

Some technology agreements allow either or both parties to freely assign their rights without any restrictions. This can make sense in some cases, but we usually counsel clients in B2B transactions against it. At least one of the parties usually has a good reason to pause before committing to a contract with a new company it has never heard of.

Practical Tips for Negotiating Assignment Provisions

For customers:

As a customer, negotiate for your assignment clauses to include these terms:

• Your vendor will not unreasonably withhold its consent to your assignment.
• You may freely assign the contract in a change of control, and your doing so will not trigger the vendor’s right to terminate the contract unilaterally.
• You may also freely assign your rights to your corporate affiliates (any parent, subsidiary, or sister companies that you have today or may have in the future).

For providers:

• No matter how broadly you allow customers to assign contracts without your prior consent, consider adding an exception for assignments to companies that are your competitors or with which you otherwise wish to avoid dealing. It is fair and important for you to have the right to avoid those relationships.
• Consider reserving for yourself the right to terminate the contract or renegotiate pricing if the customer’s change of control causes a material change to your obligations. This can be especially important in cases where providers have a Service Level Agreement offering human-delivered customer support.  You may be happy to offer 24/7/365 Slack or telephone support to a customer with only 10 employees for a fixed monthly fee. If that same customer assigns the contract to a subsidiary with 1,000 employees, that may overload your team; you may need to reduce your support commitment or charge higher fees to expand your support team.
• In all cases, include language stating that any assignment or purported assignment that the other party makes in violation of the assignment clause is “void,” and not merely a breach of the contract.

To continue reading about how artificial intelligence intersects with privacy law and your company’s legal obligations, explore these resources from Verrill:

• Maine’s House of Representatives Adopts Comprehensive Privacy Act—A closer look at LD 1822 and what Maine’s new data privacy framework means for businesses operating in the state.

• Using Artificial Intelligence Within Your Company: A Legal Checklist—A practical guide to identifying and managing the legal risks that arise when AI tools become part of your technology stack.

Adam Nyhan is a Partner in Verrill’s Intellectual Property practice and Co-Chair of the firm’s Data Privacy and Security group. He advises companies and nonprofits on privacy, software licensing, Artificial Intelligence, compliance, and corporate matters in sectors that include health care, education, AdTech, MarTech, FinTech, and cybersecurity.