AI and Your Purchase Order Form

The purchase order, or PO, is a ubiquitous transaction document introduced by accountants principally for the twin purposes of budget control and fraud prevention. But the PO form also gives you a chance to achieve certain legal objectives—it provides a vehicle for any business buying goods or services to set and memorialize the terms of the purchase transaction.

Accordingly, an effective PO form will incorporate not just some blanks on the front side for identifying the ven­dor and specifying the description of goods or services, the quantity, and the price; it will incorporate a set of standard terms and conditions (Ts&Cs), printed on the backside of a paper form or by link to a digital document.

Unfortunately, businesses often overlook these Ts&Cs. Make that mistake, and your state's commer­cial law will fill in the gaps—but maybe not the way you’d like. Or, worse yet, your ven­dor may supply and bind you to a set of vendor-friendly terms when it confirms your order (in what you think of as the "small print" when it consists of the other party's terms).

If you are already using Ts&Cs with your PO form, the increasing likelihood that your vendors will be using generative AI is good reason to ensure that you expressly address the intellectual property issues presented by this use, as explained below. And while you’re at it, this is as good a time as any to give the rest of your Ts&Cs a once over.

Basic Gap Fillers

What are the gaps you should be filling with buyer-friendly terms? Here’s just a sample.

• Reserve the right to cancel any undelivered or unperformed portion of the order for your convenience without a cancellation fee, restocking charge, or other liability.
• Require warranties of good title, merchantability, workmanship, and conformance to specifications (among others) and provide for your election of remedies in the event of any breach.
• Disclaim acceptance of any delivery until you’ve had a reasonable opportunity to inspect the goods or service deliverables.
• Require that the price to you is not less favorable than the price to any other customer and claim the benefit of any later price cut.
• Specify that time is of the essence with respect to any delivery (if you don’t specify this, then the default standard is delivery within a commercially reasonable period of the time specified).
• Reserve a right to set off against amounts due the vendor any claims you have against the vendor (if you don’t expressly reserve this right you don’t have it).
• Bar the vendor from subcontracting the work or assigning the contract without your consent (the general rule is that the contract can be assigned unless it says it can’t).
• Define the process for resolving disputes, including mediation and/or arbitration if that is your preference, which state’s laws will govern, and where cases must be brought.
• Establish a private statute of limitations that bars any action against you based on the purchase unless it’s commenced within a time that you specify.

More Issues, More Opportunities

Even after you have taken charge of your transactions and filled some of the previously mentioned gaps by incorporating a set of Ts&Cs in your PO form, there is a good chance that the Ts&Cs you have incorporated were drafted with only the purchase of goods in mind.

Today, as businesses outsource more functions to special­ists, commonly used Ts&Cs do not keep pace. Given that, review the Ts&Cs on your standard PO form against this additional checklist of sometimes overlooked issues:

Work-made-for-hire. There is a widely held misconception that any intellectual work product specially commissioned by the buyer has been "made-for-hire" and will be owned outright by the commissioning party. Where the work product is copyrightable expression, however, this is not the case. There are many types of works where copyright ownership is at risk if you have not docu­mented the transaction suffi­ciently -- ornamental product designs, advertising and mar­keting materials, training tapes, photography, videography, web development, and customization of software applications all entail copyright interests that, inevitably, you will not own.  

When a copyrightable work is created by a contractor or freelancer rather than an employee, default rules in the United States vest copyright ownership in the human creator automatically at the moment of fixation. There is an excep­tion to this default rule that permits certain classes of com­missioned copyrightable works to be "for-hire" by agreement under certain circumstances, but only for certain types of work, and even then, only if your PO form contains the right provisions and you get the vendor's signature.

Your PO form should also include an assignment provi­sion as a backup to cover those types of works that are ineligible for treatment as works-for-hire as a matter of law. Without the right language in your PO, the best you will get is a nonexclusive license of indefinite scope and duration—you won't own the copyrights in the material; your license might be terminated at any time by notice from the vendor; you won't be able to keep the vendor from repurposing it for someone else; and you may have to pay again to repurpose or redeploy it yourself.

Inventions, trade secrets, and sensitive information. Information shared with non-employees loses its proprietary/confidential character in the absence of an obliga­tion to maintain the confidence. Accordingly, your PO form should anticipate not only your sharing of proprietary information and proprietary specifications with your vendors but also incorporation of technology or information that you wish to own and protect as either proprietary or sensitive in work product delivered to you. In other words, the PO form should provide for a transfer of ownership of trade secrets associated with in-bound work product and should restrict further use or disclosure of any confidential material you might disclose to a vendor. You want to be sure the market research you commissioned doesn't end up being repurposed for a competitor. If the Ts&Cs in your PO cover this, you don't have to remember to address it specifically.

Vendor’s use of AI. Output produced by generative AI is not human created and so is not copyrightable or patentable; it may also not be protectible as a trade secret for other reasons. So, your PO form should prohibit vendor use of AI except with your prior consent, so that you have an opportunity to decide whether it is important to you that the deliverables provided by your vendor can be protected as proprietary. And your PO form should go on to provide that when you do consent, the vendor will keep and provide you with contemporaneous records of its prompts and resultant outputs so that you are in a position to claim and defend any copyright, patent, or trade secret right arising out of the combination of AI output and human-conceived additions.

Warranties of noninfringement. It is also important for your PO forms to incorporate warranties of noninfringement against the possibility that the vendor's deliverables might include intellectual property that it does not own or have the right to provide to you. Your PO form should oblige the vendor to defend and indemnify you against risks of this sort and should oblige the vendor to carry sufficient errors and omissions insurance to ensure that it can do so.

Employee/independent contractor. When services are to be performed at your facility and the contractor/vendor is an individual rather than a business entity, it is important that the relationship not be interpreted as an employment relationship (unless that is your intention), which would trigger income tax withholding, Social Security, workers' compensation, and unemployment insurance obligations, as well as entitlement to benefits. When economic downturns force business layoffs, businesses are tempted to test the limits of employment and labor laws by re-engaging laid off employees or others as independent contractors to provide services previously rendered by staff. Although it's not what you and your vendor call the re­lationship that is controlling, there are circumstances you can document in well-crafted provisions in your PO form that will go a long way toward minimizing your exposure on these issues.

Battle of the Forms

 In cases where you and your vendor are both on top of your Ts&Cs game (i.e., where the vendor has also included vendor-favorable terms in a written order confirmation), a battle of the forms ensues. Anticipate this and include the right language in your PO form, and  that will go a long way toward winning that battle . . . or at least minimizing your casualties.

In the ordinary course of daily business your PO form captures and sup­ports a substantial portion of your business transactions. Spend the time now to review and update it to be sure that it still does everything you want it to do.