A guest post by Andrew Lipman, Bingham MuCuthen LLP
A prominent feature on the landscape of our interconnected world is the large scale data center. Data centers are buildings, or rooms within buildings, that are especially designed to house servers and other networking equipment in conjunction with the cabling and global connections needed for a modern IT network. Today’s data centers must have adequate primary and back-up power sources, high capacity heating, cooling, ventilation and humidity-control systems, access to the best telecommunications networks and sophisticated security systems. Some of the data centers now being planned in the United States will be significantly larger than any that presently exist. Such facilities will bring new attention to energy consumption and other environmental issues. At present there are few Federal or state laws that impose special environmental conditions on data centers. However, this article discusses where the prospect for regulatory action exists, and also suggests the issues that providers and users of data centers should consider when negotiating their own private contracts.
Regulations and Standards for Environmental and Utility Usage
In general, a data center is subject to no greater environmental regulation than any other large building. Development in some areas may involve National (or California) Environmental Quality Act review, air quality considerations and issues that arise from wetlands and endangered species. In addition, some data centers built in urban areas have been cited by zoning officials after construction because their oversized air conditioning plants violated local noise ordinances. Other data centers have been treated like unwelcome neighbors in the cities where they are located due to their rooftop antennas or the fact that neighborhood activists might have preferred a building of that size be occupied by a business that generates more local jobs. For these reasons, developers of data centers should be observant of environmental issues, aware of noise ordinances, and should anticipate the possibility of public opposition to their project in city council or planning board hearings if the facility requires a zoning variance or any other local approval. Such opposition may be addressable by a community relations initiative.
Data centers produce a significant amount of electronic and electrical equipment wastes, including the hazardous chemicals they contain (“e-waste”). At present there is no Federal mandate to recycle e-waste, although twenty states and the City of New York have enacted recycling laws. None of the existing laws impose recovery, fee or reporting obligations on data center providers, but e-waste issues are likely to receive more attention from the government in the future. If the United States follows Europe’s lead, responsibility for handling e-wastes will fall primarily on producers of electrical and electronic products. However, consumers ultimately bear the burden of recovery and disposal of electrical and electronic equipment if no producer is obligated to take it back. In most cases, the consumer of equipment housed in a data center is the customer, rather than the owner of the center, but it is advisable for the parties to contractually assign the responsibility for recycling or disposing of e-waste.
Data center owners may be required to negotiate special interconnection agreements with electric utilities, and existing distribution lines may be insufficient for the demand. Individual interconnection agreements and special construction of distribution lines require the approval of state and Federal utility regulatory agencies, who will examine each transaction to ensure that the utility’s charges to the data center are not preferential or subsidized by other electric ratepayers. The potential for regulatory scrutiny of the transaction will complicate negotiations with the electric utility. If the data center undertakes to supply any of its own power by use of solar panels or co-generation, or merely wants to install uninterruptible power sources, it is wise to consider the environmental issues, regulations of the Federal Energy Regulatory Commission (“FERC”) and possible tax incentives. Self-supply rights are not legally unlimited, and FERC regulation may entail the data center becoming a “public utility” subject to Federal financial and corporate regulation.
Ideas for reducing power consumption and cooling requirements at data centers are generally addressed as cost-saving measures. However, the environmental benefits of such technologies are beginning to be recognized. Data centers are not subject to any mandatory social responsibility standards, and there have been no known cases in which data centers have been opposed because of their carbon footprints. However, the U.S. Environmental Protection Agency (“EPA”) provides an energy performance scale by which data centers may voluntarily assess the energy efficiency of their facilities. Data centers that score 75 or higher on EPA’s 1-100 scale are eligible to display an “Energy Star” logo, which may have commercial and public relations value.
Data Center Contract Issues/The Customer’s Viewpoint
Data center agreements in the United States vary widely in the reasonableness of their terms and the degree to which they address their customers’ important legal and operational issues. Some data center operators offer their customers standard agreements resembling the commercial leases that building owners and managers offer to tenants of ordinary office space, replete with terms and conditions that can lead to future difficulties.
Typical of the undesirable terms and conditions found in some data center agreements are clauses describing the equipment space with phrases like “as is,” “with all faults” or similar words, none of which should be accepted. Unfavorable agreements may also include significant hold-over penalties for continuing to occupy the space after expiration of the term, or may provide the data center provider with an unrestricted right to approve all transfers, assignments and changes of ownership by the customer, often combined with a provision that even an approved transfer does not release the transferor from liability for the transferee’s future defaults. Such provisions are common in commercial leases, but do not meet the expectations of most data center customers, and many data center operators will agree to compromise or soften those terms.
Data centers may be owned and operated by telecommunications carriers. A common problem with the contracts drafted by the owners of these facilities is that they may contain clauses that require all or a significant portion of the customer’s backbone network services be provided by the data center operator or its affiliates. The resulting lack of competition among service providers can increase the customer’s overall costs. Another problem is that telecom carrier owners of data centers have a familiar practice of incorporating other documents into their contracts by reference, and all such extrinsic documents must be obtained and examined carefully. Many of the incorporated documents include terms and conditions that address problems that arise in the context of providing telecommunications service, but are inappropriate for a data center agreement. The customer should not hesitate to challenge the inclusion of inapplicable terms that impose additional risks or may lead to misunderstandings.
All data center agreements address the issue of termination, but very few of them contain sufficient language related to orderly disengagement at the end of the term. An adequate data center contract should provide that a customer who is not in default may continue to occupy the facility on a month-to-month basis without a hold-over penalty and with continuation of all services for a period of at least ninety days, even after the initial term of the agreement expires.
Most data center customers look for clauses in the agreement that provide for service level commitments, which should be compared for competitiveness. All service levels should be backed by credits for failures in performance, but even the most liberal credits are seldom enough to compensate for a single failure that causes a network outage. More importantly, customers should look for contract terms in which the operator agrees to provide a stable physical environment, reasonable intervals for installations, around-the-clock monitoring and adequate security.
Data Center Contract Issues/The Owner’s Viewpoint
Most data center agreements grant customers a licence to use space in a data center for a term of at least one year. Customers ordinarily expect some form of renewal option, and the licence agreement should provide for routine adjustments to the fee schedule, at least upon each renewal. Electrical power usage is ordinarily capped at a specific capacity for a fixed rate, subject to periodic adjustment.
In the typical data center agreement, customers receive exclusive occupancy rights to a specific cage, cabinet or rack. The customer’s right to use risers and common areas should be expressly stated as non-exclusive.
Customers should not be permitted to assign or sublicense their rights or obligations under a data center agreement, or authorize any third party to use data center space without the provider’s express written consent. Many customers have business plans that specifically anticipate sublicensing, so that issue should be addressed while the licence agreement is being negotiated. It is important to identify any affiliates of the customer or other third parties that are entitled to have access to the space, and clarify that the licensee retains all liability for rent, security breaches, property damage and the like. The customer should disclaim any real property interest under the data center agreement, together with any rights as a tenant under landlord/tenant laws, regulations or ordinances.
Customers move in and out of data centers on a regular basis, and their space requirements change over time. Accordingly, the provider must have the ability to “groom” the facility to maximize utilization of the space as customers come and go. This requires the provider to have a right to relocate customers, in which case the customers whose facilities are moved should have the right to recover their reasonable costs, especially if such relocation occurs before expiration of a license term. The operator’s right to relocate customers is generally a major area of disagreement in any license negotiation.
The act of operating a data center will not, in itself, subject the provider to any regulatory requirements. However, data center operators should not agree to provide any electronic interconnections within the data center. Providing unlit cabling would not be considered a telecommunications service, but “lit” services, even over a short distance, could subject the provider to regulation as a common carrier under federal and state laws.
Although data centers are critical links and points of vulnerability in global communications and IT networks, and while they are major consumers of electric power and emitters of heat and noise, they are essentially unregulated in the United States. It will be interesting to see how long the customers, owners and neighbors of data centers will refrain from seeking regulatory solutions to real and perceived problems. Meanwhile, it is advisable for data center owners and customers to attempt to address the risks of their relationship by deliberative contract drafting and review. Disputes and misunderstandings can be prevented through a process of careful contract negotiation.