I came across a white paper by Budd Larner of the The Technology Executives Club recently listing the Top 10 Issues in Software License Agreements and Negotiations. He actually listed 12. I thought there were some interesting insights.
"An ounce of prevention is worth a pound of cure"
While many of us would like to think that managing licenses is a simple problem of counting software entitlements and can be solved by implementing complex tracking and counting algorithms and systems. These are tactics for measuring the software licenses after the fact, in other words, after the license terms have been set in store.
For those in the trenches, it’s important to keep in mind that much of the issues can be avoided by including these issues in the license negotiations. Also it's important to note that the negotiating of software licenses is all about reading the text of the license agreement, and negotiating with the software vendor to change the text to accommodate your needs.
Top 12 License Negotiation Issues
So let’s review Bud's top “12” items:
1. The “Licensee” must be defined very carefully.
While this seems obvious and is a very broad statement, it carries a lot of weight. When defining a software license, there are a lot of items to consider as listed below.
2. The permissible Scope of Use provision must be broad enough to cover all aspects of how your company transacts business in its ordinary course, including allowing the necessary third parties to use, access and benefit from the software.
Scope of Use is probably one of the most important parts of a software license. As the way software is deployed and used in an environment changes, changes to the scope of use of the licenses needs to change accordingly. Topics such as license types, software as a service, pay-per-use, processor and installations on virtualized systems become more and more prominent, being able to negotiate a license that allows you to use the software to meet your demands, yet doesn’t cost you an arm and a leg because of how the scope of use is critical to economizing your software license costs.
3. Insist that Addenda not be used. If modifications must be made to the base agreement (and I strongly suggest that all companies use their own form software license agreement) then incorporate those changes into the base agreement.
I’m not so sure I agree with this tactic. I’ve been convinced by one expert practitioner that often times the best way to get a vendor to agree to changes to the license conditions, is not by changing the text of the original license, or by submitting your own agreement, but instead to outline your specific demands as addendums to their original license. These addendums can override text in the original license, but the lawyers for the vendor can easily analyze the impact of the addendum, where if it were a change to the text of the software license, they would have to look all through the license text to find where else changes might affect that one point, and their uncertainty would cause them to be over cautious. By creating addendums, you can keep issues separate, and more easily negotiated and tracked.
4. Procure all necessary Representations and Warranties, which includes a Representation and Warranty that there is no disabling device in the software.
Most folks might not consider warranties with software, but warranties and terms of acceptance are all important to negotiate and track. Also, any associated documentation should be stored with the license to reference as needed. So make sure you can track your warranties for your software separate from the other contracts associated with the license.
5. Make sure that all Maintenance and Support obligations of the Licensor are spelled out in detail in the software license agreement.
Maintenance and Support is often times spelled out in a separate agreement, or even a separate line item on a purchase, and ends up being a separate contract than the software license. That’s ok, but the support and maintenance terms should be spelled out and associated with the license as well. Is the support 24 by 7, or only during normal business hours, and during whose normal business hours. If the user is in London, and the software company is in California, will they answer the phone at 9:00 AM in the morning London time?
6. Make sure that the Indemnification provision is broad enough to provide your company with complete indemnification for all intellectual property claims and all claims relating to bodily injury.
This can be a stickler with vendors for two reasons. One is to prevent the problem of patent infringement for using software you are not entitled to. The second is the liability caused by use of the software. Vendors don’t want to be liable if their software causes a server controlling a nuclear reactor to fail. You might want to consider just what the impacts of software failing would have on your corporation, and what liability that might cause.
7. Make sure that the Limitation of Liability provision is not applicable to (a) breaches of the Confidentiality provision, (b) breaches of the representation that the software has no disabling device, and (c) the Indemnification provision.
Just make sure that if the problem is caused by the vendor, that they are liable.
8. Include an Internal Dispute Resolution provision which must be utilized before either party can commence an arbitration or litigation procedure.
If you don’t define the process ahead of time, it will more than likely include large lawyer bills after the fact.
9. Make sure that the software license agreement is very clear as to how and when such agreement can be terminated, and if you have a perpetual license, that termination does not affect your perpetual grant.
If you have a time limited license, this is particularly important. Also, it’s important to look at the renewals for maintenance and the timing thereof. I remember one software vendor who sold a web-based application and their agreement stated that the customer would be liable for a year’s worth of license unless they notified the vendor 60 days prior to the expiration of the current license agreement. This is kind of like the book of the month club, where they keep sending you bills you are liable for, and the only way to stop is for you to tell them way ahead of time. The burden should be on the vendor, and not on the customer for renewals of licenses and/or maintenance.
10. Include as many definitions for key terms as possible.
Definitions are key, especially as vendors invent new methods for measuring usage and software entitlements. If you don’t know, ask.
11. Make sure that the audit provision is fair and equitable.
I’ve seen clauses that allow vendors to come in and audit a company without any warning. There should be some clause as to warning for an upcoming software audit, and just what data will be accepted as viable data concerning the entitlements being measured in an environment.
12. Make sure that, if necessary, the software license agreement addresses partitioning the computers and servers; dual processing and the number of instances that are allowed.
As software gets installed on more and more powerful systems, this often times means you don’t have to install as much software. Think of the case of database software. Often times a company would set up a separate server for every database they managed simply because of scalability issues. However as system performance improved, companies started managing more and more databases on one system, so database vendors started charging more when the software was installed on more powerful systems. It’s this trend that has caused vendors to include licensing restrictions such as points based on the processor type, or the count of virtual processors instead of physical processors, or how many virtual systems the software is installed on, whether it’s used or not. Make sure to get a firm understanding of their licensing position for each of these situations, so that sometime in the future you are not limited to how you can deploy and use the software.
If you keep a checklist for key items such as this with every software license you negotiate, then you will avoid many many problems with licenses.