Software Licensing Disputes Are On the Rise

Software licensing disputes are on the increase, a trend that is being driven to a large degree by customers implementing new technologies without examining how this affects pre-existing agreements.

Dispute triggers and battlegrounds

The main problem areas for customers stem from developments in technology which have changed the way in which the licensed software is used, and which have not been reflected in updates to its contractual terms with the software vendor. These tend to include:

  1. a) virtualization that is intended to improve efficiency but results in software licensed on a per-CPU or per-core basis either running or being capable of running on a vastly increased number of CPU/cores. For example, software licensed for use on a small number of readily identifiable cores 15 years ago may now be in use within a virtualized ecosystem comprising hundreds of cores;
  2. b) new front-end services that make use of back-end software without the requisite licence, often introduced by customers as part of a drive to provide self-service functionality to end users; and
  3. c) legacy contracts licensing software on a named user, per-CPU or per-core basis that are incompatible with cloud solutions, where these numbers cannot easily be ascertained or may not be representative of the level of use.

Software vendors also face difficulties when enforcing their rights, mainly relating to the following scenarios:

  1. a) Excess use often comes to light as a result of the exercise by the software vendor of its audit rights, but problems arise where there has been infrequent monitoring and audit of customer usage. While software vendors are often entitled to undertake audit processes annually, in reality they may operate the right less frequently, resulting in high value claims spanning multiple years of alleged overuse. These are (generally) vigorously resisted and which lead to customers raising arguments that the software vendor has waived its rights by failing to audit at an earlier stage. The same problems arise when the software vendor fails to enforce contractual obligations requiring the customer to report its own usage;
  2. b) Older contract terms may not have been drafted with virtualisation in mind and as a result are difficult to apply; and
  3. c) A lack of clarity regarding contractual consequences for excess use, for example whether historic maintenance fees can be charged where maintenance is an optional element of the customer’s licensing package.

Prevention is better than cure

When adopting a new system, it is important in the design stage for the customer to consider what impact it may have on the rest of its IT estate. In some cases the design can be adapted and optimised to limit exposure, such as by employing virtualisation architecture that uses partitions to restrict which software can be run on which cores. When considering architectural solutions it is important to understand whether the relevant licence requires “hard” hardware partitioning (allocating specific cores to the licensed software) or whether it permits “soft” partitioning (where the total number of cores in concurrent use may be limited but without any restriction on which specific cores are used). It is just as important to be aware if the licence is silent on partitioning, which is often the case in older agreements, and which may represent a risk to even an optimised design.

Where older contracts do not make the position clear, it is sensible to have them analysed by lawyers in advance of implementation rather than waiting until a dispute arises. English courts will seek to interpret and apply existing contracts even where they may not expressly have anticipated a new technology, which could result in an order for payment of significant licence and/or maintenance fees. This can have a dramatic impact on the risk profile and cost/benefit analysis of implementation.

Customers can find themselves in a far better negotiating position if they identify the potential issue and approach the supplier to purchase an additional licence to cover the new usage rather than having to negotiate after the fact, once overuse has been discovered by the supplier. This approach also avoids the cost and inconvenience of a dispute arising, and the risk of that dispute shaping the negotiation.

From a software vendor’s perspective, ensuring audit and reporting mechanisms exist, are clear in their application and are operated or enforced on a regular basis is key to catching issues at an early stage. In addition, a clear mechanism for calculating the customer’s back charges is also likely to aid the rapid resolution of any dispute concerning short-term or long-term over-use.

The US Effect

US customers and suppliers doing business with a counterpart in the UK should be mindful of the issues above and – if English law and/or jurisdiction is chosen – how the English courts will approach them.

US customers should check the governing law and jurisdiction that applies to their existing and new software licences, as the choice of law may have consequences. Knowing which courts may be required to interpret the licence might be key to understanding your risks. Where new software is being deployed in a number of countries under multiple licences, it may be necessary to seek legal advice covering a number of different jurisdictions.

Although US software vendors often use particularly supplier-friendly wording in their standard terms, caution should be exercised when adapting US licensing language for international contracts which may specify a different governing law, or where standard licence terms provide for the agreement to be governed by a different governing law and/or be subject to a different jurisdiction depending on the domicile of the customer. Other jurisdictions may not enforce terms in the way that software vendors expect from US courts. Software vendors should be aware of the consequences of localisation and ensure that it is undertaken with care rather than replicating US licensing language wholesale.

The Author

Jeremy Sherman

Jeremy Sherman is a partner in the Dispute Resolution Practice Group in the London office of Bird & Bird. Jeremy has considerable experience of advising major financial institutions, multi-nationals and government bodies, on a wide range of commercial disputes and risk management issues often with an international element. In particular, he focusses on disputes in the banking and financial services, communications and technology sectors, including in relation to complex financial products, the delivery of business critical systems and communication and data networks.

For more information or to contact Jeremy, please visit his Firm Profile Page.

Jeremy Sherman

Priyan Meewella is a senior associate in the Dispute Resolution Group of Bird & Bird. His practice covers a wide range of technology disputes for global corporations in the IT, telecoms and energy sectors. He has acted in high profile and complex software disputes for both suppliers and customers. Priyan comfortably engages with a range of software, hardware and infrastructure technologies. He is particularly interested in the development and commercialisation of new technologies, advising on the disputes which can arise in their adoption.

For more information or to contact Priyan, please visit his Firm Profile Page.

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