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How to Know When to Seek Legal Advice When Negotiating a Software or Services Contract

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Today’s corporate and business teams are well versed in negotiating pricing and other critical terms in software licenses and services agreements. With their collective experience and knowledge of the specific business needs, seeking internal or external counsel’s advice can seem like an unnecessary expenditure of time and resources. Many have the perception that seeking legal advice could derail the project altogether. Taking into consideration these concerns, it can be difficult to know whether you should include the legal team in software licensing negotiations, and if you should, when is the right time to include counsel?

Ideally, the internal or external legal team would review the critical provisions of all negotiated software and services agreements.  These provisions include, but are not limited to:

  • License Grant
  • Geographic and Entity/User Limitations
  • Price and Licensing Metrics
  • Service Expectations
  • Indemnification and Limitations of Liability
  • Data Privacy and Protection
  • License Compliance Reviews

It is necessary to carefully review these provisions to ensure that the license or services agreement accurately and clearly reflects how the business intends to utilize the software or services, and who is responsible if something goes wrong. Ambiguous language or missing terms can cost the business millions of dollars in a dispute. The business and legal teams should work together carefully to verify that all expected current and contemplated use cases are reflected in the written agreement. Similarly, the agreement should reflect which party will be responsible for damages to either the business or third parties that have been caused by the software or services.

License Grant

Because the licensee bears the burden of proving a license in a dispute involving copyrighted material (like software), the license grant should explicitly allow all current and contemplated uses of the software. If the license grant contains any conditions, limitations, or restrictions, the licensee must understand those limitations and determine whether to negotiate custom licensing terms to allow for the intended use. Licensees should always consult with legal counsel when negotiating license grants. The license grant is one of the most crucial provisions in a software license agreement, and forms the basis of many licensing disputes.

To minimize the likelihood of a misunderstanding, businesses should be aware of license conditions that require the licensee to comply with terms or policies that are not included in the agreement. Many vendors condition the license grant on compliance with policies that are not attached to the agreement or are located on their web sites. Later, those vendors can claim that the business does not have a valid license because the license was conditioned on adherence to policies about which the business was unaware.

Furthermore, it is not sufficient to explain your intended use to the vendor’s sales team or your reseller. The license grant must explicitly include all of the use cases the licensee intends to have. In short, it is critical for software customers to make sure that the written agreement accurately reflects how the software will be used in the customer’s environment. Many licensees find counsel a useful resource in ensuring the written agreement reflects the licensee’s understanding.

Geographic and Entity/User Limitations

Many software licenses are restricted to the country in which they were purchased, which can become an issue for global organizations with centralized IT departments. If a licensee requires the flexibility to purchase software in one country and use the software in other countries, it must negotiate the geographic areas that are allowed. It is important to clarify what geographic regions are included. If the license agreement allows use in “North America,” make sure to ask whether the vendor’s definition of North America includes the United States, Canada and Mexico. Vendors do not always use traditionally accepted definitions or geographic regions.

The license agreement will also likely restrict which companies and users are allowed to install, access, and use the software. If you intend for contractors, affiliated entities, and others to use the software, you may need counsel to assist you with negotiating custom definitions. Sometimes, the vendor will define a licensee to include a named organization and all of its affiliates. Other times, it narrowly defines the licensee as a specific entity, but then allows the licensee to grant access to the software to its affiliates under specific circumstances.

For license agreements that require licensing of an entire environment or user group (e.g., a Microsoft Enterprise Agreement that includes Office 365), it may be helpful to seek legal advice if you need custom provisions allowing your organization to only license certain locations or user groups.

Price and Licensing Metrics

The business team is typically well-versed in negotiating contract pricing, and so the team may not need counsel to arrive at the appropriate pricing for a software license agreement. However, they should consider seeking counsel’s advice if the business requires price protection during or after the term of the agreement. They should also seek counsel if the business team is unfamiliar with current pricing trends in that particular software market. Some negotiations are unnecessarily lengthy and difficult because the licensee’s expectations are not consistent with the software license market.

The license metric identified in the license agreement or ordering document dictates how license usage will be measured during a license compliance review. For that reason, the metric should be clearly defined, easy to measure, and the vendor should not be allowed to unilaterally change the license metric, particularly for on-premises perpetual software licenses. Changes to the license metrics should require a written agreement signed by both parties. This could reduce the risks associated with license metric changes contained in click-wrap agreements in software updates.

Service Expectations

Most of the time, the business team members are the best resource for identifying the service level agreement, or service expectations that are appropriate for the organization’s needs. Whether it’s guaranteed availability, service response/resolution times, or how to receive credits. Counsel can be helpful in reviewing the service expectations provisions and identifying ambiguities. Consider the following example:

Sample Credit Provision

In order for Customer to qualify for a pro-rata credit for a Service Outage, the Service Outage must have occurred during Service Hours and be reported within one business day or be included in the list of Critical Outages.

Interpretation One

In order for Customer to qualify for a pro-rata credit for a Service Outage, the Service Outage must:

  • Have occurred during Service Hours and be reported within one business day; or
  • be included in the list of Critical Outages.

Interpretation Two

In order for Customer to qualify for a pro-rata credit for a Service Outage, the Service Outage must:

Have occurred during Service Hours and

  • be reported within one business day; or
  • be included in the list of Critical Outages.

If this ambiguity persisted in a license agreement, the licensee may believe that it will receive a credit for a Critical Outage (interpretation 1), but the vendor may argue that Critical Outages are only covered if they occur during service hours (interpretation 2). Counsel can help identify these types of ambiguities and try to resolve them during negotiations.

Indemnification and Limitations of Liability

These provisions are the most hotly contested provisions in the license agreement, and the disagreements have not dissipated when the license involves software-as-a-service. These provisions are the most likely to be deal breakers in a proposed licensing transaction.

Parties often struggle with coming to an agreement on what happens if a third-party makes a claim that involves harm caused by the software or services. What is the process for making an indemnity claim? What are the time limits for making a claim? Does the party seeking indemnification have to allow the other party to participate in the defense of the claim? How much might one party have to pay to the other one, and for what claims might the limits be higher? Counsel can help with identifying potential compromises to the disputes that involve these provisions.

Data Privacy and Protection

As organizations move more and more data off premises to hosting providers, these provisions are becoming increasingly important, and as a result, more heavily negotiated. Counsel could be especially helpful in devising provisions that are designed to protect the licensee. If the licensee is subject to a regulatory scheme around data privacy and protection (e.g., GDPR, HIPAA, GLBA), it is even more important to involve counsel in memorializing the agreement about privacy protections. Make sure you understand whether the vendor has access to your data, and what the vendor can do with the data.

There are plenty of dangers and uncertainties surrounding data privacy and protection. You don’t want to make things more complicated by not having appropriate protections in the license agreement.

License Compliance Reviews

If the license agreement gives the vendor the right to audit the use of its software or services, the organization should do everything it can to include the following provisions in the audit clause:

  • Scope of the audit
  • What installation information will be required, and what is the acceptable format for the deliverable
  • The vendor will provide all purchasing information and license agreements at the beginning of the audit
  • What third-party tools, if any, will be required
  • How the licensee will be permitted to resolve compliance issues (removing installations vs purchasing)
  • What happens if there is a dispute and who will be the tiebreaker if the parties cannot reach a resolution

In some circumstances, like software-as-a-service agreements, there may be an argument that there should be no right to audit at all. Even though it may not be possible to get concessions on all of these requests, the more clarity you can get around the audit provisions, the better off your organization will be.

Conclusion

When you have decided that you do want counsel’s assistance, when is the appropriate time to get counsel involved? Although every negotiation has its unique challenges and objectives, I typically recommend that counsel be introduced at the beginning of the process. This helps reduce the risk that the vendor will be unpleasantly surprised by the interjection at a later point in the negotiations. More importantly, counsel can identify the non-monetary expectations at the beginning of the negotiations. In some instances, counsel then steps away from negotiations until the parties are ready to work on the license agreement and supporting documents.

Even if counsel is actively involved in every step of the negotiation, it is generally not appropriate to start trading proposed revisions to the license agreement while the parties are working out the business terms. It is more efficient to use a term sheet or other tracking document to understand the parties’ positions on the critical terms. If you are ready to seek counsel’s assistance with negotiating a software license or services agreement, call Scott & Scott today for a free consultation.