November 28, 2019

How to avoid a software licensing dispute

Over recent years, we have seen an increase in software licensing disputes in the Middle East. In a common scenario, a software supplier audits a customer for the first time in years and tells them they are under-licensed. The supplier may demand a fee for the historic under-licensing as well as future increased license costs, which can run to multi-millions of dollars that were not budgeted for.

Typical issues that may arise in software licensing

One reason for the increase in such disputes is out-dated software license terms that do not take account of changes in technology or organisational changes.

Organisation changes

If software is licensed on a 'per user' basis, as an organisation grows, the number of users may increase and new licenses will need to be bought.

Software licenses may be limited to a named company or specific geographic location. If the customer later outsources some of its IT function, moves part of its operations offshore, or changes its name or corporate structure, this may lead to a breach of software license terms, even if the outsourcer or offshore staff are using the software for the benefit of the named licensed company.

Technology changes

Software license agreements may be signed before a technological advancement was envisaged.

The UAE and other Middle East courts will generally try to enforce the terms of a contract even if its terms were drafted before a new technology was envisaged, which could result in an order for payment of significant licence fees that were not foreseen by the customer at the time of buying the software.

When implementing an IT efficiency project such as virtualisation or outsourcing, an organisation will budget for the implementation costs and anticipated cost-savings to be gained from efficiencies; but failing to factor in the increased software licence costs may change the cost/benefit analysis entirely.

One issue that can arise from technological advancements is so-called 'indirect use' by other systems. If the customer implements new software that 'talks to' the existing software, this may result in a dispute about whether interactions between the existing and new software counts as 'users' or not. The potential cost of this issue was highlighted in a 2017 case in the English courts between SAP v Diageo, in which SAP successfully claimed c. £55 million for 'indirect access' to its software.

Where software is licensed on a 'per CPU' or 'per core' basis, charges are based on the amount of computer processing resource available to use the software. If an organisation later moves from a traditional physical server environment to a virtualised or cloud-based solution intended to improve efficiency, this may have the unintended consequence of hugely increasing the number of (virtual) CPUs or cores that can access the software.

How can customers limit the risks of a software licensing dispute?

Customers wanting certainty of software licensing costs should consider the following:

  1. At the outset, negotiate your software license contract robustly.It may be possible to negotiate a fix or a cap on the costs of any additional, remedial licences to avoid the risk of paying list price if an under-licensing position does arise.
  2. When adding new software or implementing an efficiency project such as virtualisation, consider the impact upon all software running on the network and estate, in particular any interactions between software that may amount to chargeable events under your software license contract.
  3. Do not assume that if the owner of the software knows about the other systems you use that will protect you in a dispute relating to 'indirect use' of software by other systems.
  4. Review your software license terms in the context of your current IT environment and if in any doubt contact the software supplier to negotiate new terms. It is far better to do this at the outset, and factor any increased licence costs into the budget, than wait for a dispute to arise and get an unanticipated bill retrospectively.
  5. Keep in mind that software is a major cost to your business and also critical to day-to-day functions. Organisational changes, such as increases in staff numbers or corporate restructuring can affect your licensing position just as much as IT projects.
  6. Regular reviews of software license compliance by not just the IT department but the legal team will help to avoid an unexpected bill.

How can suppliers limit the risks of a software licensing dispute?

For suppliers, we recommend that you:

  1. Ensure audit and reporting mechanisms are set out in the license terms and that such processes are operated in practice.
  2. Regularly review your standard license terms to ensure they are current and reflect the state of the art.Clarity of terms is an essential factor for successful enforcement, particularly in the UAE and many other jurisdictions in the Middle East where the court will base its decision almost exclusively on the documents.
  3. Keep under review technological developments in the market that may affect your licensing basis, consider how these will affect customers on your legacy terms, and look to commence discussions and enforce early.
  4. It will be easier to enforce increases that are forward-looking rather than retrospective, and it is also better for customer relationships to have those discussions as early as possible.

Conclusion

Both suppliers and customers in the Middle East and beyond should keep their software license agreements under constant review and identify any technology and organisational changes that may affect software use and licensing.

If any potential effect on software licensing is identified, both customers and suppliers should take early action to address this, both for financial certainty and to maintain relationships.