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How to survive a software licensing audit

From to time to time, software vendors will approach your organisation seeking to conduct a software licensing audit. This is particularly frequent in relation to end of life software, which is perhaps embedded deep within your IT system. Needless to say the vendors are seeking opportunities to maximise revenue from your organisation and things can quickly get out of hand with the vendor demanding enormous amounts of money and even purporting to terminate your software licence on the basis of infringement.

Whist you cannot rewrite history, you can take measures to take to help safeguard your organisation;

1. Check the software license contract to see whether the vendor has a right to conduct a software audit, ad if so the scope of that right;

2. Check the software licence contract to determine the metric for the calculation of the licence fee and any relevant restrictions; and

3. Consult with the IT Department to ascertain details of the current use of the software.

When you are armed with this information you are in a better position to engage with the vendor and co-operate with them in a structured way. The vendor may engage a third party auditor to conduct the audit. A third party auditors may present you with a further agreement which expands the scope of the audit. Whilst there is no reason to agree to any expansion of audit rights, it is an opportunity to clarify what they consider to be the fee-relevant information to be gathered.

Due to recent developments in technology, such as virtualisation, auto scaling and APIs, the interpretation of old software licence contracts can have unexpected outcomes. In two recent cases, the expansive approach of the vendors had the opposite outcomes.

Mars Incorporated v Oracle (2015)

An application for a declaration in the Superior Court of California, which was settled without any order or judgement, where it appears that the vendor blinked on its expansive claims. Oracle sought access to information of the software usage by Mars. Obligingly, Mars provided access and documents to Oracle on the servers running Oracle software. However, Oracle sought access to information about environments which had no Oracle software. The reasoning was that the presence of software which allowed automatic migration of applications across services meant that all servers should be licensed. Oracle was seeking licence fees for all servers. Mars denied access to this additional information. Oracle then purported to terminate Mars’ software licence. Mars issued an application for a declaration that its refusal to provide further information was not a breach of the software licence. The matter settled out of court without orders.

The point of this case is that a vendor might make some completely unsustainable claim to fees. If you do your homework then you can determine whether their claims are sustainable.

SAP UK v Diageo Great Britain Ltd (2017)

A judgement in the High Court of the UK, where the vendor successfully pursued an expansive approach.

Diageo obtained a license to use enterprise business processes software (collectively the ‘SAP Software’). The software license contract had a fee metric based on ‘Named Users’, which was defined as anyone who had ‘directly or indirectly access’ to the SAP Software.

Diageo used the SAP Software as a resource planning tool to calculate stock level data and place orders. Initially, customers would call Diageo’s call centre, who would access the SAP Software to confirm stock availability and then place the order. The persons with access to the SAP Software were their employees in the call centre taking the orders from the customers (i.e. low numbers of Named Users).

Diageo integrated the SAP Software with a Salesforce software product called ‘Connect’ to allow online customers to access stock availability and place orders. This was done through an API, which we will take about later. Diageo closed its call centre.

SAP took an expansive approach that the customers were Named Users and claimed additional license fees.

The court found that:

• ‘access’ had its everyday meaning of ‘acquiring visibility of, or connection to the [Software]’; and

• ‘indirect’ had been indirectly exemplified in the license as ‘via the Internet or by means or a hand-held or third party device or system’;

Accordingly, the customers ordering online were ‘Named Users’ and an additional licence fees of $97 million were payable.

The point of this case is that an unexpected expansionary claim by a vendor may be valid and can have serious repercussions for the customer.

In our experience, fees proposed by vendors following an audit can often be negotiated down by up to 95%.

SAM FUNNELL

PARTNER

Email: sam.funnell@fal-lawyers.com.au