OOPS! Know What Your Licenses Say!

            Lots of activity on the legal front over the past several weeks.  Recent court decisions effect how you might look at use of licensed software by third parties.

            [First the disclaimers:  I’m not an attorney and these comments do not constitute legal advice.  Consult your attorneys; for your convenience and theirs, links to the court decisions are provided below.]

            Autodesk provides its AutoCAD software under a Software License Agreement that all customers must agree to before installing the software.  The SLA states that: 1) Autodesk retains title to all copies of the software; 2) the customer has a nonexclusive and nontransferable license to use the software; 3) customers are prohibited from renting, leasing or transferring the software without Autodesk’s prior consent. In addition, there are other significant license restrictions including requiring the destruction of all copies of previous versions after an upgrade.

            Timothy Vernor purchased several unopened used copies of AutoCAD from one of Autodesk’s direct customers and resold the copies on eBay.  The District Court held that the sales were lawful and did not infringe on Autodesk’s copyright, because two of the Copyright act’s affirmative defenses apply to owners of copies of copyrighted works, the first sale doctrine and the essential step defense. 

            The Ninth District Court of Appeals in Vernor v. Autodesk, Inc., No. 09-35969, 9/10/10 overturned the lower court decision finding that Autodesk’s direct customers are licensees of their copies of the software rather than owners.  Because Vernor did not purchase the copies of the software from an owner, the first sale doctrine cannot be invoked and an essential step defense cannot be asserted.

            Because Vernor purchased the software from a licensee and not an owner, the sale did not constitute a transfer of ownership.  As a result, copyright infringement liability may be imposed upon Vernor and subsequent users of the software, because its subsequent use is in contravention of the original software license agreement. 

            What’s the lesson here for us?  Know your seller. Understand the terms of the license agreement before you buy.  And, begin with the end in mind.  Determine up front what your likely plan will be at the end of your use of the software.  Don’t expect to be able to sell, donate or transfer it unless the license specifically allows it. 

            Compliance Source develops, licenses and sells mortgage-financing forms to residential lenders.  Digital Docs develops, licenses and supports computer software that prepares residential-mortgage loan documents.  Jointly they developed technology that allows mortgagees to merge their own transaction-specific information with Compliance Source and Digital Docs proprietary forms and prepare customized loan documents. 

            GreenPoint Mortgage Funding signed a licensing agreement to use the technology to streamline its loan packaging process.  The licensing agreement allowed GreenPoint and its Originating Lenders access to closing documents.  It specifically prohibited GreenPoint from copying, selling or sublicensing the forms database.  The licensing agreement also included a specific license to “use the Software Products in a Production Environment at the Customer Site Locations.”  It specifically prohibited sub-licensing to third parties.  GreenPoint allowed its attorneys access to the technology to prepare loan documents. 

            Compliance Source and Digital Docs sued GreenPoint for breach of the license agreement, and the District Court found in favor of GreenPoint on the basis that use of the licensed property by a third-party solely on behalf of and for the benefit of the licensee is not a transfer or sublicense.

            In Compliance Source, Inc. and Digital Docs, Inc. v. GreenPoint Mortgage Funding, Inc. No. 09-10726, 10/18/10, the Fifth District Court of Appeals stated that because the license agreement expressly prohibited any use not explicitly permitted by the agreement itself, and because the attorney’s use was not explicitly permitted in the agreement, the District Court’s decision was in error, reversed and remanded for reconsideration.

            What’s the lesson here for us?  Simply granting any third party access to licensed technology may be considered a breach of your license agreement. Seek permission first, or better yet, negotiate up front your ability to grant attorneys or service providers access to or use of the technology in the normal course of business.

            Bottom Line:  Know what your licenses say!

Our guest blogger is Dan Wallace, a staff member at ICN and Caucus-The Association of Technology Acquisition Professionals. For advice on software license agreements, contact ICN. 

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Ten Truths of Negotiations – Truths #5 & #6

     Truth #5. Information is power. Who do you think ranks higher in terms of having information about the other side—the customer or the vendor? As clients, we offer the vendor office space and security passes, we allow free passage through our building and access to our computers and then we try to negotiate with them. No surprise…it’s a mismatch.

     Ask a vendor if you’re “partners.” Most likely, the answer will be, “Oh, YES!” Then, in the context of partnership, ask for equivalent floor space in their headquarters; ask to sit in on their planning meetings. Of course, they’ll reject that idea, citing proprietary information. On the other hand, we give our vendors an inordinate amount of information about us. That’s a mistake. I wouldn’t let them have more than is absolutely necessary for them to complete the project for which they were hired. Any information you give them beyond that gives them negotiating power over you.

     I’ve even seen clients lose competitive intellectual property through on-site vendors who also work with the customer’s competitors. An on-site vendor sees how something is being done; they may very well be getting paid to learn that something. On the other side of town or on the other side of the world, another of the vendor’s customers magically learns that same concept soon afterward. I’ve seen this more times than you might believe.

     Truth #6. Don’t worry about the vendor’s feelings or profits. Both are the vendor’s responsibility. How often have you heard someone caution not to “beat up” a vendor because the vendor must make a profit? This is a true statement: they must make a profit. I’ll go even further: if our deal isn’t profitable for them, we’ll end up losing in the end. But to whom does the responsibility fall to ensure that the vendor makes that profit?

     Here’s what happens on the vendor’s side of the table, just to ease your mind about feelings and profits. Imagine you’re the customer and I’m the vendor. You negotiate your best deal and sign the contract. I take that contract to my manager. If the deal is close in either of two areas—yield or risk—there’s a team of people waiting for me at headquarters. This is the deal review team, which assesses whether or not a profit is going to be made. The team also determines if too much risk is being taken—by the vendor, of course. Both areas must be acceptable. The customer is not there saying, “You must sign this deal.” The vendor decides on its own, without any pressure, if the profit and risk levels are acceptable. If there’s too much risk or too little profit, the salesman will return to the customer and say he couldn’t get the deal approved; it must be renegotiated.

     I think you can negotiate a great deal without ever raising your voice, if you have the negotiating power. You can even ask for what you want very nicely, but you must ask. For example, when I was on a vendor negotiating team, there were two types of people whom we thought were fools. One type was the people that fell for everything, all the ploys. You walked out of the negotiating session saying, “Can you believe those guys just left three-quarters of a million dollars on the table? What fools!” There also were the people who didn’t know what to ask for. They asked for all the wrong things if they asked for anything. We, the vendor team, had 75 pages of pre-approved contract addenda that they could have gotten just by asking. The customers we respected were those who were prepared and came right at us, knowing what they were negotiating. So I can tell you from first-hand experience, the vendor’s feelings and profits are not the customer’s concern in negotiating.

Worldwide Software Negotiations Training Coming to the UK

(London, 15-6-2010) – Worldwide IT Contract Negotiations Training Company, International Computer Negotiations (ICN), is coming to the United Kingdom on July 1-2, 2010, for their highly acclaimed Software: Issues, Contracts, Negotiations training class.  For 35 years, ICN has been training Global 1000 companies on how to Do Better DealsICN’s Software Negotiations Training has taught over 1000 IT buyers how to do better licensing and development deals. Click here for more information.

“How Software is Protected, Key Licensing Ingredients, Software Development, Pricing Models and Strategies, Avoiding Litigation, Prioritizing Objectives are just some of the topics the business community will see,” says CEO Joe Auer Sr.  People looking to register for this 2-day event must do it in advance.  Training will take place at the headquarters of BP in London and sign-up is available through http://dobetterdeals.com. “Anybody that is involved with the acquisition of Software, including legal, IT, finance, procurement and contract or vendor management, needs to see this course,” says Auer.

Since 1975, Winter Park, FL based ICN has provided critical training and consulting in high tech procurement, vendor management, and negotiations, establishing a reputation that sets it apart from the competition.  Internationally, ICN has presented both public and customized on-site seminars in countries around the world including the United Kingdom, the Netherlands, Malaysia, Canada, Australia, New Zealand, Hong Kong and Singapore.

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What Vendors Do Not Want You to Know About Escrow

WHAT IS SOFTWARE ESCROW?

by Ron Scruggs, CTPE

Software escrow is an agreement whereby a software supplier and its customer agree that the supplier will deposit the source code and related materials of a licensed software product with a third party (an escrow agent). This escrow agreement provides the customer access to the escrowed materials in the event defined conditions (triggering events) occur such as the supplier is no longer able or willing to provide support of the software.

A Source Escrow Agreement is usually a three party agreement between customer, software supplier and the escrow agent. Often master escrow agreements are put in place between the supplier and the escrow agent or the customer and the escrow agent.  This allows customers or suppliers to be added to the terms of the agreement in a simple manner – usually a one page form. As a party to be added a precaution is added to review the agreement since it was negotiated with the escrow agent and the other party with the terms favoring those parties.

An escrow provision is often used in ASP, outsourcing and software license agreements for critical software.

CONTRACT CLAUSE – THEN ESCROW AGREEMENT

After getting a clause agreeing to agree to escrow, the next step is to enter into an Agreement with an Escrow Agent, the vendor and you incorporating the elements in the escrow provision.  Some contracts have a simple statement that the parties will mutually enter into an agreement for escrow of sources when requested by the buyer. That delays negotiation of the key clauses and is not recommended when an escrow agreement is an absolute necessity. Have an escrow agreement as an exhibit to the agreement in order to avoid negotiation after selection – negotiation with little leverage for the customer.

EXPLANATION – DEMAND or QUICK RELEASE (Vendors hope you don’t know this)

The demand release provision in escrow agreements provides that the escrow agent turn over the source material promptly when you, the customer declare there is a release condition.This is known as a ‘demand release’ or ‘quick release’ provision. The escrow agent would turn the material over to you but the vendor can use arbitration to appeal after the material is released. General escrow clauses give the vendor a process to appeal before the escrow material is released delaying the source release.

These demand or quick release provisions can be inserted into any contract where escrow is deemed necessary.  Do use them if you are involved in SaaS in the Cloud.

IDEAL SCENARIO – YOUR EXISTING ESCROW AGREEMENT (Vendors hope you don’t do this)

In the ideal scenario you would have a negotiated agreement with an Escrow agent containing the desired escrow language including the demand release (aka quick release). Then the contract clause would just require the vendor to be part of the existing agreement between you and the escrow agent.

I have negotiated agreements with escrow companies on behalf of customers.  These escrow agreements were in place when an escrow situation arose with a vendor.  The purpose of having your own escrow agreement is to avoid having the vendor’s negotiated agreement with the escrow agent govern the escrow.  The vendor negotiated agreement generally contains provisions that delay getting the escrowed materials and other provisions protecting the vendor – not you.

SUMMARY

In summary the best scenario is to have your own agreement with an escrow agent where you can add vendors to your escrow agreement.  You can have the demand release in your agreement.

Absent that have a provision in your agreement (SW, ASP, SaaS) that commits the vendor to enter an escrow agreement with a demand release provision. It is generally a good practice to avoid being added to the vendor’s escrow agreement for the reasons noted but many firms do it since (1) it is easy (2) escrow need is low probability and (3) it is likely cheaper. The downside is that it is written to favor the vendor rather than you – the customer.

If escrow is really a necessity consider having your own agreement with the escrow agent permitting vendors to be added.  In your escrow agreement have a demand or quick release provision.

 Another option is to have a party such as your law department be the recipient of the source materials under seal. That is another subject for another day.

 

Ron Scruggs is a Senior Consultant at International Computer Negotiations, Inc. (www.dobetterdeals.com), a Winter Park, Fla., consultancy that educates Professionals on IT Procurement, Sourcing, and Vendor Management. ICN sponsors CAUCUS: The Association of Technology Procurement Professionals. Contact him at ron@dobetterdeals.com .

Beware of Software Upgrade Insurance, Part 1

By Joe Auer

Beware of software upgrade insurance. There’s an emerging trend I must warn you about. Software companies are excluding new releases of the software you’ve bought from the maintenance and support fee you already pay. They’re adding fees, only they’re often calling them “upgrade insurance.” There’s no better way to say it: We should resist paying for upgrade insurance. By using the term “insurance,” those vendors want us to feel we’re covered for some unforeseen or unusual event. Nonsense. It’s just a way for the supplier to charge a new fee for a service that has always been included.Traditionally, software maintenance included bug fixes, help-desk support, enhancements and new releases (a.k.a. major enhancements). Although most basic maintenance programs still include the first three, the inclusion of new releases is now becoming an open question with upgrade insurance. Just to be clear, new releases are usually indicated by a change in the number to the left of the decimal, such as 3.5 to 4.0. Enhancements are usually noted by changes to the right of the decimal, such as 3.4 to 3.5, and are sometimes called point releases.

Regardless of the names, it’s important for us to insist that software maintenance and support include everything. To fully realize the benefits of standardized software packages, we must be kept current. Software that remains static undermines the fundamental reason for moving away from in-house custom development. After all, the supplier is joining us with other users to collect common requirements and spread costs. Maintenance and support fees were originally designed to do just that — provide dynamic software that evolves with changing business conditions.

So how do we counter the upgrade insurance racket? We should include maintenance and support as part of the licensing negotiations. That raises the deal’s value and also ties the deal’s completion to resolving all maintenance and support issues at the time of licensing. That way, the supplier risks losing the entire deal over just a maintenance issue. It’s easier to get vendors to concede that maintenance and support include everything, even new releases of the software, when we have bargaining power. If we fail to get that concession, we’ll in essence be relicensing the software with each new release.