Software Licensing Agreement How Customers are Taken for a Ride by the software Companies

A sofware license is an agreement granting rights to use packaged sofware or components of that sofware to the licensee (buyer of sofware). The sofware license agreement spells out the terms and conditions of the license usage by the licensee and also vests with the licensor the right to take actions against the licensee in case of violations of one or more clauses of the sofware license usage by the licensee.

The licensing method describes how the company that owns the sofware collects and recognizes the revenue from the sale of its sofware.

There are broadly two models - subscription and perpetual. Subscription licenses are paid for with a recurring (ofen annual) fee to continue using the sofware and if the fee is not paid, the sofware may stop working in the case of some sofware. The customer does not own the sofware license. In the Perpetual type, licenses are paid for on a one-time basis, giving the user the right to run the program as long as the company or individual chooses. It does not imply a right to sofware upgrades, which are typically sold separately as part of a maintenance agreement.

The licensing model further specifes the environment, production or test environment in which the application can be used. The license is also linked to number of users, number of machines the sofware is installed, the CPU, CPU cores, single or multi-thread and so on there by complicating the licensing matrix further.

Another important aspect that is covered under the sofware license agreement is the right of the seller to do an audit of client's sofware license usage and ask the buyer to take corrective steps in case of any violation of licensing terms.

The importance of a sofware license agreement and right of the owner of the sofware to protect his express and implied interest through a sofware license agreement cannot be understated. However, in majority of cases the sofware license agreements use technical jargons and terminologies that are abstruse to buyer of the sofware and at the time of purchase buyers ofen ignore understanding the terminologies at their own peril at a later stage. The sofware sellers justify their ofen loaded agreements made in their favour using the principle of 'cavet de emptor'. In most of the countries which have incorporated commercial contract law into the common civil law, the courts tend to protect the seller of his intellectual property rights; express and implied, arising from the sofware license agreement. Hence it is of interest to buyers of sofware to understand their rights and duties under the sofware license agreement and ensure that they remain compliant to avoid litigations and monetary penalties.

The right to audit the client for sofware usage as mentioned earlier is a right which cannot be avoided as it is part of agreement arising due to IPR rights. The audit done by the seller using sofware tools on client environment helps the seller to notice if there are any violation of sofware license usage by the buyer. Any shortfall in licenses based on usage needs to be corrected by the buyer by procuring additional licenses.

How can buyers of sofware be protected from becoming noncompliant to sofware license agreement and what are the precautions they need to take?

There are several obvious and not so obvious tricks adopted by sofware companies while selling sofware to make customer become non-compliant. Unfortunately, many of these methods are not transparent. It appears major sofware companies acquire a hidden satisfaction with the objective to make customers become non complaint and later pay to become compliant. I will state few obvious and not so obvious tricks employed by the sellers of sofware which buyers needs to beware:

• Bundling additional products into the CD which is provided to customer. Any unsuspecting customer starts using those products for which he is not licensed and becomes non-complaint;
• Lack of clarity on whether the licensing matrix is core-based, CPU-based, chip- based or socket-based, ;
• The sofware being licensed to run in 32 bit processor or 64 bit processor;
• Specifying single or multi-threaded processor for which sofware may be licensed. Companies while buying and using sofware need understand the following besides the points listed above:
• Is the licensing of sofware perpetual or for limited period?
• Is the license linked to a particular PC?
• Is there any restriction on number of actual users?
• Is there any restriction on usage in production or test environment?
• Is the license usage restricted to a particular country or region?
• Can the license bought by parent company be transferred to subsidiary company or vice versa?
• What happens to sofware license bought by company when the company gets acquired by another company?
• What happens to license usage when installed on virtual machine?
• Is there a necessity to inform the seller for changes in the hardware environment?
• What type of audit will be performed by the customer and at what frequency?

In our experience with clients especially in the case of large organization, we have come across situations where companies have ended up paying much more than what they paid while acquiring the sofware in the frst place afer seller conducted a license compliance audit and found non compliance in terms of license usage. Such situations happened primarily due to companies not carefully reading the sofware license agreement and their entitlement.

Sofware license violations by the users are considered as serious violation of IP rights of the owners in the West and courts normally favour the seller in case of violation of contractual terms. For large entities not being compliant and failure to become compliant afer a compliance audit can lead to seller stopping all support to the sofware thereby increasing business risk due to non-availability of sofware support.

To summarize, it is important for organizations while buying enterprise level sofware to carefully analyze the license agreement they enter into before signing and abide by the agreement through proper controls in place once the sofware is installed thereby preventing from geting into non compliant issues with the sofware vendor.