Upcoming Mallesons seminarsMallesons clients who are customers under software licence agreements.
What do you need to do?Read the article and contact us if we can be of any further assistance.
Cheng Lim
Partner
T +61 3 9643 4193
Software licensors and resellers are in business to generate revenue and are entitled to enforce their licence rights for financial gain. But with some licensors this can cross the line into something more opportunistic, or even aggressive. When that happens, you may well feel that you have been backed into a corner. What can you do about it?
When does it happen?
You may find your licensor behaving badly towards you when you are most vulnerable. This may be no coincidence. Software vendors read newspapers and other publications, and are probably also well connected in your industry. So they will be aware when an opportunity to strike presents itself. Consider the following scenarios. All of these are based on real examples we have seen.
Divesting a business
Your company has been working for some time on the divestment of a business. It is a commercially sensitive deal and must be completed in a timely manner because rumours about the transaction are finding their way back to staff who may be affected.
Information about what you had hoped was a confidential transaction may even be appearing in newspapers. The reports may be wildly inaccurate but it is enough to create more pressure on you to close the transaction. There is a mission critical piece of software that the target business will require ongoing use of following the divestment. The potential buyer is very interested the software which it perceives will deliver competitive advantage and so it is a key part of the transaction.
The software is based on some licenced software obtained by the target entity some years ago. In the intervening period your organisation has invested considerable time, effort and money in developing the software to give it the unique capabilities it now has.
You are about to close the deal when you receive a letter from a software supplier who has got wind of your proposed divestment, claiming that it has an interest in the software. This supplier claims that in order for the software to be used in the business after the transaction closes, you will need to:
- gain its consent; and
- pay a licence fee (which is likely not to be trivial or insignificant).
You do not want anything to get in the way of this transaction closing, and closing quickly.
What happens next?
Outsourcing - scenario 1
Your organisation is engaged in a major outsourcing. A key element of your outsourcing strategy is to save costs by off-shoring where possible and practicable.
A proposal to have your outsourcer use an existing instance of certain software by means of remote access is well advanced when the licensor of that software informs you that the your organisation’s licence does not permit such use.
The licensor takes the view that the outsourcer is an unauthorised third party and before such a third party can be permitted access to or use of the software:
- the licensor’s consent is required;
- the third party must sign an access or non-disclosure agreement; and
- an additional licence fee is required (which again, is likely not to be trivial or insignificant).
This development threatens to delay roll-out of the outsourcing at a critical juncture.
What happens next?
Outsourcing - scenario 2
Your organisation has recently completed a major outsourcing. Transition to the service provider is progressing smoothly. But then there is an unwelcome development.
A key software supplier informs you that your organisation’s licence for some mission critical software precludes or does not permit use of the software by a third party in the context of outsourcing.
The supplier tells you that its consent is required, and that an additional licence fee must be paid. The fee requested is significant and materially impacts your outsourcing business case.
You have been careful to list in the outsourcing agreement the third party consents that are required and to allocate financial responsibility for the payment of any licence fees as between your organisation and the outsourcer.
However this one has been missed.
Your outsourcer says that other than in respect of those already identified and agreed, it is not responsible for the payment of third party fees that are required for it to take over the services. Your position is that the outsourcer is responsible.
Who pays?
Disaster recovery
Your organisation has been running certain software under licence for a significant period of time. As prudence would dictate, your organisation has full disaster recovery and business continuity plans in place, including maintaining a disaster recover site with instances of mission critical software and data base mirrors to provide a cut-over in the event of disaster striking the main production facility and rendering it unavailable.
The licensor of the software has learned of this and writes to you to inform you that your software licence does not permit you to run a copy of the licensed software for disaster recovery or back-up purposes. However it tells you that it is prepared to permit such use on payment of an additional fee, including back-payment to cover the period for which you organisation has been using the software in this way. The proposed fee is substantial.
What happens next?
What can you do about it? (or “Know Your Rights”)
What does your licence say?
Your first port of call should be the express terms of your licence. What does it permit? What does it exclude? Have there been any relevant variations to your licence terms, whether formally documented or otherwise?
Who is responsible?
In the context of an outsourcing, what does your outsourcing agreement have to say about who is responsible, as between you and your outsourcer, for paying the costs of third party licence fees? What does the agreement say about consents that may not have been identified as at the date of contract signing but are identified later?
What is your statutory position?
Does the Copyright Act 1968 (Cth) provide any relevant rights? For example, does section 47C (Back-up copy of computer programs) allow you to copy software for disaster recovery purposes?
What are the facts?
What other relevant facts and circumstances are there? For example, how have the parties conducted themselves historically? What relevant communications and correspondence have passed between relevant parties and how have these affected the rights and obligations of those involved?