KPMG's Tom Lamoureux, in an article located here summarizes the results of a recent KPMG survey of software vendors regarding the issue of software license compliance. "[S]urvey respondents said their companies lose significant amounts of revenue due to unlicensed use of their products. For example, 34 percent of those polled said losses amount to more than 10 percent of revenue, and 21 percent of respondents said their companies lose over 20 percent of overall revenue."
The survey also indicates that "[m]ost [software companies] said license compliance activities have a positive or neutral impact on their relationships with end-user customers and channel partners."
That last quote is particularly interesting. I don’t remember one client ever coming away from a software audit thinking it was a positive experience. A more common experience, at least in our practice, is an angry client coming to us after being contacted by a software sales representative that needs to make his quarterly numbers and leveraging an overly broad audit provision and an unclear license grant that were never reviewed by a software attorney.
The above numbers indicate that software vendors have a big incentive to aggressively enforce the software audit provisions contained in their license agreements.
As a licensee you should not be surprised if a vendor license agreement includes an audit provision allowing the vendor to audit your use of the licensed software. While you may be successful in having the audit provision removed in its entirety during the negotiation process, it is much more likely that the vendor will hold his ground and insist that audit language be included in the contract.
A typical vendor software audit provision looks something like this:
During normal business hours and at any time during which the Software, Documentation, or other Vendor Proprietary Information are being utilized, Vendor or its authorized representative or licensors, shall have the right upon reasonable advance notice to audit and inspect Licensee's or any Affiliate's utilization of such items, in order to verify compliance with the terms of this Agreement. Upon Vendor’s request, Licensee shall deliver to Vendor a report, as defined by Vendor, evidencing Licensee’s usage of the Software licensed under this Agreement.
From a licensee perspective, this is a potential nightmare. For example:
1. Is it clear who will conduct the audit – who is an authorized representative and how are they are authorized and by whom?
2. If the authorized representative is a third party does that third party have any confidentiality obligations to the licensee? If those confidentiality obligations are breached, can the licensee look to the vendor for a remedy? Is the vendor willing to be responsible for any breach or bad act of the “authorized representative?”
3. Is there at least a reasonableness standard regarding how the audit will be conducted? How many auditors will be on the licensee’s site? What happens if they disrupt the licensee’s normal business?
4. What happens if an unauthorized use is revealed? Does the licensee have the ability to license the seats (named users, servers etc.) it is using without authorization to bring itself into compliance? If so, will the license fees be based on list or any negotiated rates? Should it matter if there is an inadvertent expansion of the license grant or an intentional breach?
By asking the right questions and anticipating issues during the negotiation process, you should be able to mitigate the risk posed by vendor audit provisions and adequately address any reasonable issues the vendor may have concerning the unauthorized use of its software.
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