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The Bug Checklist: Protect Yourself Against Snafus in Software Vendors’ Licenses

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Steve GillenSteve Gillen (photo right) is a partner in the intellectual property firm of Wood, Herron & Evans L.L.P. and has focused his practice on publishing and media matters for 30 years. To reach him, email sgillen@whepatent.com or call 513-241-2324.

Whether it’s general accounting, royalty reporting, workforce management, CTP imaging, or some other back-office process, the right software application can make all the difference for getting a job done well and inexpensively. You know that, and you do your homework before making the purchase decision—creating your requirements definition, identifying and qualifying prospective vendors, evaluating their proposals, selecting a winner and doing your due diligence, and then negotiating refinements to the winner’s proposal.

But don’t quit just yet. Before you sign the vendor’s form license (or click “I accept”), be sure to assess the license terms against the list of common shortcomings that follows.

What Are You Really Getting?

Contemporary software applications are complex, and ever evolving. You want to be sure that the license accurately specifies:

  • which applications you are getting, including which versions or releases, and whether subsequent versions and releases are included in the support package. See whether the vendor’s form leaves you with an open-ended obligation to purchase upgrades at an unspecified price to maintain support.
  • whether the software will run in your existing environment (hardware, operating systems, network systems, interfaces, operating environment, and infrastructure) and, if not, who pays for required improvements. You may think the vendor has sold you something you can use, but the vendor’s form probably puts the burden on you to be sure this is correct.
  • whether you are getting the software only in executable form (required to run the hardware, but indecipherable to humans) or whether you are also getting source code, which is essential for doing your own customization and maintenance.
  • what sort of documentation will be provided (user manuals, system administrator manuals, maintenance manuals, etc.).

Your task is to ask the right questions of the right people until you are certain that both you and the vendor have a common understanding and that the details have been adequately memorialized in a document incorporated or referenced in the license—typically as an order form or an order confirmation, or in schedules or exhibits to the license.

What Can You Really Do with It?

Understanding the scope of your ownership rights or license can be even more challenging than understanding the technical details. Questions to explore include:

If you have paid for the application to be customized for your business, will you own the improvements? If the vendor’s form gives you rights in improvements no greater than the nonexclusive rights you are granted in the base application, those improvements may be available to your competitors at a price less than what you had to pay.

Is your license limited to a particular machine? A particular size of machine? At a particular location? Can you outsource the operation? If your needs change, you may find that the vendor’s form requires you to pay an unspecified exchange or upgrade fee.

Is the license limited to your internal business purposes only? Can you service customers or business partners? Or separately operated imprints or divisions? Pay close attention to how the “licensee” is identified, because the vendor’s form probably prevents the application from being used by or for the benefit of any party other than the “licensee.”

Is the license limited to a certain number of users? Are these concurrent users? Are they named users, so that you will have to buy a new seat each time an employee leaves or changes jobs? Is this a site license? If so, how is the site described? Is it an enterprise license? If so, what happens if you expand by acquiring another business?

Is your license transferable or assignable? Can you transfer it if you sell your business or a business unit?

Does the application you are buying include open-source components, and if not, does the vendor warrant that it does not? Open-source software is a cost-effective and efficient solution for many applications, of course, but it is fatal to applications that you would like to protect as proprietary.

Using your software in ways not permitted by your license will almost certainly constitute a material breach of your license agreement, probably voiding your warranties and in some cases triggering an automatic license termination. Moreover, such activity will probably also constitute an infringement of the vendor’s copyrights in the software, exposing you to statutory damages of up to $150,000 and attorney’s fees for both sides of the case.

What Will It Really Do?

If you have made your purchase decision based on the performance representations in the vendor’s sales literature or those made by the vendor’s sales agents, you may be in for a disappointment.

Make sure that you understand exactly what the license says about what the software will do, and if the license references user documentation in this regard, look carefully at what that documentation says about functions, features, and performance—including meaningful, measurable response-time parameters.

Do not simply rely on what you have been told. If you have spent the time and effort to work up an RFP and negotiate a proposal, be sure that the license includes an affirmative obligation on the part of the vendor to deliver a system that complies with that documentation.

And watch out for vendor forms that make the documentation a moving target (e.g., forms with references to “then-current” documentation, or documentation “as it is updated from time to time,” or references to documentation that exists only as a dynamic Web page).

What Will It Really Cost?

Is the license offered for a one-time fee, or must it be periodically renewed? In either case, the license fee may be only a part of the cost of acquiring a new application.
Questions to explore in this regard are:

  • Will some customization be required to tune the software to your business?
  • Will there be separate installation and implementation fees?
  • Will your staff have to be trained?
  • Can you make your own copies of training and user documentation, or do you have to buy copies from the vendor?
  • Will existing databases have to be converted? This can be a bigger expense than the cost of the license.
  • Will new interfaces need to be written?
  • Are all the services mentioned above included in the fees you have been quoted? If so, are these fees based on estimates, or are they fixed, or not-to-exceed, costs?
  • Are there separate support and maintenance costs?
  • Does the maintenance agreement have an escalator provision?
  • Will you get advance notice of cost increases?
  • Will you have to purchase upgrades periodically in order to continue your maintenance and support service?
  • Is the system scalable? If you have to go to a larger server to support growth in your business, will you have to buy a more expensive license? If so, can you get a guaranteed, or fixed, upgrade fee now?
  • Are any of these additional costs fixed and predictable? The vendor’s form may well refer to fees at “then-current” rates that are not even published, in effect locking you into an open-ended obligation: Just go ahead and sign that blank check now.

Bear in mind that additional costs may outstrip the initial license fees.

What Happens If You Have a Problem?

No matter how hard you try to check out the vendor and the product, and no matter how carefully you review the license agreement, contemporary software applications are complex, and you should never assume error-free operation.

To forestall or minimize problems:

  • Leave enough cushion in your implementation schedule to deal with difficulties.
  • Make sure that payments are directly tied to deliverables or to progress against objectively measurable milestones, and that your payments don’t have to be made ahead of the progress.
  • Review the software agreement, knowing that the installation and implementation will not go exactly as planned, and hold back a sufficient portion of the fees to provide financial leverage meaningful enough to ensure that the vendor will pay attention to your concerns and cooperate fully to get them resolved.
  • Check to see whether the vendor will have a finite amount of time to repair identified defects or deficiencies. Many vendor forms allow this process to continue indefinitely.
  • Check to see whether there is a drop-dead date for go-live. Document every missed milestone or failed deliverable and be careful not to inadvertently extend performance deadlines by establishing a pattern of acquiescence.
  • Don’t fall into the trap of assuming that the first delay or failure is an aberration, and deciding not to object in writing in the interest of preserving your relationship with the vendor. If it turns out not to be an aberration (but instead a harbinger), you may have forever missed an opportunity to start the clock on any cure period.
  • Make sure your objections are sent in a manner that is calculated to both notify the owner of the problem and satisfy the specific notice requirements in your license.
  • Check to see whether there is a monetary remedy in the event the vendor can’t make the software work.
  • Also, check to see whether you have to surrender the system to get access to the monetary remedy. Are you allowed to retain the system for long enough to make an orderly transition to a substitute?
  • Determine whether the license includes a limitation on the vendor’s liability. If so, is it limited to a refund of license fees only (which is common)? Or do you get back all sums paid? What about reimbursement for data and file-conversion costs?
  • If failure would be catastrophic, decide whether you need to consider insuring against this risk.

Finally, assume that once you have completed your implementation and switched over to your new system, you will experience an error, failure, or disruption at the most inopportune moment. Then satisfy yourself that, under those circumstances, the remedies laid out in the agreement would be sufficient to allow you to sleep at night. If they would, that’s just what you will be able to do.

Steve Gillen is a partner in the intellectual property firm of Wood, Herron & Evans L.L.P. and has focused his practice on publishing and media matters for 30 years. To reach him, email sgillen@whepatent.com or call 513-241-2324.

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