In today’s digital-first world, the software your business relies on isn’t just a tool; it’s the backbone of your operations, often driving everything from sales and HR to finance. Consequently, the potential risk to business continuity and financial stability could be huge if a software supplier suddenly claims your business owes £millions in additional licensing fees, threatening to sue, or even cut off access to crucial software, unless you pay up.
How do you respond in the face of such threats? The stakes are high, with the potential for severe, even existential, consequences for your business.
This situation arises more often than you might think, and is increasing in frequency. The pressure applied is amplified as the supplier approaches peak trading periods and financial year-ends. For some suppliers, this process of targeting customers for additional licence fees has become a lucrative source of revenue. Understanding how to navigate these treacherous waters isn’t just beneficial – it’s essential for safeguarding your business’s future.
Based on reports (including by G2 and CompareSoft), around 85% of licence “audits” (usually conducted by a supplier, or a third-party auditor on their behalf, either remotely or on-site), result in claims that the customer is not fully compliant with its licence terms. Non-compliance is usually alleged to have occurred due to (a) over-usage by the customer’s own personnel (or those to whom the customer has given access to the software), or (b) third-party software being integrated in a way that it (and therefore everyone using that third-party software) is now “directly or indirectly” using or accessing the supplier’s software.
We often support businesses in dealing with claims by software suppliers that the business (its customer) owes £tens of millions in additional licence fees, often based on the business’s end-customers using third-party software which interacts with the supplier’s own software. This interaction might only allow end-customers very limited visibility of the supplier’s software – but this is nevertheless leveraged by the supplier to pursue the business for large £sums.
Clients facing such claims have a decision to make: pay up to avoid disruption to the business; or refuse to be pressured, and invest resources in challenging the supplier’s allegations. Where the business stands its ground and engages with technical, commercial and legal teams, it often proves a very effective approach to minimise, and sometimes even eliminate the need to pay, additional licence fees.
If you are a business that wants to pre-empt risks and seek to mitigate these to avoid uncertainty, then the following top tips will help:
What to consider in contract negotiations/management – 5 top tips:
- Map your requirements. Prior to any contract negotiations or licence renewals, engage early with technical, commercial and legal teams to ensure the business understands fully: (i) its present and future software needs; and (ii) how the software solution and any licensing restrictions may impact those business needs.
- Read the small print. Check you understand what definitions such as “use”, “user”, and “access” mean. Make sure that the licence terms and conditions accurately reflect how you will use the software.
- Pre-agree financial consequences of under-licensing. Negotiate into the contract fixed or capped costs for any additional licences, to avoid demands for expensive list prices in the event of over-use.
- Limit audit rights. Beware the risk of a poorly run audit! However they may be described, giving a supplier oversight of your IT ecosystem increases the risk of confusion or mischief. Insist on audits having to be conducted by an independent third party. Also consider whether the software contains any automated monitoring tools. Sometimes unavoidable, the output from this monitoring could be used as evidence in support of or to undermine a supplier’s allegations.
- Keep “the lights on” during a dispute. Limit the impact of disruption caused by a dispute by negotiating into the contract a requirement for the parties to engage in discussion and commercial escalation before the supplier can issue a claim – and avoid any right to suspend access to the software.
What to do if the business becomes a target – 5 top tips:
- Understand your contract. Liaise with technical, commercial and legal teams to understand the contractual position, and how this aligns with actual use and deployment of the software. Consider potential deficits, how those can be addressed, and what that is likely to cost the business (it is usually much less than the supplier alleges).
- Use “legal privilege” as a shield. Before any audit, conduct a legal-led review to help connect technical assessment, legal analysis and commercial negotiation. This gives you the protection of legal privilege whilst taking steps to minimise or eliminate alleged additional licence fees, and negotiating more business-favourable terms. Engage with the audit to ensure you provide clear, concise and precise information – to limit the risk of confusion or mischief on supplier’s part.
- Respond quickly and firmly to threats. If a supplier insists that it will “switch off the lights”, take immediate legal advice. Often, the threat of applying to Court for an injunction will be enough for the supplier to back down. However, urgent steps may need to be taken to prepare the injunction application and every second counts when it comes to protecting business continuity.
- Plan for the future. In any commercial / settlement negotiations, consider carefully, alongside internal stakeholders, the changes or additional licences needed to align with current use of, and future plans for, your IT ecosystem. Make sure there is flexibility in any new licence terms to enable those future plans, or if the business plans to migrate to a different software solution.
- Draw a line under it before you move on. Take legal advice to ensure that any commercial deal with the supplier settles all actual and potential historical liability, to prevent the supplier from bringing a similar claim in the future.
About the authors:
Simon Lofthouse is a leading figure in Addleshaw Goddard’s tech sector team, focusing on large scale IT procurement, outsourcings and cloud arrangements, which are often transformational projects for the client, and software licensing arrangements including SaaS solutions. Bill Gilliam is head of Addleshaw Goddard’s commercial disputes team and highly experienced in dealing with all areas of conflict in relation to technology systems, projects and software under-licensing. This includes his successfully acted for Diageo in a leading case in this latter area (SAP v Diageo); the UK’s first software ‘over-deployment’ licensing case. This article is also thanks to contributions from managing associates Anouj Patel and Manraj Bhullar.