Mini Roundtable – Licensing Disputes

IT Group experts Jason Coyne and Tony Sykes recently took part in a mini roundtable feature for Corporate Disputes magazine alongside Amanda Burge and Julian Ward of Hamlins.

Using their joint expertise in the fields of technology and law, the panel discussed the current licensing disputes landscape and the trends and developments that have emerged over the last 12 months.

CD: Can you provide an overview of the major trends and developments to have emerged across the licensing landscape over the past 12 months? To what extent have any changes to licensing rules contributed to the number of disputes we have seen?

Burge: The licensing landscape has been changing over the last few years and the last 12 months have been no exception. There is an increase in user-centric licensing because users require access to software applications from their desk and also remotely via a variety of devices. In addition, there appears to be an increase in subscription licensing which provides licences as a service rather than goods. Software as a service can involve the major components of the software residing on the supplier’s servers as opposed to the user’s servers and being accessed through a generic piece of software such as a web browser. In that case, the user transfers the support function and responsibility for cyber security to the software provider which may in turn lead to disputes. As software is being provided as a ‘service’, the implied terms as to ‘goods’ under the SGA and SGSA do not apply and so there are no implied terms as to satisfactory quality of the software on that basis. However, there is a common law duty for services to be of satisfactory quality and reasonably fit for their purpose. There is also an implied term under the SGSA that the supplier carries out the services with reasonable care and skill so that should make little difference in practice. What will make a difference are the further laws and regulations.

“There is a common law duty for services to be of satisfactory quality and reasonably fit for their purpose.”

Ward: The last 12 months has seen a flurry of laws and regulations impacting the legal licensing landscape. From the recent IPO guidance on orphan works licensing, the UK’s implementation of the Collective Rights Management Directive, the potentially onerous impact for business of the EU Data Protection Regulations and the EU Commission’s announcements on geo-blocking and shake up of the audio visual sectors territorial licensing regime, the potential for major licensing disputes across sectors in the coming year is ever present.

Sykes: The last 12 months has seen a continuation of the phenomenon that is virtualisation. The two leading authorities are Microsoft with its Hyper-V offering and VMware; a company set up specifically to offer cloud and virtualisation products and services. Although VMware is by far the largest player in this arena, Microsoft led the way in sorting out the licensing confusion surrounding virtualisation. This is perhaps unsurprising because most datacentres and server rooms with the exception of web services are heavily invested in Microsoft in some form. Why the confusion? Well, in traditional computing/ IT, one licenced the product being used either by the number of users – concurrent or in total – or by the number of instances of the software installed. This is all relatively simple to understand and logical. In a virtual environment, however, the licencing rules become complex and most involve determination of the number of processors within a server which may be common knowledge to a datacentre manager, but is not always front of mind for a software licensing manager.

Coyne: In a relatively high profile case in the last 12 months, the giant confectioner Mars came to blows with Oracle over the terms of its software licensing audit. The case highlighted the hands-off approach to software deployment and then the strict and, some would say, unreasonable, approach to audit which is time-constrained and in many cases virtually impossible to comply with, resulting in huge demands for back-dated licence fees and a seemingly irreconcilable justification. Conspiracy theorists have argued that the process is engineered to entrap customers by presenting them with bills for millions of dollars and then by offering huge discounts to settle, clients still part with large sums of money for some intangible and questionable realignment of their licensing.

CD: What, in your experience, are the most common reasons for a licensing dispute to take place? Can you outline the range of dispute resolution frameworks that software publishers may have at their disposal when seeking to enforce their contractual and IP property rights?

Ward: While no one licensing dispute is ever identical, there are often common reasons for fall out. Top of the list is a breakdown in communication between parties. Make sure your licence contract clearly sets out each parties’ responsibilities and obligations in the contract, the scope of rights granted, exclusive, non-exclusive or sole, reserved rights, royalty calculation, a detail product or service specification, deliverables, delivery timeframe and approvals. Ensure you set out a clear dispute resolution framework – usually this begins with an incremental process with disputes initially referred to each party’s authorised representatives, through to senior managers and executives and ending in an agreed binding mediation, or ultimately arbitration or the courts.

Burge: Common reasons are the users’ lack of familiarity with the terms of the licensing agreement and users not being on top of their licensing needs. Software users need to understand the rights and duties set out in the licence and ensure that they adhere to the same. In addition, it is critical for users, particularly large organisations, to have a mechanism to ensure they do not unwittingly exceed the licences purchased leading to under-licensing. This often happens where businesses expand or merge rapidly or where there is a reorganisation of a company’s structure. The dispute resolution mechanism depends on the terms of the licence. However, there are often service level agreements in licences addressing certain issues, and processes for addressing disputes in a certain timeframe by escalating the problem to senior managers and executives. There are also often mediation processes and, as a final step, provision for arbitration or court proceedings.

Sykes: Continuing with the virtualisation theme, many companies are entering this arena for the first time and are encountering issues with licensing. While it is undoubtedly better now than it was five years ago because there is an improved awareness which has come from some of the high-profile disputes, there is a significant lag between becoming non-compliant, and this being discovered leading to a licensing issue or a dispute. Those entrusted with renewing licensing within a corporate body may deploy Software Asset Management (SAM) tools to help police the real estate, but these products can quickly become outdated when virtualisation is introduced. There are a surprising number of corporates who do not use SAM tools and rely on headcount or filed licences to renew their licensing. The big players in the supply chain – Microsoft, SAP and Oracle – often do not deal directly with clients and therefore the transparency of licensing requirements can be questionable in some cases.

“Continuing with the virtualisation theme, many companies are entering this arena for the first time and are encountering issues with licensing.”

Coyne: Dispute resolution mechanisms should be built into licences and, in fairness, that is increasingly the case. The key issues in my experience are the provision of a reasonable escalation process and the allowance of sufficient time to investigate and establish the facts. When a corporate has acquired a number of companies in a period, or has itself been acquired or merged, the licensing landscape can be far from clear. Often the dispute starts when the licence vendor seeks to recover far more revenue than it would have secured if the customer had purchased the licences from them at the appropriate time. Managers responsible for licensing may find themselves in an invidious position when they simply renew what is presented to them in good faith to find that rules have changed and there is no budget or authority for the shortfall. A practical escalation process and the time necessary to execute the escalation properly should combine to avoid full disputes developing and help broker a fair resolution to a licensing mismatch.

This article originally appeared in the Oct– Dec issue of Corporate Disputes magazine. To download the full article, click the button below.