Software Licensing & Master Service Agreements : Chicago Software Licensing Lawyer & Attorney : Sam Conforti Law Firm : Master Service Agreements, Negotiations, Outsourcing : Cook County, Illinois

Thomas Trappler is Director, UCLA Software Licensing, UCLA. He is the Manager (and I believe he is also the Founding Member) of “Software Licensing Professionals”, a group on LinkedIn which I am a member. Tom has a wealth of experience and his articles and commentary have been an excellent resource for me during my research on Cloud Computing and many other software licensing related topics. His current article in Computerworld entitled “The Cloud Contract Adviser: Service-level agreements” will be very helpful to those of you considering moving some or all of your computing to the Cloud.

He begins his article by breaking down SaaS, IaaS, and PaaS to its simplest terms, and that is “Service”. As Trappler points out, the key concern for the licensee should be “Uptime”. The service availability should be memorialized in the contract itself. Trappler cautions us about the vendor’s claims of 99.9% uptime. As he comments, the initial impression to the licensee to such a claim is favorable, but as the cliché goes, read the fine print. Such service availability and the vendor’s responsibility for downtime are not always computed as part of the 99.9% claims if your internet connection is lost. Also not included in the percentage is scheduled maintenance. Trappler also suggests that in the contract definition of service availability the percentage can be affected if it is measured by consecutive minutes or such downtime is spread over a certain period of time. Any or all of these components can be included in the contract definition of service availability or downtime.

Trappler’s section in his article on the remedies built into the contract is very useful. He states that this is the place where the draftsman builds in certain incentives to help assure compliance with the 99.9% uptime claims. These incentives usually come in the form of credits to be applied to future billings. I’ve been practicing law for close to 25 years and I have a particular angst when I hear my opposing counsel say something like “I’ve never heard of that before”, but I have to admit I was not familiar with one of the suggested remedies, as Trappler labels it, the reputational remedy. Apparently, one might consider including a remedy which would require the vendor to take out a full page ad in a newspaper of general circulation announcing missed service levels. A strong motivator, no doubt; but getting it into the contract itself might be a bit tricky.

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Once again I have been the beneficiary of an excellent lead due to my membership in LinkedIn and the group Software Licensing Professionals. Jennifer Junitz Keenan was kind enough to share a link to an article written by Steve Mullins in which he reported on a white paper by Budd Larner of the The Technology Executives Club. The article is entitled Top Ten License Negotiation Concerns, and oddly enough Mullins points out at the outset that the Budd Larner white paper actually contains twelve (12) points. This article is directly on point to one of the stated goals of this blog “… to discuss software licensing and … the legal nuances involved in the contract negotiation process …” I thought it an excellent idea to share the link with my readers and also to provide a brief synopsis on the salient points as follows:

1.       Clearly define the Licensee: The article does not discuss in-depth the importance of this first point, but allow me to point out the need to consider Affiliates and Subsidiaries and providing use rights to such entities.

2.       Use Rights for necessary third parties: Larner points out that “Scope of Use” is the most important part of any license. I suggest that you not rely on the licensor’s blanket representation that other necessary third parties may have access, but rather call out specifically those that are known to you such as lawyers, accountants, banks, and other financial investors without limiting your right to add others as they become apparent.

3.       The use of Addenda to revise the base agreement: Here Larner presents both agreements on whether to use addenda or not. I have seen both methods either an almost complete re-write of the base license agreement or the addition of amendments, riders, schedules, and other forms of addenda. A good lawyer should be able to function in both worlds. Realize that the license will be revised. Discuss the revising process with the licensor upfront and proceed accordingly.

4.       Include Representations and Warranties: Develop procedures to track your warranties.

5.       Include Maintenance & Support Obligations: Often these result in a separate agreement. Whatever the form, make sure all obligations are clearly defined.

6.       Have an Indemnification provision broad enough to cover any patent infringement: Also include language to cover any liability caused by use of the software.

7.       Insert “Carve-Outs” to any Limitation of Liability clause: Except out breaches of confidentiality and indemnification.

8.       Have an Internal Dispute Resolution clause: Such a clause clearly defines the process and procedure to notify the other party of a discrepancy and how it will be resolved. The procedure usually has stages and time limits for varying degrees of executives within each organization. I find this more apropos in MSA’s (i.e. consulting agreements and their accompanying SOW’s) rather than in a software license agreement.

9.       How to Terminate and is the License Perpetual: How does this affect maintenance and note any language on renewals and the necessary notice provisions. Who carries that burden?

10.   Definitions: Define ALL key terms. Not sure about the placement of this section. I am more comfortable with it being placed in the front, but I have seen it placed in a section in the back and/or a separate schedule. This is a matter of drafting preference.

11.   Is the Audit provision reasonable: Make sure it is done in a non-disruptive manner and limit the times it may be conducted and sufficient notice must be provided the Licensee.

12.   Number of Instances allowed and effects of partitioning and dual processing: This is the point that I call in the “techies” and they tell me exactly what they want and what they know to be fair and standard in the industry.

Obviously this is not an inclusive checklist, but I think it will get you started and act as a valuable aid in your negotiations.

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I have been a member of LinkedIn, the Professional Networking Site, for some time. I have joined several groups that compliment my background and/or can increase my understanding in my particular area of practice. I have found one group, Software Licensing Professionals, to be particularly helpful. There is one relatively new discussion started by Michelle Nerlinger,Sr. Product Marketing Manager, SRM Solutions at SafeNet, Inc., entitled SaaS v Software: Their Licensing Needs to be Integrated. I was very impressed by the comments from all the discussion participants. Their comments are evidence of each person’s vast experience in this area and the trials and tribulations they have experienced while we all take this journey into the world of SaaS. The one overriding issue in this series of comments, as well as in my many readings on the topic, is pricing. The concept of pay-as-you-go just hasn’t crystallized and many vendors have resorted to a sort of subscription model, if the customer can indeed make use of the model. I came across one very informative comment by one of the discussion participants and I want to share it with you. I want to give full credit to its author David Ochroch, Information Technology Strategic Sourcing Consultant and Manager. His comments on SaaS pricing are as follows:

“Most pricing for SaaS follows a per-user model because that tracks directly to web-based access rights. A number of on-premise apps can price per-user...and as long as the software is a true user-based application, a per-user model works well as a value indicator. The per-user pricing model starts to break down in (at least) two cases: 1) where the app can't readily define or track users; and 2) where the app is used very rarely or primarily during peak times. Software with those latter attributes are usually sold on some other basis (per server, per processor, etc.). From my experience, software with those attributes (e.g., databases, middleware, security monitoring, transaction processing) often resides on-premise for performance reasons -- and I don't see SaaS being widely used in those areas for some time. I'm suggesting that there won't be a one-size-fits-all licensing model for either SaaS or on-premise but there should be commonality in the licensing metrics between the same SaaS and on-premise software versions.”

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As many of my readers know, I am a member of the business networking site LinkedIn. In my practice I have had numerous inquiries regarding SaaS agreements and many requests to draft such agreements from my clients. I found and joined a very good group on the LinkedIn networking site entitled Software as a Service (SaaS) Group. The group site itself has a lot of information and discussion groups and news items and I found it to be a good resource when I encountered some unusual issues. So one day I’m sitting in front of my computer when a LinkedIn notice pops into my inbox from Justin Pirie entitled “Your guide to the week’s events in SaaS for the Linkedin SaaS group by Justin Pirie.” He got my attention and so I checked it out and I am glad that I did. His site Paradigm Shift Actionable Insight for a cloudy world has a plethora of information. It is current, it is informative, it is hard hitting, and a must read. I like the sources he cites. It is a bit of a “No holds barred” approach. 

As an ex-SAP employee sometimes it is hard to see the forest through the trees and I tend to tread lightly, especially since a significant part of my current practice involves SAP licensing and drafting of Master Service Agreements for the implementation of SAP software. However I also am aware that it is also important to be forthright and recognize the issues and Justin Pirie does that in his blog. With the current news regarding SAP and the upheaval that has ensued, I think Justin’s approach is the right one. He starts with a cite to Paul Hamerman’s article for Forrester entitled SAP Announces Changes at the Top; Hasso Steps Up. He follows up the hard-hitting truth of Hamerman’s article with more of the same with a quote from Jeff Kaplan of THINKstrategies and his February 8, 2010 article entitled SAP Needs Strong Leadership to Stop Sinking as follows:

“The significance of this event was clearly underlined by the role SAP’s Co-Founder and Chairman of the Supervisory Board, Hasso Plattner, played as the primary company spokesperson during a corporate conference call this morning.

During the call, Plattner made an emotional defense of the company’s strategies and tactics in response to rising criticism in the face of SAP’s financial struggles. Plattner used the occasion to dispute claims that SAP isn’t moving fast enough to respond to changes in the market by proclaiming that SAP is well on its way to becoming a “multiple product company”. He gave Apotheker credit for “turning around” BusinessByDesign and said the rollout of the v2.5 of the on-demand solution is “close”.

The reality is that BusinessByDesign has only had isolated success in a handful of deployments in the field, and its scalability from a technological and go-to-market point of view is yet to be proven.

The truth is that BusinessByDesign’s lack of success is a reflection of SAP’s lack of commitment to the solution and an overall SaaS strategy.

The company’s leadership has never fully acknowledged the fundamental changes disrupting the software industry as a result of rapidly changing customer preferences and competitive pressures. For example, various SAP leaders in the past have suggested that BusinessByDesign would primarily serve as an ‘on-ramp’ to its on-premise customers rather than a solid standalone solution. This half-hearted approach not only turned off prospective customers, it didn’t incent its own staff to make a concerted effort to develop and deliver a competitive solution. (Emphasis Ed.)”

Justin Pirie follows up this strong dose of truth with yet another quote from Vinnie Mirchandani’s article entitled Enterprise Software is Entirely Bereft of Soul:

“But the reality is the customer has been forgotten in enterprise software, not just at SAP. It’s about squeezing as much out of old technology as possible. As I wrote earlier in the week. “I wish the other bigger vendors had the cajones to acknowledge they similarly mostly live off profits from software 15- 20 years old, from consultants which implement that old software and provide services from data centers which were designed during the Cold War.”

Leo was expected to do more of the same in his new role as CEO. So, he did – unbelievably pushing maintenance price hikes in the middle of the deep recession. For all his talk about taking on the partners who have piled 5 to 10X costs on top of SAP’s own expensive solutions, he really could not – they were part of the “field” he created.

SAP needed someone to dismantle that “old field” as the market transitions away from the big, honking upfront license and implementation and operating cost model. It is screaming for soul and innovation. Instead they rewarded Leo. Surely, they did not expect him to choke his own baby?”

At this point, I’m not sure if another dose of reality is needed. Enjoy the articles and do stop by Justin Pirie’s blog.

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Facebook’s most popular feature, News Feed, has been patented thus locking in the Intellectual Property Rights. This popular feature shows a member’s activities, to those allowed to view it, across the site.

Kenneth Corbin reports in his Internetnews.com article entitled Facebook Lands Patent for News Feed that facebook described the feature in its patent application as follows:

“The method includes generating news items regarding activities associated with a user of a social network environment and attaching an informational link associated with at least one of the activities, to at least one of the news items, as well as limiting access to the news items to a predetermined set of viewers and assigning an order to the news items. The method may further include displaying the news items in the assigned order to at least one viewing user of the predetermined set of viewers and dynamically limiting the number of news items displayed.”

There have been numerous privacy concerns and protests from members regarding how much of one’s activities could be broadcast on the site. However, these privacy protests have waned as other social networking sites such as MySpace, Twitter, and LinkedIn have imitated the feature.

So what are the ramifications? With the granting of the patent, Facebook may now sue any social networking site that includes an algorithm-driven mechanism for sharing and distributing information.

In a related Reuters’ story Military Allows Twitter, Other Social Media:

The Pentagon announced on Friday it has authorized the use Twitter, Facebook and other so-called "Web 2.0" sites across the U.S. military, saying the benefits of social media outweighed security concerns.

The decision, which comes at a time of growing concern over cyber-security, applies only to the military's non-classified network.

"The purpose of the policy is to recognize that we need to take advantage of these Internet-based capabilities. These Web 2.0 tools need to be part of what we use," David Wennergren, a deputy assistant secretary of defense, told Reuters.

Defense Secretary Robert Gates, 66, has said that he wants to use social networking to help the Pentagon interact with U.S. military members, many of whom are in their early 20s.

But opponents have cited the risks of information leaks, of opening gateways to hackers, along with a potential overload of precious bandwidth on the Defense Department's network.

Training people so they know what can and cannot be disclosed on the Internet is a more effective policy than simply banning use of social media on work computers, he said.

"So part of this is about having a trained workforce that is savvy in how you operate in the information age."

Copyright 2010 Reuters. Click for restrictions.

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