Canada: Licensing Blues

Last Updated: June 5 2014
Article by Lisa R. Lifshitz

Pity the poor licence agreement. Sometimes it doesn't get much respect from clients.

Recently one of my clients sent me a licence entitled "legal boilerplate," which at least brought a smile to my face. After all, don't all these licences just say the same thing?

However, I have found this laissez-faire attitude sometimes comes with a cost, usually in the form of a litigation lawyer's letter demanding the client immediately cease using the software in question, or pay additional licensing fees/upgrade its software to account for the client's additional usage/misuse or face the (dire) consequences.

The following three scenarios illustrate the pitfalls of disconnection between vendors' standard paper and the way in which licencees actually use their products.

1. The licensing model/terms have changed but the contract has not.

The way in which vendors have licensed their software has changed over the years. In addition to enterprise licences, site licences, licensing by seats, servers, CPUs — to name a few — vendors are now seeking to maximize their revenues by licensing software on a "core" basis or via "virtualized" licences.

Some licences contain stipulations that virtualizing a software licence is tantamount to creating additional copies, requiring more licensing fees or is forbidden outright. Or maybe the client itself has decided to change the way it is using the software without advising their vendor. More often than not, however, it is the vendor that chooses to revise their standard "product use rights schedule" or whatever it is called and buries these new changes in a hyperlinked document contained on its web site.

I have nothing against vendors that want to change their licensing models to increase revenues or otherwise refresh their offerings — after all, the technology market is notoriously fast-paced and companies that don't re-evaluate their revenue streams on a regular basis will become uncompetitive and die.

However, my concern is with vendors that do not take the time to adequately advise and familiarize their faithful clients with changed licensing models.

Licensees often continue to use older legacy software systems under earlier forms of licence agreements or occasionally, the vendor has acquired a particular licence as part of an acquisition but did not properly transition all of the prior licensor's contracts (and clients). Through no real fault of their own, such legacy licensees may be shocked to find out that they are now in breach of newer licence terms that they were never made aware of.

In such instances, the vendor may demand the licensee upgrade to the newer version of software and licence agreement or face penalties for their non-compliance on a compulsory basis, often at a significant price increases with almost no time or room for negotiation.

The message here — if you are using a legacy software, particularly if the actual licence is lost in the mists of time or comes from a vendor that has been purchased more than once — is you may want to verify your ongoing usage rights (especially if you are using the software for your affiliates) to see if your "existing" licensing terms are in fact those that now actually govern the use of your software.

2. Narrow licences and third-party contractors

With shrinking IT budgets and a desire for efficiency, many licensees are using third-party contractors for integration services, additional maintenance and support (i.e. help desk and/or other assistance), and business process outsourcing, whether to companies located in North America or elsewhere. Unfortunately, many older standard licence agreements contain very narrow and rigid terms that do not allow third parties to access APIs or otherwise touch the vendors' software.

Any attempt at such access may cause the licensor to assert the licensee is breaching its licence rights as well as the confidential information of the vendor. While more sophisticated/robust licence agreements explicitly contemplate the use of third-party vendors for specific circumstances and contain sufficient language to protect the original vendors, the vast majority of licences are either silent or explicitly forbid such activity.

Others require third-party contractors to sign standard third-party confidentiality agreements and access rights agreements prior to any usage. Licensees that wish to avail themselves of such third-party contractors should very carefully review the terms of their existing licence agreements to determine whether such access/usage rights can be granted without inadvertently breaching their licence agreements.

If a licensee knows it needs to use a third-party contractor from the beginning, such rights should be carefully and proactively drafted into the standard boilerplate along with language that clarifies the extent to which the licensee is responsible for the use of the vendors' software by such third parties.

3. The stealth licence or no licence

Over the years, many clients have told me they have no actual licence with their software vendors, only an invoice or purchase order. Instead, they proudly say they have trust with their vendor and no additional paper is necessary. While this has been true, some of the time this just means they forgot to notice the hyperlinked terms to licences contained in their purchase order or invoice that will send them to detailed licence agreements that may change from time to time on their vendor's web site or portal.

Or perhaps they clicked through a licence agreement when they downloaded or installed the software and forgot about it. This is still a licence, unfortunately. And the problem is these stealth licenses are often drafted the most narrowly of all. It's a pretty safe guess these stealth licences don't usually allow for a licence to use copies of the software across technology platforms/networks or on mobile devices or as discussed above, for third-party contractor access, as many of these additional licence rights have to be separately negotiated.

So these days when a client tells me they have no actual licence agreement with their vendor, I usually tell them to please check again.

It's best to make sure that you are familiar with the terms of your critical software licences, monitor your ongoing usage to ensure it does not exceed your licensing rights, and check to see your documents remain current.

From experience, the good news is reasonable vendors that value their customer relationships are usually willing to see reason and work with their clients to achieve licensing compliance without too much pain. The bad news is some of the less-reasonable vendors are more interested in long, drawn-out, expensive litigation than growing their business. Oh, those licensing blues...

First published: April 21, 2014, Canadian Lawyer Magazine, "The IT Girl" column (www.canadianlawyermag.com/author/Lisa-R.-Lifshitz.html)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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