UK: SAP v Diageo: Slicing The Salami

Last Updated: 31 March 2017
Article by Michael Butterworth and Yvonne Dang

In the recent case of SAP UK Ltd v Diageo Great Britain Ltd [2017] EWHC 189 (TCC), SAP succeeded in its claim against Diageo for over £54.5 million of additional licence and maintenance fees arising from indirect use of licensed SAP software that was out of the scope of Diageo's software licence and maintenance support agreement with SAP ("Agreement").

Background

In May 2004 SAP, a world leader in business applications, originally entered into the Agreement and granted a licence to Diageo plc, a global alcoholic beverages company, to use SAP's mySAP Business Suite software and certain software engines and SAP agreed to provide maintenance support to such use. SAP alleged that Diageo's use of the mySAP Enterprise Resource Planning software ("mySAP ERP") and SAP Exchange Infrastructure software engine ("SAP PI") infringed Diageo's licence with SAP, in particular in relation to SAP PI which was software that facilitated interactions between third party software and the SAP software.

In around 2011, Diageo used a hosted software platform made available by Salesforce.com (a competitor of SAP) to develop two new software systems: Gen2 and Connect (the "Diageo Systems"). The former assisted with the management and tracking of sales by collation of data whilst the latter facilitated direct review and placement of orders via an online portal. The Diageo Systems were then launched into live use by Diageo in 2012 and interacted with mySAP ERP via SAP PI. SAP claimed that it had a right to £54,503,578 either in additional fees or damages because the Diageo Systems used and/or accessed the mySAP ERP software directly or indirectly. On the other hand, Diageo was of the view that the existing licence fees that they paid for using the mySAP Business Suite software and software engines covered the use of SAP software with the Diageo Systems.

Judgment

The High Court examined how the Diageo Systems functioned in light of the terms of the Agreement, specifically focusing on the wording of the recitals and the licence provisions in relation to authorised usage. In reaching its judgement, the Court only considered the issue of liability, leaving the issue of quantum to a later date.

The Agreement used a tiered pricing structure, such that fees were payable based on the number of "Named Users" of mySAP ERP, who were in turn defined as "individual[s]... authorised to use or access the software directly or indirectly". The licence stated that whether a Named User was in fact authorised, depended upon their user category as set out in specified list in a schedule to the Agreement. Applying Arnold v Britton [2015] UKSC 36, the judge, Mrs Justice O'Farrell, rejected Diageo's claim that the Agreement was a "gatekeeper licence" for general access to the SAP software suite, and found that there were no words in the Agreement to make an exception to the rule that usage under the Agreement was subject to this Named User pricing structure.

Further, upon examination of how the Diageo Systems interacted with mySAP ERP, the judge found that, logging on to the Salesforce interface used by the Diageo Systems triggered messages and data to be sent to and from mySAP ERP via SAP PI. This in turn meant that customers accessed mySAP ERP indirectly through SAP PI and the Diageo Systems in breach of the licence conditions of the Agreement.

Analysis

It is standard practice for licensors, whether software vendors, market data vendors, content distributors or any other copyright owner, to seek to permit only a defined list of activities in respect of their intellectual property and to exclude any other activity. This encourages the customer to speak to the licensor for any new usage, allowing the licensor to extract new fees and keep on top of development in the market.

However, in this instance Diageo will feel aggrieved that O'Farrell J did not find in its favour. The Diageo Systems were designed to remove the need for call centre staff to regularly access to mySAP ERP when dealing with customer queries, and instead allow Diageo's customers to engage with mySAP ERP via the Salesforce.com cloud platform. When the parties entered into the Agreement in 2004, this way of interacting with mySAP ERP and SAP PI was not anticipated and, consequently, not reflected in the Agreement.

Diageo took the view that since it had paid SAP for access to the mySAP ERP software and a separate fee for the SAP PI software to facilitate access by third party platforms, access by the Diageo Systems to the SAP software packages was therefore permitted. As such access by a third party cloud platform was not covered by the pricing structure (as the judge also found), Diageo thought that no charge was payable.

It is possible to have sympathy with Diageo's position, as the Agreement appears to have lacked any catch all provision that may have clearly prohibited any usage other than as specifically licensed. Organisations will often have one vendor's software interfacing with the software of another vendor, and so managing the different licence fee structures in respect of such interfaces and otherwise can become a complicated task. However, what seems to have undone Diageo in this case is that the interface with the Diageo Systems was intended to channel requests from multiple individuals and this reflected the "per user" method of charging by SAP, which may have encouraged the judge to look beyond the Diageo Systems connecting with the SAP software and to examine the activities of the ultimate users – which in this case was a much larger group of individuals.

Conclusions

Licensors will want to ensure that:

  • clear wording is included in their licence agreements;
  • the licence excludes all usage except as specifically authorised; and
  • fee structures are plainly stated to ensure that the licensor can recover charges for increased usage or require additional fees for a change in the nature of such usage.

Customers ultimately need to ensure that:

  • their use of software complies with the terms of the agreed licence; and
  • such use is also aligned with the agreed charging mechanisms in respect of software provided.

This case is a good reminder to customers to be watchful of any usage that may deviate from what is originally agreed. If the customer proceeds with incremental usage without the licensor's agreement, it runs the risk of a large back bill at a later date. Sooner or later, the licensor is likely to get wind of the customer's usage, whether in the marketplace, on renegotiation, an audit, disposal of a business or when new or additional services are requested.

That being said, when entering into new licence agreements, customers should pay particular attention to the scope of use and continue to manage such contracts diligently on an ongoing basis to prevent unwanted surprises in the form of additional fees. Early and open communication with licensors can help customers manage their exposure, as it is more difficult for licensors to levy charges for small incremental changes in scope and discussion with the vendor can take the additional costs into account when re-designing their systems.

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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