Software licenses and their pitfalls

Companies generally do not avoid using software from major software vendors such as Oracle, Microsoft, IBM, SAP and Adobe. In connection with that use, license agreements are entered into that specify arrangements for the use and support that the software vendor offers the licensee.

Very unfavorable provisions

The license agreements that the large, mostly American, software vendors enter into with their licensees are voluminous and not easy for laymen to understand. Often the agreements are signed without any attempt to negotiate a modification of the license agreement. This while license agreements are often replete with very unfavorable provisions for licensees. Even more troubling, licensees do not always realize the obligations arising from these agreements. They also assume that the license agreement will never be taken out of the drawer. Unfortunately, the latter frequently turns out to be a misconception.

License agreements are generally concluded for a certain number of users and/or for a certain number of processors and/or for a certain number of functionalities. If changes occur in these, for example by renewing hardware, or by opening up the software to a new group of users, this affects the fee payable to the software supplier. This fee can be very steep. What does not help is that it is often quite easy to use more technical functionality than is licensed, especially if a company does not use authorization restrictions for software functionalities. An inadvertent violation of the license agreement therefore quickly occurs.

The risk of an audit

License agreements often include provisions that allow the software vendor to conduct audits. This makes it very easy for software vendors to audit whether a license agreement is being violated. Indeed, under such an audit provision, licensees are required to cooperate in an audit of the use made of the software. For some software vendors, such audits have become a very important source of revenue, as such audits very often reveal that the license agreement is breached. The result is then that after-taxes are sent out that are sometimes many times higher than the amount that was due based on the intended use. Some large software vendors do not shy away from confronting their licensee head on after an audit. For example, Oracle has reportedly previously threatened the central government with a billion-dollar fine over an alleged violation of issued licenses.

How to deal with licensing agreements

Given the significant risks associated with violating a license agreement, it is wise to thoroughly review license agreements so that it is clear what the license covers. Where possible, negotiations should prevent highly unfavorable and unclear provisions from becoming part of the license agreement. It is also wise for companies to monitor their own compliance with the license agreement and not wait for the time when the software vendor reports that an audit is coming. In this way, adjustments can be made at an early stage when the use mentioned in the license agreement no longer corresponds to reality. In that context, it is wise to designate someone within a company to be responsible for this monitoring, such as a Chief Information Officer (CIO), or IT manager, and to seek timely legal advice. Paying attention to license agreements and proactively monitoring the use of software can prevent a lot of (financial) misery.