This article looks at the case of SAP UK v Diageo.

In a decision set to be felt across the SAP user base, Justice O'Farrell, sitting in the Technology and Construction court, ruled in favour of SAP UK ('SAP') in relation to its attempt to recover licence fees for indirect user access to its mySAP ERP ('ERP') software products.

SAP UK Ltd v Diageo Great Britain Ltd [2017] EWHC 189 (TCC) saw O'Farrell J accept SAP's submissions that all user access to ERP, direct or indirect, and regardless of whether machine intermediated, amounted to access under the agreement between the parties, and was therefore liable for licence fees.

Cloudy, with a chance of dispute

From May 2004 until the present dispute, the parties: Diageo - a global beverage distributor, and SAP - a leading multinational enterprise software house, enjoyed a commercial relationship in which SAP provided Diageo with access to its ERP software in exchange for substantial licence fees.

Diageo deployed ERP to manage numerous business critical assets including manufacturing, stock and supply chain, financial reporting and control, and human resource management. In addition to ERP, Diageo utilised SAP's Process Integration ('PI') software, an integration layer allowing third party software to interface and access data from SAP databases.

Diageo's licence fee for access to SAP's products was calculated against a 'Named User' metric, segmented into various categories. Any aspect of Diageo's business (or third party agents, consultants etc.) requiring direct or indirect access to any SAP software or database fell under the definition of Named User. Licence fees and access controls were levied against users on the basis of their categorisation within Named Users.

Arrested development

The party's dispute arose as a result of Diageo's development and deployment of two new software systems:

  • Diageo Gen2 - an iPad based Salesforce app, allowing Diageo's sales and service representatives access to customer visit and call data; and
  • Diageo Connect - a customer facing app, allowing Diageo's client's to place orders online, again by way of a Salesforce system, obviating the need for call centre transactions.

While both Gen2 and Connect leveraged Salesforce (an SAP competitor) code and design, both, through a relatively complex chain of machine-to-machine access, interfaced via PI with ERP. In simple terms, while neither of Diageo's bespoke apps were in a strict sense 'front ends' to SAP's database, through PI's integration layer, both could access and/ or edit data within the ERP database.

With the licence agreement silent in relation to ERP access to PI enabled third party software, and with an explicit statement that no licence fee was chargeable for data passing from one SAP application to another, Diageo concluded its licence in respect of PI was analogous to that of a 'gatekeeper'. In effect, the PI licence fee covered the functionality the integration layer provided, but did not, in Diageo's view, oblige the drinks distributor to pay any additional sums for access through it, on a per-user basis.

SAP, predictably, did not share this view. The software house maintained that any use of SAP products, EPR database or otherwise, whether or not facilitated by PI, amounted to direct or indirect access as defined by the agreement. Diageo's almost 6,000 ultimate customers, indirectly accessing and creating data within the ERP database in order to place orders through Connect, did therefore, amount to Named Users. In addition, all sales staff using Gen2 would require individual licencing, without which their access to customer data held on ERP through Gen2 would be unauthorised.

The devil in the drafting

In her Judgement, Justice O'Farrell rejected Diageo's submission of PI as licenced on a 'gatekeeper' basis, finding 'a separate basis of pricing for. PI software, which applies even where there is a named user licence for.ERP'. In siding with SAP, the Judge ruled 'it is clear that [the PI licence fee] is an addition, rather than an alternative, to authorisation under a named user licence'.

While accepting 'there is no applicable named user category for the Connect customers [within the agreement]', O'Farrell J nonetheless found in SAP's favour, ruling 'only named users are authorised to use or access [ERP] software directly or indirectly. Named user pricing is the only basis on which the [ERP] software was and is licensed to Diageo'. According to the Judgement, Diageo customer's indirect access to ERP, through Connect, was not a category of Named User explicitly referenced in the agreement. Nevertheless since only Named Users were entitled to access SAP software under the agreement, the Judgment concluded that such users must fall within Named Users, one way or the other. Their access therefore levied licence fees.

In addition, Justice O'Farrell sided with SAP in agreeing that 'additional licence and maintenance fees.were payable [for ERP access not explicitly defined] in the agreement'. As a result, Diageo would be required to make appropriate payments in respect of indirect access, facilitated by PI, regardless of whether that access was envisaged at the time of signing the agreement.

In the slimmest possible silver lining, O'Farrell J did reject SAP's full demand (totalling some £54 million), instead ruling that licence fees in relation to indirect third party software access ought to be levied at a rate significantly lower than the standard sum of £9,400 per user. Final quantum will be determined at a later hearing.

Conclusion

SAP v Diageo raises significant contractual and operational concerns for any business deploying SAP software products. Understanding that any access to ERP data might present significant licence liabilities, including access through what might appear to be decidedly abstract vectors, will likely become a key risk profile consideration.

Given that it can now be assumed that any B2B data flow involving an SAP database, whether via internal or external users, may trigger licence fee obligations, comprehensive review of any SAP agreements should now be conducted as an internal audit priority. A complete understanding of the extent to which a business grants ERP data access to internal and external parties, is key to avoiding a nasty future licence fee surprise. Time, and a forthcoming costs hearing, will determine the extent to which Diageo itself will be required to pay for its misunderstanding.