On February 16, 2017, the High Court of Justice in the United Kingdom held that Diageo plc, a global drinks company, was liable for unauthorized use of SAP software as a result of failing to secure “Named User” licenses for its customers and sales representatives who used certain third party applications running on a Salesforce platform that accessed and exchanged data with SAP systems. While the decision does not have direct application outside the United Kingdom and may be appealed by Diageo, it is an important win by SAP and a significant cause for concern for companies licensing SAP software. The decision may embolden SAP to be even more aggressive in attempting to extract additional license and support fees from customers—which could potentially run into tens of millions of dollars for many companies—based on alleged “indirect” uses of SAP software. We encourage licensees of SAP software get in front of this issue by undertaking an assessment of whether they are at risk for claims of indirect use by SAP.
As reported by the court, Diageo licensed mySAP Enterprise Resource Planning (mySAP ERP) and certain other SAP software in 2004, including a software engine, SAP Process Integration (SAP PI), which distributes messages between mySAP ERP and other systems. In 2011/2012, Diageo developed and introduced two new software systems using a Salesforce platform: (1) Gen2, which manages the operations of Diageo sales and service representatives; and (2) Connect, which enables Diageo customers to manage their business accounts with Diageo. Among other things, Connect allows customers to place orders directly rather than through Diageo call centers. Gen2 and Connect interface and interact with mySAP ERP through SAP PI. The use of those applications triggers exchanges of data generated by mySAP ERP, including updates and syncing of data between the systems through batch processing.
Under Diageo’s license agreement with SAP, license and maintenance fees were largely determined by reference to the number of Named Users of the software (i.e. individuals authorized “to access the software directly or indirectly” depending on their user category, per one of the agreement’s schedules).
SAP claimed that the use of Gen2 and Connect constitutes an indirect use of mySAP ERP which requires Named User licenses for all users of Gen2 and Connect. SAP argued that “Professional User” licenses—the most expensive category of Named User licenses under Diageo’s license agreement—were required and, as a result, Diageo owed SAP over £54 million in additional license fees. Diageo’s total investment in all SAP products up to that point was between £50 and £61 million.
Diageo argued that the license to SAP PI is a “gatekeeper” license for gaining access to the SAP suite of applications and database which covers operations occurring within mySAP ERP as a result of data and instructions passing through SAP PI from third party software systems. The license fee for SAP PI is based on the monthly volume of processed messages passing through SAP PI. Diageo also argued that SAP’s interpretation would result in all users of the third party systems being required to be Named Users, which would not make commercial sense.
In reaching its verdict, the court held that a Named User license is required under the terms of Diageo’s license agreement for any individual who is authorized to use or access SAP software directly or indirectly. In finding that users of Gen2 and Connect were provided indirect access and use of mySAP ERP, the court noted:
- The login process for those applications triggers a connection with mySAP ERP;
- Changes in records stored in the mySAP ERP database are extracted from the database and sent in regular batches to Connect and Gen2 to ensure data is aligned;
- Each stage of the order process by a customer in Connect requires the transmission of a message from Connect to mySAP ERP and a corresponding response from mySAP ERP;
- Customer orders in Connect cannot be completed in Connect (i.e. interaction with mySAP ERP is required for final processing and completion of the order);
- Prior to Connect, orders were placed by customers through Diageo call center reps who were licensed as Named Users;
- Gen 2 extracts customer and product data from mySAP ERP; and
- Sales representatives access and use mySAP ERP when they log into Gen2 for the purpose of entering beer tags for returned kegs.
The court also found that the license fees for SAP PI were for use of that product alone and did not obviate the need for Named User licenses for direct or indirect uses of mySAP ERP through SAP PI. Since the court held that the objective meaning of the words in the license agreement were clear and unambiguous, it found that there was no room for argument as to whether SAP’s position made commercial sense. The court did find, however, that the users of Gen2 and Connect do not fall within any of the Named User categories under Diageo’s license agreement and, therefore, left it to the quantum phase of the trial to determine the level of fees owed by Diageo by reference to the nature and extent of the usage and SAP’s price list. Diageo is reported to be reviewing its options and considering next steps.
SAP is entitled to an account of the additional licence and maintenance fees due from Diageo and an order for payment of the sums found to be due on such account.
– High Court of Justice
Many companies have deployed third-party systems, including SaaS and other cloud based solutions, that interface with and exchange data generated by SAP software, and many SAP licenses contain provisions that could be construed to require Named User licenses for individuals using these third party systems. For the past several years, SAP’s published Software Use Rights (which is incorporated by reference in SAP’s current form on-premises license agreement) has provided that:
- “‘Use’ means to activate the processing capabilities of the Software, load, execute, access, employ the Software, or display information resulting from such capabilities.”
- “Use may occur by way of an interface delivered with or as a part of the Software, a Licensee or third-party interface, or another intermediary system.”
- “Licensee needs to hold a Named User License for any individual accessing any Package [i.e. software licensed from SAP] . . .”
(See Sections 1.1.1 and 1.2.1 of SAP Software Use Rights enGLOBAL.v.1-2017a)
The risk to companies that overlook potential indirect uses of SAP software is substantial additional license and maintenance fees payable to SAP retroactive to the initial occurrence of indirect use, including interest on those amounts. In addition, SAP may have claims for intellectual property infringement based on such uses. Given the magnitude of potential liability associated with indirect use claims, we recommend that SAP customers review their license agreements and deployments of third party systems that interface with SAP software to assess their risk exposure. Among other things, customers should identify:
- What third party systems interface with software licensed from SAP;
- How those systems interact with SAP software, including whether they activate the processing capabilities of any SAP software or exchange data generated by SAP software;
- How many users there are of the third party systems and the nature of their use of those systems; and
- Whether these users are covered by existing Named User licenses from SAP.
To the extent that this due diligence reveals possible indirect uses of SAP software that are not covered by Named User licenses, the customer’s license agreement with SAP (including all relevant Appendices and Order Forms) should be reviewed to assess the strength of a potential claim by SAP for additional license / maintenance fees. In light of this assessment, a strategy should be developed for addressing the risk. Such strategies may include, among other things, changes to the deployment of certain third party systems, a “wait and see” approach with SAP, or proactive negotiation of commercially reasonable license / maintenance fees for the indirect use (e.g., when the customer is considering a discretionary purchase of additional SAP products and has significant negotiating leverage).
The Diageo case is not the first instance of SAP seeking additional license fees based on alleged indirect uses of its software. This has been a point of contention with the SAP user community for several years. We expect that SAP will be even more aggressive in pursuing these types of claims in light of the Diageo decision as a means of generating additional license / maintenance fees and gaining leverage to “encourage” customers to purchase additional SAP products, particularly SAP cloud / SaaS products.