Computer software contracts often contain restrictions and requirements regarding the computer hardware on which the licensed software may be used. Those restrictions can result in significant adverse legal consequences if the customer upgrades its computer hardware. Customers should be mindful of those risks when acquiring software or upgrading their computer systems.
SOFTWARE LICENSE RESTRICTIONS
Computer software is usually acquired under a contract that gives the customer limited permission (called a license) to use the software subject to various kinds of restrictions. The scope of the license is usually reflected in the license fee paid by the customer – the broader the license (fewer restrictions) the higher the fee.
Computer software licenses often include restrictions regarding the kinds of computer hardware or operating system on which the software may be used. Some restrictions reflect technological requirements for the software, while other restrictions are imposed by the software vendor to justify additional license fees for different or additional uses of the software.
If the customer fails to comply with the license restrictions, the customer is in breach of contract and may face potentially significant adverse consequences, including termination of the license and liability for damages. If the license is terminated, the customer is usually obligated to immediately stop using the software, which can be disastrous if the software is necessary for the customer’s daily business operations.
HARDWARE UPGRADE RISKS
The rapid pace of innovation can quickly render computer hardware obsolete. Businesses that upgrade their computer hardware often wish to continue to use software that was acquired for use on older computer hardware. Sometimes, new hardware will be compatible with older software. If the hardware is not compatible, the customer might use other technologies – such as virtualization or emulation, which can make hardware appear to behave as if it were an older compatible system – to enable older software to run on newer hardware.
Even if there is a technological solution, the software contract might expressly or implicitly prohibit the use of new hardware. For example, a software contract might prohibit the use of virtualization or emulation technologies, limit the number of processors or processor cores in the hardware used to run the software, or require that the software be run on a specific brand or type of computer. Even though it might be technologically possible to ignore those restrictions, doing so is a breach of contract that exposes the customer to risks of liability and license termination.
RISK MANAGEMENT RECOMMENDATIONS
Customers should be mindful of the risks associated with hardware restrictions in software contracts. We recommend the following:
- When acquiring software, the customer should negotiate either the removal of restrictions that prohibit hardware changes or the addition of an option to pay specified fees if hardware changes are made in the future. The customer will have maximum negotiating leverage regarding those issues before the software contract is signed.
- If an existing software contract prohibits desired hardware changes, the customer should negotiate an amendment to the contract before the hardware change is made. After a prohibited hardware change is made, the customer’s negotiating leverage is compromised, and it may be difficult for the customer to negotiate a reasonable fee to permit the hardware change.