A recent court judgment from the UK has provided a timely reminder of why it is always important to properly understand the basis on which your enterprise level software is licensed – a simple misunderstanding about how licensing metrics work in practice can quickly lead to major over-use issues (and unbudgeted back-licensing payments) as software spreads through an organisation in an uncontrolled manner.

Background

It is not uncommon for disputes to arise between an organisation and its enterprise software vendors about the basis on which their software is licensed (any vendor manager reading this will no doubt be ruefully shaking their head right now), but it is rare for these disputes to ever end up in court. Why? Well, there are many reasons, including that vendors are mindful of the brand damage that ventilating a dispute in a public forum can cause (suing a customer is never a good look) as well as the risk of setting a precedent that is inconsistent with their preferred reading of their standard licence terms (which could undermine the negotiating stance they have taken with other customers).

However, sometimes, it is simply not possible for parties to settle their differences on a commercial basis, leaving no option but to go to court to reach a resolution. This was the situation in a recent dispute between German software behemoth SAP and multinational beverages business Diageo. Diageo had created two proprietary applications on a Salesforce.com platform that integrated with underlying SAP systems. However, not all of the users of those applications were covered by named user licences that Diageo had purchased from SAP. SAP argued that this amounted to a breach of Diageo’s licence agreement with SAP, which required that all users directly or indirectly using the SAP software be covered by a licence from SAP.

Many readers will be familiar with the angst that the concept of “indirect use” can cause for organisations that use SAP software. The term is often not defined, or only defined in a vague way, in SAP’s licence terms leaving significant areas of doubt about what type or level of interaction with SAP’s software will trigger a licensing requirement. While the Diageo case is relatively fact-specific, it certainly provides a cautionary tale about how innocent-seeming changes to system architecture can lead to major licensing concerns.

So what happened in the Diageo case?

Diageo’s applications were designed to help with Diageo’s sales functions, by providing sales reps to manage customer visits and calls, and to enable customers to check stock levels and prices and to place and review orders directly by themselves rather than by transacting through a Diageo call centre.

Each of the applications used an interface engine called SAP Process Integration (SAP PI) in order to issue queries to and retrieve data from underlying systems that ran on SAP software. Diageo argued that this use of the SAP software was covered by the licence it had purchased for SAP PI. However, SAP argued that the licence for SAP PI was simply a licence to use the interface and not an alternative for a licence to use any underlying SAP software. In support of its position, SAP said that the SAP PI interface did not substitute for the functions performed by the underlying SAP software, and that each user of the Diageo applications was, through the conduit of SAP PI, indirectly using the underlying SAP software in a way that required a separate named user licence. This was clearly not something that Diageo had anticipated, or factored into its plans, leaving Diageo with a large number of potentially unlicensed SAP users.

Unable to resolve their differing viewpoints, the parties eventually found themselves before the UK High Court of Justice, which decided the matter in favour of SAP. In making this decision, the Court noted that the relevant licence agreement required Diageo to procure a licence for each person who used the SAP software either directly or indirectly, and that this would extend to use of the SAP software “via the Internet or by means of a hand-held or third party device or system”. This clearly indicated an intention that a person would still require a named user licence even if they used the SAP software through an intermediary interface or application. It did not matter that SAP’s licence agreement did not expressly state that each user of a third party application that interacts with a SAP system via SAP PI would require an individual user licence for the underlying SAP system. The simple fact was that such interaction would constitute indirect use of the SAP system and, therefore, would trigger a licence requirement.

Diageo noted that prior to the development of the new customer application, its customers would typically place orders through a Diageo call centre. The order would be entered into the SAP system by one of the call centre operators. In this scenario, only the call centre operator would require a licence to use the SAP software – there was no suggestion that the customer would be considered a user of the SAP software, whether directly or indirectly. The new application simply provided a way for these customers to produce the same outcome by placing orders directly into Diageo’s systems, without the need for call centre staff to play any intermediary role. On its face, it may not make sense for this streamlined process to lead to a greater licensing requirement by rendering all customers independent users of the SAP software on which Diageo’s ordering platform was based. However, Mrs Justice O’Farrell did not take this perspective. To her mind, the key was simply whether or not there was any interaction, whether direct or indirect, between the customer and the SAP software – where orders were placed through the Diageo call centre the answer was “no” but where orders were placed through Diageo’s new application the answer was “yes” and, therefore, a new licence requirement was triggered.

What can we learn from Diageo’s experience?

On one view, the Diageo case is relatively fact-specific (turning on the particular terms of Diageo’s licence agreement with SAP, and the way that Diageo had designed its new applications) and, therefore, of little precedent value. However, it is worth bearing in mind that SAP agreements are almost always based on the same standard terms and it is likely that similar concepts of indirect use will be present in most cases. Ideally, this concept, along with any other potentially uncertain or ambiguous licensing metrics, would be expressly negotiated and defined in detail at the time of entering the agreement in order to avoid the type of confusion that affected Diageo.

At the very least the decision in this case illustrates that a technological change that, on a superficial level, appears to simply streamline an existing process without making any functional change may, when analysed more closely, result in substantial compliance issues. Any change in system architecture that may alter the way an organisation interacts with its underlying enterprise software platforms needs to be carefully considered in order to confirm that it will not trigger any new licensing exposure. While damages have not yet been decided in the Diageo case, SAP’s claim is for £54 million or roughly double the total licence and maintenance fees that Diageo had paid to SAP over the life of its agreement. It is safe to say that the instant doubling of this significant licence cost would have a major impact on the operating budget for Diageo’s technology function and lead to more than a few sleepless nights for Diageo’s technology leaders.