A recent UK decision in favour of SAP highlights some important lessons when it comes to contracting with large software vendors and the risks that come with under-licensing.
Contracting with large scale software vendors is complex. There’s generally a labyrinth of documents, often incorporated by reference, with unclear definitions and consequences. SAP’s case against one of its customers brings this complexity into sharp focus.
SAP brought proceedings against Diageo, a global beverages company, in the UK High Court and claimed over £54 million in additional licence and maintenance fees. The case related to Diageo’s use of the mySAP ERP software, which underpinned its financial reporting, HR, supply chain and manufacturing systems. SAP and Diageo entered into a licence agreement in 2004 and Diageo’s licence fee was calculated on a ‘named user’ basis for various categories of users.
In 2011, Diageo developed two new systems using a platform provided by Salesforce.com (a competitor of SAP) which interacted with the SAP software (New Systems). The New Systems allowed Diageo sales staff to manage their customer visits and calls, and Diageo customers to place and review orders directly online (without having to go through a Diageo call centre).
SAP contended that the New Systems used and/or accessed the mySAP software directly or indirectly. Therefore SAP claimed it was entitled to additional licence and maintenance fees of £54.5m. Diageo disputed this on several grounds including:
users of the New Systems were not required to be ‘named users’ because Diageo had licensed an SAP product called SAP Process Integration which facilitates communication between SAP systems and non-SAP systems, and this acted as a “gatekeeper” licence;
the interactions between customers and the mySAP software was essentially the same as it was when the customers placed orders through call centres – the underlying business outcomes hadn’t changed;
the named user categories included in the 2004 licence are outdated and there is no appropriate category for users who are accessing the mySAP software through cloud based portals;
SAP’s interpretation of the licence would require nearly all users of the third party software to be “named users” which would not make commercial sense (given that the totality of licence and maintenance fees paid by Diageo under the SAP licence over its life was between £50m and £61m.)
The Court rejected most of Diageo’s submissions and adopted a strict reading of the terms of the licence which the Court said clearly stated that the licensing of mySAP was subject to ‘named user’ pricing. The Court specifically stated that there is no room for arguments based on commercial value where the objective meaning of the words used in the licence were clear and unambiguous. The Court held that it was objectively clear that the users of the New Systems were using and/or accessed the mySAP software directly or indirectly, and therefore, should have been ‘named users’.
Importantly, while the Court accepted that there was difficulty in allocating users of the New System to any particular ‘named user’ category, this did not render the ‘named user’ concept redundant. The Court didn’t determine which category the New Systems users should fall into, but it found that SAP had the right, based on another clause in the licence, to determine the licence price for the New Systems users on its then current corporate pricing levels in circumstances where there was no relevant price for the New System users.
The additional licence and maintenance fees payable by Diageo will be assessed in the quantum phase of the trial.
What can be done to minimise the risk of this happening?
The potential financial exposure of Diageo as a result of this decision is immense. The circumstances which have caused this situation are not unique however, and there will be many organisations that are equally, if not more exposed, than Diageo.
We do not necessarily agree with the interpretation given to the relevant definitions by the Judge in this case. The consequences are potentially extreme and could render the purchase and use of SAP software (under the terms of their licence) completely uneconomic and unsustainable. No party wants that and we cannot imagine that this would be intended by any party.
Also, Australia has legislation that is different from that in the UK, such as our Competition and Consumer Act – and we would expect that this legislation would play a part in any claim brought by vendors in Australia.
Nevertheless, to reduce the risk of being hit with a large unauthorised usage claim, there are some steps that organisations should take:
Don’t blindly sign up to standard terms – While it is tempting to sign the standard form documents provided by vendors and avoid the tedium of working through the maze of ancillary documents, this is very risky. There are a number of changes that vendors will generally agree to make to their standard terms that will help balance the risk profile.
Ensure transformational activities align to current software usage rights – When assessing the risk/reward of new technology projects, it is critical that the existing software licensing framework is considered to ensure that the new project won’t expose the organisation to a significant liability that undermines the potential commercial benefit arising from the project.
Don’t assume that the terms of your licence will be invalid/irrelevant just because technology has changed – As the SAP/Diageo case has demonstrated, Courts are hesitant to look beyond the terms of the licence where the objective meaning of terms is clear and unambiguous (even if they are outdated).
Seek the software vendor’s written confirmation to changed plans and preliminary designs – Asking the vendor to review and confirm how its licensing structure will apply – in the context of a new technology project – at an early stage of the project, will greatly reduce the risk of the vendor subsequently bringing an unauthorised use claim. It will also provide an opportunity to redesign elements of the project, if necessary, before significant implementation costs have been incurred. You should include examples and a process flow chart in the actual licensing documentation.
Be willing to consider doing a deal before the issue escalates – Technology disputes rarely proceed to judgement because of the complexity involved in litigating these cases and the difficulty in attributing fault where both parties are often to blame. When an organisation becomes aware of a potential under-licensing issue (which often occurs after an audit by the vendor), it is beneficial to take a holistic approach to assessing the issue rather than being focused on a dispute based resolution. Finding and using commercial leverage in these situations will nearly always bring a more desirable outcome than a costly dispute.