It’s pretty much standard procedure for astute software suppliers to insist on audit provisions in their software license agreements. The purpose, of course, is to help the supplier protect its intellectual property – the software you license. Still, while you understand their motivation, you need to negotiate forcefully to ensure that the suppliers don’t impose onerous audit conditions that can allow them to unreasonably profit from or penalize you.
In other words, don’t allow a licensor to use its rights to take advantage of you.
Here’s a reasonable expectation: the software licensor should be allowed to periodically verify that you’re using the software within the scope of the license and the number of copies authorized. You have an obligation to pay the supplier for your actual usage if you’re using more software than your license allows. (Of course, the software licensors don’t reduce your charges if you’re using less than what the license allows.) But many software licensors want more than what they should be entitled to. Does this surprise you?
Here’s an example of particularly aggressive language in a supplier’s software license agreement:
“With or without prior written notice, supplier may audit licensee’s use of the software to ensure that licensee is in compliance with the terms of this agreement. If an audit reveals the licensee has underpaid fees to supplier, licensee shall be invoiced for such underpaid fees based upon supplier’s price list in effect at the time the audit is completed. Licensee shall pay supplier an additional fee of 25% of the applicable unpaid fee disclosed by the audit. If the underpaid fees exceed 5% of the license fees previously paid by licensee, then licensee shall also pay supplier’s reasonable cost of conducting the audit.”
That should certainly get your attention – hopefully before you sign the contract.
The example above raises three issues that need attention:
- The pricing for additional licenses.
- The additional 25% uplift fee, over and above the license fee.
- Who pays for the audit?
It’s okay to agree to the notion that the licensor has a unilateral right to audit, as long as it notifies the licensee in advance. However, assuming that you haven’t attempted to defraud the licensor, you shouldn’t be subjected to onerous fees or forced to give away previously negotiated pricing concessions, regardless of the audit outcome. Establishing conceptual agreement at this level will go a long way toward developing a reasonably balanced audit provision.
Here’s a conceptual audit statement that has been successfully used as a precursor to detailed contractual language:
“Licensor shall have the right, with reasonable notice to licensee, to audit licensee’s use of the software no more than once each calendar year to assure compliance with the terms of the license agreement.”
Once such a high-level understanding is established, the details concerning additional fees and costs can be addressed. Be careful not to give away any favorable pricing you previously negotiated. In other words, the license fee you pay for any “underlicensing” should be in accordance with your established pricing schedule, not at the prevailing license pricing at the time of the audit. Also, any uplift fee, such as the 25% in the earlier example, should be viewed as a penalty and deemed unacceptable by the licensee.
Unless there is flagrant software overuse or the audit uncovers a deliberate intent to defraud the licensor, the licensor should bear the cost of the audit. The audit is done at the licensor’s request, and it’s for the licensor’s benefit.
Even if the audit reveals material overuse on the part of the licensee, such as use of 30% more than the number of copies authorized, most suppliers will agree to contract language that establishes parameters for sharing the cost of the audit, and the licensor would be entitled to out-of-pocket costs that exceed some established dollar threshold.
The bottom line: Be prepared to insert reasonable audit provisions in your software licenses. They’ll save you a lot of aggravation — and money!
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–Joe Auer is president of International Computer Negotiations Inc. (www.dobetterdeals.com), a Winter Park, Fla., consultancy that educates users on high-tech procurement. ICN sponsors CAUCUS: The Association of High Tech Acquisition Professionals. Contact him at joea@dobetterdeals.com.
