When a Software Audit Leads to New License Terms

A software licensing audit (also called a software compliance audit) is a process used by software companies to check whether a customer is running only the number of licensed copies of software ordered and paid for.

Some software companies perform these audits directly, while others use a third party service, such as the Business Software Alliance (BSA) or an accounting firm.

Enterprise-level software licenses, for example, may be limited to use by a fixed number of users, in a fixed premises, or even on a specific named server. It may even be a violation of the license if the software is re-installed on an updated or upgraded server, if provision for the same was not made as part of the license.  Companies need to be aware of their licensing terms, even when upgrading to a new server or otherwise updating or upgrading their systems.

The right to perform an audit is standard in enterprise software licensing agreements, but licensees may be able to negotiate limits on the terms and frequency of these audits.

According to a recent survey, 56% of large enterprises underwent a software audit in the past year – and 17% were audited three or more times.

Discrepancies between a company’s actual use of its licensed software and the terms of the license are usually resolved in a settlement between the parties.  However, if the parties are unable to agree on for resolution, the licensor may in fact initiate litigation for copyright infringement and breach of contract.

In a settlement for resolution of a discrepancy discovered in an audit, the company will most often be required to pay for additional licenses to cover the unlicensed usage discovered during the audit.  The software company may also impose penalties, such as interest payments, higher per-user fees, loss of discounts, etc.

The settlement agreement may actually constitute a new license grant that effectively supersedes the terms of the original license.  For example, the new license may require:

  • additional purchases of software to be made only through the software company as licensor (and not via third-party vendors),
  • a shorter notice period for conducting audits,
  • that the licensee pay the cost of the audit if unauthorized software use is discovered in the future.

Licensees facing settlement negotiations as a result of an audit should be no more passive in accepting the terms first offered by the licensor than in any other licensing negotiation.

For example, if the software company does not offer a release of liability for past actions prior to finalizing the settlement, the audited company should demand this.

If the non-compliance was inadvertent and non-material, then the counter offer should be focused on adopting steps to assure compliance in future – rather than paying dated licensing fees and losing out on previous discounts.

In negotiating a resolution it is important to remember that for most software companies keeping customers long term should be more important than penalizing them for past mistakes.  If a licensor takes an unreasonably aggressive position demanding retroactive payments, penalties, and new licensing terms, it may be necessary to remind it that customer retention is a big part of its long-term interests.iStock_000022173184Small-300x199

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